Tuesday, September 11, 2007

Check the Markets: Tapping the Power of the Planet

Marc Courtenay of ChecktheMarkets.com's Seeing Green blog is back with another great post on geothermal energy. This isn't a renewable energy source I cover often, so it's great to have Marc's expertise and point of view on this topic. He also highlights a few companies to watch.

Geothermal Energy is an alternative form of green energy with unlimited supplies and explosive upside potential for investors. Geothermal energy is found in the hot rocks and the hot fluids that fill the fractures and pores within the rocks that make up the Earth’s crust. Under the right conditions, geothermal energy can be utilized to generate electricity, and this is why we are focused on it.

A geothermal resource map of the U.S. shows the estimated subterranean temperatures at a depth of 6 kilometers (or just under 20,000 feet), which is considered relatively near the surface. As the map makes clear, essentially all of the U.S. has some form of surface-oriented, available geothermal potential.

There are two types of geothermal power plants in today’s world: steam plants and binary plants. Steam plants use extremely hot steam and hot water resources, such as are found at The Geysers complex of plants in Northern California. This complex is the largest geothermal electricity producer in the world and has been operating for close to 40 years.

Binary plants, on the other hand, use lower temperature, but much more common, hot water resources (100–200 degrees Celsius). And because these lower- temperature reservoirs are far more common, binary plants are the more prevalent.

Currently, electric power produced by binary plants costs about 5–8 cents per kWh. This is a very competitive cost compared to other forms of electric power generation.

When looking at the business and policy issues involved here, you should first understand that extracting the Earth’s heat and selling geothermal power is subject to the same regulatory entities as most other energy transmission and generation companies in the country. Secondly, geothermal energy is very costly, so it takes a good deal of time to pay off any major investment.

Once a plant is built and running, geothermal power is quite dependable. Geothermal plants are continuously available to create power, with historic reliabilities in excess of 90%.

Geothermal power benefits from the renewable energy production tax credit. This tax credit has been extended by the U.S. Congress through 2008, and is expected to receive further extensions in the future. The production tax credits, plus five year depreciation schedules, equals an effective U.S. government subsidy of over 63% of the capital cost of renewable energy projects. (Think of it as spending dollars that cost only 37 cents).

This brings us to our introduction of two publicly-traded companies that engage in the geothermal and recovered energy power business. The first is Ormat Technologies (NYSE:ORA), a well-established, Reno, Nevada-based operation. The company operates in two segments, Electricity and Products. The Electricity segment develops, builds, owns, and operates geothermal and recovered energy-based power plants, and sells electricity in the United States, Guatemala, Kenya, Nicaragua, and the Philippines. The Products segment designs, manufactures, and sells power units for geothermal power plants.

ORA has a great deal of technological leadership in this sector, as well as 70 patents on important technology and systems for geothermal power conversion. They have constructed some 900 MW of geothermal plant for other operators, with around 2,600 remote power units installed worldwide.

As far as the stock goes, ORA is trading closer and closer to its 52-week high of $45.13. With a forward P/E of nearly 28, meaning that the stock is trading around 28 times projected future earnings, we would encourage patience before buying. Our desired price target is closer to $30 per share and we will not even contemplate a price above $40 for the foreseeable future (barring some unforeseen good news).

Yet ORA trades at an enterprise multiple (EM) of close to 21, this according to Yahoo Finance. We’d prefer to see it below 15 before we would “back up the truck.” That would be around a 28% reduction in the multiple. If the current stock price of around $41 corrected by the same percentage, that would bring the price below $30 and then we would want all of ORA we could afford.

The other company we want to own shares of is called Nevada Geothermal Power Inc. (OTC: NGLPF.PK). On the Vancouver exchange it trades under the symbol NGP.V. Nevada Geothermal Power Inc. is a renewable energy company developing geothermal projects in the United States to provide electrical energy that is clean, efficient and sustainable. NGP is committed to the geothermal industry and currently owns a 100% leasehold interest in four properties: BlueMountain, Pumpernickel, Black Warrior, all located in Nevada, and Crump Geyser in Oregon.

With the shares of NGLPF.PK recently trading as high as U.S. $.89, two cents below its 52-week high, we would encourage carefulness with this stock. First of all, it is highly speculative and that is why the price is so low (which indicates more risk and the potential for unusual rewards if you can stomach the risk). Secondly, we agree with the Casey Research people (www.caseyresearch.com) that this stock is better purchased below C$.85, which is around U.S. $.81 or below. We are going to hold out for around U.S. $.77 or better.

When it comes to reports on Nevada Geothermal, we rely heavily on their own website and news releases which can be found at www.nevadageothermal.com. We suggest you do the same and also check with Casey Research at its above website. Their newsletter “Casey Energy Speculator” is outstanding.

1 comment:

Maria Surma Manka said...

Renewable Energy Access has a Q&A about how to determine if geothermal hot springs hold potential for renewable energy