BET ON GEOTHERMAL

Geothermal power stocks offer steep discount to oil
Martin Mittelstaedt, March 1, 2011 (Globe and Mail)

"Investors looking to buy energy dirt cheap may want to consider an unconventional asset – shares of geothermal power producers…[R]eserves of energy in the ground [are priced at] the equivalent of about $5 (U.S.) per barrel of oil…That’s a huge discount to the…current [oil] market values of around $100 a barrel…

"…[Wellington West Capital Markets] analysts concluded that geothermal companies offer energy exposure that is ‘significantly undervalued’ by the market, even though they think the reserves should trade at a premium to oil in the ground, based on their view that geothermal is a cleaner power source than hydrocarbons…[T]he firm’s research is one of the first comparisons of how geothermal energy reserves stack up on an energy equivalent basis against petroleum…"

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"Geothermal companies have some similarities to oil producers, so the firm’s comparison isn’t as far fetched as it may sound. Both drill deep into the ground looking for energy, but instead of hydrocarbons, geothermal firms seek places with extremely hot rocks from which steam can be extracted to run turbines and produce electricity. In its analysis, Wellington converted these in-the-ground reserves of thermal power into the equivalent amount of energy derived from oil.

"As with petroleum producers, the riskiest point for a geothermal energy company is when drilling. A company can chew through money trying to find the hot rocks it’s looking for. Even after a discovery is made, many additional wells are needed to prove the size of the heat source. But once a company determines its reserves and negotiates a contract to sell its power to a nearby utility, there is no difference between a geothermal operation and a conventional electricity generating station…"

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"Most of the world’s large geothermal companies with public listings are in North America, with four in Canadian markets and one in the U.S. There are a larger number of firms in Australia, but their capitalizations are tiny and they’re more speculative. Wellington’s analysis was based on the reserves at five North American firms: Magma Energy (MXY-T1.250.032.46%), Nevada Geothermal (NGP-X0.660.023.13%), Ram Power (RPG-T1.350.053.85%) , U.S. Geothermal (GTH-T0.980.011.03%) and Ormat Technologies (ORA-N24.54-0.51-2.04%). They’re rated as buys by the firm, except for Nevada Geothermal, which it ranks as a speculative buy, and Ormat, a U.S.-based firm it doesn’t rate.

"The evaluation assumed no value for any carbon credits the geothermal firms might receive if governments adopt measures to reduce emissions…[Unlike] wind and solar…[geothermal] power plants tapping into heat in the ground can run flat out, all the time…Once a geothermal generating station is up and running, it doesn’t face the risk that commodity prices will rise, which can hurt profits at a conventional oil- or gas-fired power plant…[And] regulatory support for geothermal energy is growing…"