Geothermal power waiting for its renaissance

OTTAWA Mon Sep 20, 2010 9:13am EDT

OTTAWA (Reuters) - For all the talk of a geothermal renaissance fueled by government incentives and the quest for clean energy, Canadian investors are cool on the sector, despite a list of compelling business advantages.

Industry claims lauding the renewable, round-the-clock and profitable power source are more than just hot air, say analysts, who believe better times are ahead.

All that's needed are more examples of companies with money-making power plants, a better investor understanding of the business and a dash of economic recovery.

That's a tall order, but for patient investors prepared to take a risk, now may be the time to buy these distressed stocks.

Geothermal companies, which tap heat stored far below the earth's surface to generate electricity, are starting to attract serious interest from big, traditional power producers that are preparing carbon offset programs.

Enbridge Inc, Canada's second-biggest pipeline operator, said earlier this month that it would spend $23.8 million for a 20 percent stake in US Geothermal's Neal Hot Springs project.

"Oil and gas, mining, utilities; they're all circling geothermal. However, these companies are generally loaded with ... engineers that don't know anything about geothermal and the last person to try something before it's really proven is an engineer," said Jacob Securities analyst John McIlveen.

"They realize the attraction of geothermal being the only baseload (steady flow) renewable power. I think eventually you'll see many of them entering this field, and so Enbridge being the first, I think, was a really good sign."

Several analysts raised their stock targets for US Geothermal afterward. Wellington West Capital upgraded the stock to 'buy' from 'speculative buy". Over the past 12 months, the stock has shed more than half its value. It closed at 84 Canadian cents on Friday.

Enbridge's investment, one of many it has made in renewable power, but its first in geothermal energy, briefly lifted US Geothermal's stock by more than 18 percent.

"If we do see more of that in the space, it could be a factor which contributes to a geothermal love-in," said Mackie Research analyst Matt Gowing. "And now is a great time for these guys to get active, because valuations in the sector are very attractive."

Despite depressed valuations, geothermal companies have successfully raised cash in recent months, sending a positive signal for future project development and internal growth.

Nevada Geothermal Power, for example, recently closed a $98.5 million loan with John Hancock with the first-ever U.S. Department of Energy loan guarantee. It will save an estimated $9 million in annual interest payments.

CONSOLIDATION PICKS UP STEAM

A consolidation jag that has gathered steam over the past year is seen as another catalyst to stock gains. A dwindling number of targets may help drive M&A premiums higher.

The deal-making is driven by the hefty financial and human capital required to develop geothermal power.

Ram Power merged last year with Polaris Geothermal, Western GeoPower Corp and GTO Resources. This month it closed a C$28 million ($27 million) deal to buy Sierra Geothermal Power.

Magma Energy Corp, Canada's biggest geothermal company, has secured a 98.53 percent stake in Iceland's HS Orka through a series of transactions.

"Today we have about five or six publicly traded companies in this space, mostly in Canada," Ram Power's CEO, Hezy Ram, said at a recent conference.

"Eventually, I expect to have just a few champions, large companies that are well capitalized and able to develop those projects internationally."

Magma CEO Ross Beaty wants to build his company to the size of sector-leading Ormat Technologies and become one of the industry champions.

But the one-time mining magnate is frustrated by Magma's weak valuation -- the stock is well below the initial public offering price of just 15 months ago.

Beaty plans to list Magma on a U.S. exchange in the next six to seven months and, as part of that process, tell his company's story far and wide.

Gowing said the sector doesn't get the attention it deserves, but believes that may soon change.

"I'm optimistic that we are in a period of economic recovery and you're going to see a return energy price inflation and that's going to be a key driver to push geothermal valuations higher," said Gowing.

($1=$1.03 Canadian)

(Reporting by Susan Taylor; editing by Rob Wilson and Jeffrey Hodgson)