Why China Is More Important to Your Portfolio Than Ever

"China adds the combined (natural) gas demand of Germany, France, and Belgium in 5 years, equivalent to 27% of global demand growth."
--IEA Medium Term Gas Market Report, St Petersburg International Economic Forum, June 2013

The North American energy boom isn't news, but sometimes as investors we can skip past things that seem "old" and assume that all the "best" money has already been made. However, the quotes above should serve as a reminder that the growth in natural gas isn't exactly slowing down. For investors, that's great news. The two key drivers behind natural gas today? China and transportation. Let's take a closer look at how this opportunity is lifting the prospects for a lot of companies in the natural gas game, including producers like Chesapeake Energy  (NYSE: CHK  ) and services companies like Weatherford International  (NYSE: WFT  ) , not to mention some less traditional plays on energy. 

A little deal that points toward massive opportunity
Back in August, IMW Industries announced a three-year, up to $167 million deal to supply as many as 416 natural gas compressors to China Gas, to be used in up to 310 natural gas stations that the company is building. This was on top of the 124 stations IMW has already supplied with equipment. So while in an industry that generates hundreds of billions of dollars, is this potentially $167 million deal big?

Source: IMW website

IMW is owned by Clean Energy Fuels  (NASDAQ: CLNE  ) , which is already the largest domestic supplier of natural gas for transportation, and is investing heavily in building out a network of natural gas stations to provide refueling for over-the-road shippers as that industry begins to adopt natural gas due to the cost- and emissions- reducing benefits of natural gas versus diesel. But even as domestic adoption ramps up, the expansion in China is happening even more quickly. 

And when one considers that Clean Energy Fuels' trailing revenue is $371 million coming into next weeks' earnings report, this $167 deal at IMW takes on a pretty big picture in terms of its importance. Over three years, we are talking about 15% in incremental revenue, and Clean Energy Fuels isn't even directly targeting China (yet) with its core refueling and fuel services business. 

It's the engines, too
Which is where Westport Innovations  (NASDAQ: WPRT  ) and Power Solutions International  (NASDAQ: PSIX  ) come into play. Westport operates two significant joint ventures: One in the U.S. with partner Cummins, and one in China with Weichai Power. And while the Cummins JV (CWI) is expected to grow strongly over the next few years on the back of expansion in heavy-duty trucking, revenue grew only 12% over the first half of the year. The Weichai JV (WWI), on the other hand, grew more than 144% over the same period. And it's not just percentages that tell the story: In absolute terms, WWI is generating more than double the revenue of CWI; $258 million in the first half of 2013. Lastly, per IEA, the growth rate of natural gas for transportation China is four-times that of the U.S. 

Power Solutions International does most of its business in application-specific engines such as generators and forklifts, and has just begun expanding into engines for transportation, using primarily General Motors engines that the company itself modifies (not through joint ventures) to run natural gas. The approach has netted different results so far. Power Solutions International is a much smaller company, having generated only about $215 million over the past year, while Westport Innovations and its joint ventures combined have generated more than $600 million in engine sales. 

Additionally, Power Solutions International is moderating its growth to remain profitable (on an adjusted basis) while Westport is yet to transition to profitability, and is using both equity and debt to grow as quickly. Westport management has told us that all JVs and business units will be cash-flow positive by the end of 2014.

But it's still about getting natural gas out of the ground
And with gas reserves that could be comparable to the U.S.' according to the IEA, China is investing heavily in getting it out of the ground. Chinese Sinopec invested $1 billion for half-interest in a Oklahoma shale play with Chesapeake Energy, which will operate all activity in the venture. A key part of this venture, and also the one $2.5 billion deal Sinopec inked with Devon Energy is surely to gain access to the technical know-how of American shale producers. And while it's yet to come to fruition, a rumored deal with Weatherford, which has nearly doubled its revenue since 2010, would be another step toward more Chinese adoption of natural gas. 

Final thoughts
The bottom line is a handful of non-Chinese companies are well-positioned to grow significantly as China adopts natural gas at an immense rate. Take a look at your portfolio, and make sure you're positioned to gain from this massive opportunity.

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