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Published: November 8, 2010
Less than two months ago, Canadian pipeline giant Enbridge
did something strange.
The company announced it was spending $24 million to take a 20%
stake in a modest, 35-megawatt project being developed by a
company few investors have ever heard of: U.S. Geothermal (HTM).
The project is located at Oregon's Neal Hot Springs, where the
Earth's heat literally shoots out of the ground. Companies like
U.S. Geothermal build plants on top of these hot spots,
providing clean, quiet energy for decades.
Don't be surprised if the Enbridge deal turns out to be the
start of a string of new joint ventures or even acquisitions of
geothermal companies. As large-cap energy companies and
utilities move into this space, share prices are going to
skyrocket. (U.S. Geothermal is up more than 40% since Enbridge
announced the deal.)
It's easy to see why interest is brewing. Geothermal projects
are capital intensive but low risk. The U.S. Department of
Energy guarantees loans for up to 80% of a project's total cost.
In addition, the government will subsidize up to 30% of
expenditures.
Also, utilities and other energy companies that might be eying
geothermal takeover targets have done extremely well in 2010.
The utility sector fund (XLU) is trading near a two-year high
while dishing out a dividend over 4%. Many of these companies
are in a position to do some deals.
Finally, geothermal assets are on sale... Most geothermal stocks
are down about 40% over the past year. It's one of the few areas
in the energy space that isn't rocketing higher.
Take a look at Magma Energy (MXY on the Toronto Exchange), one
of the biggest and best players in the industry. A lot of
geothermal charts look similar...
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These companies sign long-term power purchase agreements that
ensure a predictable stream of revenue. So one way to value them
is to figure out the present worth of that future revenue
stream, taking into account potential bumps along the road, and
add that to current assets. It's called "risk-adjusted net asset
value."
By this measure, U.S. Geothermal is worth somewhere between
$1.60 and $2 per share. With shares trading for around $1.10,
you've got plenty of upside. I'm seeing similar valuations in
other geothermal stocks.
In a market that offers few bargains, geothermal stocks stand
out. The already-low valuations make these stocks likely to
outperform even if the broader market pulls back.
If you're not sold yet... keep an eye out for more announcements
similar to the Enbridge deal over the next few months. These
could provide the signal this unloved sector is about to take
off.
--Larsen Kusick
Analyst
Phase 1 Investor
Note: This article originally appeared on
Growth Stock Wire |
