Why I Wouldn't Bet Against This Natural Gas Play

The past two years have been great ones for shareholders of Westport Innovations (Nasdaq: WPRT  ) . The company is one of the few that has been able to design an engine that can run entirely on natural gas. I'll be the first to admit that the stock looks a little pricey now, as it's up more than 280% since the beginning of 2010.

But I'm a big believer in the company, as my money and my All-Star CAPS profile are riding on its success. In an effort to emphasize the "motley" in Motley Fool, I'll be taking on fellow Fool Jeremy Bowman's recent article, which questions the wisdom of an investment in Westport.

The bear's case
To better understand the valid concerns that Jeremy brought up, I've summarized the big points here.

  1. "A mass conversion to natural gas-fueled vehicles cannot happen overnight," Jeremy says, citing the relatively small number of natural gas fueling stations built out by Clean Energy Fuels (Nasdaq: CLNE  ) .
  2. "The higher prices internationally mean a dramatic shift to natural gas fuel is unlikely." Jeremy believes that, given that natural gas is far more expensive abroad, a nat gas conversion is only a stateside movement.
  3. "The time horizon for Westport to take advantage seems relatively slim. Domestic natural gas prices should either go up in the near future as producers curtail output or around 2015, when exports begin."

All of these points are valid, and worthy of investigation. But I'll show why none of them should worry you.

Why the bulls will be right
I'll address all three points in order. First is the issue of filling stations. It's true that currently there are only 1,100 natural gas fueling stations in the country -- which is small when compared with the 116,000 standard stations in operation.

The problem with the bear argument is this: At this point in the adoption curve, no one is hoping for a massive transformation. Instead, long-haul trucking is the first industry looking to make the conversion -- as evidenced by Westport's partnership with Cummins (NYSE: CMI  ) -- and by Navistar's (NYSE: NAV  ) recent announcement that it'd be buying Westport-Cummins engines for its new fleet of natural gas trucks. If you take a look at Clean Energy's plan for filling stations, you'll see there should be more than enough stations to meet the trucking industry's needs.

Source: Clean Energy Fuels publication.

Source: Clean Energy Fuels publication.

As far as consumer adoption (in terms of standard cars) goes, that would probably come after the trucking industry is able to show that natural gas' size, scale, and cost-savings could apply to everyday folks as well.

Natural gas prices
Yes, natural gas prices are higher abroad. But I think that fact alone misses the bigger point -- because I know another thing that's more expensive in foreign countries: the cost of standard gasoline.

The price of natural gas is important only in terms of how it relates to the price of a gallon of petroleum-based gasoline. Here's the average price of a gallon of gas, and a gallon equivalent of natural gas in the countries Jeremy cited.

Sources: Fool.com, International Energy Agency, MyTravelCost.com. Natural gas assumes 7.9 gallons per 1,000 cubic feet. Europe includes France, Germany, Italy, Spain and the U.K.

Sources: Fool.com, International Energy Agency, MyTravelCost.com. Natural gas assumes 7.9 gallons per 1,000 cubic feet. Europe includes France, Germany, Italy, Spain and the U.K.

As you can see, the assertion that higher natural gas prices abroad would discourage natural gas adoption simply doesn't make sense. In fact, I think countries like Japan and those in Europe have even more incentive to make the switch over.

A disappearing glut?
Finally, Jeremy argues that because of the current glut in natural gas supplies, prices will inevitably go up. And sure enough, major providers like Chesapeake Energy (NYSE: CHK  ) have announced cutbacks in production to help ease the glut.

But here's the thing: Natural gas producers aren't stupid. They know that the only way to drive demand for their product -- while still making a hefty profit themselves -- is to make sure the value proposition natural gas offers is superior to standard petroleum-based fuels. And as that graph shows, there's a long way for prices to rise before they'd lose their cost advantage.

In the end, I simply think Westport -- and others riding this wave like Clean Energy, Navistar, and Cummins -- has too much going for it not to be invested. Sure, natural gas plays may take a slump over the short term, but I'm very bullish on them all in the long term. That's why I've backed up these sentiments by giving all four of these companies a thumbs-up on my All-Star CAPS profile.

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Fool contributor Brian Stoffel owns shares of Westport. You can follow him on Twitter at @TMFStoffel.

Motley Fool newsletter services have recommended buying shares of Westport Innovations, Chesapeake Energy, and Cummins. 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 (15) | Recommend This Article (23)

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 February 21, 2012, at 10:17 PM, Cyherbst wrote:

    Finally someone who understands, that even though natural gas may go up, you still have to compare that to price of gasoline. Which, by the way will be at five dollars a gallon before we know it.

  • Report this Comment On February 21, 2012, at 11:23 PM, InvestWhatWorks wrote:

    Nice article.

    I'm bullish on nat-gas stocks in general (production, fueling stations, engines, etc). If your outlook is long enough and you can deal with some short-term volatility, there are many companies that should do very well.

  • Report this Comment On February 21, 2012, at 11:34 PM, TMFCheesehead wrote:

    @cyherbst-

    Not sure if it'll go that high, but the sentiment remains the same.

    @Invest-

    It's amazing how a long-term time horizon can change your outlook vs. the Market's.

    Brian Stoffel

  • Report this Comment On February 22, 2012, at 12:59 AM, NOTvuffett wrote:

    Nat gas as a motor fuel makes sense for fleet vehicles in a metropolitan area- but there would have to be a huge investment in infrastructure to make it a practical fuel for other users.

    The range is much less than gasoline or diesel powered vehicles. Many people that live in the sparsely populated 'fly-over' states have seen a sign like 'warning, 80mi until the next gas station'.

    Having said that, nat. gas is near 10 year low. There is a glut in the market but it is not like oil, it is a regional commodity. Currently there are only LNG receiving facilities in the US but work is being done to facilitate export. If you are patient, you could probably buy just about any nat gas related stock and do well over the next 3-5 years.

    Nat gas is also a seasonal commodity, demand ramps up during the summer when utility companies fire up generators to meet peak loads, and winter of course.

  • Report this Comment On February 22, 2012, at 1:15 AM, Mega wrote:

    Brian -

    The legend above which says "Gallon of Nat Gas" is confusing. I know you say "gallon equivalent" in the text, but that doesn't mean the legend should be wrong.

    And the note which says "Natural gas assumes 7.9 gallons per 1,000 cubic feet" is unhelpful. You could save your readers the trouble of looking up whether you're talking about CNG or LNG.

    It would make much more sense it the graph was labeled something like "Gallon of Gasoline" and "127 Cubic Feet of CNG (equivalent energy)".

  • Report this Comment On February 22, 2012, at 9:45 AM, TMFCheesehead wrote:

    @Megashort-

    Yea, it really is confusing. The basic measure is MMBTU, which is equivalent to 1,000 cubic feet of natural gas.

    To make the conversion, most analysts, use GGE (Gallon of gas equivalent), which is 7.9 gallons per MMBTU (or 1,000 cubic meters)--or, as you said, 126 cubic feet per gallon.

    Brian Stoffel

  • Report this Comment On February 22, 2012, at 10:44 AM, Mega wrote:

    "The basic measure is MMBTU, which is equivalent to 1,000 cubic feet of natural gas."

    1026 cf of natural gas to be more exact. But we are talking about a gas as a transport fuel, where the most common measure is cf of CNG, not cf of NG. Or it's sold by energy content (therm, BTU or GGE).

    "To make the conversion, most analysts, use GGE (Gallon of gas equivalent), which is 7.9 gallons per MMBTU (or 1,000 cubic meters)--or, as you said, 126 cubic feet per gallon."

    GGE of 7.9 gallons per 1000 cubic feet (not meters) also indicates the typical compression level of CNG.

    "Yea, it really is confusing."

    It should not be.

  • Report this Comment On February 22, 2012, at 10:58 AM, kmacattack wrote:

    Brian,

    Good article, but you failed to mention the $450 million cash infusion courtesy of Chesapeake ($150 million) and two other nat gas players of $150 million each loaned to Clean Energy to build 450 fueling stations on the nation's interstate system with an exclusive agreement with Pilot truck stops. This only occurrred within the last 90 days. Construction of this network is now in ""high gear" and the San Diego to Los Angeles corridor is already up and running. If I were 25 years younger and not nearing retirement, I would strongly consider getting into the long haul trucking business, because the fuel cost is so low compared to diesel, which is far higher than the CNG to gasoline ratio you mentioned. I'm in the flooring business, and freight costs have doubled over the past few years due to higher base rates, plus a "fuel adjustment surcharge" of about 35 percent. CNG is selling in this state for as low as $0.78 per gallon and even when natural gas was at an all time high in early 2008 at nearly $14 per MMBTU, I don't think CNG was ever selling for more than $2.00 retail, versus about $6.00 at the same time for dirty burning diesel. CNG emits only 1/4 the CO 2 of diesel, and no sulfur, so there is a huge advantage to converting trucks which are operating in cities where air quality is a problem, Iran runs their entire transportation system on natural gas, but our government evidently is not as smart as the Iranians, who export virtually all their oil which funds projects such as nuclear research. In 2010, Sen. Mitch McConnell twice filibustered the American Power Act, (the Energy Bill) which had passed the house of representatives with nearly 290 votes 18 months earlier. This bill would have funded development of the CNG fill station development, which would in turn insure that the trucking fleet would convert 100 percent to American produced Natural Gas from diesel within 5 years, which would cut OPEC oil imports by 50 percent within that same 5 years. The problem is that OPEC, the refining Koch brothers, Exxon, BP, Marathon, and the few Big Oil players who manipulate and price fix transportation fuel prices would stand to lose TRILLIONS OF DOLLARS if their monopoly ends. So big oil "donated" nearly $500,000 to McConnells "campaign contributions" before the energy bill came to a vote. There were 60 votes in the Senate, including about 7 republicans, until Sen Ted Kennedy died and was replaced by republican Scott Brown. With "only" 59 votes "for" McConnell was able to filibuster, or block the bill with his ONE no vote. With no threat of competition, gas prices escalated within a month after the elections and when they shot up to $4.00 and more last spring, the economic recovery stalled. While the country was suffering from the after effects of "the great recession" Exxon and OPEC were racking up record profits. If McConnell had been an Iranian politician, both he and the lobbyist who handed him the $500,000 "contribution" (bribe?) would both at a bare minimum be missing a hand for engaging in stealing from the people. It's a good thing that congress does not operate on votes based on a show of hands. If we were under Islamic, or "Sharia" law. there wouldn't be enough hands left to qualify for a quorum,

    And your map showing CNG fill stations is completely out of date. Within about 30 miles of Tulsa for example, there are at least a dozen CNG fill stations, and the pump price ranges from $0.78 per gallon to about $1.29. A long haul trucker would save about $1,000 per week by converting to CNG. The trucking fleet conversion would divert over $3 trillion per year which now goes straight to OPEC bank accounts into the pockets of American consumers. Talk about a STIMULUS package !!!

  • Report this Comment On February 22, 2012, at 11:26 AM, Mega wrote:

    Anyways, the bigger issue is the low energy density of CNG. It's fine for garbage trucks, but for the majority of vehicles it's not a very attractive fuel source. Thus, the low price.

    Of course, I've never seen a CLNE or WPRT bull acknowledge the importance of this critical issue and quantify it in terms of limitng the market.

  • Report this Comment On February 22, 2012, at 12:12 PM, TMFCheesehead wrote:

    @kmacattack-

    The map only represents filling stations operated by CLNE.

    Brian Stoffel

  • Report this Comment On February 22, 2012, at 12:33 PM, xa13000 wrote:

    Like E-85 the mpg is about 25% lower than regular gas. So the price per gal should be 25% less than regular gas to break even. I have a flex fuel Jeep that I only run on regular gas as the price difference is not there.

    How does nat gas compare??

  • Report this Comment On February 22, 2012, at 1:19 PM, TMFCheesehead wrote:

    @xa13000-

    Though the jist of this article is pointed towards truckers, the new Honda Civic that runs on natural gas gets 38 mpg on the highway.

    Brian Stoffel

  • Report this Comment On February 22, 2012, at 2:16 PM, xa13000 wrote:

    Thanks TMF

    What does it get on regular gas? Do u think it is comperable? In any case that is great milage and with fuel that is half the price, hmmmm I wish my Jeep would run on nat gas.

    So if u get the same mpg from both fuels the comparison can be made based only on price.

    Thanks

  • Report this Comment On February 22, 2012, at 3:36 PM, xa13000 wrote:

    Found out that the comperable Civic matches the hwy mpg however:

    1. Gas Civic has an 1800 cc engine rated at 140hp.

    2. Nat gas Civic has 1800cc engine putting out 110 hp.

    That is a loss in hp of about 20%.

    Not sure if a loss in hp would be a factor with truck diesel engines?

  • Report this Comment On February 24, 2012, at 9:34 AM, robertinvestor wrote:

    1 st

    This article gives the whole sale price of natural gas

    bought as it is put into the pipe system

    In the Us its mark up 10 to 20%.In China 30- to 40%

    Next .People hear have greatly under stated the price it sells at the pump

    Yes their may be areas that it sells for a dollar range

    But the average retail price that clne charges is around $2 or higher

    Their contract price is much lower ans is probably

    around $1.25 to $1.75 depending on whether there is competition

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