Five Reasons to Buy Raser Technologies 20 comments
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There are five reasons why I think Raser (RZ) is a buy right now.
- A 2 million-share "spot secondary" was placed on Friday at $8.95 - a healthy discount to the prior day's closing price of $10. The market did not like this one bit, but it's got the stock down to a very attractive level again and, if an investor really examines what happened, this stock sale exhausts RZ's recent shelf filing. Translation: there should be no more "overhang" of the company selling stock in the immediate-term. Plus, the company just put roughly $18 million into its pocket which helps with its continued drilling programs.
- It recently announced that it has drilled into one of the most important geological finds of the last 25 years in North America. At the time the resource was certified, it had a "p90" of delivering over 130 megawatts and had a high likelihood of delivering over 230 megawatts. Since then, the resource has continued to heat up - this is a very very hot property and the land value alone is likely worth more than Raser's current market capitalization as another geothermal developer could make a very comfortable living exploiting this property.
- The financing commitment from Merrill Lynch is likely to close within the next two weeks, which will silence many skeptics who have wondered aloud if Merrill would ever fork over the money. This will knock out yet another leg of the short stool and bring Raser one step closer to delivering on its promises to build a plant by October.
- That plant is nearly constructed - the foundations and cooling towers are nearly ready, several units have been delivered and installed. Pictures are available on the company website.
- The math, to those willing to do it, is very compelling. In a nutshell, Raser spends $5 million to drill holes on its property, and then receives $25 million in net present value dollars (it receives much more in actual dollars, but it's spread out over 10-20 years). This is for a 10 megawatt resource - if it only delivers on HALF of what it has promised investors (100mhw per year for the first 3 and then 150mhw per year thereafter), the stock is worth 50% more than it is today.
This brief article is likely to attract the spiteful comments by shorts that other bullish Raser articles have attracted in the past. I welcome them - I will respond to them with factual statements about geophysics, the company and the business model. However, I will only respond to intelligent and well thought-out comments/questions. Prior authors on Raser have been lampooned with unreasonable and incorrect arguments. In my opinion, that only shows desparation. I will not respond to those as they are a waste of all readers' and my time.
The bottom line is this: the short case is not only tired, but incorrect. Although this story has taken some time to unfold and the company has encountered drilling, construction and funding delays, it is delivering a story with a business model which is unmatched in the alternative energy industry.
Although the recent convert deal will skew the numbers somewhat, the 8 million shares sold short may soon need to cover as additional legs of their stools are swept out from beneath them. Plus, what if my hunch that Google (GOOG) will soon become a power-purchasing and/or financing partner is correct? Would ANYONE want to be short this stock if that happened? Heaven help you...
Disclosure: Long RZ.
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This article has 20 comments:
How are you going to squeeze these shorts?
The shareholders, bankers and other players need to look up here-You best get title and control of where you stick your money and do your business.................
Ok, comments, you section #1 you wrote
<<<...if an investor really examines what happened, this stock sale exhausts RZ's recent shelf filing. Translation: there should be no more "overhang" of the company selling stock in the immediate-term.>>...
What is there to stop them from filing another shelf offering?
#2 It is only raser that has said they have the hottest geo discovery in 25 years, They also said they would have a hand full of automotive contracts by year end--2005. They also said they expected ML funding by last February. --There are more of these.
Is there any support that the land value alone supports the current market cap? Did you just make that up? Please show your work.
#5) you say.
<<<The math, to those willing to do it, is very compelling. In a nutshell, Raser spends $5 million to drill holes on its property, and then receives $25 million in net present value dollars (it receives much more in actual dollars, but it's spread out over 10-20 years). >>>
In the conference call raser pointed out well development cost of $20 Million that would not be reimbursed. How do you come up with your $5 million number. Seems way off.
Further more there is no evidence as to what revenue and income they may receive.
your frustration and anger is understood. I share your frustration. However, let's look at the alternatives:
1) they could have continued with their ATM program (at the market). In my opinion, that was somewhat of an "overhang" on the stock, since they were in the market (through ML) selling roughly 15-30k shares per day. The stock was handling the sales reasonably well...but nonetheless, RZ being in the market every day raising equity was somewhat of a lid on the stock.
2) so if we agree that they needed to raise capital to continue to fund their drilling program (remember, their business model is very cash flow positive, but only AFTER such time as they have several plants up and running and the receipt of electrical sales, fees, etc can support their drilling program.....so now we decide: should they continue to dribble shares out or do them all at once? one could argue for either case, but if you take the stance that raising it all in one piece would remove the lid, then you've got 2 positives - 1) all the cash in-hand and 2) no more lid.
3) once you decide that they're going to sell 2m shares - I don't think it's plausible to expect them to sell them at a premium to the market. Further, even if strong news were coming in the near future, perhaps they had other important uses of the cash now.
4) so now that we "agree" that it's unlikely for them to be able to sell all this stock at a premium to the market, we should debate how big a discount they should offer. That's a matter of opinion, but if you owned 2m shares and wanted to shop them around on the Street, I'd be surprised if you got better than a 10% discount to market.
In summary to your post, I hear your frustration....getting diluted is never something a shareholder wants, but they have been very open about saying they needed to raise cash to further support drilling. Additionally, once they announced the shelf, we should have all been incorporating the additional shares into our diluted share count, so this isn't a surprise.
I'm sorry you're frustrated, but a development stage company has to raise money - particulary when they have such ambitious growth plans. they will raise more money in the future - be prepared for it....but perhaps it won't be equity.
I don't fully understand your question. Typically, in a convert, the convert-buyer owns the bond and shorts the stock so he is effectively "hedged" against any movement in the stock while he collects the coupon from the bond.
Regarding the short interest, since the stock wasn't very easy to borrow and was quite thin heading into the convert, Raser undertook the buyback and also a collar deal with ML. As a result, I don't know how many of the 8million shares which are reported short under Bloomberg are related to the deal and how many were shorted directly to ML, as ML acted as the other side of the trade to enable the convert to happen.
What I will say however, is that the short interest was in the 6 to 7m share amount prior to the convert - so let's just look at that figure for the purpose of this discussion.
What will create a short-squeeze? There are a few things in my opinion - in reality, I don't know if any "one" of these will actually burst the stock...my experience is that short squeezes tend to happen gradually and having been on the "wrong side" of them many times, I can tell you they pick up steam (pardon the pun) as the stock moves higher. A short who doesn't want to cover at $10 or $11, will be more inclined to cover it at $12 or $14. it's counter-intuitive but short-squeezes can be very emotional.
Here are a few things which could contribute to a squeeze based upon reasons I've heard people tell me they're short. Typically, squeezes start when legs get kicked out from the short-stool:
1) Merrill financing closing
2) Thermo getting completed
3) Electricity flowing from Thermo and revenues flowing to RZ
4) A deal with Google as a power purchaser or financier (that would be a mother-load, since Google investors would be introduced to RZ - look at what happened to RZ stock when they announced their deal with UTX last year)
5) large institutional holders recalling their borrow, forcing buy-ins
The bottom-line is this: stocks with short interests that are this large a percentage of the float and which don't have high short interests because of a convert (remember we're apples-to-apples here ignoring the size of the convert because of the funkiness of the ML deal), are considered very "crowded." Anything can set them off and create a stampede. Given how "small the door" is on this one - when people feel the need to run for the exits, they will find themselves very boxed out and the stock will lift without much for sale.
Look at who holds the stock - it's a pretty smart group of buysiders. Successful, smart hedge funds and a few long-only guys. My sense is that they're unlikely to part with big chunks of stock when it begins to lift - which will only create more of a frenzy.
Is it worth it to remain short? Only if you think this is going to zero. Otherwise, you're playing with fire in my opinion.
1) there is nothing to stop them from filing another shelf. They still need more money to continue their drilling - that is not new news to anyone. My point was simply this: what if they find other sources for the capital and don't need to do another shelf? Perhaps they can do a debt deal? Simply stated: if someone considered the existence of the ATM deal and them consistently selling stock every day to be an overhang, that is gone. If an investor thinks they dont need to raise money, they're wrong.
However, the company has talked about things like "prepaid PPAs" and other similar deals which would give them some more capital upfront, and would therefore reduce their cash needs.
Cash needs by themselves aren't awful - once the Street can see RZ's ability to generate profits and cash on each individual deal, they will be more willing to give them money. Until then, it feels like a bottomless pit.
2) regarding other things they have said - I would not hold the current management team accountable for things the prior team said about the automotive business. Regarding the ML committment - you are partially correct. If you recall, they first drilled at Truckee NV - that was supposed to be the first plant and that was what the ML committment letter was based around. That resource is adequate, but RZ decided to pursue Thermo because it had more near-term promise. They started drilling on that a short while ago and will be putting that plant into service Oct/Nov. So...yes, the ML financing for Truckee didn't happen in the timeframe they expected - so it is "late" - something I cited above in my initial comments. However, one of the beauties of the RZ model is its portfolio approach. Since Truckee was only so-so, they moved onto thermo and here we are with a very hot resource.
I have no reason to doubt what Geothermix said about the resource. I suppose that Geothermix, who is one of the most well-respected authorities in the industry would have a lot to lose from lying about this resource. Further, I suspect that at some point the report will be made public (though I don't know for sure) and you can see for yourself how important it is vs. others in the past 25 years in NA.
Regarding its value....if you just assume what RZ's numbers suggest (and these figures are all available from the 8k they filed in January around the Truckee financing committment which, by the way was signed when PPA prices were far lower than they are today - so the values have likely gone up)....the NPV is $25m for every 10mhw. At 238mhw, that would be a market value of $595m. Further, although I don't have my notes handy (I'm typing on a laptop and it's Sunday evening...so pardon my rough calc here)...but I recall that Ormat with a value of roughly $2 billion had something like 300-400mhw in production. That's a value of $5 per mhw. If you apply $5 to the 238mhw, that's a market value for Thermo of $1.19 billion. Let's be conservative and only use the p90 value of 130mhw - that's a $650m value.
I hope you don't think, as you point out, that I am "making anything up."
Last - you questioned the math on the $25m in NPV. All the figures are in their 8k - payments to RZ every year for years 1-25 are there. I used a discount rate of 15% to calc the $25m NPV.
Also, the non-reimbursed development costs you highlight are a very good point. However, you have the numerator (costs), but not the denominator (number of wellfields this represents). This could be Truckee, Thermo (multiple sites there), and some driling at other locations - we just don't know. What we do know however, from general work in the geothermal industry, is that a 5-hole wellfield costs "approximately" $5 million. Some are less (like Lightning Dock) and others are more (if they are deep or they encounter problems at the site). There are ample places out there which will confirm that a general wellfield costs about $5 million.
I hope that helps - please let me know if I can provide more information or color.
Before I will put money in any stock, they have to prove that they can make money instead of just talking about it. There are always new hyped alternative energy sources, but few ever deliver as plan.
You can rationalize this company all you want, but I have to see it to believe it. Right now LZ has nothing to show for themselves.
Thank you for your comment. I appreciate your desire to see revenue before investing in this company. I also believe that is not only a very common perspective, but also the one of many short sellers.
One of the reasons why I believe the stock is a buy now (vs in November), is that although they have no revenue now, they will have revenue in November as Thermo gets turned on and power sales begin.
At that time, in my opinion, several people will reconsider their perspective and will say "ok...they have revenue now - I can justify the story."
Buying the stock now provides an investor with the opportunity to realize gains when other people figure that out and perhaps when short sellers realize this and head for the exits.
Now, if you think there's no way they will have revenue in November, that's a different story. You might want to look at their power purchase agreements and the construction of the plant. I'd be curious what evidence you'd have that the company will not produce revenue at that time.
<<<Also, the non-reimbursed development costs you highlight are a very good point. However, you have the numerator (costs), but not the denominator (number of wellfields this represents). This could be Truckee, Thermo (multiple sites there), and some driling at other locations - we just don't know. What we do know however, from general work in the geothermal industry, is that a 5-hole wellfield costs "approximately&qu.... $5 million.>>>
I ask, how you came up with your $5 million number?
<<<In the conference call raser pointed out well development cost of $20 Million that would not be reimbursed. How do you come up with your $5 million number. Seems way off.>>>
You are suggesting that of the $20 million, only $5 million is for the Thermo property. That is beyond far fetched and reaches into ridiculous.
To further support you number you say, "
<<<What we do know however, from general work in the geothermal industry, is that a 5-hole wellfield costs "approximately&qu.... $5 million.>>>
We don't know that--support your work. That aside raser has shown their numbers. I don't think any one will buy into the argument that 75% of the line item $20 million is for projects other than thermo. Should we call raser and ask them?
The $20 million is just one example, if you listen to the CC, they point out other costs that will not be reimbursed.
Thank you for your continued interest in my posts.
I apologize if the languge I used suggested that only $5 million of the wellfield costs were for Thermo and I could see why you would call this "far fetched and ridiculous." In fact, I do not think this is the case.
Thermo has consumed quite a bit of financial resources. However, as you well know (again please pardon the pun), Thermo is larger than a 10mhw resource. I suspect that some of the additional drilling costs were done for purposes of expanding and exploring the resource for future use.
$5 million is a general round number figure used per 10 mhw resource. If they were to look at doing 20mhw for example, they'd incur $10 million and if memory serves, they are going to produce 22mhw of power there - so that would be something north of $10million spent right there.
Now, the $5 million is a general industry figure - call the drilling companies and ask them. Call the other geothermal companies. From time to time, I suspect that figure will be lower (if it's a very shallow resource) or higher (if it's deep, if they encounter faults or granite caps, or if they run into unforeseen difficulties like breaking a liner or something like that). My point was not to get hung up on the $5 million figure (though I will defend it), but rather to demonstrate that the business model uses cash up front to the tune of roughly $5 million (if I increased that number to $7 or even $10 million to be conservative, my argument would still make sense) and then returns cash in the form of fee payments and electrical sales in the form of a $25m NPV. This also does not provide RZ with any value of owning the plant, which is a valuable balance sheet item itself. Either way, we can argue $5 million vs. another larger number, but the payback is substantial and the business model quite strong.
Although there are various costs which will not be reimbursed, the important one is the "wellfield development costs" which represent RZ's equity investment in each LLC/drilling/productio... program.
I hope this helps.
I too was disappointed when Raser made promises before and did not meet them. This Geothermal project has benefits beyond just the profit and loss numbers, which means more than ever in this geopolitical environment. Both candidates will support alt energy. No doubt Merrill Lynch is looking for the tax benefits. I look at the photos on Raser's website and can see the changes taking place, unlike the past hopeful promises.
Well, (pun intended) you started out using well field as the numerator and you have know switched to MW produced. You defined well field as a five –hole field.
<<<However, you have the numerator (costs), but not the denominator (number of wellfields this represents).>>&g...
<<<What we do know however, from general work in the geothermal industry, is that a 5-hole wellfield costs "approximately&qu.... $5 million.>>>
The switch, <<<$5 million is a general round number figure used per 10 mhw resource. If they were to look at doing 20mhw for example, they'd incur $10 million and if memory serves, they are going to produce 22mhw of power there>>>
There is over $20 million in expenses so far. I am not sure how many 5-hole well fields they have developed. Using your number they have developed (4 ) five-hole fields and have drilled enough holes for 40MW.
This is not the case.
Also, I'd like to know why we can drill for oil 2 miles deep under another 2 miles of ocean, but can't tap the crust for an unlimited power source. How does an geotherm project compare to an oilfield?
On Aug 22 04:11 PM Chris B wrote:
> Who does their drilling for them? NE? RIG? APA? Lowest bidder? <br/>
>
> Also, I'd like to know why we can drill for oil 2 miles deep under
> another 2 miles of ocean, but can't tap the crust for an unlimited
> power source. How does an geotherm project compare to an oilfield?
On Aug 18 05:15 PM HuckFan wrote:
> I have been long RZ for years, and usually see only negative blogs
> on RZ. Thanks for posting an alternative viewpoint.
>
> I too was disappointed when Raser made promises before and did not
> meet them. This Geothermal project has benefits beyond just the profit
> and loss numbers, which means more than ever in this geopolitical
> environment. Both candidates will support alt energy. No doubt Merrill
> Lynch is looking for the tax benefits. I look at the photos on Raser's
> website and can see the changes taking place, unlike the past hopeful
> promises.
I gently called BS on his numbers when he wrote this article, .e.g drilling costs. Was Abraham associated with rz or one of their PR firms? We will probably never know. What we do know is that he wrote a lot of stuff that was just not true.