We've been hearing about natural gas as an alternative to oil for quite a while now but it isn't until recently that it's become a viable alternative. Like a lot of major industry shifts, it's been a chicken and egg scenario. Trucking fleets and consumers won't buy natural gas vehicles if the fuel isn't available, and the infrastructure won't be available until there's a fleet to buy natural gas.
So, for a few years Clean Energy Fuels (NASDAQ:CLNE) has slowly built a network of buses and local truck fleets that run on natural gas, demonstrating lower costs and reliable service. But now the company is setting its sights on a much larger prize, a nationwide natural gas highway.
Infrastructure build-out continues
Clean Energy Fuels is building what it calls America's Natural Gas Highway in an effort to move liquefied natural gas (LNG) and compressed natural gas (CNG) forward. Through October the company has built 48 LNG stations, primarily at Flying J stations around the country, in an effort to build over 100 stations to serve the heavy duty trucking market. By the middle of next year it thinks there will be enough infrastructure to support this new market.
To serve this growing market, Clean Energy Fuels just signed a deal with GE (NYSE:GE) to build two ecomagination MicroLNG plants that GE will finance for up to $200 million. These two plants will add 500,000 gallons of LNG capacity with the ability to expand to 1-million gallons each, adding to the 260,000 gallons of capacity the company currently has.
GE and Chesapeake Energy (NYSE:CHK) have a partnership that will install 250 CNG stations around the country as well, adding to the more than 300 CNG stations for Clean Energy Fuels. Chesapeake is even working on a home fueling "appliance" with the help of GE and Whirlpool (NYSE:WHR). Imagine fueling your car before you leave for working the morning.
Vehicles are on their way
All of this build-out is meaningless for Clean Energy Fuels, GE, Chesapeake, and others unless there are vehicles on the road that use their fuel. So this is the next big step.
As I mentioned above, the heavy duty Cummins Westport engine is coming to the market next year and will be the big driver of future domestic LNG demand. According to Clean Energy Fuels, LNG is currently priced up to $1.50 cheaper than gasoline or diesel -- for trucking fleets that becomes a huge cost savings tool.
The passenger market is less likely to be a driver of LNG or CNG demand in the near future, but we're seeing some progress. Honda (NYSE:HMC) makes a natural gas version of the Civic. GM (NYSE:GM) offers Chevy Silverado and GMC Sierra in CNG options as well.
If the trucking fleet makes a quick conversion to natural gas in 2013 you can expect a steady trickle of passenger vehicles to follow. Fueling stations are clearly influencing adoption rates, and if natural gas remains a significantly less expensive fuel source, then there's a big incentive to make the switch.
Foolish bottom line
The two pure-plays on natural gas fuel are Clean Energy Fuels and Westport Innovations, and both companies have a lot of upside. Clean Energy Fuels recently had a $16.3 million loss in the third quarter, but this was due in large part to continued investment in infrastructure. It's more important to look at a 24% increase in gallons delivered, which will eventually drive the company forward.
Westport is a riskier play on the technology behind natural gas engines. The company just reported a $32.5 million loss; while there's a lot of upside if adoption rates pick up, who's to say engine makers won't develop CNG and LNG technology on their own.