Ormat Technologies: A Look at Geothermal Energy

Of all the alternative energy sources being discussed, I think geothermal gets the least amount of discussion, especially considering the positives.

For those who don't know, geothermal energy is energy from heat stored in the earth. It is captured in various ways, but it typically involves drilling into the earth's core and extracting hot water and steam from different depths.

There are a couple of big advantages with geothermal.

1. To start, fuel isn't needed to heat or cool a home, or generate electricity. This cuts down on the need for fossil fuels to be burned.
2. Geothermal is competitive price-wise. There are extensive upfront costs, but for generating electricity, it's similar to wind and much cheaper than solar. For home systems, it typically cuts yearly costs dramatically, and takes 5-10 years to payoff, depending on the size of your system.
3. The big advantage it has over wind and solar is its ability to provide base load power. This basically means it runs 24/7. Base load is the minimum amount of electricity that utilities need to supply for things to run. This is HUGE. The wind doesn't always blow, the sun doesn't always shine, but the earth's heat doesn't shut off.

Combining 24/7 geothermal with other various sources can provide a workable combination for power generation. Plus, you can use the same land for multiple uses often times. In the U.S., the best areas for geothermal are on the West coast, which is also the best areas for solar power. It is feasible to run geothermal below ground and solar above ground on the same land.

So where does that put us as investors? Through my research, the best company I've found is called Ormat Technologies (ORA).

Company description:

It operates in two segments, Electricity and Products. The Electricity segment develops, builds, owns, and operates geothermal and recovered energy-based power plants, and sells electricity. The Products segment designs, manufactures, and sells equipment for geothermal and recovered energy-based electricity generation; and remote power units and other power generators, including fossil fuel powered turbo-generators and heavy duty direct current generators.

Some positives for the geothermal industry:

• The states are taking the lead by passing Renewable Portfolio Standards requiring specific amounts of energy be derived from renewable sources by a specific date. California is one of the first to kick in with 20% required by 2010. 27 states have taken on this plan, and geothermal should play a big role. Plus, the entire world is taking on many mandates like this, and Ormat supplies products and services worldwide.
• The federal government will be rolling out programs to stimulate renewable energy. First, there's Obama's economic stimulus plan coming in 2009, and geothermal should fit into it somewhere. There are also tax credits for businesses and individuals to adopt these programs.
• There is a lot of funding and venture capital floating around for renewable energy programs. Google (GOOG) has been a big proponent of geothermal, via their philanthropic wing, Google.org. They've given over $10 million in grants to research geothermal power.

As for Ormat's stock, it's expensive, but cheaper than it was six months ago. With oil prices dropping and the economy weakening, many renewable projects are being put on hold, but it should come back stronger, and soon.

The stock is trading at 20x 2009 projected earnings. They are estimated to grow earnings from $1.10 in 2008 to $1.51 in 2009, via consensus estimates. I don't currently own the stock, but I'd look at taking a position if the price gets a little more attractive. Overall, I'm a buyer of geothermal energy and I think it will play a big role in the world's transformation to renewable energy.

Disclosure: no positions

Comments

[Tim Plaehn:]

I think Ormat is an excellent company but have always steered clear of the stock. It has always traded at growth multiples but has grown like a utility, slow and steady. A P?E of 20 is still rich for the level of growth this company can sustain.

2008 Dec 11 10:28 AM

[billp37:]

According to EPRI and PNM geothermal has the worst heat rate [BTUs/KWhr] of all of the electric generation technologies. See FOIL 7.

home.comcast.net/~bpayne37/pnmelectric...

2008 Dec 11 12:32 PM

[Road Runner:]

Your article is all pump. You make it sound like a panacea, which it isn't. The technology is not fully developed.

2008 Dec 12 11:45 AM

[Chris B:]

ORA is making electricity and producing consistent profits with a technology that is not fully developed? What exactly would developed look like then?

Yet I agree that 20x forward earnings is too much to pay for a utility. Even as the market has dropped I've watched this stock basically sit on a floor of too-high valuations. My only explanation might be that once the high upfront investment is paid-off geothermal infrastructure produces almost free energy, so a 15 year old geo plant would have much, much higher margins than a 15 year old coal fired plant that still has to buy fuel. Replacing a few pipes or generator bearings every year is much cheaper than doing that PLUS buying a trainload of coal every day.


On Dec 12 11:45 AM Road Runner wrote:

> Your article is all pump. You make it sound like a panacea, which
> it isn't. The technology is not fully developed.

2008 Dec 12 04:45 PM

[ebeng:]

Ormat may be too expensive. Calpine, US Geothermal better bets in this field. cpn has the largest current geothermal capacity, htm just ramping up, recently got Dept of Energy grant for Enhanced Geothermal Systems - tech for improving availability and output. Both stocks depressed, cpn due to nat gas - should pick up as coal gets phased out & cars start running on natgas, htm due to general malaise in energy stocks & small cap.

2008 Dec 29 12:28 AM

[Chad Brown:]

Calpine not a good way to play Geothermal. It is small for them even though they are the No. 1 US geothermal producer.US Geothermal is a pure play and there are others but after Ormat all the other pure play geothermal names are development stage companies. And as Raser (RZ) showed, if you get one of these projects wrong it can run up your costs so high you will never recover the investment.


On 2008 Dec 29 12:28 AM ebeng wrote:

> Ormat may be too expensive. Calpine, US Geothermal better bets in
> this field. cpn has the largest current geothermal capacity, htm
> just ramping up, recently got Dept of Energy grant for Enhanced Geothermal
> Systems - tech for improving availability and output. Both stocks
> depressed, cpn due to nat gas - should pick up as coal gets phased
> out & cars start running on natgas, htm due to general malaise
> in energy stocks & small cap.

Jun 30 07:17 PM