May 2016 - Pump Insights 65

Bob McIlvaine will be giving a plenary speech at the Pump Summit on June 13. He will cite examples of advances to meet the corrosion, abrasion, pressure and purity needs of your pump customers. The speech will be supplemented with a background document where case histories by industry will be summarized. Please provide Bob with links to the appropriate information on your website or in articles/case histories which you have written so that he can include excerpts in the background documents.

High performance pump Decision Guides are being prepared in each industry. So, in addition to the information we are seeking for the speech, we want to work with you as we provide end users with the latest options for their tough pumping problems. Complete guides are already available for coal-fired power and gas turbine combined cycle power plants

We are also preparing decision guides on the processes. The decision guides on the pumps are just part of a set of component decision guides for each industry. The process selection can affect the pump choice but also the pump features can affect the process choice. For example, belt filter presses deliver lower solids contents than centrifuges. Are pump designs available to handle the highest solids content delivered by a decanter centrifuge? Both municipal wastewater and dredging operators are faced with these types of decisions. Can boiler feedwater pumps meet the flow accelerated corrosion and operational challenges in gas turbine combined cycle operations where there is daily cycling? Can slurry pump designers meet the hundreds of thousands of gpm demands of large mining and FGD system operators? Fewer pumps mean less piping and fewer valves. How do you design pumps with less maintenance for shale fracturing? One option is to change the fracking fluid to CO₂. As the line sizes for semiconductors shrink, the need for the highest purity pumps increases. Demands in food and pharmaceuticals are also focused on higher purity.

We look forward to hearing from you relative to the speech and the longer-term effort on the decision guides. Please contact Bob McIlvaine at 847-784-0012 ext. 112 rmcilvaine@mcilvainecompany.com.

The Impact of Non-Traditional Needs and Solutions on Pump Industry Profitability

Investors are attracted to pump companies because of the large size of the pump market and the fact that their products are needed in growing industries such as water treatment. Investment analysts do a good job of predicting the profitability of the segments of the market dealing with traditional needs and traditional solutions but have difficulty anticipating the impact of non-traditional needs and solutions. The future in the case of non-traditional needs and solutions will not be an extension of the past.

We are now at the bottom of a pump industry cycle. The fortunes of the companies focusing on traditional solutions tend to look brighter than the fortunes of those who rely in part on non-traditional solutions. If we look out five years, we need to take into account four scenarios.

Pump Needs and Solutions
Need Type	Desired Solution
Traditional needs	Superior traditional solutions
Traditional needs	Superior unique solutions
New needs	Market leadership
Creating needs	Pro-active development of products and services

The traditional needs are exemplified by the municipal wastewater industry. Processes are slow to change. Because of the nature of the bidding process, traditional solutions are encouraged. An oil and gas floating platform lends itself to unique solutions. A pump requiring less maintenance is valued more highly when the service engineer has to make a boat trip to make repairs. The high pressures and unique conditions to which subsea pumps are exposed dictates new solutions. The development of pumps for energy recovery in desalination reverse osmosis (RO) plants is one of many examples where a need was created by a technical development.

As the pump industry rebounds, there will be many opportunities for market leadership and development of new products and services. Analysts should take this into account in their assessment of various pump companies.

Xylem and Flowserve are two of the four leading pump companies in the world. They have different markets and strategies.

Name	Pump Sales ($ million)		Company Ranking by Sales
Grundfos		$3,400	1
Schlumberger		$2,430	2
Flowserve		$2,400	3
Xylem		$2,100	4

Xylem exemplifies a large supplier targeting superior traditional solutions. It is focused on industries with slow but steady growth. It is the world’s fourth largest supplier with pump revenues of $2.1 billion. Total revenue in 2015 was $3.65 billion which was down $200 million from an average of the previous two years. Despite lower sales, the operating margin was up from 11.8 percent in 2013 to 12.9 percent in 2015. On the other hand, R&D dropped $10 million to $95 million and represented 2.6 percent of sales in 2015.

The 2015 revenue split was 44 percent industrial, 33 percent public utility, 21percent residential and commercial and 2 percent agricultural. Transport generated 41percent of the revenues and building services 21 percent. The pump or transport activities are complemented by treatment and test products. More than 40 percent of revenues come from repair and services. Most of the industrial revenues come from transport of water. For example, a power plant extracts river water in the same quantities and manner as does a water utility.

Due to the fact that many of the customers are public utilities, there is an inherent resistance to change and a focus on initial price rather than total cost of ownership. Forty-one percent of the present revenues are in the U.S. compared to only 13 percent in the Asia/Pacific region. Application of superior traditional solutions leveraged by the U.S. experience offers substantial growth opportunities in Asia/Pacific.

Flowserve has a business model which lends itself to capitalize on “new needs.” It focuses on cyclical markets but ones with long-term positive drivers. 2015 sales were $4.6 billion. Oil and gas accounts for 36 percent of sales whereas “water” accounts for only 4 percent. Thirty percent of Flowserve’s revenues come from engineered pumps, seals, and systems. Flowserve and Xylem have not competed with each other since the Xylem/ITT split which resulted in the industrial pump activity remaining with ITT.

The cycle magnitude has been reduced by the change in mix of orders. Traditionally new large projects accounted for 20 percent of sales. Now it is between 10 and 15 percent. Short-term smaller projects such as replacement and upgrading now account for more than 40 percent of sales. The aftermarket segment now represents more than 40 percent of sales. The big drop in sales to the oil and gas industry has reduced earnings but cost reductions have partially offset the revenue losses.

The challenge for Flowserve and similar companies is to minimize profit reductions in the low end of the cycle and maximize opportunities at the high end. Manufacturing migration is one of the steps the company is taking as it right sizes its assets to deal with geographic market conditions.

Another challenge is to leverage the “engineered solutions” to provide products with lower total cost of ownership. Life of pump parts in applications such as fracking is measured in months. So there are major opportunities to differentiate themselves with superior materials and designs.

2017 will be a good year for those flow control and treatment companies selling into the petrochemical industry in East Asia. Production for this region will exceed 45 percent of the world total. There has been growth in the NAFTA region due to the availability of low cost natural gas, but it does not match the growth in China.

The investment in flow control and treatment in East Asia will be more than 60 percent of the total because of the feedstock source. A large portion of the Chinese petrochemicals will be derived from coal-based feedstocks rather than natural gas. The gasified coal must be filtered to eliminate ash. The acid gases also need to be removed before they even reach the conventional gas-to-petrochemicals process. Coal also contains unacceptable levels of mercury which require carbon beds or ionic impregnated bead beds for removal. Dehydration requires molecular sieves. Generally, three molecular sieve units are needed to allow for regeneration. The molecular sieve switching valve is expensive due to the temperature and corrosion exposure as well as the zeolite particles.

The large quantities of H₂S generated in the coal gasification process require conversion to sulfur or sulfuric acid. Scrubbers, pumps and valves are all needed for this process.

This alert is being issued twice per month for suppliers in flow control and treatment who are coordinating market research with targeted pursuit of the larger and longer term orders.

The following projects each will result in millions of dollars of orders for flow control and treatment products. Each project has been rated. The opportunity size is rated from 1-10 with 1 being small and 10 being very large. The timing for flow and treatment orders has been provided by year, e.g. T 16 = timing of order is 2016.

These projects are covered in more detail and are integrated in a database which is part of Oil, Gas, Shale and Refining Markets and Projects. This semi-monthly report is available as part of this service or as a stand-alone subscription.

The Oil/Gas/Shale/Refining E Alert is issued twice per month to registered subscribers. It is not to be resent to others. Each subscriber must be registered. The first subscription is $950/yr. and additional subscribers are $90/yr. The newsletter is free for those who subscribe to N049 Oil, Gas, Shale and Refining Markets and Projects.

There is a 30 percent discount for those building an Opportunity Creation package with one or more of the market reports and one or more of the E Alerts.

The Oil/Gas/Shale/Refining E Alert is issued twice per month to registered subscribers. It is not to be resent to others. Each subscriber must be registered. The first subscription is $950/yr. and additional subscribers are $90/yr. The newsletter is free for those who subscribe to N049 Oil, Gas, Shale and Refining Markets and Projects.

There is a 30 percent discount for those building an Opportunity Creation package with one or more of the market reports and one or more of the E-Alerts.

The 41F Utility E-Alert is issued weekly and covers the coal-fired projects, regulations and other information important to the suppliers. It is $950/yr. but is included in the $3020 42EI Utility Tracking System which has data on every plant and project plus networking directories and many other features.