Tom Konrad CFA
Hezy Ram
Geothermal industry veteran Hezy Ram has worked in the industry forover three decades. His career began with 28 years of experienceat
Ormat(
ORA),where he was Executive Vice President of Business Development, afterwhich he founded
Ram PowerCorp. (RPG.TO/RAMPF.PK) in 2009. In February, he
resignedas CEO of Ram Power shortly after the company warned ofsignificant delays and cost overruns at a key Nicaraguan project, amove he says was motivated by irreconcilable differences with otherboard members and major shareholders regarding the company'sstrategy.
Today, he has his own geothermal company, advisingclients like drilling technology innovator
Potter Drilling, and lesserknown but equally deserving technology innovator
Geotek Energy. GeoTek'sGravity Head Energy System, which improvesgeothermal plant efficiency by eliminating parasitic loads, is lessflashy than Potter's drilling innovations, but it shouldmake many more geothermal resources economical by significantlyincreasing net efficiencies in the relatively near term. Ram alsoserves on the board of Latin American and Caribbean Council onRenewable Energy.
I caught up with Ram at the 8th Annual
Renewable Energy Finance ForumWall Street (REFF), an event co-hosted by the American Council onRenewable Energy (ACORE) and Euromoney Energy Events, and followed upwith him in a phone interview this week. Ram sees a lot ofpotential for growth in geothermal power, but thinks the bestopportunities are outside the US, while much current development isdomestic. He's looking at opportunities in developing countrieshimself.
High Oil Prices Create Opportunitiesfor Geothermal Developers
In North America, current low natural gas prices are creating headwindsfor geothermal by lowering wholesale price of electricity. Inplaces like Chile, Central America, and Africa, all of whichhave excellent geothermal resources, most electric generation comesfrom oil. With oil around $100 a barrel, that means the cost ofelectricity exceeds 20 cents per kWh. There, geothermal can bethe low cost producer of energy, and need not rely on subsidies orRenewable Portfolio Standards to create demand.
JohnAnderson, Head of Power and Infrastructure Investing at JohnHancock, also spoke at REFF and sees the best potential for cleanenergy in the developing world. He said the most importantquestion for renewable energy projects is, "Are you displacingoil?" The advantage of displacing oil is not unique togeothermal, but where good geothermal resources exist, geothermal poweris not only cheaper than solar and all but the best wind resources, butit's baseload power, and easier to integrate onto the electric grid.
Drilling on King Street
The other opportunity he sees is consolidation in the industry.Like many industry observers (myself included; see this recent articleon
NevadaGeothermalPower (
NGP.V/NGPLF.PK),Ramseesan industry ripe for consolidation. He sees a sectorcurrently at a low point in investor attention, and there is a lot ofunrecognized value in geothermal companies.
He also thinks that consolidation would be good for the junior publiccompanies. Speaking with the voice of painful experience, hedescribes the mismatch between investor expectations and the smallplays andlong lead times of geothermal projects. The market expectsregular news updates, but there is not much to say when you spend ayear on permitting, while compliance and committee meetings are adistraction from running the company. He thinks only Ormat has thebillion dollar scale to afford the distractions of being public.
The smaller geothermal players (Ram Power, Nevada Geothermal,
AlterraPower (
AXY.TO/MGMXF.PK),andUSGeothermal Power (
HTM))wouldallbenefit from the scale and cheaper funding that would comewith consolidation. Since three of the four are listed on theToronto Stock Exchange, I like to call this strategy "Drilling on KingStreet," in homage to the oil and gas industry tradition of
drillingon Wall Street when reserves get hard to find through traditionalexploration.
Possible Consolidators
Which companies might start drilling on King Street?
The most obvious consolidators are those already in the geothermalindustry. I've been surprised that Ormat has not already made amove to acquire the cheap assets available on King Street, given thatthey have signed up for a more expensive joint venture with NevadaGeothermal just last year, but one reason for the lack of action mayhave been the financial position of the controlling Bronickifamily. On July 7, it was
announcedthat the family is in negotiations to sell a large stake in Ormat'sIsreali parent company, Ormat Industries (
ORMT.TA)to cover debts. If the sale goes through, holding company
Shikun &Binui (
SKBN.TA)is expected to be the major shareholder. Shikun & Binuidescribes itself as "a leading infrastructure, real-estate andenvironmental group," and already operates some renewable energy andenergy efficiency projects internationally. Israeli Analyst ShayLipman said "Ormat combines excellently with Shikun U'Binui'sportfolio." Will other geothermal companies combine equally well?
In additionto internal industry consolidation, Ram sees two types of companies forwhich he thinks it makes sense.
The first of these are the traditional drillers on Wall Street: Oil andGas companies. They have expertise with much of the sameequipment and techniques used in geothermal, money to spend, and couldbenefit from the positive PR, such as
that usedby Chevron around their Philippine and Indonesian geothermal assets.
The other group he thinks might become interested is utilities,following the pattern with wind and solar, where companies like
NextEraEnergy (NEE) are large players. NextEra used to be known asFPL Group after itsutility subsidiary Florida Power and Light, but set up a large wind andsolar development arm and re-branded itself to reflect the new focus ongreen power.
Conclusion
Will a utility or an Oil and Gas major be the first to decide that theopportunities to pick up quality geothermal projects for little morethan spare change on King Street are worth moving into a new (butrelated) industry? I think Oil and Gas is more likely, since theyare more accustomed to accepting drilling risk. While IndependentPower Producer
CalpineCorp. (CPN) has significant geothermal assets, these were allacquired when they were already operating, not during exploration anddevelopment.
But the more important question for investors considering geothermalcompanies as an out of favor value play is: When will a consolidatorappear? Neither I nor Ram has the answer to that one.
DISCLOSURE: Long RAMPF, NGPLF,MGMXF, HTM.
DISCLAIMER: Past performance isnot a guaranteeor a reliable indicator of future results. This article containsthe current opinions of the author and such opinions are subject tochange without notice. This article has been distributed forinformational purposes only. Forecasts, estimates, and certaininformation contained herein should not be considered as investmentadvice or a recommendation of any particular security, strategy orinvestment product. Information contained herein has beenobtained from sources believed to be reliable, but not guaranteed.