Whiskey and Gunpowder Special Report
Geothermal Stock- Ormat Technologies

Ormat Technologies Inc.
Ormat Technologies and its subsidiaries engage in the geothermal and recovered energy power business. The company operates in two segments, Electricity and Products. Ormat is about as pure a geothermal play as you can find among the well-traded stocks on major stock exchanges. 

When it comes to its product line, Ormat designs and builds modular power plants that are designed to match the full range of geothermal resources, which include high-enthalpy (essentially, high heat content), high-pressure steam fields, whether steam dominated or water dominated, and low- and medium-enthalpy (again, heat content) water-dominated sources, including resources whose fluid conditions may vary over time.

Ormat has installed its systems worldwide, and its geothermal power plants are field-proven, mature, commercial products. They are designed for outdoor installation and remote control, unattended operation. Ormat has successfully supplied more than 800 MW of geothermal power plants, based on its proprietary technology, logging multimillions of hours of operating experience.

Most of Ormat's products and business activities are based on its original Ormat Energy Converter (OEC), a proven technology for utilizing low- and medium-temperature heat sources, in which Ormat is considered the world leader. OEC is based on what is called a Closed Cycle Vapor Turbogenerator (CCVT) that uses an organic fluid that follows the Organic Rankine Cycle (ORC). This is considered to be the most dependable power source for reliable maintenance-free power in remote unattended applications in the power range of 200-4,500 watts. For almost four decades, OECs have demonstrated ultra-high reliability for cathodic protection, valve operation on oil and gas pipelines and offshore platforms, as well as telecommunications and cellular phone networks, even in extreme climate conditions. One of Ormat’s first remote installations was on the Alaska Pipeline, by the way.

Ormat also specializes in manufacturing systems to enable recovery of heat that would otherwise be vented into the atmospheres. This is called recovered energy power generation (REG), and involves capturing unused residual heat from industrial processes and converting it into electricity. The electricity can be used on site or sold to power purchasers, without any additional fuel consumption and with zero emissions. REG is recognized as a preferred solution for energy efficiency, fossil fuel savings and greenhouse gas emission reductions. Many REG projects benefit from the same policy incentives as other renewable energy projects.  

Ormat has a large degree of technological leadership in the field, as well as 70 patents on critical technology and systems for geothermal power conversion.

In the field of electrical generation, Ormat has about 388 MW of generating capacity in operation, of which it owns 364 MW via net equity ownership. Ormat also has an additional 264 MW of capacity coming online by 2009. In the field of recovered power from other sources, Ormat controls 22 MW in operation, with an additional 32 coming online. Ormat has constructed 900 MW of geothermal plant for other operators, with 2,600 remote power units installed worldwide. 

Ormat was a privately held business for several decades. Ormat closed its initial public offering of common stock on Nov. 10, 2004. Its recent stock price has been in the range of $35 per share, drifting downward in recent months after an earlier run-up. Its 52-week range has been $31.60-45. The price-to-earnings ratio (P/E) is 60, which is high, and we will discuss this further below. Ormat’s market capitalization is about $1 billion, with 38.1 million shares outstanding. Ormat’s five-year earnings per share (EPS) growth has been 17.6%, and its current profit margin is 12.8%. Power generation generates 73% of revenues, 81% of operating income. Power generation products generate 27% of revenues, 19% of income. Ormat has demonstrated profitable growth over the past five years (2002-2006), with 2006 EPS of 99 cents.

The company’s dividend policy targets an annual payout ratio of at least 20% of net income, subject to board approval, and current dividend yield is 0.5%. Institutions hold 35% of outstanding shares. Recently, the high-end investment firm Goldman Sachs told its customers, “ Overall, we are bullish on the growth prospects for clean power generators like Ormat, where we expect significant capacity growth going forward.” However, Goldman added, “We believe this growth is already reflected in Ormat’s current share price” (at the time, about $38 per share).

Well, I acknowledge that Ormat’s stock is rather pricey. And ordinarily, I would pass on a stock with a P/E of 60. But then again, this is the only major stock on the boards that offers such a pure play in the geothermal business. And I believe that the geothermal business is on the verge of a major breakout, as desperate utilities demand green power to comply with the wave of new laws that is sweeping the nation, as demonstrated by California. I also think that Goldman was being conservative in its view of Ormat’s future growth, because the Ormat management is quite seasoned. (In fact, Goldman has hosted Ormat presentations to its own list of blue-chip investment clients.)

So for many of the reasons that I described above, geothermal power is rapidly becoming a preferred energy source wherever economically accessible. Yes, the P/E is higher than I would like, but sometimes you have to pay a relatively high price for a ticket. Or you can stand on the platform and miss this geothermal train entirely. 

Until we meet again, Byron King

P.S.  In this Special Report I look at the dirty secret Wall Street and Washington hoped you'd never discover about...here's a clue its about ETHANOL.

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