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EnerCom, Inc. traveled with John Moore, CEO of Acorn Energy (ticker: ACFN) to meet with investors in Dallas on April 9, 2013.

Acorn Energy, Inc. is a holding company whose four portfolio companies help customers achieve greater productivity, reliability, security, and efficiency—factors which can lead to greater profitability.  GridSense provides monitoring for all critical points along the electricity delivery system. OMNIMETRIX remotely monitors emergency back-up power generation systems to increase their reliability. US Seismic (USSI) supplies fiber optic sensing solutions to increase oil/gas production and increase drilling returns. DSIT provides security solutions from underwater threats to naval and marine based energy assets. The company’s corporate presentation can be found here.

Moore provided investors an overview of the company’s operations as it related to Acorn’s four portfolio companies but primarily concentrated on Acorn’s growth component – US Seismic.

Here are some of the questions and issues posed by institutional investors during meetings in Dallas:

  • Is Acorn looking to acquire additional portfolio companies?
  • Why do you believe that the short interest in the ACFN stock is high?
  • Which portfolio company has the greatest growth prospects?
  • How do you allocate capital between portfolio companies?
  • How is your relationship with the management teams that are in place and how are they incentivized?
  • What tax issues are there associated with the strategy of divesting portfolio companies?
  • Why did you decide that a dividend was important to implement?  Do you see the dividend continuing?
  • What is it going to take for the oil and gas industry to adopt the new fiber optic technology as it relates to USSI
  • What is your background?
  • You recently split up the Chairman and CEO roles, and you became the CEO.  What made you want to be CEO over Chairman?
  • Do you have any debt on the balance sheet?
  • What is your cash position?  Do you have ample liquidity to fund you plans in 2013?
  • How quickly and at what cost could you ramp up your operations at USSI?

Below, we provide some of the key points that investors focused on regarding the company’s operations and efforts to advance its energy technology projects.  Moore started the meetings with giving an overview of the company and its history to illustrate the company’s strategy.  We will do the same.

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Strategy and History of Acorn

Acorn’s strategy is to acquire distress capital light energy technology businesses and put the right management team, business plan and capital behind the technology to grow the business to the point where a profitable exit can be realized.  As Moore is quick to point out to investors, the past is no guarantee of future success, but it is a good lense for identifying future potential.

Moore started Acorn in September 2005 through the acquisition of DataSystems & Software Inc., a distressed $10 million market cap company that had traded publicly since 1992. DataSystems & Software’s primary asset was Comverg, a company with technology to monitor demand response for utilities and industrial clients. By April 2007, Moore and his investors addressed the balance sheet, put the right management team behind the company and focused the business plan to take Comverg public at a $250 million valuation.  After selling all Acorn Energy’s shares in Comverg, the company received $50 million in cash.

With the proceeds from the exit of Comverge, Moore bought a 100% interest in CoaLogix, a company with clean coal technology (selective catalytic reduction) for $11 million.  In August 2011, CoaLogix was sold for $101 million to Energy Capital Partners.  At the time of the sale, Acorn Energy owned approximately 65% of CoaLogix on a diluted basis, with the balance held by EnerTech Capital and CoaLogix management.

Today, Acorn Energy has returned $5 million to shareholders in the form of dividends while raising a total $21 million in equity. The company has no debt and $26 million in cash as of year-end 2012.

Though all of the current portfolio companies have a clear growth path investors on this non-deal road show were mostly focused on USSI.

USSI is Acorn’s Growth Catalyst

USSI provides fiber optic sensing solutions to both conventional and unconventional energy markets in the oil and gas sector.  Management believes that new fiber optic sensing systems will enable users to improve efficiency, increase output, and enhance safety at a lower cost than today’s electronic sensor technology. With four patents issued and ten patents pending, the USSI system is designed to replace the existing 50 year-old geophone technology. Moore uses the analogy of the telecommunication industry when it made the step chance from twisted copper wire to fiber optics.  The belief is that the oil and gas industry in on the verge of the same step change.

There are a number of benefits to impaneling the fiber optics technology.  First, in today’s unconventional resource environment, the oil and gas industry uses seismic more as a production tool than as a pure exploration tool.  Seismic is being used to identify geo-hazards, natural fractures and the best well location for drilling.  E&P companies are always reviewing processes for improving their well economics.  It is generally accepted in the oil and gas industry that not all frac stages are meeting the expectations of management. As much as 70% of the capital for drilling a well is being wasted because of unproductive stages.  This is where USSI could help alleviate a major pain point for the industry.

Based on a recent study from Welling & Company cited in this Halliburton presentation, 73% of the of the surveyed participants believe that the root cause of frac Jobs not meeting performance expectations has to do with a failure to understand the subsurface picture. Many geophysicists agree that 90% of the subsurface data is in the low frequency shear waves (s-waves) which are not successfully monitored by the legacy geophone technology.  USSI’s fiber optic technology however will register readings from 1 Hz to 1600Hz.  This increased bandwidth could give E&P companies a picture of where to frac a well and identify individual stages that are not working.  The end result is lower well costs and increased EURs.

Overcoming Hurdles

That all sounds good in theory. Companies have been trying to develop these seismic solutions for more than 10 years, but now Acorn and USSI have to prove that they are the ones that have cracked the code.

To date, USSI completed seven trials and received seven orders. On April 25, 2013, USSI will participate in it largest test to date.  USSI will participate in a “shootout” against other legacy systems.  The winner of the trial will receive an initial $12.5 million order to be received by the client by year-end 2013.

We believe investors are looking for execution from ACFN’s primary growth company – USSI – and USSI’s ability to attract additional investment and sales from oil and gas companies.

Acorn presented at EnerCom’s The Oil & Services Conference™ 11 on February 19.  Readers can listen to the presentation webcast here.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. As of the report date, neither EnerCom nor any of its employees has a financial interest in any equity or debt of any company mentioned in this report.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.