Photo of Joel Gay
Photograph by Chris Strong

Grace Under Pressure

Shaped by Milton Friedman, president and CEO Joel Gay, ’10 (XP-79), led small-cap Energy Recovery in licensing a hydraulic pumping technology that just may be a multibillion-dollar disruption in the fracking industry.

On a warm day in July, Joel Gay, ’10 (XP-79), walked through the manufacturing and corporate headquarters of Energy Recovery, where he is president and CEO. Pausing periodically in the 175,000-square-foot facility located in San Leandro, California, on the eastern shore of San Francisco Bay, Gay talked about the production, value, and profit margins of Energy Recovery’s PX Pressure Exchanger, its current flagship product.

The device helps desalination plants run more efficiently by recycling energy during the desalination process. “With this product, we’ve been able to secure 90 percent of the large-scale capital projects of the market—large desalination plants,” said Gay, standing over a handful of newly manufactured PX Pressure Exchanger parts. The device is made of a high-purity aluminum oxide ceramic. It’s more than ten times stiffer than steel. Constructing it is a highly intricate process, taking five weeks from start to finish and requiring components from both domestic and international sources. One PX Pressure Exchanger, Gay tells me, sells anywhere from $20,000 to $40,000, depending on the customer. The price is, apparently, right: Energy Recovery’s signature device is used on all seven continents.

In discussing Energy Recovery and topics such as global markets, economic theory, and his approaches to making consequential business decisions, Gay regularly channels the frameworks and philosophies he’s learned from studying—both via coursework and autodidactically—the University of Chicago’s great economic minds.

You won’t hear him channel anyone more, however, than Milton Friedman, AM ’33.

“It’s more than just an intellectual admiration that I have for Professor Friedman. I began reading Capitalism and Freedom in the second grade,” said Gay, 38. “I may have understood 5 percent at that point in time, but that book has stayed with me every year.”

Milton Friedman and the Executive MBA Edge

Inspired by the visionary Milton Friedman, CEO Joel Gay has seen Energy Recovery’s share price climb significantly, but his sights are set on even bigger goals. “I want to be the CEO who sustained that peak and began to truly monetize the intellectual property of this company, and to create a recurring and predictable stream of cash flows,” he says. Gay, a graduate of Booth’s Executive MBA Program, explains why Booth was the ideal business school for him, and shares the most valuable thing he learned in his coursework.
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One of the most important concepts Gay acquired from Friedman is that a corporation shouldn’t lose sight of why it exists: to deliver returns. “At the senior leadership level we discuss this all of the time as a means to very conveniently rationalize initiatives that perhaps are born from a mere intellectual curiosity but don’t necessarily have a commercial purpose,” Gay said. “And that commercial purpose needs to be to create value above and beyond our opportunity cost of capital.”

Perhaps it’s no wonder, then, that when Gay was named in late 2013 as the executive lead of a potentially groundbreaking idea—an initiative that could generate significant returns for his company and its shareholders by disrupting the hydraulic fracking industry—he could think of only one name for the project.

Project Friedman

In the summer of 2013, then-president and CEO of Energy Recovery Tom Rooney, ’91, was speaking with Farshad Ghasripoor, managing director of engineering, during a weekly breakfast event the company holds for its employees. The two began talking about Ghasripoor’s time at General Electric, where he had worked on a handful of oil and gas products. Ghasripoor, who spent 12 years at GE before joining Energy Recovery, informed Rooney that oil field service companies were struggling to find a solution to a common problem in the hydraulic fracturing industry: pumps were constantly failing in the field.

Hydraulic fracturing, often shortened to “fracking,” is the process of extracting hydrocarbons that are contained in shale, a semiporous rock found deep below the surface of the Earth. In order to remove the hydrocarbons, an oil field services company will drill a hole into the ground (often as deep as two miles down), drill horizontally, and then send pressurized water with an additive called a “proppant,” typically sand, down the hole.

Photo of machinery Photograph by Chris Strong

This process cracks the shale and creates fissures in the rock, which the proppant then enters, allowing for the release of oil and natural gas. (Learn more in, "Fracking: An Explosive History."

The hostile process of pressurizing the frac fluid in the pumps causes the equipment on the pumps to break on a regular basis. (“Imagine putting sand in the gas tank of your vehicle,” Gay told me.) As a result, operating costs for oil field service companies are high, which lowers profit margins.

During their conversation, Ghasripoor told Rooney that the solution to the pumping problem might lie with an Energy Recovery device such as the PX Pressure Exchanger. Management at Energy Recovery loved Ghasripoor’s idea and decided to fund the initiative. The concept of what would soon be named the VorTeq Hydraulic Pumping System was up and running. A few months later, toward the end of 2013, Rooney assigned Gay, who was then vice president of finance, as the executive lead of the VorTeq initiative. He named it Project Friedman.

Rooney’s directive for Gay was simple: bring this product from concept to proof of concept to commercialization. “I relished the challenge and opportunity,” Gay said.

VorTeq’s groundbreaking technology is deceptively simple. It isolates the frac pumps entirely from the proppant in the frac fluid. With the VorTeq, frac pumps process clean water only, and then send their energy into the VorTeq “missile”—the manifold through which frac fluid flows. The energy is transferred from the clean water originating in the pumps to the frac fluid, which is then sent down the hole to crack the shale and release the hydrocarbons.

The VorTeq’s primary value proposition is that it greatly reduces the amount of capital that oil field service companies—which are also referred to as pressure pumpers—spend to repair frac pumps that fail at a fracking site, sometimes as often as every five–10 hours. According to Gay’s analysis, pressure pumpers spend between $6.5 million and $8 million a year on fluid and pump maintenance per fracking fleet. (A fracking fleet is a convergence of fracking equipment at a frac site whose total horsepower reaches between 30,000 and 45,000.) The VorTeq is profoundly durable. It’s constructed with tungsten carbide—1,000 times more abrasion resistant than steel.

It’s more than just an intellectual admiration that I have for Professor Friedman. I began reading Capitalism and Freedom in the second grade.

Joel Gay

There are ancillary benefits with the technology too. Making the surface equipment more reliable reduces the likelihood of injuries occurring at fracking sites. “When you are introducing a worker to an amalgam of high-pressure iron and very, very heavy, high-powered pumps, the risk for safety incidents is ever present,” Gay said. “The VorTeq lets the pumps operate in the manner they were originally designed to.” The VorTeq also makes the fracking process more environmentally friendly, according to Gay. In addition to frac pumps consuming fewer units of energy, the technology is capable of powering some of the onsite equipment with the natural gas emanating from a well being fracked. This reduces the need for pressure pumpers to transport diesel and gasoline to remote areas where fracking is taking place.

Recent data from the US Energy Information Administration shows a real need to reduce pump and equipment costs in the fracking industry. A March 2016 report published by the EIA found that frac pumps and equipment used on fracking sites accounted for 24 percent of capital operating costs.

The report examined five US-based onshore drilling regions and found that more than three-quarters of the total cost of drilling in those regions was determined by the expenses that fall under five key categories. The most costly category, according to the report, is frac pumps and equipment.

Multibillion-dollar pressure-pumping companies such as Houston-based Schlumberger, the world’s largest player in this space, largely measure profitability by cost per barrel to frack a well. “With the right types of pumps and fuel used in conjunction with our VorTeq, you can potentially lower the cost per barrel to frack a well by up to $5,” Gay said. “Canvass the entire universe of R&D within oil and gas, and you won’t find 20 concepts or products that are currently in development whose savings would approach even $1 per barrel.”

Photo of machinery Photograph by Chris Strong

Put all of this together, and the VorTeq is potentially the most disruptive product introduced to the fracking industry in the last 15 to 20 years—since drilling into shale horizontally became the commercial norm for pressure pumpers.

Proving the VorTeq Concept

In February 2014, Energy Recovery built a $2.5 million test loop for the VorTeq at its San Leandro facility. The test loop simulates practically any type of condition found at the wellhead of a fracking operation.

That summer, Gay was promoted to CFO of Energy Recovery. He secured Denver–based Liberty Oilfield Services, a pressure-pumping company, to partner on field trials of the VorTeq. “When Energy Recovery presented this idea to us, it was like a long-lost cousin had showed up,” said Ron Gusek, Liberty’s vice president of technology and development.

In July, Liberty began testing the first prototype at the company’s operating facility in Henderson, Colorado. Gusek and his team staged a mock fracking site in a controlled, outdoor setting. “For the most part the testing went very well,” Gusek said. “But we did identify some operational challenges.”

After addressing those issues with Energy Recovery, Liberty and its sister company, Liberty Resources, took the VorTeq to a well in North Dakota, deep inside of the Bakken Formation, a 200,000-square-mile landmass rich with oil and natural gas. Gusek observed that the VorTeq performed well. Gusek said: “It showed me that this technology could truly reach commercialization.”

From Soccer Fields to Oil Fields

Joel Gay was born in 1977 in Colorado Springs, Colorado, the second of three children, to Haitian immigrants. His younger brother, Michael, is a production engineer and project manager at Energy Maintenance Services, a midstream oil field services company based in Houston. His sister, Roxane, is a New York Times best-selling author, feminist scholar, commentator, and professor at Purdue. Gay largely credits his ultracompetitive nature to growing up with his big sister. “It was difficult being Roxane’s little brother. She was always better prepared for the myriad debates we had,” he said. “Our sibling rivalry runs deep.”

The Chicago Three

In the Executive MBA Program, students form strong bonds as a result of their cohort experience. When alumni are looking to fill executive positions where they work, many look to former classmates. Shortly after becoming CEO at Energy Recovery, Gay used the power of his Booth network to hire his two “rowmates” from his cohort, Chris Gannon, ’10 (XP-79), and Eric Siebert, ’10 (XP-79). Gay, Gannon, and Siebert have come to be known by their colleagues as the Chicago Three.
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His father, Michael Gay Sr., a retired civil engineer, earned a degree at City College of New York and enrolled at New York University for graduate school. His mother, Nicole, also earned a degree from CCNY. While at NYU, Gay’s father was hired by the Kiewit Corporation, a privately held construction company—one of the largest in North America—based in Omaha, Nebraska. “Growing up in a Peter Kiewit family is akin to being in the military,” Gay said. “We moved around probably seven or eight times.”

Gay spent his formative years in Omaha. His parents exposed him and his siblings to books at a young age—economic and political heavyweights such as The Wealth of Nations (Adam Smith), The Communist Manifesto (Karl Marx and Friedrich Engels), and of course Capitalism and Freedom. “I have two books on my nightstand at all times: the good book and Capitalism and Freedom,” he said. He’s read Friedman’s masterpiece more than 50 times. 

Growing up, Gay’s father noticed his son’s fascination with Friedman. When Joel was 11, his father had a custom T-shirt made for him. On the front was a picture of the 11-year-old. The back of the shirt had the skyline of Chicago with the words “Chicago Boy,” a reference to the Milton Friedman–trained economists of the 1970s and ’80s—the “Chicago Boys” who advanced free-market principles in Latin America. “I can’t think of another ideologue, another visionary, who has been more influential in terms of how I view the world as a market participant,” Gay said.

During high school at Creighton Prep, Gay was a star athlete, participated on the debate and math clubs, and won a full-ride soccer scholarship to Drake. He enrolled but soon transferred to Saint Louis University, with a scholarship to play for a men’s soccer team with 10 NCAA Division I Men’s Soccer Championships—the most in the country. Soccer, Gay decided, was his calling. He dropped out of college at 19 and turned pro.

Gay moved overseas to begin his professional soccer career as a goalie. After five months trialing with teams across Asia and Europe, including in Germany, Turkey, Ukraine, and China, he began playing for Oostende, a second-division team in Belgium. He became a standout player, and other teams in Europe began to notice his talent.

Then, in 1999, a first-division team in France, Olympique de Marseille, offered Gay a $750,000-a-year contract, “top dollar at that time for goalies,” Gay said. Despite the opportunity to be the first American to play in France’s first division, he declined the offer. “I felt as though my intellectual capacity was atrophying,” he said. “There was so much that I wanted to do in business, specifically in applied finance.” Gay returned to the United States and enrolled at St. Thomas University, a small, private Roman Catholic university in Miami Gardens, Florida, two hours east of Naples.

Gay majored in liberal studies at St. Thomas—“the most nondescript major they offered . . . right up there next to basket weaving,” he said. He was “hell-bent” on finishing as fast as possible, taking 30 credit hours a semester.

After finishing college, Gay felt a deep desire to engage in some form of public service. He put together an index of demographic stats to identify the most disenfranchised schools in Miami, and took a job teaching a full suite of AP courses at Miami Central High. At night, Gay labored over his first business plan.

After pitching to and securing capital from his father and other investors, Gay launched a janitorial logistics and landscape contracting company. He grew the business to 25 employees with annual revenues of $1.3 million, acquiring eight other small companies in the space. It was Gay’s first opportunity to put into practice the business theories that, until then, he’d only read about in books. “I’m an autodidact,” he said. “And I always loved valuation theory. Whether it’s Merton Miller’s work or Eugene Fama [MBA ’63, PhD ’64]’s work—I believe you can value anything.” Seventeen months later, in 2003, he exited the business at a significant multiple.

Be prepared to meet your unicorn. Because it’s here in the greater Silicon Valley area.

Joel Gay

After selling his business, Gay joined Memphis, Tennessee–based ServiceMaster as a middle manager and was quickly promoted up the ranks of the Fortune 1000 company. He left in 2007 and joined Aegion Corporation based in Chesterfield, Missouri, where he served as strategic advisor to the CEO, and later as CFO North America. He created a five-year strategic plan for Aegion, built out its business-intelligence infrastructure, and led the process of horizontally integrating into oil and gas by acquiring two oil field services companies, Bayou, out of New Iberia, Louisiana, and Corrpro, based in Houston.

During that time, Gay began the Executive MBA Program at Booth. Although he had applied to other top business schools, including Harvard and Wharton, his first choice was always Booth. After all, he’d been exploring the theories behind some of the University of Chicago’s best economic minds since he was seven years old.

“People go to business school for three reasons: brand, toolbox, and network,” Gay said. “After evaluating a number of schools, it was clear to me that if I wanted the optimal balance of brand, toolbox, and network, it would be found in the Executive MBA Program.”

Black-Scholes and Unicorns

The toolbox Gay developed at Booth and his love of economic theory played crucial roles in his quest to find the right partner for Energy Recovery and bring the VorTeq to the market.

Photo of machinery Photograph by Chris Strong

One year after the initiation of Project Friedman, with the field trials of the VorTeq complete, Gay determined that the best approach to take the VorTeq to market was licensing the technology through a channel partner. By then appointed interim CEO upon Rooney’s resignation in January 2015, Gay went straight to the world’s largest oil field services company, Schlumberger.

“They are the best-run corporation in the world—certainly the best-run corporation within oil and gas,” Gay said. “Good companies understand and appreciate what they’re good at and what they’re not so good at. We’re a technology company. We’re an R&D company. We’re not an oil field services company. So we spawn the explosive IP, and then we identify the most efficient distribution channel to take that IP to market.”

Preliminary discussions between Energy Recovery and Schlumberger began in fall 2014. In a teleconference discussion with representatives from both companies, Gay  framed his pitch in the simplest possible terms: What if you never had to put another piece of proppant through your pumps again? “I believe the response was, ‘If you show me a technology that does that, then I’ll show you a unicorn,’” Gay recalled.

“‘Then be prepared to meet your unicorn,’” Gay remembered responding. “‘Because it’s here in the greater Silicon Valley area.’” Gay met with Schlumberger leadership in March 2015, and they created the framework of the VorTeq licensing deal. In August, Energy Recovery and Gay—by then promoted to president and CEO—executed a term sheet with Schlumberger. The two companies entered a definitive agreement two months later. Energy Recovery’s share price immediately tripled.

The agreement to license the VorTeq to Schlumberger has two components: upfront consideration and an ongoing royalty stream over the course of the 15-year contract. On day one of the agreement, Schlumberger paid Energy Recovery a $75 million exclusivity fee. In crafting the upfront consideration, Gay relied on his Booth education to arrive at the fee figure. “We designed and valued a real option, which is to say we sold Schlumberger a call option on the technology,” he said. “We used a variant of Black-Scholes to do this real option.” In addition to the exclusivity fee, Energy Recovery is set to receive two $25 million payments, which are subject to the performance of the VorTeq at two fracking sites. Gay said he expects both milestones to be completed by the end of this year.

We spawn the explosive IP, and then we identify the most efficient distribution channel to take that IP to market.

Joel Gay

Once the VorTeq is fully commercialized in 2017, Schlumberger will pay Energy Recovery $1.5 million per VorTeq, per year. Depending on how quickly Schlumberger migrates to the VorTeq pumping technology throughout its entire global fracking fleet, Energy Recovery could generate returns of $3.5 billion to $4 billion over the lifetime of its 15-year licensing agreement, in Gay’s estimation. It’s a staggering figure when you consider Energy Recovery’s marginal cost to develop the VorTeq: $12.5 million.

Competitive edge

On the day that Gay was promoted to CEO, Energy Recovery’s share price was a modest $3.22 and fell to an all-time low of $2.07 shortly thereafter. About one year later, in April 2016, the stock hit an all-time high of $13.35. Not many CEOs can boast of quadrupling their company’s share price in roughly one year’s time. 

Gay owes that success not just to his Booth education, his love for Chicago-style economics, or his past business experiences. At his core, Gay is fiercely competitive.  “Competition is quite important to me,” he said. “Without competition, I don’t really know what the point is.” Competition drives him as the CEO of Energy Recovery, where he wants to continue to disrupt the global pumping market. Competition drives him to continue to create value for his company’s shareholders—not simply immediate returns, but sustained value over years of their investments. Competition drove his charge to lead his company by vertically integrating into the fracking industry with the VorTeq. It’s what drove him to attempt to out-debate his sister, Roxane, when they were kids. And it’s what drove him on the soccer field.

“For me, after retiring from soccer, business was just the next realm for competition,” he said. “And I think one day, I’ll move on to the next realm for competition—most likely politics.”

Local? State? Federal?

Gay smiled wide. “There’s only one office that matters.”

—By Brent White