Big Catch for Ocean Power

Earlier this week shares of Ocean Power Technologies (OPTT:  Nasdaq) soared as the company announced its first commercial order for its PowerBuoy hydrokinetic devices.  The order represents a modest $975,000 in potential revenue, but the customer, Mitsui Engineering and Shipbuilding Co. Ltd., provides extra value as a discerning buyer.  PowerBuoys are built to capture the energy in ocean waves to drive an electrical generator.  Power output can be delivered to nearby ocean or terrestrial installations.  With worldwide interests in the numerous marine markets, Mitsui could develop into a large and long-standing customer.

OPTT traded as high as $6.79 in the first hours following the earnings announcement, representing a fourfold increase from the closing price the day before.  Since that first frenzied day of trading with unprecedented volume, things have settled down a bit.  However, it is clear the Mitsui opportunity has resent investors’ views on Ocean Power.

Quick to take advantage of the newly kindled fervor, Ocean Power announced the pricing of a registered offering of common stock.  A total of 417,000 shares with a warrant attached to each will be sold at $4.60.  Each warrant buys about a third of a common stock share at $6.04 per share.  A fortuitously planned shelf registration statement facilitated the fast response.

Ocean Power will take in about $1.6 million in net proceeds after the investment bankers get paid.  This is not a large offering, but just enough to top off the bank account without diluting current shareholders more than necessary.  Management appears to have the view that, even after the dramatic price increase, the shares still do not reflect the long-term earnings potential in Ocean Power’s technology.

Mitsui is leasing the PB3 PowerBuoy which has the capacity to generate 350 watts of continuous power.  The structure floats on the ocean surface from a tethered attached to the ocean floor. As the wave move the direct drive generator, the electrical charge is stored in an on-board battery pack.  Power can be delivered to a nearby marine installation such as an off-shore oil rig or to coastal installations such as a communications network.

Ocean Power expects more to develop in its relationship with Mitsui Engineering & Shipbuilding.  Mitsui is among the largest construction companies in the world, with interests in energy and environmental projects as well as shipbuilding and infrastructure construction.  Mitsui is expected to be a strong advocate for the PowerBuoy if it begins designing the ocean-based power source into its assignments.  Mitsui has recently been trusted to address customer problems in a wide range of projects involving underwater inspection, marine position keeping and deep-sea remote observation.

Indeed, the range of potential applications that Ocean Power sees for the PowerBuoy is as wide as Mitsui’s business interests.  In a recent investor presentation, management outlined multiple addressable markets:  ocean observing, communications, off-shore oil and gas installations, and off-shore wind energy projects.  Likely, the new capital going into Ocean Power’s bank account this week, will be used to reach customers in these markets.

It was impressive that Ocean Power was able to take in capital at a strong price  -  at least from the corporate perspective.  However, one lease to Mitsui  -  and it is a lease, not an outright sale  -  may not be sufficient to support the current price.  Effective execution on market penetration will be the key for OPTT valuation.  It is then important that Mitsui fulfills the promise so many have placed in that relationship  - bringing in a big catch of fish for Ocean Power.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.