by Debra Fiakas CFA
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 Buoys Up Ocean Power Tech”, 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 “Ocean Power Nets A Discerning Buyer” 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.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
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.