Xebec CEO Kurt Sorschak on Competing with Schlumberger, Honeywell
— JAMES WEST
APRIL 10, 2017
Xebec Adsorption Inc (CVE:XBC) )(OTCMKTS:XEBEF) (FRA:XB6) CEO Kurt Sorschak explains how his recent multi-million dollar orders and renewed vitality in the oil and gas space is allowing him to compete with Schlumberger Limited (NYSE:SLB) and Honeywell International Inc (NYSE:HON).
Transcript:
James West: Kurt, thanks for joining us today.
Kurt Sorschak: You’re welcome, Jim.
James West: Kurt, let’s start with an overview of what is the value proposition for investors in Xebec?
Kurt Sorschak: Well, at this point, Xebec, as you might know, is a gas purification company. We have some unique proprietary technology that will allow us to purify gases from basically a raw state into something more valuable that our customers can better monetize. So what does that mean? For example, you have a refinery off-gas stream, let’s say, hydrogen, and you want to further utilize that hydrogen stream. We can now purify it up to 99.999 percent pure hydrogen, which gives you a much higher value either in resale or reutilization.
James West: So basically, you create value added processes that improve a hydrocarbon stream?
Kurt Sorschak: Yes, who might help, in this instance might help, in the petrochemical or refinery industry.
James West: Okay. So on March 6th, you released some news indicating that you’d received an order totalling $2.6 million for multiple purification systems, and they were spread out across Taiwan, France and Canada, all for 2017 delivery. Now this strikes me as quite a transformational sort of transaction for the company. Is it representative of a new phase of growth in the company?
Kurt Sorschak: Yes. We’ve been on the public market for quite a while now, but we haven’t really gained a lot of traction, and I think one of the main reasons for that having been that we focused too early on our clean technology offering. In other words, back in 2009, 2010, we started to promote upgrading solutions for renewable natural gas, so taking a bio gas source and producing renewable natural gas. That was too early at that point in time. Consequently, the company didn’t really grow, and we were – it wasn’t very satisfying.
Now over the last couple of years what we have done is to broaden the product portfolio of the company into solutions the company can offer. So in other words, besides now having a clean tech segment, we also have an industrial compressed air and gas segment, and we have an oil and gas segment. So all those segments obviously have different product solutions for our customers, broadening the customer base and giving us more opportunities. And by the way, now the clean tech, this renewable natural gas segment, also seems to be growing or starting to grow. So we’re in a good space at the moment, and we are receiving orders as a consequence.
James West: Okay. So to what extent is your future growth dependent upon a robust oil price globally?
Kurt Sorschak: Very dependent. Everybody in our industry has been surprised at the impact this oil price drop has had directly on the oil and gas industry, but also on all kinds of supply industries there, too. We have seen a significant drop in revenue in 2015, 2016, but since mid-2016 when the oil price started to stabilize, we’ve also seen our business start to stabilize and pick up again. So we are quite hopeful now going forward that in the range of $45 upwards, investments will happen.
James West: And in terms of the opportunity for investors going forward, the – let’s just assume in a worst case scenario that the oil price does not really do much. What are the prospects for Xebec outside of oil and gas?
Kurt Sorschak: So as I mentioned, we have diversified into three business units. Our first business unit, compressed air and gas, is essentially a recurring business. So we’ve been providing compressed air and gas equipment for a long time, so we have thousands of pieces of equipment out there, and we have started to focus over the last couple of years on our after-market parts and service business. So this segment will nicely grow; it’s not directly related to oil and gas. In some ways it is, in others it isn’t, but it will continue to grow; it has continued growing through this downturn in oil in 2015, 2016, and I expect that to continue growing.
On the renewables side, if oil prices are not going anywhere but are stable where they are at the moment or drop slightly, I still believe that in the European Union you have opportunities on the renewables side. They have renewable energy directives there which require the countries to implement certain renewables policies, which have gone into effect, and we are actually seeing a significant uptick, especially on our renewable natural gas side, but also on the hydrogen side.
So I think there are opportunities which go well beyond oil and gas for Xebec.
James West: Right. So from what I’m hearing, it sounds like you’re positioned to capitalize no matter which way the energy sort of mix goes, you’re going to be in a position to get something?
Kurt Sorschak: Well, that is what we have tried to do. After our disappointment back in 2009, 2010, where we were very hopeful that this renewable natural gas would grow into a significant business, we wanted to make sure we can create a company that can withstand different hits, be it on the oil side, be it on the renewables side that the incentives aren’t there or that the market doesn’t require all those renewable solutions. I think we are well positioned with how we have structured our company now with a recurring revenue segment, a clean tech segment that offers several nice solutions into the clean tech space, and then our oil and gas solutions.
James West: Okay. So tell me about what proprietary technologies do you have, what kind of moat have you built around your IP, and who are you competing against?
Kurt Sorschak: So again, in each one of those business segments, they are quite distinct. The over-arching theme in our business is obviously absorption technology; absorption and membranes, if you so want. But the segments require quite distinct strategies and run quite differently. So on the technology side, if we look at the absorption technology, we have what we call a fast cycle Pressure Swing Absorption technology, which we basically developed. It offers very robust performance, high purity levels, in a nice, tight package. And that plays out in each one of the segments, but in each segment we have different competitors.
James West: Okay. So are you competing or taking market share from major, larger corporations, or are you more or less developing your own niche trajectory within the market?
Kurt Sorschak: Well, on the clean tech side I would think we are more like a niche player, because the clean tech space in itself will be operate as a niche. On the oil and gas side, we compete against basically Honeywell and Schlumberger; those are our two big competitors in that space, and Ellicat to a certain degree. And on the compressed air and gas segment, where we have a multitude of different products, we compete against a wide range of different companies. Some are being multinationals like Parker Hannifin or Ingersoll Rand, Atlas Copco; others are smaller local players.
James West: Okay. So looking out across 2017 and beyond, what are you looking for in terms of the main drivers of growing revenue?
Kurt Sorschak: I think that the main drivers for us is, if we again start with the clean tech space, the over-arching thing here is environmental protection, Co2 reduction, carbon trading, which is starting to happen. So this will definitely drive our clean tech business.
On the compressed air and gas side, there is an increasing demand for purer air, if you so want, be it in medical, in food industries, different applications require further dehydration, purification of the air. So that will continue; the growth forecast there is, I believe, around 6 percent per year, so it’s a nice growing segment. We’re pretty stable, because it touches so many industries.
On the oil and gas side, the drivers primarily will be operating cost savings. I mean, we have some very nice products for the oil and gas industry; CapEx is not so much the driver there as, I think, with low commodity pricing, all the operators are looking how can they get the highest possible profit out of their operations. And that obviously focuses a lot about reducing operating costs, and I think there we have some very nice solutions to reduce operating costs. So those are basically the big drivers for us.
But again, each segment has their own drivers, because it’s such a diverse business.
James West: Okay. So then, in terms of profitability and margin, what do the numbers there look like going forward in 2017?
Kurt Sorschak: Well, for 2017, we expect to see some nice revenue growth in the double digits. We expect also to become profitable in 2017, which we haven’t been 2015, 2016. And I think the growth can continue going forward.
James West: Okay, great. Kurt, that’s an excellent introductory overview of the company. We’re going to come back to you in a quarter’s time or so and see how you’re progressing. Thank you very much for your time today.
Kurt Sorschak: Thanks, Jim, that was very pleasant.
