This article is an update to my prior articles (1 and 2) which I direct you to for background if you aren't familiar with the story. As a quick overview, Acorn Energy (ACFN) is a public company which makes investments in a small portfolio of private companies in the clean-tech and energy space. Prior to this quarter's earnings release, Acorn was a dividend paying stock; however, this dividend was discontinued in May as management will be facing a liquidity crunch in roughly 8 months (math below). But first, after reading through the transcript from the 1st quarter conference call posted here, new information on the cost and configuration of Acorn's subsidiary, USSI's product is available.
USSI will increase well cost by as much as 300%
On the first quarter 2013 conference call, several analysts asked about the implementation and costs of the USSI seismic system. Management indicated for an average implementation, an E&P company would want between 20 and 100 levels per hole with 3 or 4 observation holes per production well. The observation holes need to be at least 1,000 feet deep.
Anadarko Petroleum (APC) is drilling and completing Eagle Ford horizontal wells at $5.5-6MM per well. Generally, a vertical well runs around half the cost of a horizontal. The tests being done by Acorn are for vertical applications. Using half the cost of the high end of Anadarko's horizontal cost implies a vertical well cost of $3MM.
Four 100 level arrays will cost $10MM to the customer, according to management. Assuming the customer goes with the smaller array mentioned on the call, a four array 20 level system would run $2MM. Adding the smallest USSI 4 well system of 20 levels each would result in a total well cost of $5MM, 67% higher than the cost of a standard completion. If the 100 level configuration was used, the cost would increase to $13MM, a 333% increase! This cost increase is BEFORE the cost of drilling observations holes in which the USSI system must be placed which would only further hurt E&P company IRRs.
While it might make for a nice science experiment, one has to question whether or not there is a serious possibility of E&P companies tripling their drilling capex for the installation of USSI's system.
When an analyst asked would the system add a "significant increase in well cost" for potential customers, Acorn management responded, "I would tend to agree with [the analyst]".
Cash Flow Problems Persist
Average free cash flow (OCF less capex) for the past 4 quarters is negative ($6.0MM) per quarter with trailing twelve month free-cash-flow of negative ($23.8MM). As of 4/30/13 (p28 1Q13 10-Q), the company had $16.3MM in cash at the corporate level (including 100% of all corporate cash held in the U.S. or elsewhere), which based on the trailing twelve month free cash flow, leaves Acorn with a hair over 8 months of cash with the implication being the company completely runs out of cash sometime in January 2014. The discontinuation of the dividend is evidence of management's realization that its cash flow problems are real and fast approaching.
The 10-Q states management is "contemplating whether and on what terms" the company might sell additional securities and that the company expects it "may conduct such an offering in 2013" (p28. 1Q13 10-Q). With net PP&E of $1.6MM as of 3/31/13, an asset backed loan or secured debt offering is out of the question leaving the most likely offering being a secondary.
Please see prior write-ups for a discussion of valuation based on sum-of-the-parts which is still sub $4 based on the comps used in prior valuation.
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