"Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy."
-- Warren Buffett, 2013 letter to Berkshire Hathaway shareholders
According to the company's most recent fact sheet, Berkshire Hathaway subsidiary BNSF Railways ships enough coal every year to power 10% of America's houses, and enough crude oil to fill the gas tanks of nearly 650,000 cars every day. Transporting energy is pretty important to BNSF, and BNSF is pretty important to Berkshire, having generated some $3.8 billion in net income in 2013.
At the same time, there is an increased amount of activity around the benefits of natural gas as a cheaper, cleaner-burning alternative to diesel, and BNSF is working aggressively with Caterpillar (NYSE:CAT) and General Electric (NYSE:GE) to develop natural gas-powered locomotives. Canadian natural gas engine expert Westport Innovations (NASDAQ:WPRT) is working with Canadian National Railways (NYSE:CNI) and Caterpillar both, with CN already ordering several of the company's LNG tenders. And not to be left out of the action, Westport's partner in engines for on-road vehicles -- Cummins (NYSE:CMI) -- just announced that its new QSK95 and QSK120 engines will be coming in natural gas-powered versions as well.
Let's look at what's happening with natural gas for rail and other transportation. There are huge implications for several of these companies.
4 billion reasons natural gas makes sense for BNSF
BNSF spent $4.5 billion on almost 1.5 billion gallons of fuel in 2013, making it one of the largest buyers, if not the largest buyer, of diesel in North America. Shifting to natural gas as a fuel could save the company hundreds of millions of dollars every year, but there are a number of technical and regulatory challenges that must be overcome before any large-scale adoption happens. The company first announced that it was going to test natural gas locomotives about a year ago, and that it would be working with both GE and Caterpillar's EMD unit, starting testing in late 2013.
According to this article from Progressive Railroading, BNSF is focusing on not just engine technology, but tenders to supply fuel, and -- maybe most importantly -- refueling infrastructure and regulatory approval. All of these things must come together for the cost-savings and reduced pollution benefits of natural gas to be possible. So far, GE's testing has only been at a GE manufacturing facility, and Caterpillar at a testing facility in Kansas.
Westport, Caterpillar addressing technology
Caterpillar and Westport have been working together to develop natural gas-powered locomotives since 2012. Westport's HPDI technology, which allows diesel-designed engines to run primarily on natural gas, will get its first "real" test in rail this year, when Canadian National and EMD demonstrate the technology. LNG tenders to supply are just as important as the engine technology, and Westport is also leading this charge. CN ordered four LNG tenders last year, and it is expected at all four -- which could cost $1 million each -- will have been delivered by now. Westport's LNG tenders are capable of supplying two locomotives at a time, and supplying a larger amount of fuel than a typical diesel locomotive carries. Increasing range would help reduce the cost of refueling infrastructure, making LNG more viable and cost-effective.
GE "all-in" on natural gas
General Electric's involvement in natural gas extends beyond locomotives. The company is also working with Clean Energy Fuels in a number of ways, including offering financing for trucking companies to acquire natural gas-powered tractor-trailers, and agreeing to co-finance and build LNG production facilities in the coming years. Additionally, GE's energy unit is a key supplier to the natural gas production business, as well as one of the primary manufacturers of the gas turbines that utility companies use to make electricity from natural gas. As it says in the company's annual report, GE can participate in every part of the natural gas value chain.
Considering that almost half of the $103 billion in revenue that GE's industrial business did last year came from its Power & Water, Oil & Gas, and Energy Management segments, and it's easy to understand why GE is investing big-time to participate in the natural gas boom.
Cummins the dark hedgehog?
Cummins' new QSK95 and 120 engines -- codenamed "Hedgehog" -- are its first entries into the high-horsepower engines that can be used in locomotives. However, the company's extensive expertise in developing diesel engines with substantial emissions reductions while maintaining performance and reliability is unmatched. These engines -- much as with GE and Caterpillar's engines -- have applications far beyond locomotives, including marine, mining, power generation, and offshore oil production. Initially shipping only diesel versions, Cummins announced that they were designed to also run on natural gas. This is a divergence from what Caterpillar and GE are doing -- adapting new technology to existing engine platforms -- to bring natural gas to the high-horsepower engine market.
Reducing carbon footprint, costs: Who are the winners?
The cost-savings and environmental benefits of natural gas could be massive for BNSF and Canadian National Railways, as well as their peers. However, it will take a few years for this story to play out and have an impact on their bottom lines. There are two companies that seem positioned to benefit in the interim, though: Cummins and Westport.
Westport Innovations is easily the smallest of the companies involved in this, and with the most upside. Having disappointed investors for the past several years, the next three could see the company explode as rail and on-road shipping begins shifting to natural gas. Cummins' new engines are in many ways transformational for the company, as it will open up markets it never played in before. Could its low-emissions legacy give it a leg up? Based on the company's success in its other engine categories, it seems it has the most to gain, while Caterpillar may have the most to lose.