5 Stocks for the Transition to Natural Gas Fuel

Oil prices may be down over the last few weeks, but that doesn't seem to be translating to lower prices at the pump so far. And that means that alternative fuel sources are still looking attractive. As the only alternative with a chance to make a dent in gasoline consumption in the next few years, let's take a look at what companies could play a role in natural gas becoming a viable transportation fuel.

Making fuel and building fueling stations
If you want to see the start of a natural gas revolution, you don't have to look any further than Clean Energy Fuels (Nasdaq: CLNE  ) . The company owns two liquefied natural gas production plants and 200 fueling stations across North America. That network is growing quickly and financial results are starting to follow.

In the first quarter, Clean Energy Fuels' revenue grew 67% to $65.3 million and the momentum doesn't appear to be stopping. On the company's conference call, management pointed to diesel prices near $4.50 per gallon, and comparable liquefied natural gas from Clean Energy at $2.27 as a driver of momentum for the entire sector.

Questar (NYSE: STR  ) is primarily a natural gas exploration and production company but recently it has started building out compressed natural gas stations in Utah. It isn't a pure play on the conversion to CNG and LNG fueling, but Questar will be safer than competitors who still aren't making a profit.

Cheniere Energy (NYSE: LNG  ) owns receiving terminals and pipelines that transport LNG to locations near the Gulf Coast. If natural gas fueling catches on, this network could expand nationwide.

Building vehicles to make the transformation happen
Everyone in the trucking industry is taking notice of natural gas, starting with manufacturers. Cummins, Navistar, and Volvo are building new engines to run off natural gas to meet customer needs. With fuel prices putting pressure on profits, trucking companies and buses are naturally the first step to make the transition to natural gas.

Westport Innovations (Nasdaq: WPRT  ) is basically an intellectual property company that relies on engine and vehicle manufacturers who use its natural gas fuel technology in their engines. This allows the company to reach lots of customers without investing capital in building engines but the risk lies in relying on others for your success. Cummins is one of Westport's joint venture partners so major manufacturers have taken notice.

UPS (NYSE: UPS  ) is another big name that signed a deal with Westport to power their LNG trucks. But big name signings haven't turned into revenue growth or any sort of profit yet. In the fiscal third quarter, Westport's revenue grew just 8.5% to $39.5 million and net loss jumped to $13.5 million or $0.31 per share.

A similar story is playing out in the fuel conversion business at Fuel Systems Solutions (Nasdaq: FSYS  ) . The company provides the tools needed to convert your average passenger vehicle to natural gas. But revenue was down 44% in the quarter, and earnings per share fell to $0.02 from $1.59 last year. But that is a profit -- something most of these companies can't claim. And automakers are building their own partnerships for new natural gas vehicles.

Clean Energy Fuels subsidiary BAF, which designs vehicles systems and conversion technology, is working with Ford (NYSE: F  ) to develop fuel systems. A ServoTech designed fuel system is expected to be available for the F-450, F-550, and F-650 in June of this year.

These companies all show a lot of promise but investing in them can be tricky because there is very little profit between them.

Investing in the transition
Knowing where a company stands in the transition to natural gas is key to investing in the space. Right now, buses dominate the LNG and CNG landscape while trucking is following fast. Passenger vehicles may be a great idea, but until the fueling infrastructure is built out, I would be wary of companies that rely too heavily on this space.

My pick right now is Clean Energy Fuels because of their focus on fleets and their role in expanding infrastructure. I would like to see the company grow more quickly before I make a real money investment, so for now I will add the company to My Watchlist and give it a thumbs up on My CAPS. Westport is an interesting story and a Motley Fool Stock Advisor pick but I would like to see a move toward profitability before jumping into the stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended Ford Motor and Westport Innovations. The Motley Fool owns shares of Ford Motor and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (31)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 16, 2011, at 5:45 PM, buddylee59 wrote:

    Travis,

    Thanks for the informative article. You're right to be cautious about the prospects of the replacement fuel from diesel to CNG and LNG. In the course of my research into the matter, I've come across some fleet owners who have found converting didn't save them money or lessen consumption. Particularly in the areas of heavy transport, concerns exist about Natural Gas-powered vehicles matching the performance of diesel-fueled trucks.

    I'm not saying that NG-fueled vehicles can't match the performance of their diesel counterparts; but I have come across some companies that converted and are dissatisfied.

    The companies you mentioned and many others are working on these issues, but the science and its applications are by no means settled.

    I have been watching FSYS and CLNE for a while now. Like you said, I intend to keep watching, but I think I'm going to have to see a lot more private businesses sign on before I invest.

  • Report this Comment On May 16, 2011, at 9:10 PM, bobcollins wrote:

    Hey buddylee59, could u share more details of your findings? I'd like to know who is unhappy w/ conversions and why...thank you....

  • Report this Comment On May 17, 2011, at 10:30 AM, TCock2 wrote:

    Nice overview Travis. It is amazing how much resistance some industries are applying towards converting - primarily for two reasons; they are heavily invested in utilization of coal or crude, and the oil/coal industries themselves are only aiding and abetting their own causes via their local politicians (by local, I mean the ones in their hip pockets).

    I recently had a discussion with a reported from Bloomberg that stated the problems with NG being an alternative, despite that it abundant and more eco-friendly, is that it would take trillions of dollars to convert everything over - transportation, wholesale and retail distribution, etc., etc.,

    A very short sighted statement.

    Trillions are going to be spent either way.

    Much of it spent with our conflict management strategies a.k.a. conflicts in the middle east.

    Much of it burning crude or coal and then cleaning up the residuals.

    Much of it trying to develop "less dirty" ways to burn crude or coal - but basically those efforts are nothing more than ways to market them in such a way that they are more acceptable by the common folk. Think about it - cleaner burning coal... Really. No, it is simply less dirty than poorer grades with higher sulfur content or untreated. After all, burning a lump of coal is cleaner burning than a rubber tire.

    So, should we continue to be held hostage by our own short term solutions that result long term problem avoidance?

    Or, should we bite the bullet now so that we don't have a gun to our heads in the future.

    I think America is waking up to this. I think we are realizing that we are spending billions on energy sources that are bad for the environment and keep us in political gridlock with much of the world.

    So what does this rant have to do with the stocks mentioned here, these companies are in position to be ahead of the game as the paradigm changes and people say enough is enough.

    Much of the world is headed that direction already and that is what makes companies like Cheniere attractive. Their business plan as an exporter and importer of NG allows them to be the gate keeper and collector of the tolls both ways. They already have contracts signed (contingent on completion of the Sabine Pass operation) with several countries that will result in strong profits starting day one.

    Find other uses for crude, leave the coal in the ground, and burn the natural gas - abundant and cleaner burning.

  • Report this Comment On May 17, 2011, at 5:33 PM, buddylee59 wrote:

    bobcollins,

    I have spoken with numerous owners of private sanitation and waste-hauling companies who are reluctant to purchase CNG fueled vehicles for the following reasons(their reasons, not mine:)

    1. Vehicles cannot drive at normal speeds when loaded;

    2.vehicles underperform significantly in colder temperatures;

    3. Refueling is difficult due to relative inaccessibility of stations;

    4. The price of natural gas is not much less than diesel.

    I have also heard from several who have NG vehicles in their fleets.

    Specifically, one gentleman emailed a large industry group that his trucks could not exceed 20MPH when loaded, and that 'when you run out of diesel, you can bring it to the truck; when you run out of CNG, you're getting towed.'

    Again, I'm not trying to rain on anyone's parade here. My criteria for researching this type of investment involves trying to find people who are investing their own money in a technology that works for them. In the Wall Street Journal today, an executive with a large publicly-held company whose fleet contains some NG-fueled trucks, specifically stated that his company's future NG-vehicle-purchasing decisions depend on the fate of a bill pending in Congress which contains significant subsidies for the purchase of the NG vehicles. Without the subsidies, he said, they would not be purchasing as many NG vehicles.Please see the article for specifics.

    As I stated in my first post, I've been watching some of the companies mentioned in Travis' article for a while. I just don't think the conversion to NG vehicles will be as comprehensive and seamless as some would have you believe.

    And because of that, I'm more comfortable on the investing sidelines right now.

  • Report this Comment On May 19, 2011, at 10:40 AM, jdogbrown wrote:

    Have a look at the recent agreement between Westport & Caterpillar - 2012 timeline - imminent progress - CNG application is simply a tech hurdle - your toaster sized mobile will fit nicely in your breast pocket by the end of the year - foreign oil's about to be someone else's problem - merry christmas

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