Raser Technologies (RZ) has been the topic of much discussion over the last few months. With roughly 4 million shares sold short and a relatively thin trading volume profile, much emotion and misinformation has dominated the online forums. This essay seeks to present the facts in an unbiased fashion so that investors may make an informed decision on the shares. Further, this author seeks to present all the facts, versus a partial and incomplete analysis as others have presented.
It is this author's viewpoint however, that most rational and well-informed investors will conclude that the stock presents an excellent investment opportunity. In the name of full-disclosure, readers should know that Abraham Gaines is the pen name of the author, who is an institutional investor and owns shares of Raser.
Readers should understand that this essay assumes some understanding of the Raser business and geothermal energy production in general. Readers wishing to learn more about either of these can read previous posts by this author under the ticker RZ.
Market Capitalization: roughly $500 million
Daily Trading Volume: roughly 120,000 shares
Short Interest: roughly 4 million shares
Recent price high: $18 – achieved mid-January 2008.
Current price: $7.65
Company description: Raser is a development stage company which produces and sells steam-based energy made from hot water found beneath the earth's surface. This is called Geothermal electrical production and has been well-studied, documented, and explored for decades. Raser intends to use its proprietary motor technology called Symmetron to make its geothermal power plants meaningfully more efficient than its competitors' plants and will leverage its well-documented relationship with the United Technology Corporation (NYSE:UTX) to mass-produce the equipment necessary to convert this hot water into electricity. The company has secured drilling and surface rights to several properties (hundreds of thousands of acres) that are known to have hot water reserves (KGAs – "known geothermal areas").
To date, the company has not produced any revenues and has substantial accumulated losses. In this author's opinion, this has been the topic of most short-related essays and is not an appropriate way to evaluate a development-stage company like Raser. As an example, would an astute investor evaluate a pre-revenue biotech company on the basis of its balance sheet and history of accumulated losses? Likely not – an informed investor would realize that the value of a stock is based on the discounted FUTURE value of the company's cash flows and that a development stage company should be evaluated based upon its intellectual property, business model, and verifiable FORWARD-looking statements of fact.
Rather than rehash the issues that short-biased investors have with Raser's balance sheet and history of losses (an article detailing this was published in this forum only last week and can also be found on the website of the 10-Q detective), this essay seeks to point out the current and forward-looking facts juxtaposed alongside the short arguments.
Short argument: The company has no revenue
Fact-based response: True. The company did however, just announce on March 18th 2008 their first power-purchase agreement with the City of Anaheim. In the power industry, a power-purchase agreement is the same as a revenue-producing contract. In a worst-case scenario where Raser could not produce electricity themselves, they would procure the electricity and sell it to Anaheim. Either way, this will represent revenue to Raser.
Short argument: The company has no hot water – how will they make electricity?
Fact-based response: Not true at all. See the linked pdf file which is a description of the hot water found at the Lightningdock Geothermal site. Raser recently purchased this piece of land – it already has a production well where temperatures and flow rates are sufficient to generate commercial-grade power. Further, see the company's press release from Feb 27 indicating hot water in one of their other wells in Utah. Informed investors will further realize that the company's business strategy is to acquire previously explored properties that are known to contain hot water flowing at appropriate rates to generate commercial-grade electricity. While the first well they drilled in Nevada has yet to be certified as containing water with acceptable flow rates and temperatures, the company's portfolio approach to drilling and land acquisition mitigates this risk. Plants are constructed of modular equipment which is not customized to any site and can be easily moved to the most relevant well as needed.
Short argument: the production tax credit (or PTC) is set to expire on December 31, 2008 and if it is not renewed, would be a substantial negative to Raser's 'tax equity monetization' method.
Fact-based response: Raser has been successful in negotiating "escalators" into their PPAs which protect them in the event the PTC is not extended. Said differently, PPAs now include 'step-ups' in the price of power if the PTC is not extended. By doing this Raser not only insulates themselves from any negative impact of a non-extended PTC, but they also have made the utilities additional 'lobbyists' in favor of extending the PTC.
Short argument: They burn $12-14 million per quarter and don't have a balance sheet capable of absorbing those losses.
Fact-based response: If taken on the surface, this is true – however doing so would be an incomplete analysis and would lead to an incorrect conclusion. While the company's cash burn to-date has been $12-14 million per quarter, much of that represents drilling costs which ultimately get reimbursed by their financing partner, Merrill Lynch. This brings the "true" cash burn after consideration of these items which will be reimbursed, down to $12-14 million PER YEAR.
Note that the company recently raised $50 million through a convertible bond offering led by Merrill Lynch to help fund these drilling costs.
Short argument: the company will burn through these funds and be out of business in a year.
Fact-based response: The company has indicated that they have 7 geothermal projects in production right now (representing 70-75mhw of production) and that they expect to have at least one producing revenue towards the end of the third calendar quarter of 2008. They expect to have several more in operation by the end of 2008. Each 10 mhw project generates roughly $4 million in revenue to Raser (on a non-GAAP basis) in the first year. If only 4 of the 7 go into service by the end of 2008 and Raser doesn't get anything else into service ever, the company will generate $16 million in revenue in 2009 and will be break-even at worst.
If they get all 7 into production, and don't do anything else, they would produce $28 million in revenue (non-GAAP) and $15 million in EBITDA/net income. With almost 60 million shares outstanding, that would be $0.25 in EPS.
Short argument: who cares about non-GAAP? Only companies with something to hide do this.
Fact-based response: The reason one must distinguish between GAAP and non-GAAP numbers in this instance is that all of the projects will reside off-balance-sheet. They will require some level of consolidation and would mean that both revenues and costs would seem higher (profits would be the exact same). By distinguishing between GAAP and non-GAAP, one can truly analyze the pure income statement impact that each project will have and the leverage it indicate as operating margins expand.
Short argument: the Merrill Lynch financing deal is not real but rather a proposal
Fact-based response: rather than shooting from the hip, an informed and educated investor will read the entire 8K in which the details of the agreement are spelled out. This is a very legitimate deal and represents over $600 million in committed financing over 48 months.
Short argument: the Symmetron business is bogus and will never be worth anything.
Fact-based response: the company does have a long and storied history (under prior management) of making promises related to this business that they were never able to fulfill. However, an examination of the 8K with Merrill Lynch shows a 7% royalty being paid to Raser so that UTX can use this motor in the pumps which go on their pure-cycle machines. Further, a recent agreement with Hyundai lends further credibility to the partnership as Hyundai will likely be the manufacturing partner – relieving Raser of this burden. Note that by using the Symmetron motor to reduce the parasitic load in each of the motors used in a power plant, Raser (through UTX) will be able to produce more net electricity than any competitor would on the same resource.
Short argument: why would the company require $50 million from a convert if the Merrill agreement were real?
Fact-based response: the two financing agreements fund different entities. The money from Merrill will go directly into each geothermal project (known as "the llc") after such time as Raser has met the conditions sufficient to close on each of them (namely, proving the resource and getting a PPA). The money from the convert will go to the Raser corporate entity and will fund the drilling costs which the LLC will repay.
The conclusion of all these facts is this: The company is now in the process of moving from development-stage to commercial-stage. They have signed their first revenue-generating contract and will soon allow investors to evaluate them based on the merits (or lack thereof) of their income statement and cash flow statements. The Merrill Lynch financing package is worth reading (in this author's opinion) and should shed some light on how serious Merrill is in funding the construction of these plants.
The company has indicated their intention to initiate the production of 100 mhw per year for the first three years (they are approaching the end of year 1) and then 150 mhw per year thereafter. While that would indicate 1,350 mhw placed in service over 10 years, let's assume they are only half right, and can only get 675 mhw into service over that time. At a net present value of $300 million per 100 mhw (simple math based upon the figures RZ provided in the 8K and using a 12% discount), that would indicate that the simple sum of the present values is worth $1.091 billion – more than a double in the stock price from here.
Disclosure: Long RZ