Friday, January 18, 2008

Geothermal Stocks

Finance Friday TGIF - Thank Geothermal It’s Friday

Today we will discuss stocks that are in the area of geothermal energy. First we need a definition of geothermal energy Geothermal comes form the Greek words for earth and heat. In essence there is the capability to take naturally occurring heat that is warmer than room temperature and use this to either heat homes and offices or even produce electricity from the heat (energy) source. Typically the temperature of the geothermal source is not very high like in a coal fired power plant but is still high enough to extract work out of the system to drive turbines to generate electricity. There are several companies that are listed in the US that are engaged in geothermal energy. Today we will discuss two. The first is Ormat Technologies Inc ORA on the NYSE. ORA is trading today at $43.17 and well off of its 52 week high of $57.93. The Price Earnings Ratio (PE) for ORA is still a very high 71.95 giving ORA a market capitalization of $1.79 billion. ORA has some very good underlying technology in its low boiling point fluid method of generating electricity form low temperature heat sources such as geothermal or concentrated solar. ORA is trading at just under 4 times its book value of $455 million and it is my contention that ORA will be a long term player in the alternative and green energy market because of the underlying technology it has in the low boiling point fluids. I put ORA in the HOPE column and I believe that they will be around in five years as an even bigger company than their present state. My belief is that all green stocks will see pricing pressure in the short term and ORA may still drop further over the next few months but long term this company will likely be one of the market leaders in geothermal and concentrated solar.

The second stock I will discuss falls into the HYPE column. This company is Raser Technologies Inc RZ on the NYSE. This is somewhat of a shell company that has recently made the move into leasing large tracts of land in the west that have geothermal potential. RZ is a development company and has announced they have lined up financing from the like of Merrill Lynch

We all know that Merrill Lynch took a massive bath in sub-prime mortgages. With RZ they are likely to get into even more hot water and take a geothermal bath that will scald them. The location of RZs leases is in places where there is abundant coal, abundant gas, or abundant hydroelectric. This means the electricity that will be generated will have to compete with fairly low prices alternates. RZ has a puny balance sheet and is bleeding cash. With some 55 million shares outstanding and more dilution coming its way RZ is hardly worth the $13.82 it trades for. It had peaked at $18.44 a few weeks back. Long term RZ could end up in the trash heap and be a memory like some of the energy development companies like Calpine CPNLQ.PK or the dotcom companies that got on that band wagon. Actually Calipne which is now a pinksheet fallen star does operate some geothermal electric generation plants at the Geysers in Northern California. RZ also claims to have some super duper technology for improving electric motor efficiency and some technology for hybrid propulsion. I believe GE has great technology for electric motors and Toyota has great technology for hybrids propulsion and that RZ is pretty much hot air on these sectors. Therefore I put RZ into the HYPE column.

Be very careful with geothermal companies the water is hot and the stocks were recently hot, other than Ormat I believe you will get third degree burns in this sector.

Lindsay Leveen