As 2013 closed, multiple announcements appeared regarding the expanded use of natural gas as a vehicle fuel. Colorado state and local governments, a convenience-store chain in Kansas, and the Clinton County Solid Waste Authority in Pennsylvania all recently announced plans to expand the use and accessibility of natural gas for cars and trucks. These were the latest in an ongoing string of announcements regarding a shift away from diesel and to natural gas. Here are three suggestions how investors might profit from this trend.
Bigger, better natural gas engines
Westport Innovations (NASDAQ:WPRT) designs and builds a variety of natural gas burning engines. These range from Volvo cars to Peterbuilt heavy trucks to railroad locomotives and more. Based in Canada, Westport sells engines across North America, Europe, and China.
Right now, Westport sells engines in two joint ventures: one with Cummins of the United States, the other with Weichai of China. These two ventures produce profits for Westport. A good thing, too, since the other segments of Westport's business don't. Overall, while revenue continues climbing, Westport continues reporting losses.
The two big stories for Westport are its sales of heavy-duty truck engines, those designed for interstate travel, and China. Practically every heavy-truck manufacturer offers Westport or Cummins-Westport engines for all sizes of trucks. Engine sales from its Cummins joint venture consistently grow, with 2013 sales on track for a 25% gain over 2012.
Growing even faster are engine sales in China. Sales exploded, rising from 22,000 engines in 2012 to more than 30,000 in the first nine months of 2013. More importantly, natural gas fueling stations have grown at a compound annual growth rate of 40%. This infrastructure build-out should facilitate continued rapid sales growth.
American fuel for American vehicles
Trying to emulate China's expanding network of natural gas fueling stations, Clean Energy Fuels (NASDAQ:CLNE) operates natural gas fueling stations for fleet vehicles and interstate truckers. At the moment, Clean Energy's biggest market seems to be fleet vehicles, such as refuse trucks. According to the Clean Energy website, a refuse truck can save $15,000 a year by switching from diesel fuel to natural gas. The likes of Republic Services and Waste Management have steadily purchased more natural-gas-burning trucks to reduce fuel expenses.
Clean Energy's last earnings report and investor presentation point out a number of positive trends. Fuel sales, fueling station openings, and new or expanded contracts all point to a bright future. Revenue generally trended upward, but dipped during the most recent quarter. Alas, the company continues to report losses.
The big prize remains the heavy-truck market. Clean Energy estimates the potential market is 25 billion gallons of fuel a year, 10 times that of all refuse trucks combined. The economics for trucks to use natural gas makes sense, at least, according to Frontliner. However, until the "chicken and egg" problem of enough fueling stations to attract truckers to switch fuels is solved, I see Clean Energy struggling in the heavy-truck market.
"We are in an era of natural gas"
Or so says General Electric (NYSE:GE). Putting its money where its mouth is, GE developed a variety of natural gas related products. These include small-scale liquefied natural gas and compressed natural gas fueling stations, so called "LNG in a Box" and "CNG in a Box" products. The idea is these "in a box" stations are self-contained, easy to use, and inexpensive natural gas fueling stations amenable to rapid and widespread deployment.
One market that could quickly switch from diesel to natural gas is the natural gas and oil exploration industry. Currently, drillers use electricity from diesel generators. Last August, GE received so-called "mobile certification" from the U.S. EPA for its Waukesha line of natural gas burning generators. These generators can use natural gas directly from the well to produce on-site electricity -- an attractive alternative to the practice of "flaring" or just burning off the gas. Devon Energy, for example, selected GE's natural gas generators for its submersible pump operations.
GE Capital provides financing for a variety of natural gas products. For example, GE helped Clean Energy build its fueling stations. Now, GE helps Clean Energy customers finance their new natural gas vehicles. A corporate presentation last April outlined GE Capital's willingness to finance a wide variety of natural gas related purchases.
Final Foolish thoughts
Arguably, the largest problem facing natural gas as a vehicle fuel is the lack of infrastructure. This includes fueling stations and the means of getting gas to those that exist. Right now, the engine technology seems to be there, but the gas supply network doesn't. Clean Energy continues building fueling stations, including one for maritime ships, but these cost a pile of money and the company reports dwindling cash reserves.
GE offers its "LNG or CNG in a Box" fueling station for vehicles, but has only reported one customer (the company did not respond to email requests regarding sales figures). GE also offers financing for natural gas purchases to help move the adaptation process along.
Of the three companies presented here, I would go with GE. Both Westport and Clean Energy offer greater upside potential, but they report losses with no end in sight. GE, with its sheer size and diversity, can afford to develop natural gas technology and finance it. If adaptation of natural gas remains maddeningly slow, GE can withstand the delays better than Westport or Clean Energy.