When oil and gas companies need to power their operations, they're starting to turn to small turbine manufacturer Capstone Turbine (Nasdaq: CPST), which is growing into an important supplier that can offer energy-efficient heat and power.

Buildings that use microturbines can use the energy they create in multiple ways. In the Four Seasons Hotel in Philadelphia, Capstone microturbines are used to generate power for the building, and heat given off by the turbines is used to heat water for hotel operations. This efficiency has led to some big signings in just the past few months.

  • BPC Engineering ordered 60 C30 microturbines for a pipeline in Kazakhstan.
  • A major oil and gas producer ordered 22 C65 microturbines for the Eagle Ford shale play in South Texas. This is the second order for the mystery customer, and repeat business is always a welcome sign.
  • The marine market has also taken notice. Capstone will be providing two C30 liquid natural gas turbines for a new "green ship."

Capstone has identified the Eagle Ford shale play as a major growth engine for the company. As companies like Petrohawk (NYSE: HK) and EOG Resources (NYSE: EOG) expand operations there, they need power sources at remote well sites. Capstone's pumps and services business has sold 20 MW of turbines in less than a year in the shale gas space, so Capstone should continue to grow as shale operations grow.

Margins matter
The problem right now is that Capstone doesn't have a profitable established business like Cummins (NYSE: CMI), which makes similar generating engines. Revenue may have been up 51.1% last quarter, to $24.2 million, but gross margins were a tiny 3.8%. No business is going to be able to operate profitably with margins like that.

To make matters worse, there was just $27.5 million in cash on the balance sheet to end last quarter, and the company lost $8.1 million in the quarter. So, as much as I like Capstone's growth and intriguing place in the market, the company is going to have to pick up margins to become a buy in my mind.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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