The past few months have not been kind to Westport Innovations (Nasdaq: WPRT) shareholders. The company develops the technology for engines to run on natural gas, and it typically partners with manufacturers to produce the engines.
When Cummins (NYSE: CMI) announced earlier this year that it would be developing its own 15-liter natural gas engine for long-haul trucks, the market started to worry about Westport. Sure, the company has the engineering know-how and patents to produce one kind of natural-gas engine. But since it has to rely on partners to do the actual manufacturing of the engines, who's to say that someone won't develop their own technology and cut Westport out of the equation?
As I've said, I think investors have overreacted to the Cummins announcement. Its engine won't have Westport's high-pressure direct-injection system, or HPDI, which provides the type of power most long-haul truckers need, especially when crossing the Rockies.
New partnership announcement
While the market is busy trying to figure out whether Cummins really does represent a threat, Westport just gave folks another reason to be bullish on its long-term prospects: a new partnership agreement with Caterpillar (NYSE: CAT).
The two companies will work together to develop natural-gas engines for Caterpillar's fleet of off-road vehicles. Westport will provide the engineering technology and some key components, while Caterpillar will provide the capital to fund the development program. The first focus of the partnership will be Caterpillar's fleet of mining trucks and locomotives, but it could eventually broaden to include the full suite of off-road vehicles.
The demand for such products is coming from Caterpillar clients, according to Steve Fisher, Caterpillar's vice president of large power systems: "Many of our customers are asking for natural-gas-powered equipment in order to reap the financial and environmental benefits. The program positions Caterpillar to become the first manufacturer to bring Westport HPDI technology to the high-horsepower off-road market."
The market is clearly taking kindly to the announcement, as Westport shares are up nearly 20% as of this writing.
Just one step in a larger movement
These recent announcements regarding natural gas are just a few examples of a larger shift taking place in the energy sector. During a recent press conference, Westport CEO David Demers said, "Our customers will save many millions of dollars over the life of each engine."
The graph below shows what Demers is talking about, with the price for a gallon gas equivalent of natural gas being significantly cheaper than diesel fuel over the next 30 years.
Source: U.S. Energy Information Administration, Annual Energy Outlook 2011. Natural gas assumes 7.9 gallons per 1,000 cubic feet.
"In many countries around the world, newly proven supplies of locally available natural gas offer significant economic development opportunities as well as significant environmental benefits," said Demers. Without a doubt, there is surely potential for this new form of energy to provide the kick-start our global economy is seeking.
The building out of a natural-gas infrastructure could create millions of new jobs. Clean Energy Fuels (Nasdaq: CLNE) is a perfect example of this potential, as the company is spending billions of dollars to create America's Natural Gas Highway.
A word of caution
But before jumping up and down and proclaiming that all of our country's energy and economic problems have been solved, one needs to get the whole story. First of all, though we have natural gas coming out of our ears, newly found deposits don't represent a sustainable, renewable alternative. Instead, we will one day deplete our natural-gas resources the same way we have with oil for the past century.
Furthermore, there are serious environmental concerns with the fracking process of extracting natural gas. Some companies -- like fracking wastewater specialist Heckmann (NYSE: HEK) -- stand to benefit from the development of techniques that reduce environmental impact. But it's too early in the game to tell how the natural-gas conversion will play out.
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