Newsletter

February Profile: Energy Power Systems LTD (OTC BB: EYPSF)

February 10, 2001
Volume IV, Issue 13
Email : info@otcjournal.com
URL : http://www.otcjournal.com

To OTC Journal Members:

Industry analysts have been predicting a world wide energy shortage for years and the bubble finally burst in 2000. Oil more than doubled during the year causing serious financial pain at the gas pump. Natural gas exploded off the charts with a 500% move from $2 mcf(1,000 cubic feet) to $10. Natural gas has settled in at the $6 range, and analysts believe it will stay at these levels for a long time.

We're all paying $40 to fill our gas tanks when it used to cost $25. If the pain at the gas pump is a tooth ache, our utility bills are major oral surgery. When California legislators deregulated the utility industry they did not foresee critical shortages of natural gas, the fuel of choice to run power plants. Deregulation has become a disaster, and utility costs have risen so high that many small businesses are being forced to close their doors. In some cases electrical power is not available at any price, and rolling black outs are the norm in the Bay area.

Reserves of natural gas are at an all time low. OPEC is cutting oil production because they are enjoying windfall profits at $30 a barrel. The future looks bleak for energy consumers.

It should come as no surprise that someone is making a lot of money off this surge in energy prices. Vertically integrated behemoths like Enron (NYSE: ENE), Duke Energy (NYSE: DUK), and CMS Energy Corp (NYSE: CMS) are trading at or near their all time highs off windfall profits.

We have uncovered a micro cap company that is perfectly positioned to benefit from inflated energy prices. With market dollars running up stocks of the large energy producers, interest will funnel down to smaller companies positioned to become profitable from the new pricing. The stock has minimal downside risk and exciting upside potential. This company has significant competitive advantages in the search for new energy sources. We believe this investment represents an opportunity to recoup your hard earned money spent on exorbitant prices at the pump and skyrocketing utility bills.
 

February Profile: Energy Power Systems LTD (OTC BB: EYPSF)
  • Stock Listing: OTC BB: EYPSF
  • Estimated Shares Issued and Outstanding: 5.1 million
  • Estimated Public Float: 3.1 Million
  • Closing Price and Volume: $2.95 on 25,000 shares
  • Market Capitalization: $15 Million
  • Estimated Book Value: $2 per share
  • 52 Week High and Low: $5/$.75
Energy Power Systems Limited is a vertically integrated Independent Power Project Developer, an Oil & Gas Exploration and Development Company and a Contractor of Infrastructure Projects. One of its three divisions generates a steady revenue stream, and all three have exciting upside potential in this new era of high energy costs.

Since their last audited financial statement (June year end), Energy Power added $1.5 million in equity, bringing the company's net assets to about $10 million US. With 5 million shares issued and outstanding, the book value (liquidation value) of the company is about $2 per share.

Studies indicate that companies in this group trade for an average of 2.8 times book value (Source: GEARS five year study). If the stock could find its way to the average price to book ratio it would be trading at $5.60, which is a 90% return from yesterday's closing price of $2.95.

Each of their three division are poised to profit form the energy boom- As follows:
 

Engineering Division: M&M Engineering and The Port aux Basques Fabrication Facility

M&M Engineering Limited has been in business since 1968. M&M is an industrial, mechanical and electrical contractor. A subsidiary produces steel components for structures and heavy industry, manufactures pressurized vessels and tanks, and provides in-plant fabrication, welding and assembly services for the offshore oil industry at its 40,000 square foot and 15 acre production yard in St. John’s, Newfoundland.

Energy Power also owns a 147,000 square feet fully enclosed fabrication facility on 40 acres of ocean side property adjacent to a deep sea quay at Port aux Basques, Newfoundland, along one of the major sea lanes of the world. This facility is available for use by M&M for large projects. The complex is ideal for both off-shore and onshore projects. Through this facility M&M can offer large off-shore infrastructure projects a variety of multi-metal fabrication, marine refurbishment and outfitting capabilities.

M&M currently represents all of Energy Power's present revenues. In the September quarter, M&M achieved $4.5 million (cdn) in revenues, which equates to about $18 million (cdn) annually at the current run rate.

There are a substantial number of new exploration projects being launched in M&M's backyard by major oil companies. Joint ventures and outsourcing to local companies is the norm. M&M has been in business for over 30 years, and we expect them to capitalize on these new opportunities.
 

Power Division

The demand for new power projects in the North American market as well as emerging markets is strong. According to GE Power Systems, “GE forecasts a growth of 90 gigawatts a year over the next ten years with 50% going to Asia, 30% going to Europe and 20% going to the Americas.”

The Power Division is pursuing a strategy to develop and participate in Independent Power Projects in emerging markets. The Power Division is focusing on India. Already, Energy Power has equity interest in India Special Purpose Companies that have Power Purchase Agreements to supply over 600 megawatts of power to the Electricity Boards of the State of Andhra Pradesh and the State of Karnataka.

Energy Power has invested millions of dollars in the development of two power projects in India. They originally planned the exotic strategy of placing Barge Mounted Power Plants at these sites. The Andhra Pradesh project has grown to 445 Megawatts and is now too big for a Power Barge solution.

Once completed these projects will provide ongoing utility income for the company for years to come, thereby minimizing the impact of fluctuating commodity prices from expected oil and gas cash flows.

The first of the giant Siemens turbines which will power the Andrha Pradesh project is scheduled for delivery in August.
 

Oil and Gas Division

The newly formed Oil and Gas Division is the wild card which provides the exciting upside in this stock. We have been waiting for them to complete a transaction which gives us tremendous upside before launching this profile.

Yesterday, after the market closed, the company announced they have acquired 25% interest in 1/2 million acres on Prince Edward Island (PEI). This property is located in the heart of the Maritimes Basin in Canada's eastern oil and gas country. Click here to read the full text of the press release.

According to an article in The New York Times dated September 7, 2000, Atlantic Canada could prove to be the next generation North Sea. Of the 11 oil fields larger than 100 million barrels discovered worldwide in the last 20 years, 4 have been off the coast of Atlantic Canada. Canada is the largest supplier of natural gas to the United States and America's second largest supplier of oil next to Saudia Arabia. Exxon Mobil estimates the potential oil reserves of Eastern Canada to be 40 billion barrels. The natural gas reserves of Newfoundland Labrador alone are estimated at 62 trillion cubic feet, enough to energize more than 700 million homes in North America for a year. The Sable Offshore Energy Project off Nova Scotia is already pumping 500 million cubic feet a day of natural gas and lighting up New England.

Meteor Creek Inc is drilling a gas well right now on the north east section of PEI, just a chip shot from the Energy Power property, in a field Meteor claims could contain one trillion cubic feet of natural gas. If Energy Power were to hit such a gas well on their PEI property the effect on the stock would be enormous. Meteor Creek's exploration drilling gives Energy Power a "free look" at the potential of their property.
 

Summary- Why Energy Power is An Exciting Microcap With Tremendous Upside Potential

$10 million in Book Value today- $2 per share. As highlighted above, the industry average stock trades at 2.8 times book value. If the stock can achieve the industry average it will trade at $5.60, 90% above Friday's closing price. This factor minimizes downside risk.

Immediate upside potential is exciting through both the Engineering Division and the Exploration Division. The map highlights the potential of this company.

Energy Power Systems' exploration permitis right in the middle of Atlantic Canada's Maritime Basin. Both the Sable Offshore Energy Project and the Hibernia Project are monster producers. Natural Gas discoveries are all around the Energy Power property. A find of major magnitude is possible.

Husky Oil recently announced it will be developing the White Rose Oil Field by contracting to build an Off-shore Floating Production and Offloading Platform Facility. The total investment in this off-shore project infrastructure alone is expected to run $1.8 Billion and much of it will be built in Newfoundland. M&M is expecting to fill its facilities building components for this project. The platform will be located in the Atlantic out near the Hibernia Project right in M&M's backyard.

M&M's 40,000 square foot production facility and 147,000 square foot fabrication facility are ideally located to participate in this $1.8 billion project. Newfoundland's government encourages these large companies to use local contractors and local facilities. M&M is already in discussions with Husky/Maersk, and large new contracts should follow.
 

Conclusion

Management has informed us it intends to file applications for listing on the AMEX and the NASDAQ as soon as minimum price requirements are achieved. The AMEX requires a $3 stock, and the NASDAQ requires a $4 stock. The company already qualifies in all other ways. An upgraded listing will improve the visibility of the stock and benefit early stage investors.

Friday's news announcement that the company has acquired a 25% interest in 1/2 million acres of prime oil and gas exploration land on Prince Edward Island gives investors in this stock significant upside potential. The news announcement came out after the close. Members of the OTC Journal are the first to learn of it, and you have a competitive investing advantage.

One could argue this stock is undervalued today. Based on the industry average of 2.8 times book, $5.60 should be achievable given the tremendous upside of the PEI property and the potential of the independent power project. Major new contracts are imminent for M&M with Husky's $1.8 billion White Rose Project.  You have substantial upside well beyond $5.60 if the Meteor well hits on Prince Edward Island or the company works up drilling targets on its own property through seismic surveys, joint ventures, or other means. In such a case we would move up our price targets accordingly.  If the power project achieves financial closing next quarter or if there are other corporate developments this would be icing on the cake  For now we believe the stock is undervalued and could be accumulated for a potential move over $5.00 in the near future.

Prior to making any investment we remind you to please review our section on Rules For Successful MicroCap Investing found on the left hand menu bar of our home page. Pay particular attention to the section on Trading Strategies.



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