Best stock to invest in – US Geothermal Fizzles | Alternative Energy Stocks



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by Debra Fiakas CFA

Geothermal power generator US
Geothermal
(HTM: 
NYSE) came up short in reporting financial results for the first
quarter ending 2017  –  at least from the perspective of
the four analysts with published sales and earnings expectations for
the company.  Operating revenue of $8.4 million slipped
slightly from the same period a year ago, but produced slightly
lower net income of $1.1 million.  The company’s share was
$260,000 or a penny per share.  Not good enough say the
analyst’s who were collectively looking for two pennies per share in
earnings!

Missing earnings expectations has become a bad habit for US
Geothermal, having failed to clear the consensus hurdle three
quarters in a row.  The previous missed had resulted in modest
trimming of expectations.  Investors should be prepared for
another round of nipping and tucking in revenue, profit margin and
earnings predictions.  The steady drumbeat of lower numbers,
and the muted commentary that comes along with it, is usually a drag
on share price.

Investors have to question whether a period of price weakness is a
good time to pick up shares of a quality company at bargain
prices…or a time to run for the hills.  It is May after all,
when it is ‘time to sell’.


From a revenue standpoint, US Geothermal benefited from increased
output at its Raft River facility after installation of a new
production pump at one of the Raft River wells.  That
installation was completed in late March 2017, suggesting that the
real impact will not be observed until report of the June 2017
financial results.  Unfortunately, the company also faced a
setback in the quarter.  The Neal Hot Springs Unit 1 was out of
production for five weeks in late January and early February 2017,
after vaporizer tubes froze.  The company reported a negative
impact on power generation valued at $830,000 due to the equipment
failure at Neal Hot Springs.

Total generation was 89,613 megawatt hours in the quarter compared
to 93,787 megawatt hours in the same quarter last year.  With
Raft River up 100% during the quarter and San Emidio follow up in
second place with 98.6% availability for the quarter, it was really
Neal Hot Springs with just 82.5% availability that was the cause of
the slippage in power production in the quarter. Fortunately,
business interruption insurance will cover about 38% of the lost
revenue. Property insurance will provide another $2.0 million to
repair and replace the damaged equipment.

Management seemed unfazed by turn of events at Neal Hot Springs,
reiterating previous guidance for revenue and earnings in
2017.  Revenue is expected in a range of $30 million to $34
million, providing net income in a range of $4 million to $8
million.  US Geothermal’s cut of net income would be $1 million
to $4 million.  Thus it would seem that Neal Hot Springs is
fully back to normal and with the increased production at Raft
River, management is apparently expecting another decent year. 
The increased output from Raft River in the first quarter was valued
at $200,000 for about one week of power generation.  Simple
math provides an incremental addition of $1.2 million for a full
quarter, more than enough to make up for the shortfall from Neal Hot
Springs in the first quarter.

Importantly, management’s guidance is based on existing production
facilities.  There are expansion projects in the works, but
potential power from these projects is not included. 
Altogether the development pipeline encompasses 115 megawatts of
incremental power production capacity.

  • Progress has been made at the Geysers in California where the
    company is at the point of sourcing turbine generators and is
    negotiating a power purchase agreement with a single
    buyer.  The company is targeting end of 2018 for bringing
    the project on-line.
  •  The company has received permits to deepen three wells
    in its San Emidio II reservoir in Nevada that could elevate
    power production at that location from the current 10 megawatts
    to over 40 megawatts.    Drilling will commence
    this year when spring weather conditions allow.
  • Additionally, at San Emidio an application for new development
    of three power plants, twenty wells and a power transmission
    line has already been submitted to the U.S. Bureau of Land
    Management.  The company has targeted 25 megawatts to 45
    megawatts as the ultimate resource size for this latter
    expansion project.
  • A geothermal power production project in El Ceibillo in
    Guatemala is awaiting a request for proposals from the
    government, to which US Geothermal is planning a competitive
    bid.  The process is expected to unfold yet in 2017.

Successful commissioning of all these projects would more than
triple the size of US Geothermal’s power production capacity, which
is around 45 megawatts today.  It will not be accomplished at
the hand of current chief executive officer Dennis Gilles.  In
late April 2017, the board of directors issued a cryptic press
release indicated they would not be extending the employment
agreement with Gilles.  A search committee will be looking for
a successor to take over after Gilles’ current contract expires in
July 2017.  Gilles may still have an influence over operations
through an advisory agreement.  If the board could not accept
an extension to his employment agreement, what foundation could be
built into an advisory role that would be more palatable?

The market has had an opportunity to fully digest the news of Gilles
department as CEO.  However, slippage in the first quarter
production reminds investors of the many moving parts and sources of
business risk inherent in geothermal power production. 
Knowledgeable leadership is a key hedge against those risks. 
The specter of a shuffle in the boardroom is likely to resurface as
a source of worry in the coming weeks.  Thus the price weakness
that might ensue following a ‘quarter earnings miss’ might be deeper
and more protracted than usual because of leadership change.

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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