“There is nothing more beautiful than the way
The ocean refuses to stop kissing the shoreline,
No matter how many times it’s sent away.”
Sarah Kay
The first two
lines of the prospectus for the April 2017 public stock offering by Ocean
Power Technologies (OPTT: Nasdaq)
say all investors need to know about the market opportunity for the company’s
wave power generation products. First,
the earth’s surface is covered 70% by water.
Second, over 40% of the world’s population lives within 150 miles of a
coastline. If the earth is dominated by
water and a good share of our energy-hungry population lives near that water,
doesn’t it make sense to turn the ocean into a renewable energy source?
If market
opportunity based on common sense was all required for a stock offering, Ocean
Power might have been able to sell new shares nearer its 52-week high price of
$15.65 rather than a penny below the 52-week low of $1.31. In the final trading days leading up the
pricing on April 27th traders paid as much as $3.67 for the
shares. However, underwriters were
frightened off, setting the offer price at a NEW 52-week low.
Perhaps there is more to prove than market opportunity…or
market opportunity is not what it seems.
One question
mark could be the company’s flagship technology. Ocean Power Technology is on the cusp of
commercializing a line of ocean wave conversion systems branded PowerBouy. The PB3
PowerBuoy is intended for use in remote locations off-shore and can
generate up to three kilowatts of peak power.
It comes with an energy storage system that has a 150 kilowatt hour
capacity. As we have noted an earlier
article in September 2016, “Navy Doubles Down on Ocean Power”,
the U.S. Navy has been an early and loyal follower. The Navy’s product development grant was on
top of a deal discussed in an earlier article “Big Catch for Ocean Power” in
June 2016, which described a lease of the PB3
by Mitsui
Engineering and Shipbuilding.
Thus it seems PB3 PowerBuoy is likely a strong product,
built on sound technology and delivering the performance its engineers have
promised. Testing by two high-profile
customers provides strong endorsement.
However, the intended applications for the PB3 in remote locations are a long way from “the 40% of the world
population that lives 150 miles from the coast.” If the intended market is only
in remote locations, market opportunity might not be as suggested by the
opening lines of Ocean Power’s prospectus.
Ocean Power has
identified four different types of customers:
oil and gas, defense and security, ocean observing and
communications. The ocean is a busy
place and there are numerous installations in each of the four categories. On the plus side, potential customers would
be easy to identify and target with marketing and sales campaigns. Ocean Power is even narrowing its target
markets to certain of plum geographies to make the most of its new capital
resources. Then again, demand,
especially in the oil and gas sector, might be subject to periodic peaks and
lows as each customer group contends with own business cycles. Perhaps most important, the remote location
market will be rife with competing energy solutions, such as solar power, fuel
cells or systems using conventional fuel.
Management contends its solutions will be viewed as a cost-competitive
solution, and this may be necessary to gain a place at the table.
Investors might
now be getting a hint as to why the OPTT offer price was set at a record low
level rather than at a high. Even if
market opportunity is not as significant as is implied by the ‘40% of the
population’ opening line of the prospectus, Ocean Power may still have a place
in the hydrokinetic energy industry. The
company will be among few bringing ocean power solutions to remote
installations in those very waters. That
should provide some upside to the $1.30 follow-on offering price.
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.
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