Ormat Technologies (ORA)

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Avinash Gandhi

Geoffrey Jordan

Ormat Technologies (NYSE: ORA) is the largest pure-play geothermal energy company in the world. It builds plants that use hot underground water to spin turbines and generate electricity. This method of power generation is environmentally clean and able to produce 24/7, making it an ideal source of "base-load" energy. Ormat's geothermal facilities release very few greenhouse gases, and conserve underground resources by reinjecting used water back into the Earth to be reheated and used again.

Currently, the commercial viability of geothermal energy is dependent on renewable energy government legislation that subsidizes the costs of constructing geothermal plants, since startup costs for geothermal average $2500 per kilowatt installed^[1] - around $1000 more per kilowatt installed than a regular gas turbine steam plant^[2]. Constructing plants is the most expensive part of geothermal energy, as plants must drill deep into the earth to access hot water. As geothermal energy companies often use the same drilling technology that oil companies use to prospect for oil, it can be expensive for them to procure the necessary equipment when oil prices are high and drill rigs are occupied drilling for oil.

Ormat's market is limited by geology - only certain regions have sufficient reserves of hot water beneath the ground to make a plant viable, and even then the power output per plant is typically much lower than for a typical natural gas or coal powered plant.

While Ormat is one of the only pure-play geothermal energy companies in the world, it competes with large energy producers that dabble in geothermal, like ChevronTexaco and Calpine Corporation.

Finally! This is just what I was lokoing for.

Trends and Forces

I think you hit a bullseye there flleas!

Ormat Competes with Oil Companies for Drilling Resources

Ormat doesn't just find an empty patch of ground and throw down a power plant. Geothermal energy companies must engage in exploration for underground resources - underground wells of extremely hot water - much in the same way that oil companies do. Aside from making geothermal more attractive as a source of energy, when oil prices are high there is increased demand for oilfield services, pushing up dayrates for onshore exploration and drilling contractors like Nabors Industries Ltd. (NBR). Higher dayrates for drilling contractors affect geothermal energy companies as well as oil and gas companies, but geothermal companies can't pass on this cost with higher prices for their products as oil refineries can. Hence, the fall in margins from rising exploration costs offsets some of the increased revenues that companies like Ormat feel when oil prices rise (because of demand shifting to alternative energy).

Great cmomon sense here. Wish I'd thought of that.

Rising Energy Prices and Concerns About Emissions Means an Emerging Market for Ormat's Recovered Energy Power Generation Business

Recovered Energy Power Generation (REG) allows electricity to be generated from the excess heat, which would otherwise dissipate into the atmosphere, created in industrial processes. Companies can use Ormat's proprietary REG technology, Ormat Energy Converter (OEC) to increase their energy efficiency, getting more power out of every dollar spent on fuel and cutting relative emissions of greenhouse gases and other pollutants. Furthermore, Ormat doesn't just sell REG facilities, it also builds and operates them, and sells the electricity generated from the "wasted" heat of others to its utilities customers. REG has a wide range of potential applications, from reducing natural gas plants' dependency on electric utilities to increasing the efficiency and lowering the cost of industrial processes, and with output capacities ranging from 200 kW to 22 MW^[3], OEC's potential energy production seems to be an economical way for companies to significantly increase energy efficiency and cut greenhouse emissions.

Ormat's International Operations are Subject to Political Risk

Ormat has major operations in the Philippines, Nicaragua, Guatemala, and Kenya. Both the Philippines and Guatemala are privatizing their electric utilities; in the not-too-distant past of 2006, Nicaraguans were experiencing labor unrest. Furthermore, much of Ormat's production occurs in Israel, a country that is constantly in a state of political unrest due to its disagreements with its neighbors. Damage to the company's Kenyan facilities, increased competition in the Philippines and Guatemala, and terrorist attacks on its production lines in Israel would all cause major damage to the company's revenues and margins.

Competition

Ormat's industry competitors include U.S. Geothermal Inc., Nevada Geothermal Power (NGLPF), Polaris Geothermal Inc (GEO), Geothermal Resources Ltd., and Western Geopower Corp (WGP). None of these companies are nearly as large as Ormat. Ormat principally competes with other major renewable power generation companies:

• ChevronTexaco (CVX) - With an installed geothermal capacity of 1,273 MW in Indonesia and the Philippines, Chevron supplies 13% of the world's current geothermal energy supply - and is the largest geothermal energy company in the world^[4].
• Calpine Corporation (CPN) - Calpine is a power company with 24,000 MW of generating capacity, including 60 natural gas powered facilities across the U.S. and 17 geothermal plants in the Northern California Geysers region^[5].

As a producer of renewable energy, Ormat also competes with companies that produce other renewables; because most renewable sources have similar advantages (low pollution, low greenhouse gases, self-renewing), they must compete on scale and cost advantages. Solar power, though more expensive and less efficient than other sources, is currently a leading source of small-scale power, with companies like SunPower, First Solar and Suntech Power Holdings leading the pack. Wind energy is a growing source of renewable large-scale power, though the fact that wind does not blow all the time makes it less reliable than other sources; companies like Suzlon, Gamesa, Vestas and GE Wind are the major players in the wind industry. Other major sources of renewable energy include biofuels, ethanol and cellulosic ethanol, biomass, tidal, and hydrogen. These are all young, though growing, sources of power, giving geothermal, which is already well-established (though limited in scope), a significant head start.

References

1. ↑ U.S. Department of Energy, Energy Efficiency and Renewable Energy: Geothermal FAQ
2. ↑ http://www.memagazine.org/mepower03/bbuster/bbuster.html
3. ↑ Ormat.com, Recovered Energy » Our Technologies » The OEC
4. ↑ Chevron Geothermal Website
5. ↑ CPN 2007 10-K, Overview, Page 2