Here's a Solid Natural Gas Bet

I can't help smiling at fellow Fool Brian Stoffel's brilliant take on Westport Innovations (Nasdaq: WPRT  ) , as it crushes the belief that everyday automobiles don't run on natural gas. Here's a loss-making company that requires your immediate attention, with its hot business line and superb future potential. So what if Westport's losses have widened? Its burgeoning revenues and tie-ins are way too impressive to be ignored.

Winds are changing
Natural gas hasn't crept into a majority of vehicles yet, whether because of lack of popularity or a dearth of refueling stations. But things may be changing. Automakers are getting a little more comfortable with natural gas/gasoline hybrid vehicles, and oil giants are increasingly keeping natural gas fueling stations on their investment agendas.

For example, Chesapeake Energy's (NYSE: CHK  ) initiative to invest $1 billion in natural gas infrastructure and fueling stations over the next decade shows how confident it is about the future of natural gas. It's giving money to Clean Energy Fuels (Nasdaq: CLNE  ) to construct 150 natural gas fueling stations along interstate highways. Just a few days ago, Chesapeake CEO Aubrey McClendon openly advocated for natural gas as a fuel, stressing how the U.S. government should promote its use as a highway transportation fuel.

Meanwhile, ConocoPhillips CEO James J. Mulva said a few months back that natural gas has become a major portion of his company's portfolio.

And then there's Westport, with its recent joint marketing agreement with Royal Dutch Shell (NYSE: RDS-A  ) to extensively market liquefied natural gas as a viable transportation-fuel alternative. Following this agreement, I won't be surprised to see the Big Oil companies getting on the natural gas bandwagon more aggressively. If that happens, it's great news for Westport, because vehicle makers will get involved, and when they do, many will turn to Westport. Already, Westport fixed its roving eyes on General Motors during its first quarter, and the two companies agreed to develop advanced natural-gas-engine technology. And in its second quarter, Westport bagged a deal with Ford (NYSE: F  ) to supply its new, advanced bi-fuel system for Ford's pickup trucks.

While both of these automakers already feature in competitor Fuel Systems Solutions' customer list, deals with Westport indicate how serious the auto giants are getting about natural gas. They certainly aren't shoving Westport aside.

Westport has also acquired Alternative Fuel Vehicle of Sweden AB, the sole supplier of natural gas fuel systems to Volvo. This move will extend Westport's technology to another big automaker and deepen its foothold in Europe. Expecting a quick integration, Westport thinks this acquisition should add approximately $1.5 million to its forthcoming quarter's revenues.

On top of all this, there's the NAT GAS Act -- which would add natural gas tax incentives -- remaining as a possibility. Things could turn even juicier for Westport.

On a roll
Although Westport's revenues grew an astounding 80% from the year-ago quarter to touch $81 million, its losses widened to $13.2 million from $6.2 million year on year, partially because operating expenses rose to $28.5 million compared with $16.7 million a year ago. But research and development are an important component of these expenses, with Westport increasing its R&D spending by 67% compared with last year's second quarter.

Westport's joint-venture business with Cummins (NYSE: CMI  ) did extremely well in the last quarter, and its contribution to Wesport's bottom line is on the upswing. Revenues surged 59% to $49.2 million, as the North American refuse-truck market got stronger. Given Cummins' stronghold in the trucking industry, you can imagine what a revolution this could bring about in the entire trucking industry.

Westport's joint venture with China's largest heavy-duty engine maker, Weichai Power, is getting stronger as well, with 90% higher shipments in the second quarter compared with last year. Westport is also developing new technology to be used in Weichai's engine platform, which is expected to be rolled out next year.

The Foolish bottom line
I forgive Westport for maintaining the red ink on its books, because I believe its R&D investments will pave the way for future profits. And when you have billionaire George Soros increasing his investment in Westport, you know there's a lot brewing underneath.

Make sure you add Westport to My Watchlist. It's a free, personalized stock-tracking service from The Motley Fool to keep you updated on all your favorite companies.

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford, General Motors, Chesapeake Energy, Cummins, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (3) | Recommend This Article (20)

Comments from our Foolish Readers

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 November 09, 2011, at 9:29 PM, trin6810 wrote:

    earthquakes are following unconventioanl shale plays someone is going to start putting the dots together - then what?

  • Report this Comment On November 10, 2011, at 10:28 AM, diverdon56 wrote:

    I know that gas has been used as a fuel for IC engines for a long time. In WWII there were even engines modified to fun off of wood gas. http://en.wikipedia.org/wiki/Wood_gas

    http://strangevehicles.greyfalcon.us/HOLZBRENNER%20VOLKSWAGE...

    Most backyard mechanic’s could cobble together a nat gas engine using a gasoline engine and a welding gas regulator.

    It is a well known fact that patent offices are not nearly as diligent in the search for previous art as opposing counsel in a suit to overturn a patent. Patents can be found to be defective for many reasons.

    I wonder, has any one knowledgeable about patent law and IC engines, checked to see: How necessary are Westport’s patents, and how defensible are they?

    I know Cummins is using Westport’s patents. What I do not know is if Cummins felt that they could not work around/overturn them, or if they thought it would be better to pay a small license fee to Westport so that the patents remain a barrier to entry too competition.

  • Report this Comment On November 10, 2011, at 10:49 AM, decbutt wrote:

    Westport fails the first test of investing:

    "Is this thing that I should invest in profitable?"

    If there is no profit, you don't have any share in any of the profit.

    Proof of principle is not proof of profitability.

    Maybe they will be profitable in future. Maybe they will be raking it in. Maybe not. Who knows?

    But it is unlikely, even if it does make profits, that a company that has "got where it is" by being loose with cash is suddenly going to develop fiscal rigor.

    Chances are, a lot of it will get spent. Because they are good at spending. They have a culture of spending. If spending finally results in profits, just think what more spending could achieve ...

    Some companies are already profitable. Even in Nat Gas.

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