Ormat Should Benefit from the Ethanol Backlash

With people rioting all over the world because of surging food prices, we have started to see a backlash against the cause of the food inflation - ethanol. As global warming alarmists convinced legislators and the media that we need to pour money into ethanol in order to solve the global warming “crisis,” and use it as an alternative to crude oil. So backed by government subsidies, farmers changed their crops over to grow corn, thus creating shortages of other food stuffs and soft-commodities. With smaller supplies, the prices have soared, and now the developing world is taking it on the chin, as citizens are unable to purchase even the most basic food.

What we are starting to see is a backlash against this. The media has started to run stories about the wisdom of ethanol. Better late than never, I guess. The fact that it takes more energy to produce it than it does produce. It also uses a large amount of water in the process, and it's not as if the world is full of spare water.

Hopefully common sense will prevail and we can put an end to the ethanol nonsense. If so, one company that could profit is Ormat Technologies (ORA). The Israelicompany specializes in geothermal and recovered-energy-based power plants. With crude oil hovering around $114/barrel, alternative energy is very much still in focus. But far from a dream, Ormat is a real company with real earnings and real technology.

The company has been announcing deal after deal, and Wednesday was no exception. It announced that a Minnesota cooperative agreed to a 20-year electricity purchase agreement with one of Ormat’s units.

If you are looking for a way to potentially play alternative energy, then forget about ethanol, and spend the time doing some research on Ormat.

Disclosure: The author’s fund holds a position in ORA, he has no position in any other stock mentioned as of April 16, 2008.

Comments

[Ranjit Thomas:]

Agreed, but good luck buying a stock at 47x forward earnings. And remember, their guidance for '08 was significantly below expectations.

2008 Apr 17 09:56 AM

[danno:]

I agree that Ormat is a great company and the world leader in geothermal energy. However, I don't see how that is terribly relevant to ethanol since it is used (unwisely as a transportation fuel) while Ormat adresses power generation (electricity, cogeneration, district heating, etc.).

2008 Apr 17 11:11 AM

[CrossProfit:]

Mr. Katsman,

1) What does ethanol, a fuel used for transportation , have to do directly or indirectly with Ormat that uses geothermal energy for the production of electricity?

If you would like to do an electricity production comparison with new coal burning or solar power units, then by all means do show us the analysis. Some facts and figures would make for a nice substitute for the non-stop conjecture flowing from your pen!

2) In your last article from October 2007 - seekingalpha.com/artic... - on Ormat you disclosed that you were not yet long ORA. Can we deduct that you went long somewhere between $52 and $55 on your previous assumption that Ormat was on the verge of an acquisition play?

3) From the time that you went long ORA, the stock dropped to the 40 range and is now back to the 50 range. Do you have any credible analysis pertaining to this stock?

Perhaps some backlog order figures previously undisclosed would be a start, being that you are stationed in Israel and calling the CFO is only a local telephone call away.

As the former manager of IPB - Citigroup Israel, as mentioned in your biography (seekingalpha.com/autho...), one expects a lot more substance in your articles.

CrossProfit

SA editors,
We understand that this article is opinion and NOT analysis, yet we have used a harsher than normal tone with Aaron as we are beginning to see a possible pump and dump pattern here; in violation with SA policy.

Should this turn out to be the case and we catch it, we will notify chief editor Mick Weinstein via email.

2008 Apr 17 11:36 AM

[GH:]

"As global warming alarmists convinced legislators and the media that we need to pour money into ethanol in order to solve the global warming “crisis,” and use it as an alternative to crude oil."

There are several errors backing up the innuendo in your statement quoted above. No knowledgeable environmentalist supports ethanol made from substances usable as food. It was yet another blunder from the Bush administration pandering to midwestern factory farmers.

Your writing is a waste of your time and ours. Go get an honest job.

2008 Apr 17 03:28 PM

[wheels14:]

Mr. Katsman, Please show research, not generated by an oil company, showing that Ethanol takes more energy to produce than it generates. Please use new data, the industry has made huge increases in productivity in the last several years.

2008 Apr 17 03:42 PM

[Greener:]

Any green alternative energy is good for our climate
crisis. Since Etanol may generate higher
food prices then sustainable energy, Ormat geothermal
become a good alternative as other green energy sources

2008 Apr 17 04:53 PM

[Dart:]

Can we also at least mention the progress that Razer has had with United technology designing an alternative process to Ormats's for Geothermal Power generation, thereby for the first time posing a credible risk to Ormat's monopoly in this area. Please Aaron do more work here and don't play games like this

2008 Apr 17 06:39 PM

[huskerbob:]

Hmmm... Ethanol is responsible for the rice crisis in the phillipines and pasta riots in Italy? Can't a weak dollar also be responsible for U.S. food inflation? Or previous record low commodity prices?
The rest of the article seems to be as well thought out as the introduction.

2008 Apr 17 07:19 PM

[GeorgeMo:]

I have to challenge an assumption in this article being treated as fact. If ethanol has anything to do with food shortages, that effect is far outweighed by changing dietary habits in the 3rd world. The big effect we're seeing is what happens when a few billion people start eating meat on a regular basis instead of eating meat once a month (or less).

2008 Apr 18 08:48 AM

[Steven Ward:]

I'm in agreement with crosspoint. Any article mentioning alternative power or electrical generation need not mention the price of crude oil. Stats show that in this country up to 80 % of crude is used for transportation purposes. Otherwise an interesting article.

2008 Apr 18 10:04 AM

[aquaculture:]

GM statement: "we view renewable biofuels, electricity and hydrogen as the most promising alternative energy carriers for automobiles. We are working very hard and very fast on all three fronts."
With the backlash against corn ethanol and since it also takes electricity to produce hydrogen, Mr Catsman has a point.
Ten other good reasons to invest in Ormat (ORA):

1 For the short term: the U.S. senate has extended Production Tax Credits for geothermal energy. Science and technology offer the only hope of a better future. There are many more applications for geothermal energy such as heating and greenhouse tech for food production etc.

2 Ormat tech is an international company operating worldwide with four decades of experience in a niche market of low to medium temp. geothermal heat sources, wich has lower drilling risks. It offers the advantages of a renewable energy company (rapid expansion potential) with the stability of the utility business through power purchase agreements.

3 Ormat is recession proof.

4 P/E ratios of promising renewable competitors (wind and solar) are often 2 x Ormat's. And geothermal electricity is often more valuable and economical due to its baseload supply.
Ormat is undervalued.

5 While geothermal power supplies less then 1 % of the world's energy now, according to a recent (2006) study by MIT it would be affordable to generate 100 GWe (about 100 large powerplants) or more by 2050 in the U.S. alone for a mere investment of 1 Billion $ in R&D over the next 15 years. Ormat is well ahead of the competition and able to pick the best wells first. The report futher estimated that there is enough energy in hard rock 10 km below surface of the U.S. to supply all the world current needs for 30.000 years. Drilling at this depth is now routine in the oil business (see point 7).
But remember: Ormat operates worldwide, with total EGS resources of 13000 ZJ, of wich 200 ZJ would be extractable, with the potential to increase to 2000 ZJ.
(200 ZJ is equivalent to the annual per capita Californian electricity use of 4500 Billion people, just to give you an idea.) I'm not saying Ormat will ever extract even close to that much, but LOOK AT THE GROWTH POTENTIAL HERE.

6 If geothermal wasn't economical, then why has Alcoa moved to Iceland?

7 A recent innovation, using the ratio of helium isotopes in surface waters, has made it possible to locate and test geothermal resources without drilling.
(see: technologyreview.com/E...)

8 Oil prices are rising. According to a press release by Royal Dutch Shell (RDS) ''three hard truths":
- world energy demand is accelerating (exponentially).
- world energy supply is linear and contrary to what most Europeans and American citizens believe: solar and wind will NOT be sufficient to meet demand.
- as a result more coal-fired powerplants would be build to the extent where CO2 and other pollutant emissions are no longer perceived as acceptable and sustainable by a large majority of the worlds population. (see point 9)

(RDS) has shifted its focus to (Liquid) Natural Gas, seen its oil reserves and oil output steadily decline over the years but is not getting nervous about it at all. Why?
(RDS) has a people-oriented business model.
As the philosopher Wittgenstein once remarked: Process and Result are of equal value. He also noted that the most simple truths are often hard to see, because of its crystal-clarity.
The same ingenuity, technical process, that once allowed the company to drill so deep for oil, boosting its annual results, will allow them to transform into a technical leader in the field of high temp. geothermal energy. Of course they don't say this, but WHERE ELSE IS THE ENERGY GOING TO COME FROM?
Or do you expect people to live in trees again? I don't.

9 Look at the competition. GE had a P/E of 15, but recently dropped the most since the stock market crash of 1987. On the financial side of their business: see other posts.
As for (their) technology: it is a double edged sword. GE's business model, (eg. polluting the environment and offering the medical tech to alleviate some of the suffering) which might have once worked, is no longer viable because of the scaling involved. There are now more then 50.000 coal-fired powerplants on the planet. Healthcare costs are simply rising too fast.
A 1000 MW coal-fired powerplant releases as much as 5.2 tons/year of Uranium (of which 74 pounds U-235) and 12.8 tons/year of Thorium. Total Mercury emissions by all coal-fired powerplants are expected to reach 10.000 tons/year. You can Wiki the effects of all this on your health.

10 If you don't want to get rich with this stock, think of your children, or your nieces and nephews.

Ormat 1Q earnings report: may 6 2008, after market close. Online Conference to discuss results wednesday, may 7 2008 ormat.com (log in 20 min before schedule) at 9 am EDT

(disclosure: author currently holds half of his portfolio in (ORA), buying on dips, accumulating, adding. No positions (yet) in other mentioned.)

2008 Apr 19 09:36 AM

[aquaculture:]

There is an increasing probability that the drilling and well completion cost/depth function will go linear in the near future (as opposed to exponential, conventional drilling technologies used today in the oil/gas sectors)
When this happens one can expect a lot of frenzy in the geothermal field, similar to the first days of oil.
potterdrilling.com/pag...
potterdrilling.com/pag...

2008 May 05 12:00 PM

[aquaculture:]

U.S. geothermal industry experiencing "dramatic growth surge" with expectations that the total power production (currently 3 million homes) could triple over the next few years.
GEA together with Ormat (NYSE:ORA) and Glitnir Bank will host a workshop on july 23 2008 in NYC to introduce geothermal energy to the NYC financial community.
Among the present: Google.
Google announced that geothermal energy will be one of their focus areas for new investment.

More info: geo-energy.org

2008 May 16 09:24 AM