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Are These 2 Nat-Gas Companies Becoming Frenemies?

By Brian Stoffel - Updated Apr 7, 2017 at 6:10PM

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Cummins announces the development of a 15-liter natural-gas engine.

Developments in the natural-gas realm have been unfolding at an increasingly dizzying pace -- especially when it comes to companies that wish to profit from the natural-gas revolution by manufacturing vehicles that run on the stuff.

In the center of this storm are Westport Innovations (Nasdaq: WPRT) and Cummins (NYSE: CMI). The two have been locked into a joint venture, aptly named Cummins Westport, since 2001. Essentially, Westport designs the engines, and Cummins manufactures them.

The joint venture was chugging along quite well without any major events, but since 2012 began, we've been inundated with news. None has been bigger than Cummins' recent announcement that it alone will be designing and manufacturing, without help from Westport, a 15-liter natural-gas engine, available in 2014.

But first, a little background knowledge
The benefits of a conversion to natural gas for our nation's trucking system are pretty clear. Though the costs of conversion may be initially high, they are expected to pay off quite nicely over the long run.

The following graph captures, much more accurately than my words can, just how excellent the value proposition of natural gas looks to be. Take a look at the expected divergence between the price of a gallon of standard gasoline, diesel, and the natural gas equivalent over the next few decades.

Source: U.S. Energy Information Administration, Annual Energy Outlook 2011. Natural gas assumes 7.9 gallons per 1,000 cubic feet.

The year started out with a major announcement by truck maker Navistar (NYSE: NAV). CEO Dan Ustian appeared on CNBC with Clean Energy Solutions (Nasdaq: CLNE) board member T. Boone Pickens to announce a partnership that would accelerate the trucking industry's conversion to natural gas.

Though no specific details emerged, it appeared at the time that the two were going to try to manufacture their own natural-gas engines. This was enough to cause me to pause from adding more shares of Westport to my portfolio. But no later had the story been published than it was announced that Navistar would be getting its engines from Cummins Westport.

Cummins Westport followed up this good news by announcing that the two sides had reworked their agreement. In essence, the joint venture would be in place for at least another 10 years. The pair would come out with a new 12-liter engine in 2013 and a 15-liter engine in 2014, and the partnership's focus would now be concentrated in North America.

Then we had the much-anticipated vote on the NAT GAS Act in Congress. Passage would have sped the conversion up; it would have offered tax incentives to companies buying natural-gas vehicles. Alas, after a vote earlier this month, it doesn't look as if passage is in the near future. But even without the government's help, it's hard to imagine businesses would overlook the value natural-gas engines could offer.

Are we friends, enemies, or ... frenemies?
Which brings us to last week's announcement that Cummins was going on its own to develop a 15-liter engine. If that sounds confusing to you, as the joint venture announced the same project, you aren't alone. The 15-liter engine could be lucrative, as it could woo the massive long-haul trucking industry into natural gas.

The key difference between the two offerings emerges with a little digging. The Westport engines will be built with high-pressure direct injection (HPDI) technology, whereas Cummins' engine will have spark-ignition (SI) technology.

The major difference between these technologies emerges when dealing with trucks carrying heavy loads, especially when those loads must maneuver steep ascents on the roads, as is common in the Appalachians and Rockies. HPDI technology offers the same amount of torque as standard diesel engines, whereas SI's torque capabilities fall below diesel standards as the loads become heavier and the inclines become steeper.

So it's a little curious to see Cummins headed in this direction. It may simply be that it sees a niche for providing this type of engine and an opportunity to create extra earnings.

How to approach this tenuous relationship
When it comes to Cummins' 15-liter engine, I'm not too worried that it represents a serious threat to Westport or the joint venture. It may, however, be a sign of things to come. The greatest weakness of Westport is that it's not vertically integrated -- it almost solely focuses on design. As long as it designs the best, most effective engines, it holds the cards.

But if a competitor with manufacturing capabilities were to out-design Westport, there would be significant fallout. I'm confident enough to hold my Westport shares and my bullish CAPScall on my All-Star profile for now, but I'll be keeping a close eye on the situation.

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Fool contributor Brian Stoffel owns shares of Westport Innovations. You can follow him on Twitterr, where he goes by TMFStoffel. Motley Fool newsletter services have recommended buying shares of Clean Energy Fuels, Westport Innovations, and Cummins. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Stocks Mentioned

Cummins Inc. Stock Quote
Cummins Inc.
CMI
$220.02 (0.22%) $0.48
Westport Fuel Systems Inc. Stock Quote
Westport Fuel Systems Inc.
WPRT
$1.32 (0.76%) $0.01
Navistar International Corporation Stock Quote
Navistar International Corporation
NAV
Clean Energy Fuels Corp. Stock Quote
Clean Energy Fuels Corp.
CLNE
$7.57 (19.78%) $1.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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