Monday, August 5, 2013

Ormat Technologies - Geothermal Play Poised To Show Gains

Ormat Technologies (ORA) is the world's largest pure play geothermal technology solutions provider and also owns and operates a number of geothermal plants. Geothermal energy has not really taken off like its other renewable energy siblings such as solar and wind energy. Geothermal energy has suffered as building geothermal plants is a risky proposition and also takes a long time. Most of the geothermal energy developers are also small and weakly capitalized, which makes it difficult for them to develop long gestation projects. The company has a long history and has operations both in Israel and USA. The company earlier used to be a pure equipment provider before it expanded into owning and operating geothermal plants. The company also makes equipment for generating electricity from waste energy emitted by industries. Ormat is currently trading at historically low valuation multiple as the sentiment towards green stocks remain adverse. I think that the company's current stock price does not adequately reflect prices in the company's technology and power plant assets. I would look to build a small position in the stock and look to add on stock pullbacks.

What I like about Ormat

Geothermal Technology Leader - Ormat is the world's only vertically integrated geothermal energy company that designs, builds and installs the geothermal energy equipment. The company's Ormat Energy Convertor (OEC) is used in a large number of geothermal energy plants. The OEC is based on the company's pioneering Organic Rankine Cycle Technology which was developed by Ormat Industry's founder. The company owns a large number of patents in geothermal technology and has got deep expertise and experience in this technology. The company's product segment account for 40% of its total revenues and it has got a backlog of $224 million, which is around 1 year worth of revenues.500 MW plus of geothermal plant capacity and 41 new prospects - Ormat gets almost 60% of its overall annual revenues of $500 million from its g! eothermal energy plants. Electricity revenues from its plants provide an operating margin between 10-15%. The company also has a number of exploration projects for building new geothermal plants. The company has around 200 MW of geothermal plants in various stages of construction. Most of these plants are located in USA with others located in South America, Asia and Africa.Valuation is not imposing - Ormat Technology's valuation has become much more reasonable compared to 2008 and 2009, when green companies were trading at bubble valuations. Renewable energy companies have seen their stock prices going up after a horrible 3-4 years when stock prices crashed by more than 80-90%. Some of the biggest green energy companies such as Q-Cells and Solyndra have become bankrupt, while other clean technology leaders such as Suzlon are near bankruptcy as well. Though the forward P/E at 39x might look high, the company is recovering from losses made during the last couple of years and this year's profits are expected to be smaller than its historical average.Geothermal technology has a lot of potential - Geothermal energy's total global installed capacity is quite small at ~11 GW. Most of the plants have been built in high potential areas in California, Nevada, Indonesia etc. New geothermal technology EGS is expected to raise the potential to more than a 100 GW. However, the EGS technology is still in the infancy stage and it will take some time before it can be fully developed. The biggest advantage of geothermal energy over other forms of green energy is its high load factor and 24/7 availability.Expansion into solar projects business - Ormat has decided to expand its green energy generation portfolio into solar energy plants as well. The company is building a 10 MW solar plant near its Heber complex in California and has already signed a 20 year PPA with IID. Solar energy is growing at a 50% CAGR in the USA, as the sharp decrease in solar panel prices have made it much more competitive with other forms of energy! .Green Pl! ay - Ormat is a technology and energy leader in the green industry which has been going through a rough patch. However, I think that the green stocks have seen a bottom and are starting to see their valuations increase. Ormat is not only a renewable energy generator but also a provider of energy efficiency solutions through Recovered Energy Power Generation. As energy prices increase and pressure increases on corporations to improve their environment friendliness, demand for Ormat's equipment should increase.

Ormat Risks

1. Revenues and Margin volatility - Ormat's revenues and margins are quite volatile as both the company's segments show variability due to numerous factors. The electricity segment revenues vary due to the natural gas prices, while the product segment also sees lumpiness due to the product mix. The company operates in a volatile environment where a high degree of luck is needed from transforming a prospect into an actual geothermal energy plant. The geothermal energy business is also localized in only few areas in the world currently unlike the global nature of the wind and solar energy businesses. Though the revenues have shown a lot of volatility, the overall trend has been one of decent growth.

ORA Revenue Quarterly Chart

ORA Revenue Quarterly data by YCharts

2. Capex Heavy Business - Ormat Technologies has to invest heavily in prospecting for new geothermal sites as well as construction of new plants. This stresses the balance sheet of a company with a market capitalization of just $1 billion. In general, capex heavy sectors have lower returns than pure technology sectors and also place the smaller companies at a disadvantage, as they do not have a strong balance sheet. The risk of a small company is that it might run out of cash before the projects start to generate cash flow. However, Ormat management says that it has adequate resources to! fund its! capex needs.

We plan to invest a total of $173 million, $124 million expected to be invested in projects that are fully released for construction including, Mammoth and the Heber enhancement and an additional $49 million for development of new projects, exploration, maintenance CapEx and enhancement to the production facility.

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Source - Seeking Alpha

3. High Debt - Ormat Technology is both a utility and a technology company. I think it would be better for the company to demerge these two parts of its business and allow for greater shareholder value. The company has a high debt equity ratio of 1.4x which seems abnormal for a technology company. However, such D/E ratios are common for a utility operating in stable cash flow business. The $1 billion in debt means that the company does not have too much flexibility and cannot afford to miss on execution.

Stock Performance

Ormat's stock has shown a number of peaks and troughs in its nearly 10 years of listing history in the USA stock markets. The company peaked at $57 during the green stock euphoria during 2008 when the investors were highly optimistic that a global warming deal would be reached to restrict GHG emissions. The stock touched an all time low of ~$14 in 2011 after it suffered from losses. The company has shown an upwards trend from that point and is currently trading nearly its 52 week high of $25.76.

ORA Total Return Price Chart

ORA Total Return Price data by YCharts

Valuation is at a historical Low.

Ormat's valuation is not expensive with a P/S of ~2x and a P/B of 1.5x. The company has traded at very high valuation multiples in the past, but given the current sentiment towards green stocks. The valuation is quite low at presen! t. The st! ock is currently trading near its lower limit of its historical P/S range.

ORA Forward Price / Sales Ratio Chart

ORA Forward Price / Sales Ratio data by YCharts

Summary

Ormat is a good investment for the long term investors in green energy. The renewable energy sector has been beaten down very badly due to massive industry losses and lack of a global warming deal. However, the sector has shown some strength in the last 3-4 months with stocks going up by 50-400% from their all time lows. Ormat is the only vertically integrated geothermal energy company in the world and is the leading provider of equipments to geothermal energy plants. The company also has a thriving electricity business in which it builds power plants and sells electricity. The company is currently making a turnaround after taking a big $230 million one time loss, as a power plant failed to meet its capacity expectations. The stock is currently trading at a historically low valuation and provides a good entry point for investors. I would look to build a small position in the stock and to add on pullbacks.

Source: Ormat Technologies - Geothermal Play Poised To Show Gains

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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