July 15, 2014
Interviewed by: David Snow
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EnerTech’s Investment Latitude

Investing in energy technology is the specialty of EnerTech Capital, which is now on its fourth fund. The firm’s Wally Hunter highlights how the oil-and-gas sector is embracing innovation, their investment in companies treating water at sites, and interesting exit channels.

Investing in energy technology is the specialty of EnerTech Capital, which is now on its fourth fund. The firm’s Wally Hunter highlights how the oil-and-gas sector is embracing innovation, their investment in companies treating water at sites, and interesting exit channels.

EnerTech’s Investment Latitude

With Wally Hunter of EnerTech Capital

What is EnerTech’s strategy?

Wally Hunter, EnerTech Capital:

Strategically, we invest from what I call “the wellhead to the wall socket.” It is around energy technology. We don’t define clean tech as a separate asset class. Our view is that we’re energy guys with a focus on technologies that enhance existing energy assets and then look at renewables as one aspect of new energy as part of that.

Being in “the wellhead to the wall socket” gives us a lot of latitude to move our investments around in different areas, from oil and gas through building energy efficiency and smart grid-type applications. We’re much broader. We’re investing now out of our fourth fund. In September, we raised about $120 million fresh pool of capital with great support from a number of the Canadian LPs at this conference today.

Where is there innovation in the North American energy sector?

Hunter: The surprising part is that a lot of what were staunch, conservative oil and gas guys are starting to take new technologies and integrate them into their operations because they have to find a way to become more efficient. There are always challenges around competitiveness in that sector, fluctuations in oil and gas prices. They’re looking for ways to bring down their cost base and things like water remediation. You think about how much water you have to pull before you actually get to the resource you want and you can longer pond that water, which means you have to treat it. That creates an opportunity for new technologies that can be put actually on-site to clean up and remediate that water, so you can reuse it in the production side.

We’re finding a lot of those historically big oil and gas companies that wouldn’t look at putting a new technology are doing it because they view it as a way to enhance their profitability. For us, that creates a great investment opportunity or investment theme around it.

It’s at both ends of the spectrum for us. The oil and gas through to the utility, and then the consumer is now also well aware of things they can do easily in their home or in their business that help to improve the overall efficiency.

What fields are these innovators coming from?

Hunter: We’re seeing bigger company technology guys spinning out opportunities that may not have been relevant to the big company or they have a skillset that would apply to starting up a company. Say they came out of a utility background. They may be doing a new smart-grid technology. You saw Nest, which got bought by Google for $3 billion. A lot of those guys came out of both the background of putting together things from what Apple designed to guys who really understood how smart thermostats work and what the consumer’s looking at. You’re seeing a variety, a mix of those two industry guys, and then you have people who understand how you get into the consumer’s hands.

Give us an example from your portfolio of water treatment at oil and gas sites.

Hunter: We have two companies around the space. One is called Filter Box, which is in Calgary; they remediate water from oil and gas, particularly around processed water, meaning that it’s your water you’re pulling from the well that you have to treat. Using reverse osmosis membranes or green chemicals to help clean up the tailings, ponds, and things like that around heavy oil.

The second company we just invested in is called Mark Water and they clean up drilling fluid. Part of the problem now in drilling is that there are very deep, long, horizontal wells with significantly higher temperatures. This company actually helps to remediate oil-based mud. Two-thirds of the drilling muds now are oil-based, not water-based. You actually can recover very expensive drilling fluids as part of the technology they have. These are companies with real revenue. They’ve got customers. They’ve got their units in field and they’re trying those units with a number of large oil and gas companies.

What percentage of your portfolio is focused in oil and gas?

Hunter: On a rough percentage basis, 30% to 40% of the portfolio has some focus around oil and gas. One of our strategic investors in the latest fund is Newalta and our offices in Calgary are actually inside Newalta. Their primary focus is around water waste from oil and gas. We see a lot of interesting technologies from them that apply and deals that come out of the relationships they have in the space.

Are there any interesting exit channels we should know about?

Hunter: The public markets are fairly receptive to that whole sector now because the oil and gas guys that bought typical E&P companies on the TSX are now looking for the play in technology around oil and gas drilling.

Another good example is a company we’ve called HBC, which is a rollup of a series of technologies around the horizontal-drilling tool, like high-temperature batteries. You’re going deeper and longer and you need to withstand much higher temperatures. Measurement well drilling applications, which help you steer the drill bit more accurately as you’re searching for oil. We rolled up a bunch of companies in HBC that address that market. There are opportunities there, but that’s the kind of company you could eventually get public. It’s doing a sizeable chunk of revenue from those businesses now because the receptivity to the Canadian institutional investor base is high, meaning that large institutions are used to plowing money into E&P. This isn’t far out of what they normally would do. For a lot of these companies we’re looking at, the public markets are quite viable in Canada as an exit.

Where is EnerTech focusing its energy investments?

Hunter: Canada’s become a more significant part of our strategy because of the strong tie to energy north of the border. The idea is, we have specialization in oil and gas within our firm. The firm came out of an electric utility, so we have very strong knowledge around smart grid and things that relate to utilities and consumer power usage in homes. That gives us a much bigger advantage from a venture capital point of view to do a much broader scope in energy.

The funds that were strictly renewables and focused only on solar have had a tough time with the gas prices where they’re at. Wind’s been struggling and solar—there have been great technology innovations there, but you’re starting to see it mature, too, as an industry. The big wins are well behind it and you’re going to see more innovation, but can you make as much money as VC? It’s hard to say.

We think there are better ways to make money in energy. Even if you’re not hitting 10 times your money every time, there are a lot of four and five Xs out there in traditional oil and gas technologies or in the utility side of it.

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