Good Bet? Geothermal Stocks Up With Japan, U.S. Cooperation

Geothermal energy is talked about a lot in the energy transition conversation. People are wondering if they should invest in it. This applies to everyone, not just energy experts. The question is whether or not it is worth it to invest in geothermal energy.

This blog is about geothermal energy. I'll talk about one investment opportunity I think is good. It's a big picture view.

Should You Invest In Geothermal Energy?

To plan well for geothermal, we must know that energy choices will be about balancing supply security and reducing carbon. We must accept that policies favor carbon reduction, as we invest in the future. Leaders in North America, Europe, and some areas promote green energy, and the trend seems unlikely to change.

Renewable energy has faced problems with supply reliability. This has been expensive for politicians in Europe. One time, when Russia stopped supplying natural gas, Europe had to spend a lot of money to fix the problem. They had to import liquefied natural gas, use coal plants, and stop industrial production. The warm winter also helped, but this was just luck and might not happen again.

"Power Fluctuations, Constant Supply, And Holding"

Energy is always used and must be produced constantly to keep up with demand. Also, because there's no way to store it, the energy source has to be able to handle the maximum amount needed during the day. Here's an example to help explain it:

In the past, we mostly relied on coal and nuclear for the baseload. Those power sources need more time to be ready. Nowadays, modern coal plants are more flexible. If we need power quickly, we use natural gas or hydropower instead. They can be brought online faster, so they work better for peak load situations.

Investors put a lot of money into green energy lately. Solar and wind are where they invest the most. These sources are not reliable all the time. A chart from International Renewable Energy Agency shows this.

The usefulness of wind and solar depends on the weather. But they may not be helpful during high demand periods. Solar may cause grid operators to reduce output during the day when demand is low. At night, when demand is high, solar isn't helpful.

Geothermal: The Solution

People talk about two solutions for green energy: 1. Renewable resources: These sources are natural - such as wind, solar, and hydroelectric power - and they won't run out. 2. Nuclear power: This type of energy is produced through atomic reactions, but it comes with some safety concerns. Both options have pros and cons, and it's up to us to make informed decisions about which one to use.

Some people talk about the "hydrogen" hype, but geothermal is the only other option in serious consideration. Geothermal energy is low-carbon and dependable for baseload. It doesn't have the same political baggage as nuclear power, which some people aren't comfortable having near their homes.

Geothermal energy is a good investment. It may be the only solution to our energy problem. We have to choose between "green" and "reliable" energy. But, we still have challenges to face. We need to solve practical and technological problems.

Top Geothermal Energy Producers - Who Are They?

It's hard to turn geothermal into an investment because there aren't many companies that focus on it. Ormat is a company people often talk about because they're the second biggest owner and operator in this field.

Other companies, such as Enel and CFE, are Ormat's competition. National oil companies, like Petramina, are also competition. Ormat also does other things like storage development. They analyzed themselves and found this.

Geothermal Stocks Vs Energy Stocks: Comparison

The producers have some key differences from regular energy stocks. Ørsted and Ormat have a risk-return profile like a utility.

Ormat and Ørsted make deals with governments or companies to create long-term power purchase agreements (PPAs) that last for over 25 years. This protects them from fluctuations in demand and pricing. The main risks left are project execution and operation, which is similar to any utility.

Less risk is good, but the returns may be similar to utilities. Utilities can be good investments. Geothermal investors need to know that they won't get high profits like other energy investors.

When exploring and developing a resource, an oil producer or uranium miner puts their own money at risk. They also risk that the market might not want their resource when they finish. If things go well, they might get huge returns. The utility model won't give them this, but the downside is also limited.

How Can You Exploit The Geothermal Trend?

Geothermal owners may not know how to develop a project. They hire others for that, like utilities. A good investment focus could be on companies that help geothermal developers. Ormat also offers engineering services, but it's only 10% of their business.

Ormat investigated and found out that companies such as Toshiba, Mitsubishi, and General Electric who provide geothermal equipment aren't solely focused on this business.

Vallourec: A Viable Choice

To make a geothermal well, we need more than just the basic equipment. It needs pipes and connections too. These pipes and connections must be capable of withstanding extreme heat. Vallourec S.A. is a top company that produces tubular solutions for energy and industrial purposes. Their main focus is on supplying tubulars for oil and gas wells, but they also invest heavily in research and development for new technologies.

Vallourec's research teams are focusing on high temperature problems in geothermal equipment. According to the company, they are tackling this issue head-on.

Oil and gas wells need 180°C qualified connections. Geothermal wells need even more qualified connections because of higher temperatures. Material dilatation affects them.

The API-5CT Range 3 pipe gets longer when heated to 350°C. It gains 60 mm of length. This affects deep wells, where the pipe could gain up to 9 meters of length if it can move freely. But if the casing is cemented, the strain is shared along the string. To make sure connections can withstand these conditions, the TWCCEP standards require testing and qualification at 350°C. These standards are for high temperature wells. Abiding by these standards allows for more possibilities for geothermal operators to harness more energy through the same process.

Vallourec made a big announcement. They got their connections qualified for up to 350° C. This could change the game.

If you increase the temperature from 200° C to 400° C, the energy generated multiplies up to 10 times. This means there's a big chance for the industry to create and test new solutions for systems at those temperatures.

Vallourec did a good job reaching the 350°C barrier. This helps for wells that need higher temperatures. People think there will be more of those wells in the future.

More Than An R&D Hub

I like Vallourec for two reasons. The second one is that it's not only a tech incubator. VLOWY is a manufacturing company that operates internationally and has connections to energy customers. Because of this, it can expand its innovations.

Vallourec is benefiting from the comeback of traditional fossil fuel energy. They're getting more bargaining power as equipment and services providers. In their latest investor presentation, Vallourec showed how the price of oil country tubular goods pipe is rising. This matches my bigger idea about how the energy sector will change. You can read more about that in my other blog post.

Vallourec thinks geothermal will grow bigger, seen in its investment in Greenfire Energy last year. But for now, VLOWY's tubular products make cash. So, investors can profit now and also later.

Vallourec costs less, according to Seeking Alpha. They have provided an estimated multiple.

Vallourec's ratios are lower than their peers. The forward EV/EBITDA ratio is 3.4x for Vallourec and 4.8x for their peers. The forward EV/EBIT ratio for Vallourec is 4.6x while their peers have a ratio of 7.9x. Vallourec also has a lower forward price/sales ratio of 0.4x compared to their peers with a ratio of 1.2x.

Vallourec has a high debt, which is risky. S&P upgraded Vallourec's rating from B+ to BB-. This suggests that the worst is over. S&P predicts that VLOWY will be free cash flow positive for the whole of 2023.

US-Japan Geothermal Deal: Why Should You Care?

Recently, the U.S. and Japan agreed to work together on geothermal research. This got a lot of attention, but it doesn't change much. Geothermal is still good for Japan because of their geology and equipment suppliers.

Some good news for geothermal energy in the United States. The Secretary of Energy, Granholm, may start giving it more importance. The Inflation Reduction Act also recently included tax incentives for geothermal. This could help boost its usage. However, wind and solar energy have received a lot of funding already. So, they will probably continue to be the focus for now. The hope is that the U.S. administration doesn't discriminate against geothermal and recognizes it as a superior power source.

The Geothermal Industry: What's Ahead?

The geothermal industry's future depends on solving technological challenges. A limiting factor is that geothermal can't be used everywhere due to geology. The IEA's Geothermal Roadmap may expand possible locations.

Geothermal energy is usually found where there's water or steam naturally occurring. This energy can be extracted using drilling technology to a depth of up to 5 kilometers. But, most of the geothermal energy resources in the world are in dry and low-permeability rock. These rocks don't have much water or pore space to be exploited naturally. This type of geothermal energy is called "hot rock resources." They have limited pore space and minor fractures, which makes it difficult to access the heat stored inside.

Having better technology means you can look for places farther away.

New energy sources like hot rock resources need more testing before they can be made for public use. The most popular technology used for this is enhanced geothermal systems. Other ideas are still being thought up, but they do not involve breaking the hot rock.

Vallourec wants to improve technology to make new developments more practical. They're doing this through research and development.

Geothermal is one choice to decrease carbon emissions from power generation. It doesn't have the irregularity problems of wind and solar energy. Even though nuclear energy is a good option too, some nations don't like nuclear power. So, we may have to rely on geothermal energy in the future.

Investors shouldn't think that all companies involved in geothermal energy will make a lot of money. Operators usually won't make a lot because the people buying the energy take on a lot of risk. Companies that sell equipment and services might be better, but not many only do geothermal.

The company Vallourec helps with geothermal technology. They are not a pure play. However, it is still a good way to follow the trend. Investors can benefit from the upturn in oil and gas while waiting for geothermal technology to become more popular.

Important reminder: This article is about stocks that aren't traded on major U.S. exchanges. These stocks come with risks, so keep that in mind.

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I like to invest using the value approach and concentrate on energy. I usually discuss stocks that I already possess. Follow me on Twitter at @_EnergyRealist. My thoughts are my own and don't serve as investment recommendations. They are only for informational reasons. I'm not a licensed investment advisor, so my writings aren't investment advice. Although I strive to be precise, my articles and posts may contain mistakes, so please research any information provided.

I don't own any stocks or options for the companies mentioned. But, I might buy some shares or call options for VLOWY in the next 72 hours. I wrote this on my own and these are my personal opinions. I'm not getting paid for it, except for Seeking Alpha. I don't have any ties with the companies mentioned.

My texts on here are not for investment advice but just my personal opinion. They're for learning about things only. I'm not an expert so don't take what I say as advice. I try to be accurate but I might make mistakes. Make sure you do your own research before making any decisions based on what I say.

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