Solving the Natural Gas Industry Triangle
Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many people often question why natural gas (NG) has not become a popular fueling option in the U.S., despite its favorable economics. The huge gap between gasoline prices and natural gas prices automatically makes natural gas a cheaper alternative. The actual answer lies in the fact that the NG industry has become a victim of the "chicken or egg" issue. Which will come first: NG vehichles, or the fueling stations needed to power them?
A "chicken or egg" issue
Before making any comment on the NG players, we need to understand the NG industry dynamics. Three main groups have an important role to play in this industry: 1) Auto original equipment manufacturers (OEMs), 2) fuel providers, and 3) the final users of the NG-driven vehicles.
The dilemma of "chicken or egg" in this industry tells us that not a single player out of these three is willing to take the first step to bring a change in the industry. The giant fuel providers like Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) have hardly contributed to this industry. They believe that given that the final consumer has hardly embraced NG driven vehicles, investing in NG will not be a profitable venture. On the other hand, the final user is not buying NG driven vehicles due to the lack of NG fueling infrastructure. No one wants to end up in the middle of a highway with an empty fuel. The third group, the auto OEMs, is not taking serious interest in this industry due to a lack of demand from the final user.
Therefore, we need to evaluate the current triangle of these three players in the industry. It is interesting to note that there are a few exceptions to the ‘chicken or egg’ issue.
Clean Energy Fuel (NASDAQ: CLNE): This company has taken a bold step by actively developing the NG fueling infrastructure. The company has received $450 million worth of new investments that it plans to direct towards this project. One of its important lenders is Chesapeake Energy (NYSE: CHK). Tim Boone’s Chesapeake has also shown keen interest in the NG industry. Recently, in collaboration with General Electric (NYSE: GE), the company launched a ‘CNG in a box’ system, which can compress NG from a pipeline into CNG onsite at a traditional filling station.
Coming back to Clean Energy Fuel, the company plans to build 150 NG fueling stations in the U.S. by the end of 2013. The company has already built 70 stations this year (according to the set target) and is well on its way to construct another 80 next year.
Another milestone achieved by the company is its agreement with GE. According to the agreement, CLNE will buy GE's technology that will be used in liquefying natural gas to supply to its filling stations. GE has agreed to lend CLNE $200 million to buy two GE-made plants equipped with the afore-mentioned technology. MicroLNG, the name of the technology, is a small modular system that will help to lower the temperature to -260 degrees Fahrenheit in order to liquefy the gas.
Clean Energy has strategically placed most of its LNG stations near truck stops of Pilot Flying J, the largest truck-stop operator in North America. In this way, not only will Clean Energy be able to benefit from the existing network of Pilot Flying but will also be able to gain competitive advantage over any other competitor in the long-run.
Westport Innovations (NASDAQ: WPRT): Westport is another NG stock that has not made a single cent of profit since its inception, just like Clean Energy Fuel. However, the future for this company is extremely bright. This company is one of the very engine players that have taken a serious interest in the NG industry. In fact, it is the only engine technology provider that is a pure-play on NG (100% exposure to NG).
Westport has established partnerships with most of the major OEMs operating in the United States. In the light-duty category, the company is working with Ford (NYSE: F) to produce engines for F-series trucks. Recently, Westport also signed an agreement with General Motors (NYSE: GM) to develop advanced engineering technology for engines in the light-duty trucks category. Further, Westport provides natural gas engines to Volvo's V7 wagons. This allows Westport to reach the European market as Volvo has 16% market share in Sweden and 1.5% in Europe.
The company is also increasing its presence in the heavy-duty truck engine market. A joint venture of Westport and Cummins (NYSE: CMI), a US-based truck engine manufacturer, serves the medium and heavy-duty truck market. Also, Westport's 15-L High Pressure Direct Injection (HPDI) engines are sold in North America as Westport-branded LNG option for Kenworth and Peterbilt heavy trucks. Kenworth and Peterbilt are brand names through which Paccar (NASDAQ: PCAR), a US-based truck manufacturer, sells its trucks in the US market.
Westport, through alliance with Weichai Power, one of the major suppliers of natural gas engines in China, has also penetrated the Chinese truck market. According to ACT Research estimates, China is expected to produce 1.3 million trucks in 2013 which is much larger than North America's current production rate of 323,000 trucks per annum.
Both Clean Energy and Westport are poised to benefit from an increased NG adoption rate. With, the NG prices below $3.5 and the recent rally in the WTI Crude oil prices (crossed the $90 barrier), the NG remains a very attractive option for the final users that are waiting for companies like Clean Energy and Westport to provide them with adequate infrastructure and a wide variety of NG vehicles to conveniently switch to NG.
AnalystX has no position in any stocks mentioned. The Motley Fool recommends Chevron, Clean Energy Fuels, Cummins, Ford, General Motors Company, Paccar, and Westport Innovations. The Motley Fool owns shares of Clean Energy Fuels, Cummins, ExxonMobil, Ford, General Electric Company, Paccar, and Westport Innovations and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!