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Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) has usually been right when it comes to investing in long-term value creators. Among Berkshire Hathaway’s investments are a growing portfolio of companies that are in the business of geothermal power. As clean energy grows more prominent, knowing which geothermal stocks will be winners is critical.
Berkshire also points out that “geothermal energy is so efficient, the only real source of energy loss comes from turbine friction.” While geothermal constitutes just 5% of renewable energy generation, the outlook seems promising. It might therefore make sense to consider some exposure to geothermal stocks.
Last year, Vik Rao, former chief technology officer at Halliburton (NYSE:HAL), made an important point on geothermal energy. Rao pointed out that “geothermal is no longer a niche play. It’s scalable, potentially in a highly material way.”
With the scalability factor, it’s very likely that the geothermal energy sector will see bigger investments in the coming years. Oil majors are poised to make the biggest geothermal investment in 30 years.
With these positives, let’s talk about three geothermal stocks that are worth adding to your portfolio.
Two of the companies discussed are largely pure-plays in the field of geothermal energy. I have also discussed one oil and gas major with the company planning a big shift towards renewables over the next decade:
Geothermal Stocks: Ormat Technologies (ORA)
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With some big growth plans for the next few years, ORA stock looks attractive among geothermal stocks. After touching highs of $128.87 in February 2021, ORA stock has declined to a June 21 open of $65.84. The correction seems like a good opportunity to accumulate.
In recent news, Ormat acquired contracted operating geothermal assets in Nevada for a consideration of $377 million. This includes the acquisition of the Dixie Valley geothermal power plant, which is one of the largest geothermal plants in Nevada.
In terms of organic expansion, the company plans to increase geothermal and solar capacity to between 1,182MW and 1,202MW by 2023. This would imply an annual MW growth of 27% to 29% over the next three years. The focus, however, is on geothermal. The company currently has 10 geothermal and four solar projects under development.
From a financial perspective, Ormat Technologies has $493 million in cash and equivalents. Therefore, there is ample financial flexibility to pursue growth in the next few years. It’s also worth noting that the company expects adjusted EBITDA of $400 million for the year. As cash flow visibility increases, financial flexibility is likely to remain high.
Polaris Infrastructure (RAMPF)
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RAMPF stock seems to be flying under the radar and is an attractive name among geothermal stocks. Currently, RAMPF stock trades at an attractive trailing-12-months price-to-earnings-ratio of 11.14. In addition to attractive valuations, the stock has a dividend yield of 3.9%.
From a business perspective, Polaris Infrastructure operates 72MW of geothermal project in Nicaragua. Additionally, the company has hydroelectric facilities in Peru.
For Q1 2021, Polaris reported $9.4 million in operating cash flows. This would imply an annualized OCF of approximately $40 million. Therefore, it can likely sustain its dividends at current levels.
Polaris also ended Q1 2021 with a strong cash position of $109.7 million. The company is “actively pursuing further diversification of its portfolio through strategic acquisitions.”
Therefore, it’s likely that acquisitions will add to the company’s assets and revenue growth in the next few quarters. At the same time, the company has been divesting non-core assets.
With a focused growth strategy, the best part of upside might still be due for the stock. Furthermore, possibility of revenue and cash flow upside makes RAMPF stock attractive at current P/E valuations.
Geothermal Stocks: BP (BP)
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Big oil companies have also been investing in renewable energy. BP stock looks attractive for two years. First and foremost, oil is trending higher and the company stands to benefit from rising energy prices. Furthermore, BP is well positioned from a financial perspective to increase investments in the renewable energy sector.
In February 2021, BP and Chevron (NYSE:CVX) announced an investment of $40 million in Eavor Technologies. The latter is a Canada based geothermal energy company. Eavor aims to power the equivalent of 10 million homes by 2030.
It’s worth noting that U.S. already has the largest geothermal capacity (3.7 GW), which is 24% of the world total. With innovation, geothermal can be among the largest sources of energy. Just to put things into perspective, “0.1% of Earth’s total heat content could meet our energy needs for 2 million years.”
I also believe that investment in Eavor Technologies might be just the beginning of the company’s inroads into geothermal energy. The company plans a “10-fold increase in low carbon investment by 2030.” The company targets 50GW of net renewable energy capacity, which is likely to be a mix of solar, wind and geothermal.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
