Fervo（FRVO） - 下跌而非出局：重申跑赢大盘评级

+1 917 344 8503sunaina.ocalanbernsteinsg.com +1 917 344 8422bob.brackett@bernsteinsg.com OutperformPrice Target +1917344 8306anshika.bajpai@bernsteinsg.com FRVO +1 917 344 8574minnie.xu@bernsteinsg.com Fervo (FRvO) - Down, not out - reiterating Outperform Fervo listed in May with an initial pricing of $27/sh.and appreciated to a peak of~$42/sh.Ithas sincefallen5o%andistradingnearits initialpricetoday.We initiated coveragewithan Outperformratingand $47/sh.pricetargetandmaintain conviction aheadofthe start ofcommercialoperationsatCapeStationanticipated inthe4Q. Our valuation reflects ~5GW of operating capacity by 2035 driving $4.5B in EBITDA, and a10.5xmultiple (in line with IPP multiples).The 5GW comprises 500MWunder construction,550MW ready to build,and~4GW advanced development projects.FRVO has an additional~38GW of earlydevelopmentprojects in thepipeline. The primary risks associated with scaling EGS commercially are 1) Water use, 2) Seismicityand 3) thermal decline. We wouldarguethatEGSdoesnotneedto (norplanto)access potablewaterand competewith agriculture. Because EGS is closed loop,the use of brines is acceptable. While waterwine-rack style well distribution of Cape PhaseIand beyond. Water disposal has been responsible for thelarger oil field earthquakes and is not undertakenhere.In general,the EGS systemkeeps a positiveand uniformpressureacross the systemand lacks the sudden changes likely to induce seismicity. Furthermore, the stress regime inbasin and range settings is different than previous EGS associated seismicity. If wells declinefasterthan forecast then thermal depletion could occur. If wells decline fasterthanforecast, it could be (1)lack of diverse set of induced fractures causing the cycled waterto extract heat from only limited areas, or (2) proppant crushing, which is being studied. In thecase of Fervo, item (1)is partly de-risked via evidence from monitoring and field observations.Item (2) is mitigated through proppant selection. InvestmentImplications WerateFRVOOutperformwitha$47/shTP.Weseealmost>60%upsidepotentialonour TP after the pull-back and see the current weakness as a buying opportunity. Reported EPS trading near its initial price today. We initiated coverage with an Outperform rating and $47/sh.price target and maintainconviction ahead of the start of commercialoperations at Cape Station anticipated in the4Q. multiples).The5GWcomprises500MWunderconstruction,550MWreadytobuild,and~4GWadvanceddevelopmentprojects.FRVO has an additional~$38GW of early development projects in the pipeline. In this report we address the risks that we had outlined in our initiation report, and reiterate our conviction. and also emissions (nearzero emissions)butalsopotentially on timetomarket.EXHIBIT3:EGS(Enhanced GeothermalSystems)"win"acrossanumberofdimensions. RISKS WATERACCESS Water access, especially in arid climates, has been mentioned as a concern for EGS. We would argue that EGS does not need to(norplan to)access potable waterand compete with agriculture.Because EGS is closed loop,the use ofbrines is acceptable.Those brines would circulate and nevertouch surface conditions. If waterloss (waterexiting the subsurface system into anadjacentfracture or pore system)wereto occur,brine wells could be drilled fortrivial capital to'top up'thesystem.While waterloss was observed at the trial Project Red well pair, it is significantly lower at the commercial wine-rack style well distribution ofCapePhaseland beyond. SEISMICITY Seismicity can occur in the oil patch fromtwo issues. One is the injection of water related tofraccing and the other is waterdisposal. We've written on the topic before (Bernstein E&Ps: Oklahoma Fracquakes -A Tale Full of Sound and Fury Signifying Nothing). Frac jobs are insufficientto causelargeearthquakes andarebeingmonitored byFervo in any case. Water disposal has been responsible forthelargeroil field earthquakes and is notundertaken here. induce seismicity. THERMALDEPLETIONIf wells declinefasterthanforecastthen thermal depletion could occur.We argue above that early wells followthe expected type curve. If wells decline faster than forecast, it could be (1)lack of diverse set of induced fractures causing the cycled waterto extractheat from only limitedareas,or(2)proppant crushing,which is being studied (publications.mygeoenergynow.org/grc/1035199.pdf) In the case of Fervo, item (1) is partly de-risked via evidence from monitoring (well flow tests and microseismic) and fieldobservations (natural fractures). item (2) is mitigated through proppant selection. Ultimately we believe that Fervo Energy is years ahead of competitors and has the inertia to remain so. Further we don't believethe demandforthetype of power EGS delivers is lackingdemand -it's a massivemarket. We also don't believe that E&Pcompanies would everchoose to compete inthe spaceasthereturns,whileattractive,arePPA-focused and closerto the utilitybusiness model.We can imagine that European