My eyes lit up when I saw the latest ad from Paul Mampilly for his Profits Unlimited newsletter — more geothermal! Woohoo! Even the ad looked familiar — we saw quite a few of those ‘heat map’ images of the US five or ten years ago when geothermal stocks “heated up,” so it gave me a nice moment of flashback to the early days of Stock Gumshoe.
(Today, incidentally, is Stock Gumshoe’s 10th birthday… I quietly launched this site on March 7, 2007 with a teaser solution about one of the many “next Berkshire Hathaway” ideas that come along every year… and perhaps it’s appropriate that that particular stock, Brookfield Asset Management, has pretty much tracked with the S&P 500 over the past decade despite the ribald and rapturous promises made on its behalf. I guess it’s appropriate that our 10th birthday has been equally quiet so far, despite the fact that probably 100 times as many people will read this article as read that one in 2007. And yes, mostly it’s quiet because I haven’t come up with a good way to celebrate. Any ideas?)
So anyway, geothermal teasing got revved up early on in Stock Gumshoe’s first year. 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”.
Back in 2007 we were on the verge of a couple years of teaser pitches using terms like “Sonoma Grizzly Power” and “Slow Volcano Power” and “Thermogenic Oil,” all phrases invented to help pitch little junior geothermal stocks… most of which are no longer with us and some of which were downright scammy operations. Raser Technologies, US Geothermal, Sierra Geothermal, Polaris Geothermal, Ram Power, Western GeoPower… there were quite a few little guys active seven or eight years ago, some of them very well-connected with big-name resource investors, and they all collapsed quite dramatically.
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.’Are you getting our free Daily Update
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“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 cheap, so they have to compete with the price of electricity generated from solar panels, or natural gas plants, or nuclear power.
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).
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? Thinkolator sez Mampilly must 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 — I don’t know whether that’s a red herring or an exaggerated view of what “midwestern” means.
Thanks to an earnings beat a week ago, combined with the attention of Mampilly’s large-scale newsletter, ORA is no longer at $50 like it was back in January and late last year — it has surged up to $58 a share, with a market cap now of about $2.9 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 of late is roughly 1/3 from sales — engineering, equipment and construction; and 2/3 from electricity sales from their operated facilities).
They’ve been around for a long time, 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 done very well of late as interest in geothermal seems to have perked up a bit, and as Ormat has continued its recovery from a tough 2010-2012 period to grow both revenues and earnings, and they now also have a backlog of orders that’s roughly equal to a year’s worth of revenue… which isn’t a lot for an engineering company, but does at least provide some baseline for current-year expectations.
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. The stock posted earnings per share of $2.46 in 2015, $1.90 in 2016 ($2.19 non-GAAP), and is predicted by analysts to earn $2.31 in 2017, $2.62 in 2018 and $2.71 in 2019.
That means buyers of the stock today are paying more than 20X 2019 earnings — that might work out, particularly if the optimism that shows in analyst estimates rising over the past year is warranted, but it’s a lot to pay for a company with relatively slow growth (that’s roughly 8%/year earnings growth from 2016-2019).
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 2016 investor presentation.
The rub, of course, is that most of the big-picture comments and the “this will revolutionize the world” quotes 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.
So there you have it — I don’t know that I can get excited about Ormat at this price, but it is a real company that is almost entirely focused on operating and building geothermal plants, and they are profitable and growing. 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… 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.