Morningstar | Ormat Must Fix Near-Term Margin Weakness
Ormat Technologies' geothermal plants offer utilities a more appealing source for renewable energy than wind and solar, which are less reliable--provided you can find the geothermal resource. As the industry leader in lower-heat geothermal power, Ormat's growth will come from development at more proven geothermal sites.The global potential for new geothermal development is large, and Ormat has established a major operating presence in critical emerging markets like Indonesia and Kenya, as well as increasing its reach for higher-heat projects by partnering with Toshiba. Ormat has identified Chile, Ethiopia, and New Zealand for potential development opportunities. Ormat's lengthy operating experience and technology edge should keep the company competitive in landing projects.Ormat's exposure to emerging markets where lower-heat geothermal resources are abundant supports cash flow growth well beyond our explicit forecast and could provide significant upside to our growth projections. Global expansion comes with greater risk, but Ormat mitigates the exposure through guaranteed project financing through Overseas Private Investment Corporation and political risk insurance. Existing plants provide a healthy profit stream that should grow with new construction at a rate unmatched by Ormat's independent power producer peers and without dependence on fossil fuels, supporting consistent cash returns on invested capital and a narrow economic moat. We expect that efficiency gains from investment and continued modernization of older plants will continue to improve profitability through the next few years.Recently, Ormat has seen gross margins contract, however, most of the issues appear short-term and fixable, in our opinion. Margins were negatively affected by the Puna power plant shutdown, higher costs attributed to pump replacement, and lower generation due to grid operator curtailment. Management's history of margin improvement leaves gives us comfortable that they can get margins back on track.Ormat Technologies is a holding company. Through its subsidiaries, the company is engaged in the geothermal and recovered energy business. The company's segments include: Electricity, which develops, builds, owns and operates geothermal and recovered energy-based power plants in the U.S. and geothermal power plants in other countries and sells the electricity it generates; and Product, which designs, manufactures and sells equipment for geothermal and recovered energy-based electricity generation and remote power units and provides services relating to the engineering, procurement, construction, operation and maintenance of geothermal, Solar photovoltaic and recovered energy-based power plants.
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