US Geothermal: Wringing Profits From Hot Rocks

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by Debra Fiakas CFA

Last week I spent the better part of a day listening to presentations of energy companies at the Wall Street Analyst Forum in New York.  Although I had heard the management of  US Geothermal (HTM: NYSE) tell the company’s story before, I was impressed to hear about the progress the company has made in squeezing profits from electricity produced with turbines run by underground steam.  Management called it gratifying!

The company reported $31 million in sales in the year 2014, delivering $14.9 million in net income to the bottom line.  That is something to celebrate!

Sales in 2014 grew 13.1% year-over-year compared to $27.4 million.  Production profits also increases to 48.5% of sales, up just a pinch from the year before when profits were 48.3%.  Unfortunately operating expenses rose during the year leaving profits at that level at $4.6 million or 14.8% of sales.  What really drove net income in 2014 was a $12.0 million tax benefit as the company amortized tax assets built up in previous years when the company experienced losses.

As is almost always the case with young companies, even ones that have achieved profitability, it makes sense to look carefully as the company’s ability to generate cash.  As confusing as US Geothermal’s profits and loss profile might be, its report of operating cash flow is illuminating.  In 2014, the company’s operations generated $12.8 million in cash, which tops 2013 cash generation of $10.6 million.

It is exciting seeing cash in the bank and even more gratifying when management finds something productive to do with it.  US Geothermal has a history of buying up thermal assets.  The company acquired new leases for its Vale project, but the real excitement has been in two other acquisitions.
In 2014, the company bought the WGP Geysers project from Ram Power (RAMPF: OTCBB)for what appears to be a very attractive price of $6.4 million.  WGP Geysers is a developed site with four wells in the larger Geysers project in California.  A recent engineering report suggests the project can generate 30 megawatts annually.   The company has received approval to build a 38.5 megawatt power plant.

Then in December 2014, US Geothermal issued stock to acquire Earth Power Resources, which included geothermal assets in Nevada that could give rise to three power projects.  A third party has estimated there is sufficient heat in place to generate 71 to 186 megawatts of power.  The company began drilling the first production well in December 2014.

The company is projecting nearly 200 megawatts of power by 2020 from the current 45 megawatts.  Management has told analysts who follow the company that it can generate $100 million in EBITDA (earnings before interest, depreciation and amortization).  Against such a prognosis, HTM shares appear grossly undervalued.  Unfortunately, investors are unconvinced.  A review of recent trading patterns found in a point and figure chart suggests a very bearish sentiment prevails in trading of HTM shares.  An investor taking a bull case position in the stock may have some time to wait for appreciation of the shares.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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