Over the past week, shares of natural gas engine designer Westport Innovations's (WPRT +3.65%) have jumped by more than 20%. This small, forward-thinking company is known to be a very volatile stock: It's still in high-growth mode and hasn't yet turned a profit, so the stock price is based more on expectations and emotions than earnings. The company's future depends on more widespread adoption of the engines it designs and builds critical components and systems for, most of which are powered primarily by natural gas, a cleaner, cheaper substitute for gasoline or diesel. So what happened over the past week that got investors so bullish on Westport Innovation's future?
One critical factor behind Westport's rising stock price has been the depressed price of natural gas. The single most important advantage Westport has is the dramatic price difference between gasoline or diesel and natural gas, making it much more economic to fuel your vehicle with natural gas. While a natural gas engine can add $40,000 or more to the sticker price of a new Class 8 truck, Westport customers have been finding that the fuel savings pay for the up-front investment in as little as 14 months. The cheaper natural gas is compared to diesel, the more attractive Westport's value proposition becomes. So when the U.S. Energy Information Administration announced Thursday that natural gas inventories grew 8% faster than expected, natural gas prices tumbled by 4%. That continues a trend of expanding supply and lower prices that just keeps making Westport's engines more attractive.
Another important development last week was the announcement that Trillium CNG, a division of Integrys Energy Group (NYSE: TEG), would build 101 new compressed natural gas (CNG) refueling stations across the country by 2016. This would expand the existing infrastructure of publicly available CNG refueling stations by nearly 20%. This is good news for Westport because many of Westport's products run on CNG, including its bi-fuel WiNG system for light-duty Ford pickup trucks, as well as the medium-duty ISL G and heavy-duty ISX12 G engines it produces through Cummins Westport Incorporated, its manufacturing joint-venture with independent engine maker Cummins (CMI 0.49%). Users of the ISL G and ISX12 G engines include long-haul truck manufacturers like PACCAR (PCAR +0.23%), Volvo, and Daimler. Freight trucking is a critical growth industry for natural gas engines, because the long miles and heavy loads that freight trucks endure relative to passenger vehicles make them especially sensitive to fuel costs.
One of the major reservations that trucking companies have about investing in natural gas-powered trucks is that the infrastructure to refuel their vehicles might not be available on every route a trucker might want to run, limiting a company's ability to meet its clients transportation needs efficiently. Each new natural gas station helps to alleviate that fear, and as more and more energy companies commit to natural gas infrastructure, the more the economics of natural gas compel trucking companies to convert their fleets to natural gas.
Finally, on Tuesday of last week, President Obama delivered a speech declaring his intention to use executive action to combat climate change, particularly carbon emissions. Natural gas is a much cleaner-burning fuel than gasoline or diesel -- indeed, the shift from coal-fired power plants to natural gas-fired power plants is responsible for much of the reduction in U.S. carbon emissions over the past five years. In his speech, Obama mostly ignored emissions from vehicles and instead outlined a policy primarily focused on electrical generation, building, and infrastructure efficiency, and adapting to more severe weather. These policies, if enacted, won't do much for Westport's engines (though Cummins Westport does provide some natural gas-powered electrical generation systems), the White House estimates that about 28% of American carbon emissions come from transportation, so any serious effort to reduce carbon emissions must eventually extend to controlling emissions from vehicles.
As a first step, Obama's plan envisions raising fuel efficiency standards after 2018 for heavy-duty vehicles. If such a policy had teeth that made high-emissions vehicles more expensive to operate, through fines or the requirement to employ advanced emissions control technology, the economics for heavy-duty vehicle operators to make the transition to natural gas will become even more compelling.
