2014 was supposed to be a big year for natural gas vehicles, or NGVs, in North America. After years of development, Westport Innovations (NASDAQ:WPRT) and engine maker Cummins (NYSE:CMI) had finally released a heavy-duty NG engine for heavy trucking, and with diesel prices pushing $4, the $1.50-per-gallon price savings for natural gas was expected to drive significant demand. Factor in an improving economy that was finally leading to a rebound in heavy truck sales, and hopes were high at the beginning of the year.
However, the same development that was making cheap natural gas a viable and plentiful fuel has been a big driver behind the collapse of oil prices: the American shale revolution. In recent years, the U.S. has become the world's energy superpower again, and now produces more oil than Saudi Arabia, and more natural gas than Russia.
Here's how sharply oil production has increased in recent years:
With a weak economy in Europe, Russia in serious economic peril, and a greatly reduced rate of growth in China, demand for oil just isn't growing enough to soak up all this new oil being produced. OPEC isn't cutting production, fighting to maintain its share of the global market. U.S. producers, however, are beginning to announce major budget cuts for 2015 in an effort to reduce costs and slow production growth, but it will take months for those capex investment cuts to actually have an impact on current production levels.
The result? Oil prices lower than at any time in the past five years, and no clear way to predict when that's going to change.
Impact on NGV players
Many of the largest players, like Cummins, and essentially all of the vehicle builders, are diverse companies with exposure to multiple industries and fuels. However, a handful of companies are significantly exposed to NGVs. And they've all taken a beating:
Westport and Quantum Fuel Systems Technologies (OTC:QTWWQ) are the two companies most exposed to falling NGV sales.
Westport is a key technology maker, with its HPDI, or high pressure, direct-injection technology, key to the viability of NG to replace diesel for heavy trucking. Furthermore, its position as the largest QVM, or Qualified Vehicle Modifier, for Ford Motor Company's F-series trucks and Transit/Transit Connect vans puts the company at the center of supplying both heavy-trucking and light-duty vehicle fleets with NGVs.
Quantum Fuel Systems makes CNG tanks for vehicles of all sizes, using advanced materials in order to construct smaller and lighter tanks -- a major need to address the weight and space concerns that CNG creates. Heavy trucks can't afford to lose capacity for fuel, or take on a heavy tank that reduces the potential payload of a truck. Quantum is helping address this.
However, both companies have seen sales decline over the past year, a major concern considering that both are still spending more money than they are bringing in. The reality is, it's going to take growth for these companies to turn things around.
Fuel and services supplier Clean Energy Fuels (NASDAQ:CLNE) isn't as reliant on new vehicle sales. Don't get me wrong -- new NGVs are the company's source of long-term growth, but its existing customers will continue using their current fleets of NGVs even as gas and diesel prices fall. Besides, natural gas remains cheaper than gas or diesel, if not by the same margin as earlier last year. Even as this plays out, the company continues to grow and expand.
Clean Energy has recently entered into a number of partnerships and business interests that improve its prospects while also broadening its exposure beyond NGVs. The first, an expanded deal with longtime partner Mansfield Energy, will serve the 3-billion-gallon-per-year bulk fuel hauling industry. Mansfield has business relationships with hundreds of independent fuel haulers around the country, and CNG is an ideal fuel source for these operators, which typically return to a base after each shift, and don't make long-haul trips.
Even 10% of this market would more than double the size of Clean Energy's current business, offering a significant source of future growth.
The company's investment in a controlling stake of NG Advantage to serve "beyond the pipeline" industrial customers is a major move to diversify the business. NG Advantage provides CNG to businesses like hospitals and manufacturers that don't have access to a natural gas pipeline. These businesses typically rely on fuel oil, which is similar to diesel in cost and emissions. By switching to cheaper natural gas, these companies can cut energy costs by as much as 40%, while also reducing carbon emissions.
In terms of opportunity, Clean Energy Fuels CEO Andrew Littlefair said, "[I]n New England, we believe there's probably something close to 15 BCF of demand that is not on a pipeline, so a big market for us. New York, the adjacent New York area is probably that size and larger."
The reality is, it's tough to predict what will happen in 2015. It seems likely that cheap oil prices will further impact NGV sales, but even that isn't certain, as NG remains a cheaper fuel than diesel or gas. For investors interested in the industry, 2014's big sell-off may make it look like a great time to make a big investment, but too many questions remain unanswered. Considering that none of the players have yet to demonstrate consistent profitability at current business levels, it's probably wise to keep your investments in this space small relative to the size of your portfolio.
Looking further out, it's likely that oil prices will begin climbing at some point in 2015, and they could go up just as quickly as they fell, but again, it's just not clear what -- if any -- impact the fall in oil prices will have on NGV sales. In the interim, earnings season is upon us, so we will start getting more information soon. Stay tuned here for updates.