With natural gas prices jumping over $4.40/btu, not all stocks will benefit from the gains. The first two articles focused on the two sectors that will benefit from higher prices: oil services and exploration stocks. On the flip side are the manufacturers and companies building transformational products to benefit from lower natural gas prices. These firms include Clean Energy Fuels (NASDAQ:CLNE), Cheniere Energy (NYSEMKT:LNG), and Westport Innovations (NASDAQ:WPRT).
The problem these stocks face is that the products being built are taking until 2014, 2015, or even beyond to reach customers. Will natural gas prices remain low until then for these stocks to take advantage of these extremely low prices? The latest EIA inventory report for the period ending Dec. 12 showed a substantial decline of 285 Bcf, bringing the inventory levels to over 7% below the five-year average.
The biggest risk to these revolutionary business plans would be substantially higher natural gas prices, which most investors have probably already assumed to be an unlikely scenario. Maybe a double in prices wouldn't kill the products, but it could have a dramatic impact on the stock prices. While investors should clearly be excited about the prospect of using natural gas as a cleaner transportation fuel or as a cheaper alternative to diesel, the associated stocks won't likely be spared from the volatility of the commodity.
Building America's Natural Gas Highway
Clean Energy Fuels has gone virtually nowhere in the last couple of years even with low natural gas prices. The company is building out a network of natural gas stations along the highway system to encourage long-haul trucks to convert to the cleaner burning and cheaper fuel. The highway network has been waiting on the 12L engine from a Westport joint venture that finally hit production in Aug. In the meantime, Clean Energy spent the last couple of years focused on the CNG market for airport vehicles, transit buses, and taxis.
The biggest frustration for investors is that the revolutionary business is only generating pedestrian growth rates. In the third quarter, gallons delivered only increased 17% over last year. Definitely not enough growth to get excited about a stock with a history of losses. The future is clearly the heavy-duty, long-haul trucks that consume 25 billion gallons of diesel per year, or over four times the other industries combined. Clean Energy Fuels might be on the verge of a significant run, but a spike in natural gas prices could crush the momentum building for the transition to the cleaner fuel. While the company is accurate that a sudden 50% jump in natural gas would only have a minor impact on CNG and LNG prices, it would potentially crush the shift to natural gas with customers pulling back on fears of even higher prices.
Cheniere Energy has seen its stock soar over the last couple of years as it leads the plans to export the abundant natural gas to Asian customers. The company is working on building LNG export terminals in Louisiana and Texas. The Sabine Pass LNG terminal in LA is expected to start exporting liquefied natural gas in 2015, though the whole facility won't be completed until possibly 2019.
While in the long term the concept faces natural gas pricing issues, the company should benefit from contracts that last up to 20 years. Investors recently pushed the stock up to $45 from $28 back in Aug. Due to high shipping costs, the delivered price to Asian customers is nearly double the price of domestic natural gas, making it not economically feasible if domestic natural gas prices were to normalize on a global market. Cheniere has gained significantly considering the risks to natural gas prices in the short term.
Building natural gas engines
Westport builds engines for commercial vehicles to utilize natural gas as a fuel source. The company has invested substantial capital into building engines for a multitude of industries, including heavy-duty and refuse trucks, and is working on railroads and ships. All of this spending hasn't set well with investors that expected the innovator in natural gas fuel technology to be closer to turning a profit by now.
The stock recently hit near a three-year low with more losses mounting for next year, not to mention the introduction of updated technology, which has caused fears that customers might delay purchases. Westport rolled out the next generation of high-pressure direction injection technology platform called HPDI 2.0. Considering the platform promises better performance, emissions, efficiency, and ultimately a lower cost, customers will naturally consider the opportunity and time to include this updated technology in their investment decision.
With natural gas inventories plunging, the companies building business plans to benefit from lower natural gas prices could be at risk. Investors need to remember that abundant supplies in the ground aren't the same as natural gas inventories available to sell. The exploration and production firms need natural gas prices high enough to justify drilling. The reduction in drilling for natural gas is ultimately what could cause a dramatic spike in the commodity.
While the abundant resource might prevent an extended period of higher prices, Clean Energy Fuels, Westport Innovations, and Cheniere Energy are at risk if it were to occur. Though clearly all three stocks had different paths the last couple of years, individual prospects won't improve from higher prices. Any weakness might be a wonderful buying opportunity with higher prices encouraging more drilling and ultimately securing the future of these revolutionary companies. Investors just need to understand that short-term weakness could occur despite the long-term potential.
Mark Holder has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels and Westport Innovations. The Motley Fool owns shares of Westport Innovations. 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.