Friday, November 19, 2010

Geothermal Giant

As backward as the U.S. sometimes appears to be on the renewable energy front, there is one non-fossil fuel energy source in which the U.S. is the leading producer - geothermal power. The International Geothermal Association estimates that the U.S. produced over 3,000 MW of geothermal-sourced electricity in the last year. That is approximately 28% of the total world production of 10,700 MW.

Solar power and biofuels get far more attention from the press and investors. That might be due in part to the less than glamorous efficiency of geothermal power plants in a range of 10% to 25%. That is because geothermal steam is arrives from underground at lower temperatures than say the steam in boilers fired by coal or oil.

That comparison should not be the only one investors make. Among the “freebie” power sources such as wind or solar, geothermal has great appeal. Unlike the sun or wind that can be variable from hour to hour, geothermal sources are quite consistent and reliable.

Of course, geography is everything when it comes to geothermal. Once the right conditions are found geothermal is also economical in terms footprint, using only 3.5 square kilometers of land per gigawatt compared to 30 square kilometers for coal-fired power plants. Capital costs are another story. While the matter of land IGA estimates capital costs exceed $4 million per megawatt.

The Geysers in California is among the most developed “hotspots” in the world. Calpine, Inc. (CPN: NYSE) operates fifteen of the eighteen geothermal power plants at The Geysers in the U.S., making the Texas-based utility the largest producer of geothermal power in the world. Calpine’s Geyser plants produced approximately 6 million MWh per year. Calpine does not disclose how much of its $6.6 billion in annual sales are contributed by The Geysers and how much by its natural gas fired power plants.

Calpine is among the most expensive stocks in the wholesale power segment, trading at 42 times forward earnings. This is largely due to weak profit margins that leave little left over for shareholders.

Two significantly smaller companies offer investment opportunities for investors interested in a pure geothermal play. Ormat Technologies, Inc. (ORA: NYSE) is mostly a pure play with a number of geothermal projects in North and Central America, Europe, Asia, and Africa. Sales in the twelve months ending September 2010 were $375.7 million, providing $44.7 million in net income or $1.08 per share. The stock is trading at a reasonable earnings multiple of 26.2 times trailing earnings. The consensus estimates suggests analysts are not looking for significant growth, but business is consistent enough to support a dividend. The yield on ORA is 0.7%

Gluttons for risk might be more interested in micro-cap Raser Technologies, Inc. (RZTI: Nasdaq). Raser has an operating geothermal plant in Utah and began drilling on its second geothermal project in southwestern New Mexico earlier this year. The company expects to install a 15 MW power plant at the New Mexico location. There are seven other projects in various stages of development in the company’s pipeline.

Raser is not a pure-play on geothermal energy. The company is also working on plug-in-hybrid vehicle solutions and is licensing its technology to improve torque density and efficiency of electric motors and drive systems in hybrid-electric vehicles. Thus far the power systems segment is generating all of Raser’s sales, which were $3.8 million in the twelve months ending September 2010. Raser has yet to turn a profit, so investors in RZTI would need plenty of patience.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. CPN, ORA and RZTI are included in the Geothermal Group of Crystal Equity Research’s Earth, Wind and Fire Index.

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