EBOOM CAPITAL: Power From the Ocean Has Big Potential, But Only One Pure Play for Investors

PowerBuoy® converts wave motion to electricity

Energy consulting firm IHS Inc. (NYSE: IHS) issued a report this week saying 1.8 gigawatts (GW) of ocean wave and tidal energy projects are in “the pipeline”. For investors wanting to participate, there is only one publicly traded pure-play company in this business: Ocean Power Technologies, Inc. (NASDAQ: OPTT).

Nearly all the companies behind these projects are large hydropower utilities, which see synergies with coastal tidal power, and offshore wind developers, targeting synergies of wave energy. Most of the projects are in Europe, but others are in Australia, South Korea, Japan and the United States. 

To put 1.8 GW in perspective, the United States has installed wind power capacity of 35.5 GW, the 130 turbines of the proposed Cape Wind project offshore Massachusetts would produce a peak of 450 megawatts (0.45 GW), and the largest operational solar photovoltaic installation in the world operates at 80 MW (0.08 GW) in Sarnia, Ontario. The rule of thumb is that one megawatt powers the electricity needs of 300-500 households.

The IHS report is a “good news - bad news” situation for the long-suffering shareholders of Ocean Power:

• The good news is that progress on wave energy projects around the world might bring more investors into the picture. 
• The bad news is that the length of “the pipeline” is pretty vague in the IHS press release. Can Ocean Power hang on long enough to reap some rewards?

Ocean Power, based in Pennington, New Jersey, was founded in 1994 by Dr. George W. Taylor, who was CEO and is now Executive Chairman. The company first went public on the London AIM market in 2003. In April 2007, the company raised $90 million at $18 a share in a U.S. initial public offering and listed on NASDAQ.  (Taylor owned 14.8 percent of the company after the U.S. IPO, but today holds only six percent.)

Three days after the NASDAQ listing, the shares fell to $15.55, briefly climbed back up to the IPO price in late 2007, then began a long decline to the current $6.39 (October 21 close). The shares are down 39 percent in 2010, but have recently turned up: up 18 percent over the past three months, up 22 percent over the past month, and up 11.3 percent over the past five days.

The company’s financials are depressing, but not unexpected for a development-stage company pioneering a new industry. According to its 10K annual filing with the Securities and Exchange Commission, the company lost $19.2 million in fiscal 2010, $18.3 million in fiscal 2009 and $14.7 million in fiscal 2008. As of April 30, 2010, Ocean Power had an accumulated deficit of $90.4 million.

The losses are continuing. For its latest quarter ended July 30, 2010, the company lost $6.3 million compared with revenues of $1.37 million. Ocean Power gets its revenue from development and field testing and the largest customer is the U.S. Navy. 

Fortunately, the company has a strong cash position. At July 30, 2010, the company reported total cash, cash equivalents, marketable securities and restricted cash totaling $60.8 million, which Ocean Power says will be sufficient to carry the company through 2012.

So what has Ocean Power achieved with all this shareholder capital? Quite a lot actually. 

The company’s proprietary PowerBuoy® system captures wave energy using large floating buoys anchored to the sea bed to convert wave motion into electricity using power take-off systems. Ocean trials began in 1997 off the coast of New Jersey and PowerBuoys rated at 40 kilowatts each have been installed offshore New Jersey and Hawaii. The PowerBuoy grid interface has been certified for use in several countries. 

Ocean Power progress includes:

• Completion in September 2010 of the first-ever grid connection of a wave energy device in the U.S. at the U.S. Marine Corps Base Hawaii. The company says this connection demonstrates the ability of PowerBuoy systems to produce utility-grade, renewable energy that can be transmitted to the grid in a manner fully compliant with national and international standards.
• Development of a 1.5 MW 10-PowerBuoy power station at Reedsport, Oregon, with construction to be completed in late 2010 and ocean testing to occur in 2011. The U.S. Department of Energy (DoE) has given $4.4 million of funding in two stages for this project.
• An additional grant of $3.9 million in 2010 from the DoE for development of a 500 KW PowerBuoy.
• Award of $2.75 million in funding to provide an autonomous PowerBuoy wave energy conversion system for the U.S. Navy's near-coast anti-terrorism and maritime surveillance program. The program will eventually include total funding of $15 million over four years.
• A 2007 $1.8 million contract from the Scottish Government to build a 1.5 MW PowerBuoy system at Orkney, Scotland. The buoy has been built and Ocean Power says in-ocean trials will begin in late 2010.

Unfortunately, what looked in 2006 like it would be Ocean Power’s first major achievement has apparently fizzled. As is explained on the company’s website, in 2006 Ocean Power formed a joint venture with Iberdrola S.A., global oil major TOTAL, the Spanish Government and a local Spanish regional development agency for the turnkey construction of a wave farm off the north coast of Spain.

As is not explained in the website but in the company’s 10K filed with the SEC, the initial PowerBuoy system for this project was deployed in September 2008. After a short testing period, the buoy was removed from the water for work on improvements to the power take−off and control systems. No further developments have been reported by Ocean Power. 

Ocean Power has three other projects in limbo: 

• A 2008 agreement with three major Japanese companies for construction of a demonstration wave power station in Japan; 
• A demonstration project off the coast of Cornwell that began in 2006 and for which Ocean Power is seeking funding to continue; and 
• A November 2009 announcement that Ocean Power and a partner had been awarded U.S.$61 million from the Austrialian government to build a 19 MW wave power project conditional on the companies securing additional funding. 

Photo credit: Ocean Power Technologies

DISCLOSURE: The writer has no positions in, or professional connections with, these companies.