Zedi was co-founded in 1987 by Don Clark and Dr. Ito Tokunosuke. Zedi’s founding and early growth was based on a simple premise: the traditional method of measuring gas well flow, pressure, and other parameters was inadequate.

The conventional method of measurement involves a rotating paper chart that records well flow and pressure over a set period of time, typically a week to a month. At the end of that time period, someone drives out to the wellhead, removes the written-on chart, and replaces it with a fresh one. Then he or she drives back to the office and records the data from the chart by hand. At the end of each month this field worker submits the compiled data the well owner/CFO/controller/etc.

The piece of paper pictured above is what well owners were (and in many cases still are) using to get paid by the pipeline owners to whom they sell their gas. Can you imagine invoicing your customer with a drawing?

Obviously this was a pretty backwards way of doing things. The inefficiencies are numerous:

-What if a well experiences production problems? The well owner can’t respond quickly because he or she won’t know about the problems until the time at which the chart is collected.

-What if inclement weather—not uncommon in Northern Canada—makes a well temporarily inaccessible? The well owner won’t be paid until the well becomes accessible again.

-What if something unusual happens to the well flow or measurement? What if, say, the pen literally goes off of the chart? Neither party will know how much gas changed hands during that time.

-What if a field worker makes data entry errors? What if a well is in a remote or hard-to-access location? These problems create labor, gas, and vehicle costs that are obviously inefficient.

At Zedi, Dr. Tokunosuke’s solution was to replace this paper chart system with a flow measurement device that could record flow and other data electronically, and then transmit it via cellular signal, or, if the well was off the cell grid, then via satellite. This method of recording well production data would reduce well operating expenses and measurement errors, enable near-real-time data collection, and make hard-to-access wells much easier to monitor.

The culmination of this idea was Zedi’s flag-ship product, the Smart-Alek, pictured below. The Smart-Alek, which costs approximately $10,000, offers complete remote flow monitoring via cell or satellite, and works under almost any weather condition.

With the Smart-Alek as the foundation, Zedi has built a broad line of innovative flow measurement products that span the spectrums of price and performance. Customers who want electronic data but don’t need remote monitoring can buy the EFM Walk-Up, which records information electronically but still requires site visits to collect the data. Customers who need protection from extreme weather can use the Smart-Skid, a fortified housing designed to accommodate a number of complementary Zedi products. Customers who want to control an oil well remotely can use the (recently acquired) Silverjack pump in concert with Zedi Connect software in order to monitor and, if needed, modify pump parameters such as stroke length and speed, among others. Customers who own high-producing wells and want to automate the well optimization process completely can use Zedi MTRAC. And so on. Zedi even offers paper charts and electronic chart processing for those few Canadian customers who still prefer them.

More importantly, Zedi has built a comprehensive suite of cloud-based software and data products around these devices. All the recorded data is logged in standardized databases stored on redundant offsite servers owned by Zedi. Zedi-designed software enables well owners to monitor, analyze, and optimize well production, as well as compare production data to historical and comparable producing wells. Today Zedi can output well production data straight to an IFRS-compliant format (by comparison, the conversion of chart data to financial data needs to be audited). The only thing a Zedi customer needs in order to access this suite of products is a web browser.

Selling these products is good business. The hardware devices, which are typically installed on a well shortly after the well drilling is completed, range from $3,000 for the simplest product to $500,000 for the most complex. The average across the entire line of gas monitoring devices (referred to by Zedi as “field instrumentation”) is about $6,500. On this $6,500 of revenue, Zedi typically generates a 30-45% gross margin.

Much more importantly, the Smart-Alek, Silverjack, MTRAC, and a few other devices utilize wireless data collection, and in some cases analytics and production optimization. On average, the customers that use these devices and services pay Zedi $90/month, or $1,100 annually, per well. The gross margin on this revenue stream is likely to be extremely high given the lack of associated costs. I would expect a gross margin comparable to what most cloud-based software companies earn.

Since entering the market, Zedi has been steadily gaining market share. All of Zedi’s competitors on the hardware side of the business (Emerson, ABB, Weatherford) are multi-billion dollar companies, and for them, flow measurement is a fly on the wall. They offer flow measurement products because flow measurement falls within their purview, but they have much bigger fish to fry. So they offer competing products, but those products aren’t as good as Zedi’s—they aren’t as technology sophisticated, and critically, they don’t offer the back-end software services Zedi does. As a result, Zedi has slowly but consistently grown market share, to the point that Zedi products are now on more than 20% of all existing Canadian gas wells, and Zedi hardware is being installed on 30-40% of the Canadian new wells going into production.

In Canada, the company’s products are ubiquitous among tier 2 and tier 3 gas producers. The tier 1 producers typically use internally-developed products, except when wells are situated outside of the producers’ telecommunications grids, in which case the tier 1 producers will use Zedi products. Future growth in Canada will come from continued market share gains at the expense of most competitors, including, probably, the tier 1 producers, as their in-house systems are likely inferior to Zedi’s product offerings. The U.S., which Zedi only entered in a meaningful way a few years ago, is also an important growth opportunity, and I will discuss it in detail later.

The big growth hurdle Zedi faces at the moment is the lack of new wells coming online. The chart below, courtesy of the CAODC, paints the picture well:

Hydraulic fracturing—fracking—is the culprit for this collapse in drilling. How this collapse came about and how exactly it has affected Zedi will be the topic of the next post.