Tag Archives: htm

Underrated Small-Cap In Renewables

We sent this piece to subscribers of our new free underrated small-caps newsletter last week . Renewable energy is sexy right now. As sexy as energy can be. However, when it comes to investing in renewables, it’s tricky business. Case in point. US Geothermal (NYSE: HTM ) is a small-cap stock, to say the least, trading at less than a $1 per share and $60 million market cap. Trading at a 55 cent handle, it checks a number of boxes on our Six Small-cap Laws . Often overlooked and orphaned because there isn’t enough money in covering and reporting on small-caps, US Geothermal is still an exciting stock, yet misunderstood, as so many renewable plays are. US Geothermal operates three geothermal plants in the U.S. Part of what adds to the obscurity of US Geothermal, if the fact that it trades at a $60 million market cap, is that it’s in the geothermal business. Now, geothermal is a form of energy that demands some of the highest pay rates from utilities. You’ve got long-term contracts and inherent value in the plants that underpin the valuation. Growth is the big story for US Geothermal, however, with the potential to increase its geothermal output. Its current output of 50 megawatts is a fraction of what US Geothermal could manage in just a few years and it has the management bandwidth to get it done – with Dennis Giles as CEO. Giles managed an 800-megawatt portfolio for Calpine in the past. It’s already hired an investment bank to advise on strategic alternatives, with a go-private deal a possibility. One small hedge fund, Artko Capital , has 10% of its funds invested in US Geothermal. Naturally bullish, Artko is encouraged by the strategic review, with the private equity interest offering some “downside protection.” Activist Investor Now Involved Now, Artko Capital has some company. JCP Investment Management, the small activist hedge fund, revealed a 5% stake in US Geothermal earlier this month. They are invested at an average cost of $0.58 a share. Industrials, utilities and the likes are JCP’s sweet spot. JCP took on Gas Natural a couple years ago, as well as Smith-Midland in 2012, where the fund saw annualized returns of 100% and 200% on over the campaign holding period. JCP believes that US Geothermal shares are cheap and may engage with management about capitalization, ownership structure, board structure or operations. The End Game There are risks here, with US Geothermal needing cash to fund the various projects and cash isn’t always readily available. This could mean diluting shareholders with equity capital raises. US Geothermal operates in a niche business, which is good and bad. The bad actually working for them in this market. The company needs a lot of cash to support its projects, making tapping the equity and debt markets increasingly challenging. Rather, a private equity buyer can inject cash and operate the tremendous business model outside the guise of the public markets. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

U.S. Geothermal – Still No Short-Term Catalysts On The Horizon

Summary US Geothermal continues providing decent financial results. This year the company demonstrates some progress in taking two geothermal projects, WGP Geysers and El Ceibillo, closer to their production phase. However, in my opinion, setting COD (“Commercial Operation Date”) at 2Q 2018 (El Ceibillo) and 3Q 2017 (WGP Geysers) is going to be a challenge for the company. I believe that currently US Geothermal’s shares are overvalued against its peers. On November 23, 2015 US Geothermal Inc (NYSEMKT: HTM ) published its 3Q 2015 results. Below I am commenting on these results. I am also covering the last developments at the two most advanced geothermal projects. Year to date financial results The table below summarizes year to date financial results: Source: Simple Digressions and the company’s reports As the table shows, the results reported by the company in the first nine months of 2015 were comparable to those reported last year. However, a 17.5% increase in book value is worth commenting. To remind my readers, I consider book value as one of the best performance measures of any company. Simply put, if a company is able to increase its book value in the long-term, it means that it has built its value. Let me show how HTM was building its value: Source: Simple Digressions and the company’s reports Note: to calculate HTM book value I have excluded two issues, which distort it in the long-term: Accumulated other comprehensive income (AOCI) – it is part of the equity section of the balance sheet, representing accumulated unrealized gains and unrealized losses, such as cash hedges or currency translation adjustments. Every year or quarter this item fluctuates, very often quite much. What is more, AOCI depends on exchange rates, interest rates and other issues, which the company does not control. Therefore I have eliminated AOCI from my calculations of book value. Non-controlling interest – because non-controlling interest represents the stakes other entities hold in the company’s consolidated assets I have excluded this issue from my calculations. Because non-controlling interest is excluded from my calculations, the final figure demonstrates book value attributable to the company’s shareholders. As the chart shows, HTM increased its book value attributable to its shareholders from $0.66 per share at the end of 2012 to $0.80 per share at the end of September 2015 (an increase of 21.2%). In my opinion, it is a big plus – US Geothermal, increasing its book value in the long-term, behaves like a classic utility company. Operating results The table below presents basic operating results: Source: Simple Digressions and the company’s reports As the table shows, year to date US Geothermal reported slightly lower electricity generation and slightly higher operating expenses than in the same period in 2014. After taking a closer look at each operating facility I came to the conclusion that the main factor, standing behind higher operating expenses, was the Raft River’s performance. Raft River, located in Idaho, is the smallest HTM’s power plant, in terms of generation capacity (9.4 MW). Since the beginning this facility has been lagging behind other two plants. However, this year this underperformance is particularly striking: (click to enlarge) Source: Simple Digressions and the company’s reports As the chart shows, this year each megawatt hour, generated by Raft River, delivered only $4.94 in operating income (I call it “Netback”). Other plants, San Emidio and Neal Hot Springs, delivered $61.19 and $75.66, respectively. In its 3Q 2015 report the company explained that there were two reasons standing behind this underperformance: 371 lost hours during two unplanned outages (according to my calculations, these outages were responsible for the lost revenue of $196 thousand) Higher operating costs due to turbine repairs and wage increases – year to date these additional costs were $361.5 thousand (turbine) and $142.3 thousand (wages). I think that technical problems, experienced at geothermal facilities, happen sometimes. However, granting wage increases to the crew when the facility is in trouble is not, in my opinion, the best practice. Projects under development US Geothermal has four projects classified as “Projects under development”: El Ceibillo Phase I, San Emidio Phase II, WGP Geysers and Crescent Valley Phase I. Of these four projects, in 2015 the company was developing mainly two of them: WGP Geysers and El Ceibillo. Below I am commenting on these developments. WGP Geysers In April 2014 the company acquired the so-called “Geysers project”. To remind my readers, this project is located in the Californian broader Geysers geothermal field, the largest producing geothermal field in the world. In June 2015 the company completed a flow test program of the three production wells. These tests confirmed that wells were operational but to achieve a planned long-term capacity of 28.8 MW, two or three additional production wells should be reopened (the company does not need to drill new wells). In other words – before any geothermal company takes a decision on eventual production, flow tests have to be performed to establish resource viability. US Geothermal completed such tests and announced that two or three additional production wells were needed. In my opinion, it is an important message. It seems that the company is approaching a production decision on WGP Geysers – if such is the case it could be a game changer. However I have some doubts. The company estimates that production at Geysers should start in the third quarter of 2017. In my opinion, it will be a challenge to meet this timeline because HTM must, for example, open two or three production wells, connect its property to the grid, sign a power purchase agreement, find financing for its project etc. All these issues need time so the two-year time frame, in my opinion, seems to be very optimistic. El Ceibillo, Guatemala US Geothermal used to postpone a commercial operation date (COD) of El Ceibillo many times. Fortunately, since the fourth quarter of 2014 the company has been confident that this facility should start its operations in the second quarter of 2018. On October 13, 2015 HTM was granted the concession agreement for the El Ceibillo development. To remind my readers, the previous concession expired this year so now the company is once again formally allowed to continue development. Currently the company is in the middle of it. In 2014 it completed a nine hole temperature gradient drilling program (an initial part of any development). This year HTM is performing flow tests – one well (EC-2A) confirmed that there is a commercial resource at El Ceibillo but at least two additional wells are needed to extend the resource area (drilling at the first well, EC-3, started on October 29 ). Summarizing, the company is at its intermediate stage of development at El Ceibillo. In my opinion, setting 2Q 2018 as a COD is going to be, similarly to WGP Geysers, a challenge. Equipment purchase On November 9 the company announced it acquired equipment for the construction of three binary geothermal power plants. This equipment was acquired at a significant discount to its cost. According to the company: “We paid $1.5 million, which is approximately 5% of the equipment’s original cost, a saving of roughly $28 million. This equipment gives us the ability to expand our megawatt output at our existing portfolio of advanced stage development projects at significantly lower cost, and in much shorter construction timeframes” The equipment is supposed to be applied to the Crescent Valley and San Emidio Phase II projects. The initial market reaction was very positive – on November 9, the company’s shares closed 8.9% higher than on the previous day. Well, in my opinion, the equipment acquisition is surely a positive thing in the long-term – the company should save a lot of money and time at the construction of Crescent Valley and San Emidio II. The management did a very good job, indeed. However, in the short-term this message means nothing – the company has just bought some equipment, which will be stored as inventory, waiting a few years to be applied. Additionally, this equipment will be accounted for as inventory and disclosed at cost ($1.5 million). However, the most paradoxical thing is the fact that when both projects start their operations, the company will be allowed to recognize depreciation charges attributable to only $1.5 million. Putting it differently, an excellent managerial success, due to accounting and fiscal rules, will be converted into lower depreciation charges and higher taxes in the future. Valuation To demonstrate US Geothermal’s market valuation I have calculated the Enterprise Value / EBITDA multiples for a few geothermal energy stocks. The chart below, depicting these ratios, was taken from my article on another geothermal company, Polaris Infrastructure. As the chart shows, currently the company’s shares are trading at a multiple of 12.3, which means that they relatively overvalued against its peers: Summary US Geothermal continues to provide descent financial results. However, due to large non-controlling interest component, HTM shares are relatively overvalued against its peers. In this article I have covered two projects, which are approaching production phase – WGP Geysers and El Ceibillo. Year to date some progress towards putting these projects closer to production has been evident. However, in my opinion, to meet time frames set by the company is going to be a challenge. Therefore I am sustaining my previous thesis on US Geothermal – there are still no short-term catalysts to lift the company’s shares. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

U.S. Geothermal: A Messy Micro-Cap With No Catalyst In Sight

Summary HTM showed up on a screen for long ideas, but I find the stock unattractive: Slow growth, potential dilution, no dividend, and no EPS. My attempt to value the stock valuation relies on EV/EBITDA, and it’s a messy affair to reconcile the minority interests and company adjustments. The biggest risk to this short idea is that a strategic buyer might make a bid, since HTM is a pure play in geothermal. US Geothermal (NYSEMKT: HTM ) recently showed up on a micro-cap screen designed by Marc Gerstein, Director of Research at Portfolio123 . The screen uses a combination of value and momentum factors to identify attractive stocks while avoiding what Marc calls “dumpster fires.” As a side note, Marc and I started our careers three decades ago as stock analysts at Value Line. His stock screening process is not only sound, but it is far better than anything I could design. So the first step was to take a quick look to see if the screen had netted a fish or just an old tire. (Finding junk in the net is usually caused by bad data, and does not indicate a flaw in the screening process.) (click to enlarge) Minority Interests Dilute Earnings U.S. Geothermal , Inc. operates power plants in the Western U.S., and is a pure play on geothermal energy. Unfortunately, HTM only owns a 60% interest in its largest, most profitable plant: Neal Hot Springs in Oregon. Likewise, it has a 50% interest in the plant located at Raft River, Idaho. For a granular analysis of the plants at HTM, please see All Quiet on the Geothermal Front .The minority partners take a big cut of earnings, so potential investors should keep this in mind as they read HTM’s financial statements. Capital Constrained It is hard to see the firm growing significantly without raising capital or diluting current shareholders. This article on SA described it well: U.S. Geothermal Is an Open-Ended Story . I cannot add much to this well-written analysis, except to say that it the author used a value approach that makes sense to me and didn’t conflict with anything I discovered about the firm. The firm has a number of projects in the pipeline, but these take a long time to develop and do not always come to fruition. HTM gets government incentives to develop plants, including a $65-million loan at 2.6% interest from the Department of Energy. The reliance on tax breaks and government loans is both an opportunity and a risk that is inherent to renewable energy projects. Valuation I find HTM a hard stock to evaluate, since it has no dividends and GAAP EPS hover around $0.00 (that’s not a typo). So I had to resort to EBITDA (earnings before interest, taxes, and amortization). As of August 11, 2015 the company is guiding analysts to net income before taxes of $3 to $6 million–quite a wide range. This works out to adjusted EBITDA of $11 million, so the company maintains that stock is selling for about 6x EBITDA. (Source: Page 22 of company presentation here .) But this excludes net debt, as we shall see below. Total assets of U.S. Geothermal as of 6/30/15 were $231 million. Total debt was $97 million, and minority interests were $45 million. Throw in some short-term liabilities of $6 million and miscellaneous items, and total liabilities come to $145 million. Shareholder equity was $86 million, so I calculate enterprise value of $231 million. The company presentation uses data from December 31, 2014, so the enterprise value would be $233 million, rather than $231 million. (click to enlarge) Then the adjustments start. As shown above, U.S. Geothermal adjusts the year-end assets and liabilities to reflect minority interests to come up with the “USG portion” of each. This makes sense to me. The firm also adjusts asset values upward from $233 million reported at year-end 2014 to $375 million. I cannot vouch for this, since I have not followed the trail of breadcrumbs to confirm whether or not this contains reasonable assumptions. So I will I use unadjusted asset values of $233 million, rather than $375 million. Granted, it is possible that the company has bona fide reasons to make adjustments to its asset base up to $375 million. If I were shorting the stock, I’d look into this to make sure that there weren’t saleable assets that are undervalued. But the problem with this logic is that if the asset base really is this high, then the company’s return on assets is even lower than I calculate. In any case, adjusted for minority interests, U.S. Geothermal has debt of $71 million and equity of $171 million. This comes to an enterprise value of $242 million. Based on this, and on the firm’s projection of 2015 adjusted EBITDA of $11 million, U.S. Geothermal is not earning a particularly good return on assets: $11 million/$242 million amounts to a 4.5% return on total assets. The company may have a higher return on equity, which came to 15% according to year-end 2014 numbers as calculated by Reuters. But for a highly-leveraged utility, we need to look at returns on total assets, and it is not encouraging. 4.5% seems like a low return, which may explain why the firm cannot afford to pay a dividend. (click to enlarge) Above is page 24 of a company presentation, and it shows that the current stock price is 5.8x forward EBITDA of $11 million. This seems cheap. But it does not include the company’s portion of long-term debt, which is $71 million. Personally, I find that misleading. Would a Buyout Make Sense? As of November 4, 2015 the stock had a price of $0.58, giving the firm a market cap of $62 million. Any buyer of U.S. Geothermal would assume the company’s liabilities, and this includes its portion of long-term debt. If we assume that a buyer would pay at least 10% premium for the stock, we have equity of $68 million. Add $71 million of long-term debt, and the buyer would have to pay $139 million for the whole shebang; this is the Enterprise Value that would matter to a buyer. Using the company’s forward, adjusted EBITDA of $11 million for 2015, a takeover offer of $139 million would amount to an EBITDA/Enterprise Value multiple of 12.6x. Not cheap, but not expensive. Therefore, I do not see a buyout offer as a big catalyst for the stock. Nevertheless, given the company’s tiny capitalization and niche focus, the stock could eventually become a takeover target: A large utility might buy HTM for strategic reasons, and a private equity investor might add value by injecting capital, buying out minority interests, or breaking up the company and selling off assets. I have no reason to think that a buyer is waiting in the wings, but short sellers should keep this risk in mind. Short Interest According to Nasdaq , as of 10/15/2015 HTM has a short interest of 780,207 shares. With daily volume of 190,000 shares, it would take 4 days for the shorts to cover. There are 107 million shares issued and outstanding, and the float is about 105 million. The fully diluted shares are 126 million. I have to note that it is notoriously difficult to short micro-cap stocks, and the services of a good prime broker will be essential. (There are no active options for HTM.) As a side note, insider purchases of the stock show up on Yahoo as positive, but the executives receive significant grants and gifts. This stock compensation is not cheap, and it reflects the skills of the current executive team. A strategic buyer of U.S. Geothermal may decide that it can consolidate operations and save money by cutting executive pay. This is a minor consideration, but worth mentioning. Bottom Line HTM shares may be suitable for investors who like renewable energy. There is no dividend, so investors have to be very patient. And there is no guarantee that the project pipeline will pan out, so investors have to be risk tolerant. Given current valuation and the potential for dilution, I think the potential risk/reward is tilted toward the short side. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.