As the most advanced designer of engines powered by natural gas, Westport Innovations (NASDAQ:WPRT) is a small company with a big goal: to lead the world in transitioning away from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The company has a price tag large enough to match its ambition, and will need to grow revenue quickly in order to justify sky-high expectations. To help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has released a premium research report breaking down the company's opportunities, competitive advantages, and risks. Today, you can get a free sneak peek at the report, detailing the opportunity ahead of Westport Innovations. Enjoy!
Westport Innovations was founded in 1995 to design engines powered by alternative fuels like compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen, and biofuels like landfill gas. At the time, the rationale behind alternative fuel engines was that increasingly strict emissions standards for vehicles would create demand for cleaner-burning fuels, since gaseous hydrocarbons like methane produce far less harmful particulate matter and fewer greenhouse gas emissions than diesel engines. And indeed, Westport's cleaner engines have allowed the company to gain headway while traditional diesel systems have had to employ expensive cleaning solutions like selective catalytic reduction, or face stiff fines from regulators.
However, in the intervening years natural gas has become popular for a more economic reason. With the advent of hydraulic fracturing, a technique to drill shale formations for hydrocarbon reserves previously thought economically unrecoverable, North America finds itself with bountiful and cheap supplies of natural gas, enough to last at least a century. With the cost of oil on a slow but steady rise upward, converting to natural gas solutions is not only better for the environment, but more and more companies are finding that natural gas conversion is also better for the bottom line.
The natural gas advantage
The primary factor driving natural gas engine adoption is the dramatic cost advantage natural gas enjoys over diesel or gasoline, particularly in the United States:
Gasoline prices at the pump and LNG prices at an import terminal are not quite comparable, as LNG will still incur some additional costs as it makes its way inland to end users. Skeptics might also note that natural gas is more difficult to transport and store. Gasoline is a liquid at room temperature, making it relatively energy-dense, whereas natural gas either must be compressed, using large tanks with thick walls to hold the pressure, or liquefied, using cooling systems to keep the fuel at -260 degrees Fahrenheit. Both solutions require more expensive transportation and storage systems than gasoline or diesel. Further confounding a direct comparison, higher taxes are typically levied on gasoline than natural gas.
That is all very true. What's more, with many energy companies currently spending more to produce natural gas than they can sell it for, the cost of natural gas must rise. The adoption of natural gas powered engines will further accelerate rising natural gas prices by providing added demand.
And yet, as the above chart makes clear, the price advantage natural gas enjoys is so vast that natural gas prices can rise faster than oil prices for many years, and still offer huge fuel savings to those who convert. Indeed, the International Energy Agency baseline projection is that by 2035, American natural gas will reach a price of $8.20 per MMBTU, while average import prices into Europe and Japan reach $12.20 and $14.20 per MMBTU, respectively.
These prices would offer steep discounts to traditional fuels even if the price of oil doesn't rise at all over the next 20 years. As technology emerges to better facilitate the transportation, storage, and exploitation of an energy source that is not only much cheaper, but also much cleaner, natural gas adoption seems inevitable.
Westport is the first mover in a fast-growing and potentially massive market. As an engineering and design provider, it is a capital-light business that has nonetheless managed to achieve a significant presence in virtually every market segment for natural gas engines with its best-in-class technologies and components. With a respected brand, established relationships with the biggest OEMs, and the largest patent portfolio of any natural gas engine company, Westport Innovations is perfectly positioned to capitalize on the natural gas revolution and generate multi-bagger returns for investors.