Ormat Technologies Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Ormat Technologies Inc. is a vertically integrated company primarily engaged in the geothermal energy business. They develop, build, own and operate geothermal and recovered energy power plants, as well as manufacture and sell equipment. They also provide services related to these operations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Ormat’s core business revolves around providing reliable, renewable energy solutions through its geothermal and recovered energy power plants. This focus positions them in a sector with increasing importance as concerns about climate change and sustainable energy become more prevalent.

Business Overview:

  • Revenues: ORA primarily generates revenue from two segments:
    • Electricity Segment: This segment produces and sells electricity generated from their geothermal and recovered energy power plants. They sell to utilities, municipalities, and power authorities through power purchase agreements (PPAs).
    • Product Segment: This segment designs, manufactures, and sells equipment for geothermal and recovered energy power plants. They sell directly to customers, including their own subsidiaries.

  • Geographic Reach: ORA has operations primarily in the United States but also has a growing international presence with operations, or projects in development, in countries such as Kenya, Guatemala, and New Zealand.

  • Industry Trends: The renewable energy sector is experiencing significant growth. Geothermal is one of the least used renewable options and has good growth opportunity. ORA is positioned to capture a portion of the growth as governments and industries seek sustainable, reliable and low cost energy.

Geothermal is more predictable than other renewable sources, such as solar and wind, because of its ability to provide a base-load load of power.

  • Competitive Landscape: The geothermal energy industry is relatively niche compared to other renewable energy sources. Within geothermal, ORA is one of the few fully vertically integrated players that operates across a variety of jurisdictions. Competitors include large industrial companies that also have other more profitable options and smaller development companies that are less established. Competition exists in both plant construction and generation.

ORA’s vertical integration creates somewhat of a moat, however, a bigger company with large resources could potentially compete in ORA’s niche.

  • What Makes ORA Different?: ORA is uniquely vertically integrated. This gives them more control over costs and timelines of their projects and allows them to capture value at multiple points in the supply chain.

Few companies have a vertically integrated model for geothermal projects like ORA does, which allows them to realize margins in design, equipment sale, building, and power generation.

  • Financials: Revenue has been steadily growing for many years. However, due to the nature of project development, profits can vary dramatically by year.
  • Margins: Operating margins for the latest quarter ended September 30, 2024, were 33.6% with a net profit margin of 17.7%. These margins indicate strong profitability within their projects, but are subjected to project developments and market prices.
  • Profitability: ORA’s long-term average ROIC, as well as their ability to generate free cash flow, are vital in creating shareholder value. ROIC, while varying by the year, has consistently been above the 10% average, and they are generating free cash flow to reinvest in the business or reward shareholders.

Moat Analysis (Rating: 3/5):

  • Intangible Assets: ORA has some intangible assets including patents for drilling and geothermal utilization methods, but overall, these do not create a strong, difficult to replicate moat. They also have some brand equity in the market, but this is not particularly strong either.
  • Switching Costs: ORA creates some switching costs for its services customers by creating long term PPA contracts. However, the power producer business relies more on price and availability rather than high switching costs from customers. Switching costs with equipment sales are low, since clients are not dependent on the company for a continued and ongoing service.
  • Network Effects: There isn’t any visible benefit from network effects since their projects are individual and don’t rely on connections with other projects.
  • Cost Advantages: ORA has a small cost advantage because of its vertical integration. They manufacture a lot of their own equipment and have extensive experience in geothermal operations. This helps them control project cost and increase margins, but it is not a massive advantage that other companies cannot replicate with some investment. Also, their operations are usually capital intensive, which reduces the margin of error.

ORA doesn’t have a wide moat that protects their position from competition, but they do possess some specific advantages that help them in their chosen niche.

Risks to the Moat:

  • Technological Disruption: New renewable energy technologies, such as advanced battery storage or more efficient solar and wind technology, could become more appealing and could reduce the relative competitiveness of geothermal energy.

Although geothermal provides a base load of power, newer forms of renewable energy are improving, and could lead to the obsolescence of geothermal if they are able to become as dependable. This is not a major threat, for the present as other renewable options have their own hurdles to face.

  • Commodity Fluctuations: Fluctuations in the price of oil and gas could influence the profitability of renewable energy sources. Higher fossil fuel prices typically increase the demand for renewable energy, but also increase their costs of production. As well, volatile commodity prices could also affect the material and resource costs of building power plants.
  • Regulatory and Environmental Risks: Changing regulations regarding renewable energy, environmental restrictions, permitting, or tax credits could affect ORA’s profitability and expansion plans.
  • Credit Risk: In a world that is moving into higher interest rates, servicing debt may become more expensive than the profits from projects they operate, especially when considering the long and capital intensive nature of project development in the sector.

As it is right now, ORA has a fairly stable capital structure, with long-term debt and equity both being stable.

  • Project Execution Risk: Geothermal projects are complex and often face risks during development and operation, including equipment failures, resource depletion, and issues with permitting. Problems could lead to project cancellations, and increase cost of capital for project development.
  • International Risk: Operations in foreign countries, where regulation or operating conditions can be quite different, pose a challenge. ORA needs to be mindful of cultural, political, and economic issues in all regions in order to avoid potential losses and project failures.

Resilience of the Business: Despite these risks, ORA has some resilience built in:

  • Long-term PPAs: ORA has a large number of long-term, fixed price contracts that stabilize revenue stream from their power generation segment.
  • Vertically Integrated Model: The ability to manufacture its own components helps ORA control costs and margins.
  • Experience in Geothermal: ORA has many decades of experience in geothermal operations that is very important as it is a niche industry, and few players are as established and experienced as ORA. They also have a strong understanding of their core markets (U.S. and Asia).
  • Technological Innovation: ORA continues to invest in research and development to improve the production of its plants.

Understandability (Rating: 2/5):

  • The business model is more complex than a standard industrial company. It requires understanding the various stages of geothermal development, from exploration and resource assessment to construction and operation of power plants. Investors must also understand the various aspects of financing, contract structuring, and the impact of both domestic and foreign regulations.
  • The financial statements can be somewhat confusing, specifically in regards to how and when non-recurring revenue and expenses impact the financials. A deeper look into their notes is usually required.
  • A company with a complicated business process and different revenue sources.
  • The use of various acronyms and technical language can make it harder for an average investor to understand the true nature of the business.

Despite its complex nature, ORA provides a simple, needed product with clean energy at low prices. The fundamentals are easy to grasp, however, to gain a complete picture of the various risks can be quite hard and technical.

Balance Sheet Health (Rating: 4/5):

  • Liquidity: ORA has a satisfactory amount of cash and cash equivalents, which is more than sufficient to maintain operations. This also serves as a buffer against potential losses or other risks.
  • Debt: ORA has a mix of long and short-term debt. Although this debt provides financial flexibility, it also subjects them to higher interest rates and may introduce higher risks during economic turmoil.
  • Leverage: The net debt to EBITDA ratio was 4.1 as of December 31, 2023.

Although it is not low, such levels are reasonable for the industry, and their long-term contracts will help them in repaying debt.

  • Asset Quality: Although ORA holds a significant amount of intangibles and goodwill, these are related to the cost of acquisitions and may not present a real long-term risk for the firm.
  • Overall Health: ORA has very high solvency levels, and can satisfy short and long term liabilities as well as potential issues in the future.

ORA’s balance sheet is in a good shape overall, however, they do have moderate levels of debt that need to be closely watched.

Recent Concerns/Controversies/Problems:

  • Geothermal Resource Risk: A lot of their business depends on geological and environmental factors. These factors can impact the cost and feasibility of projects. Also, there is a chance that a geothermal well could not produce as expected, reducing revenue and impairing the investment.
  • Delays: There are frequent delays in projects, specifically in the energy storage segment, which may lead to higher costs and lower revenues than originally expected. Management has focused on improving the delivery schedules.
  • Interest Rate: Higher interest rate could impact profitability as debt payments may become greater than profits. As well, higher interest rates reduces profitability from the economic effects of discounted future cash flow calculations.
  • Inflation: High levels of inflation, if not hedged, can cause increases in operating and investment costs, reducing profit margins. They do not have significant power over pricing of their projects, as well, and cannot pass the costs to customers.
  • Share Price: Their current share price as of the start of this report on the 23rd of October is around $22.5 per share. This is down from a peak of around $90-$100 per share in December of 2020. This could be of concern to investors, and it reflects current struggles with project development and supply chain issues.

Recent earnings call from November of 2022 showed investors are increasingly concerned with the share price. Management has stated that they have been focusing on improving operations efficiency and will be improving shareholder returns by increasing share buybacks and starting a new dividend program.

Disclaimer: I’m not a financial advisor, and this is not financial advice. This analysis is solely for informational purposes and based on information available to the public, but there is no guarantee on the veracity of that information. Consult a financial professional before investing.