This Company is Harnessing the Cheapest Energy on Earth

Nathan Slaughter

2/23/2013 12:01:00 AM

 

I just wrote a check this morning for my monthly power bill, made payable to American Electric Power (NYSE: AEP) in the amount of $260.02. 

I'm not alone. AEP serves five million residential and business customers in 11 states. 

Rain or shine, that's five million checks that pour in each month. They add up fast. AEP's utility segment collected $14 billion in revenue in 2011. But on closer inspection, the company only retained $2.8 billion in operating profits.

Where did the other $11 billion go?

Well, nearly half ($4.4 billion) was spent on fuel needed to run the firm's power plants. AEP burns through a mountain of coal each day. So much, in fact, that the company has its own fleet of 7,600 railcars, 3,300 barges, 61 towboats and a dedicated coal handling terminal with the capacity to move 18 million tons of the black rock annually.

By my math, AEP has to spend about $85 million per week to procure coal and other consumable fuels to generate electricity.

Most other electricity generators are in a similar position. 

Exelon (NYSE: EXC) doesn't use much coal, but it does need to stockpile costly uranium to feed its hungry nuclear reactors. Just in the United States, nuclear plants consume about 60 million pounds of enriched uranium per year. Prices have fallen from their $135 a pound peak since Japan's Fukushima disaster nearly two years ago, but at $42 a pound, they can still take a large bite out of profits. 

Exelon, AEP and their peers must replenish these feedstocks over and over again, surrendering a good chunk of their income in the process. Without hedges, they are at the mercy of rising commodity prices. So naturally there is some incentive for investors to seek out companies that use the cheapest fuel sources. 

There is one company that's found a fuel cheaper than coal, cheaper than gas, and cheaper even than water. In fact, its plants run on a resource that is essentially free. That's right -- zilch, nada, nothing. 

Now, the company has salaries and other bills to pay like anybody else. But it doesn't pay a dime for its feedstocks.

Instead of fossil fuels, this power generator is harnessing a power source that is clean, sustainable and costs nothing. No, it's not wind or solar -- they have their advantages, but they rely on heavy government subsidies and are also unreliable at times. 

I'm talking about geothermal power.

If you've ever visited Old Faithful at Yellowstone National Park or taken a hot springs bath, then you understand the basic principle. In the simplest terms, geothermal heat is produced deep in the earth's crust and then carried toward the surface by rising magma, the shifting of tectonic plates and other geologic forces.

That heat boils underwater reservoirs (sometimes up to 750 degrees), and the resulting steam and pressure are used to spin turbines. The end result: electricity.

There are already 3,200 megawatts of geothermal generating capacity in place just in the United States -- the energy equivalent of burning 70 million barrels of oil annually. According to the World Geothermal Congress, current global capacity of 10,500 MW is forecast to rise by more than 70% to reach 18,500 MW in 2015. 

There are already 146 new projects in various stages of completion in the United States -- and many more in countries such as Mexico and New Zealand. Iceland, for example, is so blessed with inexpensive geothermal energy that Google (Nasdaq: GOOG) is considering installing power-hungry data centers there.

I see one clear-cut winner from all of this. The company doesn't just operate its own geothermal power plants, it's also sharing its superior technology (for a price) and helping design and manufacture power units for other customers around the world. 

That company is Ormat Technologies (NYSE: ORA).

Ormat generates power from more than a dozen geothermal and recovered energy waste-heat plants located from California to Guatemala to Kenya. These facilities have a combined generating capacity of 560 megawatts. For context, one megawatt is enough generating capacity to power 800 to 1,000 average U.S. homes.

Electricity generation accounts for the bulk (62%) of Ormat's sales, or about $248 million. But there is even greater potential upside from the faster-growing product division, which utilizes the firm's expertise to design and manufacture power units for other geothermal operators around the world. 

There is an active market for this equipment, as well as ongoing maintenance and service. Through the first three quarters of 2012, Ormat's product division chalked up $150 million in sales, more than double the $67 million from the first three quarters of 2011. And there is more on the horizon, as evidenced by a healthy order backlog of $192 million, compared with $50 million just two years ago.

With countries around the world looking to embrace renewable (and locally available) energy, geothermal power is in a great position for growth.

And with a backlog that has quadrupled in size during the past year, Ormat is already benefitting from this emerging energy's success.

Action to Take --> The optimistic growth outlook is already incorporated in the share price at this point, but Ormat would make a strong portfolio candidate on a pullback below $19 a share.

P.S. -- The abundance of natural gas in the United States could lead to a third industrial revolution. One analyst is predicting a stock could rise 1,566%. Another stock has already jumped more than 1,000% and is expected to keep going. To learn more about investing in the natural gas boom, click here.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of ORA in one or more of its “real money” portfolios.