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OPTT, Microsoft of Ocean Wave Energy

|Includes: Ocean Power Technologies, Inc. (OPTT)

I love to buy into a company that is undervalued, undiscovered, out of favor, has investor fatigue, or is misunderstood, and unlike Buffet or Lynch, I will play the cyclicals, and even the ones without a ‘moat’ if I feel the timing on a risk/reward basis is favorable. Anyway, my favorite sector is the Energy sector, as I know this sector very well. I am always on the lookout for either beaten down value plays, out of favor commodity cyclical rotation plays, industry ‘game changers’, and watch the political and technology landscape as well, for trends and influential factors that can result in favorable conditions.
I have given a good deal of thought to the area of Electrical demand, both on a World scale, and also locally, here just in the USA. As is logical, humans continue to increasingly rely on more and more Electrical generation, for their comfort, safety, and needs, and basically just because we are lazy. You may look around you and see two computers where there was once one, an Electric can opener where there once was the manual one, an Electric Dishwasher, when it was done by hand, Comforts of HVAC instead of opening up the windows, burning wood or any other such thing, just for example. Car manufactures are thinking of making Hybrid-Electric cars running on a Battery that you can charge in your garage. Electric is just plain convenient. This is not going to stop, decrease or go away anytime soon. In the third world and developing nations, there is a super rapid pace of advancement, as the infrastructure grid is developed.
Currently most of the Electricity in the World, and the US is produced from heat engines commonly called steam turbines, from the combustion of fossil fuels, mainly burning Coal, with the remaining from Nuclear, Hydro from Dams, Oil/NG generation, usually ‘peaker plants’, and the smallest amount is from “Renewables” at about 2.4%, which could be solar, wind turbine, geothermal, biomass,and then “other” which is less than 1%. Its this ‘Other” that I want to discuss, as I feel there is a very large and undiscovered market for Utility investment going forward due to two different occurring scenarios 1) Increasing pollution controls on ‘dirty’ sources, mainly Coal fired plants, Carbon Capture Cap and Trade legislation that will penalize or make these type plants more expensive to use going forward, with pressure coming from the increased effect of greenhouse gases on our environment, worldwide. Ok, you say why the “Other” and not the Solar, Wind or Geothermal that is currently in the ‘renewables’ sector? Here’s why. Electricity for the Utility generators has to be economically cost effective, reliable and have the ability to be installed and maintained on a cost effective basis. Solar generation only makes sense in just a few locations, and only generates during the day, when the sun is shining, and is currently cost prohibitive. Wind is not always blowing, and there is opposition to the large size and landscape impact, with again only a few places these are feasible, and the transmission grid is not in place, as its development usually would be far away from where the power is needed. Geothermal is too expensive, not reliable either, for long term use on large scale. So I come full circle back to the “other” The “other” in this case is Wave Energy from the Ocean. Earth is covered with over 75% water, mainly Oceans. There are a lot of advantages. As long as our planet has a Moon, providing gravitational pull on the planets Oceans, and the Sun doesn’t supernova to get so hot as to evaporate the Ocean waters (we would have other problems then), then Ocean Waves will be there. Most of Human Civilization and Urban cities/centers are located on the Coasts, right next to the Ocean, these are the heaviest populated areas, needing the most power anyway, that would not need large or long transmission infrastructure to accompany its development.
My knowledge of the Oil/gas industry, and the current political environment supporting renewable energy, combined with my research has led me to believe that there is an on-going shift in THIS country toward the use of cleaner burning NG for our use in the transportation sector, to supplant and eventually replace Oil. We use 20Mbo/d and import over 12Mbo/d , and this HAS to change. Current Elect generation using NG is about 20%, and if this NG is going to shift over to being used more for the transportation sector, then this lost Elect production must be made up, not to mention the increasing pollution and carbon sequestation issues on Coal, that is making it more difficult to grow in this area.

Again, the answer is Ocean Wave energy. This energy is renewable, free, always there, is harnessable day and night, does not take up valuable farmland or land needed for urban civilization, has a low visual impact, and is available on over 75% of the Planet, usually close to large city's, and has high power density that suggests it has the capacity to become the lowest cost renewable energy source. Ill say that again. Capacity to become the LOWEST COST renewable energy source. Do you think this would interest a Utility?

There are several different types of Technologies using Ocean Wave Energy to produce electricity that are both in development or testing and they can basically be broken down into two groups. Wave, and Tidal. I only want to discuss Wave, as I believe the Tidal group Technology is not really applicable for use in large Utility type installations, as the large size needed for such would interfere with Boat traffic navigation in a river or channel, among other issues,and Im looking mainly for Utility scale developmental usage that is applicable all over the globe. There are known wave maps for the various offshore locations throughout the world, that are well known, and any area with an average over 15kw per meter has potential to generate electricity at a price competitive with non-renewable sources. Thus, for Wave technology use there is: Attenuator, Point absorber or Buoy, Overtopper, Oscillating Water Column, Oscillating Wave Surge Converter competing technologies, by multiple manufactures.
To give some examples, Pelamis, Wavestar, are an Attenuator concept, with Pelamis having the world's first commercial wave farm open in 2008 at the Aguçadora wave Park near Póvoa de Varzim in Portugal.

AWS, SyncWave, OPPT, Wave Energy Tech, Wave-Bob are Point absorber types:

For Overtopper type you have WaveEnergy
Wave Dragon

For Oscillating Water Column: WaveGen
Ocean Lynx

The fifth and last major technology is called Oscillating Wave Surge Converter, and you have:

Wave roller
Carnegie or Ceto ( Cylindrical Energy Transfer Oscillating) (ASX: CWE)


My research suggests there is only ONE company that is USA PUBLIC, that is in development of a commercial, economically viable and do-able, utility-scale renewable wave energy project. That company is OPTT.
or Ocean Power Technologies, Inc, and they have a letter of agreement with Lockheed Martin, “to collaborate in the development of a utility-scale wave power generation project in North America.” This company has been around since 1994, raised $89.9 million from the closing of an United States IPO on April 30, 2007. They have over a decade of ‘in ocean’ experience, proven ‘storm wave’ survivability, formed by Dr. George Taylor, and he's still there, and has over 7% of outstanding shares, making his money aligned with the common shareholder. OPTT uses PowerBuoy technology, and is contributing to a Wave Hub off the coast of St. Ives, Cornwall England, up to 5MW, has others off coast of Oregon, Iberdrola, Spain, and Orkney Islands, Scotland. Japan expressed recent interest. Has multiple contracts with US Navy for Security and Defense power projects, and just received a new one of $2.4M from USN for the power buoy LEAP program. They have 40 issued US patents with 16 US patent applications pending.
Here is the kicker. This company has over $80M in CASH, has only 10.21M outstanding shares, and almost zero debt, meaning they have $8 per share in cash, but its trading at UNDER cash, with a price target of $14, and increasing backorders. They have recent insider buying,  with open market purchases, as of 22Sept09, and low current institutional interest. At the current price, with such a strong balance sheet, increasing customer base, number of patents on their equipment, Lockheed Martin as a developmental partner, and the trend towards incentives for ‘renewable’ clean electricity, getting away from Carbon fuel burning based generation, this is just a “No brainer” to me, and represents a very good entry point for an alternative energy long term play into a possible major producer of a product that could be in demand all over the world. This is a small cap play on renewable Electricity generation, with an extremely strong balance sheet in a growing market. I DO have shares in OPTT, as I have not been able to find any other PUBLIC company, other than Aquafina renewables, but which is a penny stock and had a failed product, that has this kind of exposure to clean renewable ocean energy at this kind of a valuation discount. Disclosure, Long OPTT.