Investors looking to buy energy dirt cheap may want to consider an unconventional asset - shares of geothermal power producers.
Purchase a stake in one of these green power firms, and it's possible to buy reserves of energy in the ground at a price that works out to be the equivalent of about $5 (U.S.) per barrel of oil, according to analysts at Wellington West Capital Markets in Winnipeg. That's a huge discount to the $50 a barrel usually applied to proven reserves at junior oil companies, and of course, a whopping haircut to current market values of around $100 a barrel for oil .
In a note to clients, the Wellington analysts concluded that geothermal companies offer energy exposure that is "significantly undervalued" by the market, even though they think the reserves should trade at a premium to oil in the ground, based on their view that geothermal is a cleaner power source than hydrocarbons.
Varun Choyah, who helped write the note, said the firm's research is one of the first comparisons of how geothermal energy reserves stack up on an energy equivalent basis against petroleum. "It's very cheap," Mr. Choyah said of the geothermal sector.
He was at a loss to explain the extreme discount to junior oil companies. "The whole sector hasn't gotten that much attention. I don't know why."
Geothermal companies have some similarities to oil producers, so the firm's comparison isn't as far fetched as it may sound. Both drill deep into the ground looking for energy, but instead of hydrocarbons, geothermal firms seek places with extremely hot rocks from which steam can be extracted to run turbines and produce electricity. In its analysis, Wellington converted these in-the-ground reserves of thermal power into the equivalent amount of energy derived from oil.
As with petroleum producers, the riskiest point for a geothermal energy company is when drilling. A company can chew through money trying to find the hot rocks it's looking for. Even after a discovery is made, many additional wells are needed to prove the size of the heat source. But once a company determines its reserves and negotiates a contract to sell its power to a nearby utility, there is no difference between a geothermal operation and a conventional electricity generating station, according to Mr. Choyah.
Most of the world's large geothermal companies with public listings are in North America, with four in Canadian markets and one in the U.S. There are a larger number of firms in Australia, but their capitalizations are tiny and they're more speculative.
Wellington's analysis was based on the reserves at five North American firms: Magma Energy , Nevada Geothermal , Ram Power , U.S. Geothermal and Ormat Technologies . They're rated as buys by the firm, except for Nevada Geothermal, which it ranks as a speculative buy, and Ormat, a U.S.-based firm it doesn't rate.
The evaluation assumed no value for any carbon credits the geothermal firms might receive if governments adopt measures to reduce emissions of the greenhouse gas.
One benefit of geothermal energy compared with its wind and solar counterparts is that power plants tapping into heat in the ground can run flat out, all the time. They don't depend on the vagaries of wind or light conditions, which often cause other sources of green energy to lie idle.
Once a geothermal generating station is up and running, it doesn't face the risk that commodity prices will rise, which can hurt profits at a conventional oil- or gas-fired power plant.
Wellington said it believes that regulatory support for geothermal energy is growing and that the industry has "the lowest long-term costs of all alternative energy sources."