Geothermal is back! Paul Mampilly is circulating his “Ocean of Energy Under all 50 States” pitch once more, so it’s time to take another look. His ad is almost exactly the same as it was when we first covered it in March, 2017, but I’m sure the story must have changed a bit along the way.
Stock promos about geothermal projects are rare these days, but they really got hot (sorry!) early on in 2007, which was also Stock Gumshoe’s first year of publication. I have some fond memories of what was in many ways a “bubble” in a small number of heavily touted geothermal stocks, which were benefitting from super-high oil and gas prices that drove interest in “renewables.”
A few of those “geothermal juniors” survived, though they mostly all merged with each other, and some of them have come back to life in recent years, and there are a few real geothermal businesses in the US and elsewhere around the world that do make money, so what sort of pick is Paul Mampilly making now as he tries to reinvigorate investor enthusiasm in the geothermal space?
Now, the big picture from Mampilly that gets the ad going, referring to a simplified copy of that map (the map is from 2008-2009, incidentally, not a lot of study has gone into updating it since):
“You see, the colors of this map reveal a huge untapped energy reserve that spans across the entire United States.
“A relatively unknown energy that is under the Empire State Building in New York City … beneath the roller coaster rides at Disney World in Orlando … below the Sears Tower in Chicago … and under the shiny lights of the Las Vegas Strip.
“And this energy is so expansive and untouched, the Earth Policy Institute recently reported that there’s ‘50,000 times more [of this] energy contained in the first six miles of the Earth’s crust than in all the planet’s oil and natural gas resources.’
“That’s enough energy to power the United States for the next 30,000 years.”
That’s true as a scientific notion, though not necessarily as an economic one — in mining parlance, I suspect most of that geothermal potential would be classified as “inferred resources”, not as “proven and probable reserves” … we know the heat is there, but it’s not so easy to produce it economically except in a few places, like the Geysers in California, or in Iceland, where there’s good infrastructure and access to geothermal resources fairly close to the surface… and geothermal plants are not cheapto build or maintain, so they have to compete with the price of electricity generated from solar panels, or natural gas plants, or nuclear power.
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New technologies continue to advance for geothermal production, making it feasible to generate electricity in slightly less perfect spots than the Geysers, and at lower cost, but that doesn’t mean you can make money by just plunking a drill bit into the ground anywhere that shows orange or red on that map.
Geothermal power has been a hot topic more than once in the last 50 years, and it may be that we’re at an inflection point where more money goes into geothermal — past inflection points for geothermal have come because of rising oil and gas prices, or because of strong tax incentives for renewable energy. Or, perhaps, we could also be at such an inflection point for utility-scale solar or wind farms that geothermal will have trouble competing… I don’t know, I just want to raise the possibility for you to make sure you’ve got enough skepticism on hand to counter the hype of “power the world for 30,000 years.”
And then the meat of the tease:
“And here’s the really exciting news … I’ve discovered a little-known company that is at the forefront of it all. They have the game-changing technology that harnesses this energy and converts it into electricity.
“Make no mistake, this relatively unknown Midwestern company is positioned to disrupt the entire energy industry … it could be bigger than ExxonMobil, Chevron and Shell Oil combined … and make investors John D. Rockefeller-type fortunes.
“Those who invest in this company now will have the chance to mint millions … and all it takes is an initial stake of just $50 if you would like.”
You should NEVER go into an investment looking for John D. Rockefeller-type fortunes, of course — and that kind of thinking, touted so breezily in an investment newsletter ad, is corrosive to rational thought.
They do not, of course, guarantee that their small company will be bigger than ExxonMobil, Chevron and Shell combined, but just the mentioning of it makes us stop worrying about whether we’re paying 50 times earnings or 10 times earnings for a stock — it doesn’t matter if it’s a little expensive if it’s going to be the next global monopoly, right?
And yes, as the teases note, Warren Buffett has invested millions in geothermal energy — though he did so quite indirectly almost 20 years ago, through the fact that Berkshire’s large utility operation owns ten geothermal power plants in the other substantial operating geothermal site in the US, the Salton Sea in Southern California (there have sometimes been plans for possible expansion at that site, but they haven’t actually built a new generation project there since 2000 and have been making less money from Salton Sea in recent years, so much so that they’ve opted not to expand).
More from Mampilly on the specific company being hinted at:
“At the center of it all is an innovative company in the Midwest … with over 80 patents to harness this fuel’s power.
“Shareholders in this $2 billion firm include institutions like Vanguard, BlackRock and American Century, and it has deals lined up in some of the biggest energy-consuming countries in the world, including: China, France, India, Japan and Russia.
“And I believe, if everything falls into place, its stock will hand early investors the opportunity to make as much as five, 10, even 20 times their money in the months ahead. That’s millions of dollars for those who want in, starting for as little as $50.”
So who is it? Well, they haven’t updated the ad to include the changes to the company over the past two or three years… but thinkolator sez Mampilly must still be teasing Ormat Technologies (ORA). And yes, that’s despite the fact that the references to “Midwestern” are not a good fit for Ormat, which is headquartered in Nevada — that’s been an oddity of Banyan Hill copywriting for a couple years now, referring to companies in Utah and Idaho as “midwestern,” so I guess now we can add Nevada to that list of “midwestern” states.
Ormat is no longer at $50 like it was back in January of 2017 — it was already up to $58 a share when we first covered this ad, with a market cap now of about $2.9 billion, and now, after a rough 2018 and a very strong 2019 so far, it’s at about $75 and $3.8 billion.
Ormat is certainly the largest pure-play geothermal stock in the US, and they are both a designer and builder of geothermal power plants and equipment, and an operator of a few facilities (the revenue over the years has been roughly 1/3 from products/sales — engineering, equipment and construction; and 2/3 from electricity sales from their operated facilities… though that is shifting more to 1/4 and 3/4 in the past year or so).
They’ve been around for a long time since being founded in 1965 to build high-efficiency turbines, and they were probably the easiest and least speculative geothermal investment you could have made back in 2007 and 2008 (though the valuation was tough to swallow at the peak back then as well, when it briefly had a trailing PE of 80), though it was the junior project developers like US Geothermal and Polaris and Sierra and Ram Power that were more often teased and touted by newsletters (ORA shares are now slightly above where they were at the January 2008 peak — they bottomed out in late 2011 at around $15… most of the speculative geothermal stocks from a decade ago are down at least 75% from their peak, in some cases they’re down 99-100%).
ORA shares have very well since the 2011 bottom as interest in geothermal seems to have perked up a bit, despite a terrible year last year (when, coincidentally, they also bought one of those original “geothermal juniors, US Geothermal), and as Ormat has continued its recovery from a tough 2010-2012 period to grow both revenues and earnings. They have pretty steadily increased their revenue from electricity generation as rates have risen, though the “product” part of their portfolio (building power plants and selling geothermal equipment) has become a somewhat smaller part of the mix… and their backlog remains at about one year of revenue for that segment.
That doesn’t mean they’re “on fire”, at least not when it comes to actual financial performance — you do probably have to read between the lines and inject some “story” optimism in order to get excited about Ormat at this valuation. The stock posted earnings per share of $2.20 in 2018, which is about 20% less than 2017, and the forecast when this ad first ran was for $2.71 in 2019 but that number is more likely to come in at about $1.81… and I would assume that all of that shortfall is that big plant orders didn’t arise or projects hit delays, and the backlog didn’t grow, since the electricity generation segment of the company has grown more stable over the years. The current estimate is for $2.24 in earnings per share in 2020, and $2.43 in 2021.
That means buyers of the stock today are paying more than 40X trailing earnings and 33X forward earnings for a company that analysts think can grow profits by about 10% a year — that might work out, particularly if things really did bottom out for the company this year and you’ve got time to wait for their earnings to catch back up with their valuation, but it’s a lot to pay for a company with relatively slow growth (over the past three years earnings are flat, free cash flow has declined substantially, and yet the stock has risen 58%).
So it seems to me that it’s a little hard to buy based on the fundamentals right now — which means you need to have some real confidence in the growth story and in Ormat’s ability to substantially outperform those analyst expectations. That’s the skepticism you can use to counter the dreams of greed that might be percolating in your brain… and as for the optimism, you might start with the company’s own quarterly investor presentation from August.
The rub, of course, is that most of the big-picture comments and the “this will revolutionize the world” quotes that Mampilly uses in the ad are still from 2008 or 2009… and, in fact, many of the most enticing quotes in Mampilly’s ad were pulled from a 2008 LA Times story.
That doesn’t mean that geothermal is less real, but it does mean that we should probably be skeptical of those who promise huge and rapid investments in the sector or any other kind of dramatic change… the logic of this kind of energy was trumpeted from the rooftops in 2008 (and, before that, in 1980, and in the late 1960s), but geothermal plants are generally large, complex, capital-intensive (and often water-intensive) projects that often depend on government incentives or regulatory assistance, and they aren’t necessarily built easily or quickly. And they’re also competing with solar and wind projects that have grown dramatically less expensive over the past decade, while geothermal’s operating and equipment costs don’t seem to have changed much.
Ormat is not just standing still, they are also investing in some solar plants and in energy storage… but the majority of their revenue and the vast majority of their real cash flow (90%+) is from operating as essentially an electric utility. That’s fine, and they do have more revenue growth than most big electric utility stocks, but it also means that the stock has to compete with utilities for investor attention — and electric utilities, even after an incredible several years and even if you include the blowups like PG&E, are still mostly bought as income and “safety” investments with fairly high yields… so Ormat has a hard time appealing on that front with its 0.5% dividend (AEP, a huge regulated electricity company, has a yield of 3%, which is also roughly the yield you’d get from one of the large utility-sector ETFs).
In case you’re curious about the “urgency” of this teaser pitch, and about the performance of the company in recent years, here’s a chart of what Ormat has done (blue) in comparison to the S&P 500 (red) and the Dow Jones Utility Average (orange) since we first covered this Mampilly tease in 2017…
And here’s the same chart going back ten years:
So there you have it — I still can’t really get excited about Ormat at this price, but I said the same thing a couple years ago and it has done OK. It is a real company that is almost entirely focused on operating and building geothermal plants around the world, and they are profitable and are expected to have revenue growth in the future. Beyond that, I’ll leave it to you to make your own call… it is, after all, your money. I’m pretty sure you’re not going to make “five times your money” in “the months ahead” on Ormat shares, and certainly no ORA investors made that much at any point in the past 2-1/2 years following similar promises from Mampilly… but, of course, that depends a lot on how many months you think “in the months ahead” implies.
Any thoughts about Ormat or geothermal to share with the group today? Let us know with a comment below. Thanks for reading!
Disclosure: I do own shares of Berkshire Hathaway an but don’t own shares of any other company covered above. I will not trade in any covered investment for at least three days per Stock Gumshoe’s trading rules.