U.S. Geothermal, Inc: A Solid Geothermal Pure Play

 

US Geothermal, Inc. (HTM)  is one of only two pure-play geothermal power companies traded on US exchanges.  The other is Ormat (ORA), a vertically integrated company widely considered to be the industry leader.  As baseload, extremely reliable power, Geothermal fits easily into utilities existing grids, making it a popular source of green power, especially with utilities uncomfortable with the intermittent and difficult to predict nature of wind and solar.  

Unlike wind and solar, the potential resource for geothermal power is quite small relative to electricity demand. At least until Enhanced Geothermal Systems [EGS] technology is commercialized, geothermal will remain a boutique form of electricity generation, producing less than 1% of our electricity supply.  In many ways, the prospects are like those for new hydropower development in the US: New large resources are unlikely to be developed, but there is a lot of potential for small projects.  Until last year, the relatively small potential for geothermal led the technology to be mostly ignored by investors.  Now geothermal is getting more of the attention it deserves as a rapidly growing (if still tiny) source of clean power.

The Portfolio Approach

I bought US Geothermal last year as part of a small portfolio of Geothermal exploration companies.  Others I bought around the same time were Sierra Geothermal [SRAGF.pk], Raser Technologies (RZ), and Western GeoPower Corp [WGPWF.PK], which I added to previous holdings of Nevada Geothermal [NGLPF.OB] and Ormat.  The group as a whole has performed well, although I have small losses in Sierra Geothermal and Western Geopower.  

In general, I have not evaluated these companies in depth.  Understanding a geothermal exploration company is a lot like understanding other mining exploration companies.  To gain insight into their likely success or failure, one would have to delve into the underlying geology of their leases, something I lack the skills to do.  This is why I prefer to take a portfolio approach to the sector, which has so far been effective at protecting me from company specific risks.

US Geothermal

That said, I agreed I would look into HTM in more detail, and since the company's annual meeting is coming up, the annual report for the fiscal year ended March 31, 2008 was conveniently sitting in my inbox.  I find reading the annual report from cover to cover an excellent place to start when researching a company.  Here are my impressions:

1. The company has a handful of leases, at many stages of development, from Gerlach and Granite Creek, exploration prospects, to Raft River, which began producing power this year, but which it is continuing to expand.  In between are Neal Hot Springs, where it has what sounds like very promising test results from its first well, and San Emidio, a recently acquired older geothermal plant which the company has plans to upgrade and greatly expand (it recently received drilling permits to start the expansion.)
2. The company seems to be following its stated strategy of acquiring only leases where there is strong evidence of good geothermal prospects.  Although all natural resource exploration is risky, this should help to ameliorate the risks of exploration and development.
3. The company will need a substantial amount of cash to follow its chosen strategy.  This will probably come in the form of additional private placements, and joint ventures to develop specific projects.  The need to do additional private placements (where large blocks of stock are sold at a discount to the market price) will likely keep downward pressure on the stock price, which makes it likely that the share price will not see the quick tripling it had last year.
4. The interest among utilities in geothermal power is remarkably strong, so much so that they felt comfortable starting over from scratch on the Power Purchase Agreement [PPA] for the second stage of its Raft River project.  Management exudes confidence in its ability to negotiate favorable PPAs for future generation.  This is a marked contrast to other renewable electricity producers.  From my personal experience talking to wind, solar and hydro developers, they typically feel mistreated by utilities which often have the upper hand in negotiations for PPAs.

Overall, HTM seems as solid a company as could be expected from an early stage resource development company.  If you do want to venture beyond Ormat to buy a few geothermal exploration companies, HTM should be on your short list.  While it may not have the price growth potential of companies which do not yet have US listings, it is also relatively less risky due to the relatively high quality of the projects the company is pursuing.

DISCLOSURE: Tom Konrad and/or his clients have long positions in ORA, HTM, RZ, SRAGF, NGPLF, and WGPWF.

Comments

[john s. gordon:]

geothermal electric power - how distant from population centers is it located ?
> jack

2008 Aug 18 08:54 AM

[Jason Liu:]

I agree with most of what you've said, geothermal is a sector that has been mostly ignored by the mainstream media and a promising industry to get into. Its levelized cost of electricity is cost competitive with coal and natural gas, and as you said, provides baseload power meaning power and utility companies are desperate to have them on board.

One company that you missed out on is Polaris Geothermal (PGTHF.PK). Unlike the rest of the geothermals, there is increased geopolitical risk. Its current project is located in Nicaragua and future development plans are centered around sites in South America.

However it more than makes up for this through its high quality sites. Geothermal to a certain extent is a real estate play, access to sites with a strong geothermal resource will decide future cash flows.

Polaris Geothermal's San Jacinto site has one of the largest geothermal resources in the Western Hemisphere and with its production wells showing higher than expected resource and temperatures, the company seems to be a solid addition to any geothermal portfolio.

2008 Aug 18 09:00 AM

[NOWHEREMAN:]

CPN is in calif. and listed on nyse, they have massive geo holdings in upper calif., I believe about 30% is geo.

They will be able to sell CO2 credits far into the future.

2008 Aug 18 10:05 AM

[CPST1:]

U.S Geothermal's Annual Report:

www.usgeothermal.com/F...

It should be stressed that U.S. Geothermal is a holding company. The company report explains cost and risk, that outline the basis for one to consider before investing in geothermal. The company report is straight ahead thinking with no holes barred.

>We expect the following key incentives to influence our results of operation are:

1) Production Tax Credits. Production tax credits provide project owners with a federal tax creditfor the first ten years of plant operation. At present, unless extended, facilities constructed after December 31, 2008 will not be eligible to use this production tax credit. The federal production tax credit available for geothermal energy in 2007 was 2 cents per kilowatt-hour.

2) Renewable Energy Credits

Ormat is an industrial leader and as is UTC. More questions remain however, to develop the next generation of geothermal turbines for commercial use and how well will the next system enable private ownership?

www.utcpower.com/fs/co...

2008 Aug 18 10:08 AM

[whidbey:]

I am impressed what other countries have done with geoT, but I was also shocked at the maintenance costs on the units in Central America which have been operating for a time. I ran the WB loans on the units and I saw the financial and BSheets (such as they were -doubtful) which showed the costs. Good discussion.

2008 Aug 18 10:24 AM

[rvarin:]

"Pure Play" profits happen before the mining begins. Remember the 49rs; suppliers of picks and shovels made it even if the miner didn't. In oil the deep sea rig co. see their paycheck ($450,000 a day) long before oil hits the refiner. In wind power, makers of internal components, regulators and connectivity equipment "American Superconductor' would be the play.

2008 Aug 18 02:28 PM

[alpha24seven:]

What have you heard re seismic activity being created from GT operations Tom? Out here in CA (Wine Country) it's being seriously thought of as a contributor and potential of very dangerous introduction to seismic activity.

Nobody seems to know for sure but people are spooked, which, as you can imagine isn't good for business...

2008 Aug 18 03:37 PM

[tommytwotimes:]

I have always thought geotherm is a great way to produce energy. Too bad it is in the embryonic stages. We could probably get all of our electricity from it. Sorry old faithful.

You are funny alpha24seven. Tell those "serious thoughts" to put down the wine bottle and pick up a geology report..... thats classic.

2008 Aug 19 12:39 AM

[Chris B:]

Hydroelectric projects often cause seismic activity - check out Three Gorges Dam in China and Hoover Dam in the U.S. The relatively sudden addition of all that water weight can cause small tremors as the crust adapts. Overall, these small tremors are not considered problematic compared to the benefit of cheap, clean, independent energy. I expect the same with geothermal - probably less considering the ease with which the removed heat can be replenished from below. Also, consider that many geotherm locations are in earthquake prone areas to begin with, so causation is questionable. If trillions of gallons of oil extraction has not ever caused "the big one" I'm not worried about a few geothermal holes. Good question nonetheless.

2008 Sep 17 12:23 PM

[Chris B:]

I'm watching this sector, but I'm reluctant to commit. I've seen too many investors burned on gee-whiz energy products touted by micro-cap companies that turn out to be uneconomical with downside losses to investors of 100%. My risk tolerance is relatively high, but not unlimited. I'm keeping an eye on RZ, to see if their new plant comes online in Oct. as promised and produces a decent ROI. If I buy after the profits come, I understand I'll miss out on lots of appreciation, but I'll also miss a lot of risk.

The tide may be turning. If the American people realize that we are subsidizing oil with infrastructure, cash payments to mid-east dictatorships, and oil wars, then maybe the full price of oil could be accounted for. Nuclear is subsidized too - where do you think the waste goes? Then maybe geothermal will be revealed as very economical.

2008 Sep 17 12:32 PM

[Esol Esek:]

What is happening to HTM? Where is the discussion about it?
Do traders think they will face credit problems? They have two plants online and a third coming, and are selling electricity already. Plus their most lucrative winter season is coming up.I dont get it. Someone please clarify.

2008 Oct 08 06:11 PM