The Short Case on Raser Technology

Shares of Utah based Raser Technology (RZ) are getting “Big Love” lately, up over 144% since March of 2007, but we believe it’s a story of the FLDS (Failure to Logically Decipher a Story) - and a sell.

On the back of 12 press releases just in 2007, Raser Technologies has promoted itself out of the stigma of a failed Motor/Alternator company and into the highly coveted Alternative Energy space. They have done this by leasing land (same process as mineral rights) on what they claim are POTENTIAL Geothermal sites and promoting the hell out of them.

While we are no fans of promotion, we can’t ignore the Alternative Energy Space, so at first glance we too were interested - so interested, in fact, that we did the work. Unfortunately, what we found changed our long bias to one of a potential short.

Ladies and Gentlemen, Raser is a Geothermal Tax Credit play.

They have no proven proprietary products to generate geothermal power (hence the UTX announcement back in May), and they are not a tax credit play like fellow Utah-based Headwaters (HW), because they have nothing to license. From this page to your eyes, anyone can do what they are doing. All you need is a little seed capital, and a geologist might help. Raser rents one by the way - he’s not even a full time employee.

So what’s the big opportunity that has a company with basically ZERO revenue trading at a $662 million dollar market cap? The company would like you to believe what they posted as a slide at their shareholder meeting on page 23, but be careful, because their assumptions are very misleading.

The slide on page 23 is generic, and the assumptions for power purchases are off by a factor of 100%.

In addition, and here’s the kicker, Raser is promoting “Production Tax Credits”.

The word "production" is key, because they have no production, and if you listen to the shareholder call carefully, you will hear that in fact all their future promise is gate limited by their need to drill their sites, which they don’t have money for. To understand this concept, we researched and spoke to companies that, like Raser, are speculating on drilling for Geothermal. Those companies are Toronto exchange traded US Geothermal [GTH], Nevada Geothermal [NGP], and Sierra Geothermal [SRA] and together they have a market cap of $203M - or 1/3rd of Raser’s. And trust us, they are completely equal.

What’s key here is that it’s all chicken and egg. If you find an area and prove it up with drilling (exactly like the Oil & Gas space), and it can produce enough energy for 20 years, you can find a partner and there are tax credits available, but no partner will fund you the money to drill, because there are no Production Tax credits that will be reimbursed.

So what’s the opportunity for Raser? Well, according to the company, the next three sites they need to drill are for 10MW each - only 30MWs total. They have announced they are on a short list for a California based utility, but a conversation with the CPUC and a read of their website will easily show that the CPUC over bids on projects by 200% of need, and they actually still have short-listed projects from 2004 that have yet to be produce. All the short-list means is that you are a real company and can hopefully produce. In California, Calpine Energy, Vulcan Energy, and Esmerelda Energy all have Geothermal projects up and running. And you’re right not to get to excited, as none have $660M plus in valuation attached to them.

In the end, here’s the real math. There are potential tax credits that might come along to change this, but we have to deal in reality:

30MW = 30,000 kw

There are 8760 hours in a year

Plant operations run 96% (at the very best)

Credits are $0.03 per KW.

Total

30,000 x 8760 x 96% x $0.03 = $7,568,640 per year. (No joke, that’s all that is currently approved.)

Cost to build: $78,000,000 -

Note: This does not include the actual production of the power plant, but for the first 10 years, RZ will not participate in this revenue stream. Raser’s partner will have to recoup the costs.

So without proprietary IP, and only a small take on power generation and just the tax credits, you are paying 86x sales, and since Raser’s Op Ex was $19M last year, you still have a money loser.

So why is Raser promoting this so much? Well, if the government doesn’t change its policy, these tax credits that Raser is hoping for actually go away at the end of 2008.

Disclosure: Author is short RZ

Comments

[peytopolo:]

Lots of misinformation in this attempt of a short to drive the price down. No surprise there.

The statement that they have no earnings coming from the plants when developed is not accurate the program will be 90% to the monetizer and 10 % to Raser and the period is 7 years not 10. Also the monetizer pays cash up from for the tax credits. There are to many other misstatements and distortions to address.

2007 Aug 06 12:20 PM

[calvino:]

Didn't Barron's already run this story about six weeks ago? Also GTH has purchase agreements for their production.

2007 Aug 07 02:23 AM

[shrisinghvi:]

I did my research and I agree with the short theses and Barron's take on this puppy.
Wonder why it is up to $15 now? Who is pumping up this stock?
Even with 10% to raser for monetizing - it is no more than 1.5M per year for 30 MW plants it has commissioned. This baby is real ripe for shorting and getting more attractive by the day
You gotta look no further when of the 40 page investor presentation, more than 20 talk about why oil prices will go up - because CEO has nothing else to talk about for even 30 minutes

2007 Aug 21 04:31 PM

[endrpepper:]

I submit there is no "new" technology to make power with lower temperature resources. It has been around for years. Look at barber-nichols.com site. They have had the technology for years. The problem with lower temperature is the cost. The lower the temperature, the lower the efficiency and the larger the heat exchangers. At this point it comes to the cost of the plant and ultimately $/kW. The economic viability diminishes rapidly with the lower temperature resources. That is why they have not been developed.

2007 Dec 31 11:36 AM