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Israel's Ormat: Power From Unlikely Sources

The stock has been a huge winner and could remain so.


Ormat Technologies

(ORA) - Get Ormat Technologies, Inc. Report

had a remarkable year in 2005 thanks to climbing oil prices and a wave of favorable regulation.

Shares of the geothermal energy producer rose 60% in 2005, and have more than doubled since the company went public in November 2004. Analysts on average are expecting to see a 5.5% rise in the company's profit in 2005 when it reports its full-year earnings on Wednesday.

Shares of Ormat are currently trading at 55.9 times the 2006 earnings estimates, according to Thomson Financial data, compared with an average energy industry multiple of 25.91. The rich valuation could prove durable, however, if energy prices don't collapse. Analysts surveyed by Thomson expect Ormat's per-share earnings to rise by 25% in 2006 and 45% in 2007.

Ormat produces clean electricity through its geothermal power plants. The company drills and extracts hot water from geological depths near the earth's core, which heats other liquids, releases steam and creates electricity. The water is then pumped back into the ground and used again.

"After President Bush's last State of the Union address about America being too dependent on oil, and the following legislation, together with Sweden's commitment to convert its entire energy system to renewable sources, it has become clear that the direction of the western world is toward renewable energy," says Yuval Ben Zeev, analyst at the Israeli brokerage firm Clal Finance Batucha who covers Ormat.

"Not only is Ormat one of the most important securities in Israel, it is also the leading player in the world in geothermal energy production as the manufacturer, owner and subcontractor of these plants."

Ormat's geothermal power plants already feed power grids in many locations, including Nevada, California, New Zealand and the Philippines (the technology can operate only in the "Rim of Fire," the area that stretches from South East Asia through Hawaii to California and Guatemala, where the ground is shallow and closest in depth to the core.)

One of its major advantages is its recycling capabilities. The company's power plants preserve the earth's resources by recycling the same water for as long as 30 years. It also uses a technology that recovers heat from large factories and natural gas processors and recycles it into additional clean power.

Ben Zeev, who rates Ormat a buy, estimates the company earned $236 million in 2005, or 7.6% more than last year. He notes that several large contracts are key to its future performance, including a deal with Nevada's power outfit

Sierra Pacific Resources


, which is under final negotiations.

Ormat's competition in the areas of turbines and power plant equipment include Fuji, Mitsubishi and

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"Even if oil prices go down to $50 a barrel, the alternative energy sector in general, and geothermal energy specifically, will continue to grow as the world internalizes its importance," Ben Zeev says.

Meanwhile, only about 4% of the world's energy consumption comes from so-called "clean" energy sources, and a very small portion of that from geothermal.

But the average annual growth rate in several clean energy sectors has been spectacular. Measured by capacity added and total installations, the solar energy industry, for example, has had an average growth rate of 61% over the past five years, according to figures compiled in a U.N. study. Wind turbines and biodiesel, which uses organic matter to produce fuel, grew an average 29% and 27% annually over the same period, respectively. Geothermal energy grew by a modest 3% in the last five years on an average annual basis.

While high oil prices have created momentum for alternative energy sources, two questions remain. When will this transformation really kick in, and which of the alternative energy sources might lead the way in replacing fossil fuels?

According to data published by Clean Edge, a clean energy research firm, wind power is estimated to grow from an $8 billion industry to a $48 billion one by 2014. Solar is expected to grow from a $7.2 billion industry to $39.7 billion by 2014, and fuel cell energy from $1 billion to $15 billion.

The Energy Information Administration forecasts that global geothermal energy usage will triple by the year 2025.

"Probably the biggest growth will be in automotive solutions such as hybrid vehicles and biodiesel," says Chen Altshuler, who runs the Israel-based Green Fund, a $40 million fund dedicated to clean energy and environment investments. Biodiesel includes ethanol and other processed organic fibers that can be added to gasoline in order to reduce its air pollution.

Altshuler likes


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, which processes biomass for the production of ethanol and other bioproducts, as well as


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. The Green Fund is long both SunOpta and PacificEthanol.

SunOpta is trading at 25 times the 2006 estimate, and is expected to boost its earnings by 62% next year, compared to an expected industry average growth of 41%.

Among the hybrid carmakers,


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"is probably the best positioned in this growing industry," Altshuler says. She also recommends

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, a smaller hybrid bus manufacturer. The Green Fund currently has no position in Toyota, but is long Azur Dynamics.

Altshuler's Green Fund, which logged a 12% return in 2005, has already made a 20% return since the beginning of the year. Its only peer fund with the same investment criteria and principles is


, which posted a 6% annual return in 2005 and is up 5.3% year to date.

Many investors remain wary of the alternative, environmentally friendly energy sector. They dub it a trend that could easily fade if oil prices came down. Since many renewable energy technologies are still in initial stages of development and incorporation within the mainstream power industries, and still represent a fairly minor chunk of total production, their future success remains uncertain.

"What are the chances the world will go backwards?" Altshuler asks. "What are the chances that everyone will go back to using only oil without trying to make power generation more efficient and clean? That's not going to happen. There is no doubt that the best renewable energy innovators will beat everyone's forecasts because the change is here and happening."