Hydraulic fracturing, or fracking, doesn't have the best public image these days. But love it or loath it, the fruit of this increasingly employed drilling technology — natural gas — has upended the traditional fuel business.
In the process, natural gas is also radically transforming the transportation industry. As it does, a number of companies that have moved in early, both large and emerging, are poised to reap significant benefits.
There are many reasons companies across the U.S. that focus on heavy-duty trucks, trains, and other methods of transport are displaying a healthy appetite for natural gas. One is the price, which has been nearly $2 a gallon (equivalent) cheaper than diesel. Another is the ample supply, stoked by a 25% boost in domestic production since 2007.
The appeal worldwide is real and growing as well. The Natural Gas Vehicles for America trade group says there some 15 million vehicles powered by this fuel currently in use outside the U.S. And a company called Navigant Research estimates 30,000 natural gas-refueling stations will pop around the globe by 2020, mostly outside North America, to serve these customers.
Some oil companies recognize potential
Seeing the writing on the wall, a couple of oil majors amped up their efforts in the space. Of them, Royal Dutch Shell (NYSE: RDS-A ) is making the most noise.
Under the command of CEO Peter Voser, who is set to depart in 2014, Shell expanded its footprint in liquefied natural gas (LNG) rapidly, and related businesses now represent nearly half of its total exploration and production earnings. The company spent more than $45 billion on production facilities, storage terminals and acquisitions and now sells 40% more natural gas than it did just a couple of years ago. It currently has about 7% of the global market and plans to double that through additional investment.
ExxonMobil is another major acting like a true believer. Its $41 billion acquisition of XTO Energy in 2010 made it the largest gas producer in the U.S., and it has built a large global position through ventures in Indonesia and Qatar.
Unlike competitors like BP, ExxonMobil and Shell have shown they expect natural gas to become a much bigger part of the transportation picture over the next few years. Here's a breakdown by sector of how that industry has reacted in recent months.
Heavy-duty trucks off the starting blocks
The main draw for this segment is the low cost of natural gas compared to oil products. A typical heavy-duty truck burns more than 10,000 gallons of fuel every year, so saving a couple of dollars per gallon across a fleet is huge. The main drawback is the upfront cost, as new LNG trucks run $50,000-$75,000 more than diesel models. Accordingly, natural gas trucks still represent just a tiny fraction of overall sales — although Citigroup projects that 25% of the market could convert by 2020.
Things started changing more rapidly once truck makers developed engines that met customers' needs. The leader is PACCAR (NASDAQ: PCAR ) , whose Kenworth and Peterbilt lines have offered trucks powered by LNG and compressed natural gas (CNG) since 1996. Last year it produced over 1,400 of these with 9-liter, 12-liter or 15-liter engines, and its broad range of products in the over-the-road, regional and vocational categories have captured around 40% of the North American market.
While demand for these 18-wheelers is growing, the vehicle types that have moved furthest toward adoption are trash trucks and buses. Natural gas now fuels half of all new trash trucks sold, for example. And Clean Energy Fuels (NASDAQ: CLNE ) , the largest direct supplier of natural gas to the transportation industry, continues a push into public transport and recently expanded its operational authority for the Los Angeles Metro Transportation Authority's CNG fueling stations.
Clean Energy has taken several other steps to cement its position in the transportation industry. These include expanding its network of natural gas fueling stations along major North American trucking corridors to 360 from 70, working with trucking company YRC Worldwide to study LNG vehicle maintenance and operational challenges, and building a facility in New Hampshire to supply the fuel to customers throughout the Northeast.
Railroads moving ahead aggressively
Freight railroads have faced mounting challenges in recent years: Coal shipments — traditionally representing as much as a third of their revenue — collapsed as electric utilities moved increasingly toward abundant, lower-cost natural gas. Some rail operators benefited by transporting the fuel. Others are looking at it as a way to make their trains run more economically.
GE Transportation, a unit of GE (NYSE: GE ) that builds mobile equipment for the rail, mining and marine industries, is in the forefront. Just how far was confirmed this summer when the company began building LNG conversion kits to modify its existing Evolution locomotives. One of the workhorses of the industry, the Evolution promised a 3% cut in fuel consumption when introduced almost a decade ago; according to GE, these kits could reduce fuel costs another 50%.
Also in this space, Westport Innovations (NASDAQ: WPRT ) announced in June that it signed a deal with Canadian National Railway, the largest railroad in that country, to build LNG-powered locomotives. Westport, which designs highly acclaimed high-pressure direct-injection natural gas engines, has also been working with Shell to market the fuel to the transportation industry and partnered with Caterpillar to incorporate its technology into that company's LNG products.
The Foolish bottom line
Operators of buses and trash trucks have already seen the light. It's not surprising that those charged with running trucks and trains now see it too. There are obstacles, and it's still early — according to Citigroup, only 3% of all natural gas globally is used in transportation. But the potential is enormous.
Proponents remind us that it took more than four decades before heavy-duty truck operators replaced gasoline with diesel. They insist this transformation will take place, and much faster.
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free.