Ocean Power Technologies, Inc.

Price:$4.80

Price Range:  $6.85 - $2.23
(2011)

Shares Outstanding: 10,390,000

Total Cash:  $34M

  Brook Value:  $4.01

  Current Ratio:  6:15

Business Summary:

Ocean Power Technologies, Inc. engages in the development and commercialization of proprietary systems that generate electricity by harnessing the renewable energy of ocean waves primarily in North America, Europe, and Australia. Its product portfolio includes utility PowerBuoy system to supply electricity to a local or regional electric power grid; and autonomous PowerBuoy system that is designed to generate power for use independent f the power grid in remote locations. The company’s autonomous PowerBuoy system is also used for sonar and radar surveillance, tsunami warning, oceanographic data collection, offshore platforms, and offshore aquaculture applications. Its customers include public utilities, independent power producers and other governmental entities and agencies.

Ocean Technology is a revolutionary participant in the most important growing industry today in the world.  In fact, a recent study by the International Energy Agency stated that there will be a need for $13.6 trillion dollars to invest in the global energy sector between 2010 and 2013.  There are various forms of so-called energy generation.  Utility companies manufacture electric products themselves.  The developing world has turned to coal, which is the main source of fuel for the energy sector.  China, for instance, has need for $1.77 billion dollars for 2011 alone to generate electricity.  And in the next 10 years there is a need for $1.7 trillion in China.  In India, the need is $128 billion and tiny Vietnam is $120 billion.

These numbers not only generate jobs but require tremendous amount of money, and it requires various methods by which some activities converted into electricity, into the wire system and then disseminated for perspective needs.

An interesting but very illustrative example is China.  China is the largest energy consumer in the world.  70% comes from coal and the actual currently recognized coal reserve of 114.5 billion has to be augmented by purchase of coal from other sources, particularly from the neighboring Mongolia.  In fact, Mongolia has dedicated 90% of its coal production for China, and very soon most of the coal mining in Mongolia will be converted to electricity.  See Table 1. 

Mongolia:  Supply Center to China

•  Mongolia’s growth is correlated to China’s growth
• 2/3rds of Mongolia’s exports go to its trading partner:  China
• Mongolia exported $16.6 million tons of coal in 2010 and it is forecast to export 50 million tons of coal of 2015 and 75 million tons by 2025
• This export satisfies less than 50% of China’s electricity needs
• If we calculate 1 ton of coal at $100 then in the year 2025 the export of coal would amount $7.5 billion but more likely $15 billion at the $200  price for coal per ton

The actual segment or dedicated services other than electric power stations are well-known colorful examples.  They are namely:  (1) Nuclear; (2) Wind; (3) Solar; and (4) Fuel.  If it goes through these four alternatives, an interesting picture emerges.

Uranium has its political implications.  The building of uranium power stations will take 15 years.  It has to get dedicated uranium service from the mines, and the political controversy makes this source of energy highly questionable.

Wind has turned out to be a small, not particularly efficient method.

Solar, which has a colorful background but deficit-ridden productions, is slowly getting the question mark.

As far as oil is concerned, there are serious problems.  Whereas the world today more or less is resigned to the $100 oil price, the monetary situation in almost every country is indicating that to find the foreign currency to pay for oil is very difficult and since most countries, particularly the western countries, are getting into worse sand worse financial picture, an expenditure of foreign currency on a year-to-year basis is getting more and more expensive. 

Industry Analysis

The US electrical equipment industry is divided into two segments, electrical components & equipment and heavy electrical equipment.  The electrical components & equipment segment includes manufacturers of small-scale electrical equipment, such as motors, electric heating, and cooling systems, small generators, storage batteries, and related equipment.  The heavy electrical equipment segment includes manufacturers of power-generating equipment and other equipment, such as power turbines, machinery for fixed-use, and large electrical systems. 

There are more than 2000 establishments operating in the industry.  The industry is cyclical and manufacturers distribute their products to other manufacturing industries, wholesalers, and the construction industry.  Major players are ABB (ABB), Eston (ETN), Rockwell Automation (ROK), Emerson Electric (EMR), Energizer Holdings (ENR), and Ametek (AME).

Establishing an efficient and flexible supply chain drives manufacturing excellence.  With increasing competition from global players, minimizing inventory and lead times while maximizing top-line with quick-to-market products is crucial.  Electric power equipment, including metal-clad switchgear, switchgear relays, and ducts, has growth potential in the electric utilities market due to the increasing investment in automated systems, which results in greater efficiency and lower operating costs.  Latin America and Asia, with their increasing population, rapid industrialization, and strong infrastructure investments, represent a substantial portion of the export market.

EBITDA Margins:  Companies with higher EBITDA margins and revenue growth rates are outperforming companies with lower EBITDA margins and revenue growth rates.  Companies for this scatter plat have a market capitalization between $3.2 Million and $389.8 Million.  Companies with NA or NM values do not appear.

Earnings Yield:  Companies that exhibit both a high earnings yield and high revenue growth are generally more attractive than companies with low revenue growth and low earnings yield. 

PEER GROUP:  Electrical Equipment

Recent  Market  Net Sales
Ticker  Company Name  Price ($) Cap ($M) TIM ($M)
OPTT  Ocean Power Technologies 3.55  37       7.23
POWR  Powersecure Intl. Inc.  4.52  86   101.25
BWEN  Broadway Energy Inc. 0.38  63   164.44
GLPW  Global Power Equip. Group 24.09           390   499.43

Corporate Description

Ocean Park Technology is in development and commercialization of proprietary systems that generate electricity by harnessing sea power, primarily in North America, Europe and Australia.  It is part of the family of electricity generators considering that the limits of the oceans are unlimited and the equipment that is currently used around Scotland or Japan can be duplicated.  The restricting element is the amount of money and intellectual power and manufacturing capability to popularize Ocean Park Technology.

It is an autonomous PowerBuoy system designed to generate power for an independent power grid at a remote location.  The company’s PowerBuoy system is also used for sonar and radar surveillance4, offshore agricultural application.  Its customers include public utilities, independent power producers, and other governmental entities and agents.

However, the most important concept which can be described is the system, the utility and the PowerBuoy system that is being used in three or four locations in the world.  The PowerBuoy generates electricity, which goes into a grid and the grid, of course, can deliver that electricity wherever it is testing it to do so.

For longevity and securities, the utility of PowerBuoy is attractive.  All the negatives associated with uranium, wind are not existent.  Furthermore, the cost is very large compared to PowerBuoy system.  Partially because an individual PowerBuoy and its installation is about $3 million, whereas solar plants running to hundreds of millions of dollars.

We should not forget that electricity is basically in the final analysis a small item.  Therefore, major capital investments in PowerBuoys or solar energy is dictated by logic.  To build a plant of $700 million is a much greater commitment than to construct, install and utilize a PowerBuoy in the middle of the high seas.

The PowerBuoy technology is actually a small company.  It has 10 million shares.  It has 40 million cash, which means that the stock at $4.25 is selling just about book value or rather even liquid book value.

The concept that I have is that from the three PowerBuoy systems, in three years we will pass 10 or 12 units and its popularity will vastly increase.  At that time the rate may go up 15, 20, 25 units, which would bring about higher stock price.  The higher stock price in the PowerBuoy system and power technology to bring about an easy capital raising mechanism of $25-$50 million and would enable the company to become a much greater entity and what is important a recognized supplier of electricity at various parts of the world.
 
Business Strategy

• Sell equipment and service contracts, rather than energy.
• Concentrate on North America, Europe, Australia, Japan
  • Target high energy cost and/or high subsidy regions of the world
• Accelerate revenue streams from autonomous PowerBuoy systems and marine energy infrastructure services.
• Increase utility PowerBuoy system output from 150kW to 500kW and grow production volumes to improve economics.
• Collaborate with other organizations
  • “Smart part” built at OPT’s facilities; outsource steel work and balance of plant
  • Partnerships with potential customers with strategic interest in OPT.
    • Leverage combined expertise
    • Financial risk sharing
    • Maximize customer funding of technology developmen.

Autonomous PowerBuoys

Technology Readiness

• First autonomous PowerBuoy testing in 2004 off Stat eof Washington under Lockheed contract
• PB40-rated system operated off New Jersey during 2005-2207
  • Withstood Hurricane Wilma
• DWADS Power Buoy prototype testing in 2010 demonstrating stationkeeping for US Navy
  • Power generation in autonomous mode to maintain station and provide power intended for a sonar-based maritime security system
• LEAP PowerBuoy “mission proven” in 2011 in successful integration with US Navy’s radar-based, operational maritime security system
• Persistent power in all wave conditions, using proprietary power management system
• Withstood Hurricane Irene

Key Customers and Partners to Date

• US Navy
• Lockheed Martin

Targets/Near-Term Goals

• Report data following LEAP ocean performance
• Actively marketing to customers for maritime security applications and offshore oil and gas sector

Granted today nobody talks about ocean power technology or PowerBuoy, but everybody talks about all the other electricity-generating ideas such as uranium and wind.  However, there are very serious handicaps to all the other methods.

Like any other specialized manufacturing and services companies, the stock is volatile.  At the same time, you should keep in mind that an increase of recognition can happen any minute would be a highlight for the company and can increase the price of the stock, and the development of the company would be accelerated.