Geothermal power
generator US Geothermal
(HTM: NYSE) came
up short in reporting financial results for the first quarter ending 2017 - at
least from the perspective of the four analysts with published sales and
earnings expectations for the company. Operating
revenue of $8.4 million slipped slightly from the same period a year ago, but
produced slightly lower net income of $1.1 million. The company’s share was $260,000 or a penny
per share. Not good enough say the
analyst’s who were collectively looking for two pennies per share in earnings!
Missing earnings
expectations has become a bad habit for US Geothermal, having failed to clear
the consensus hurdle three quarters in a row.
The previous missed had resulted in modest trimming of
expectations. Investors should be
prepared for another round of nipping and tucking in revenue, profit margin and
earnings predictions. The steady
drumbeat of lower numbers, and the muted commentary that comes along with it, is
usually a drag on share price.
Investors have to question whether a period of price weakness
is a good time to pick up shares of a quality company at bargain prices…or a
time to run for the hills. It is May
after all, when it is ‘time to sell’.
From a revenue
standpoint, US Geothermal benefited from increased output at its Raft River
facility after installation of a new production pump at one of the Raft River
wells. That installation was completed
in late March 2017, suggesting that the real impact will not be observed until
report of the June 2017 financial results.
Unfortunately, the company also faced a setback in the quarter. The Neal Hot Springs Unit 1 was out of
production for five weeks in late January and early February 2017, after vaporizer
tubes froze. The company reported a
negative impact on power generation valued at $830,000 due to the equipment
failure at Neal Hot Springs.
 |
| Neal Hot Springs |
Total generation
was 89,613 megawatt hours in the quarter compared to 93,787 megawatt hours in the
same quarter last year. With Raft River
up 100% during the quarter and San Emidio follow up in second place with 98.6%
availability for the quarter, it was really Neal Hot Springs with just 82.5%
availability that was the cause of the slippage in power production in the quarter.
Fortunately, business interruption insurance will cover about 38% of the lost
revenue. Property insurance will provide another $2.0 million to repair and
replace the damaged equipment.
Management seemed
unfazed by turn of events at Neal Hot Springs, reiterating previous guidance
for revenue and earnings in 2017.
Revenue is expected in a range of $30 million to $34 million, providing
net income in a range of $4 million to $8 million. US Geothermal’s cut of net income would be $1
million to $4 million. Thus it would
seem that Neal Hot Springs is fully back to normal and with the increased production
at Raft River, management is apparently expecting another decent year. The increased output from Raft River in the
first quarter was valued at $200,000 for about one week of power
generation. Simple math provides an
incremental addition of $1.2 million for a full quarter, more than enough to
make up for the shortfall from Neal Hot Springs in the first quarter.
Importantly, management’s
guidance is based on existing production facilities. There are expansion projects in the works,
but potential power from these projects is not included. Altogether the development pipeline
encompasses 115 megawatts of incremental power production capacity.
·
Progress has been made at the
Geysers in California where the company is at the point of sourcing turbine
generators and is negotiating a power purchase agreement with a single buyer. The company is targeting end of 2018 for
bringing the project on-line.
·
The company has received permits to
deepen three wells in its San Emidio II reservoir in Nevada that could elevate
power production at that location from the current 10 megawatts to over 40
megawatts. Drilling will commence this year when spring
weather conditions allow.
·
Additionally, at San Emidio an
application for new development of three power plants, twenty wells and a power
transmission line has already been submitted to the U.S. Bureau of Land
Management. The company has targeted 25
megawatts to 45 megawatts as the ultimate resource size for this latter
expansion project.
·
A geothermal power production
project in El Ceibillo in Guatemala is awaiting a request for proposals from
the government, to which US Geothermal is planning a competitive bid. The process is expected to unfold yet in
2017.
Successful commissioning
of all these projects would more than triple the size of US Geothermal’s power
production capacity, which is around 45 megawatts today. It will not be accomplished at the hand of
current chief executive officer Dennis Gilles.
In late April 2017, the board of directors issued a cryptic press
release indicated they would not be extending the employment agreement with
Gilles. A search committee will be
looking for a successor to take over after Gilles’ current contract expires in
July 2017. Gilles may still have an
influence over operations through an advisory agreement. If the board could not accept an extension to
his employment agreement, what foundation could be built into an advisory role that
would be more palatable?
The market has
had an opportunity to fully digest the news of Gilles department as CEO. However, slippage in the first quarter
production reminds investors of the many moving parts and sources of business
risk inherent in geothermal power production.
Knowledgeable leadership is a key hedge against those risks. The specter of a shuffle in the boardroom is
likely to resurface as a source of worry in the coming weeks. Thus the price weakness that might ensue following a 'quarter earnings miss' might be deeper and more protracted than usual because of leadership change.
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.
No comments:
Post a Comment