Westport & Caterpillar: Natural Gas is Taking Over the World
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Big news today might indicate that natural gas is taking over the world of trucking and equipment engines. Westport Innovations (NASDAQ: WPRT) designs direct injection engine technology to allow vehicles to run on natural gas, and today Westport announced a partnership with equipment giant Caterpillar (NYSE: CAT) that will expand the fast-growing young company's reach even further. By the terms of the deal, Westport will design engines and sell critical components for mining trucks, off-road machines, and locomotives. Caterpillar is funding the venture, and a Caterpillar subsidiary will produce the vehicles. Design cooperation will begin immediately, with commercial production beginning in five years. While investors have known for over a year that Westport and Caterpillar were considering the potential for a joint venture, it is great news nonetheless that these negotiations have resulted in a deal. This a great opportunity and a value driver for both companies.
As the fracking-fueled boom in natural gas pushes prices for the commodity to historic lows, many industries are looking to save fuel costs by switching from diesel to liquefied natural gas. Natural gas is not only much cheaper than oil-derived fuels, it is also much cleaner. Carbon and other emissions are already being taxed heavily in Europe and there's a strong potential for other nations to enact similar regulations. With natural gas engines, Caterpillar can market its new equipment as saving customers' money on fuel while simultaneously greening their businesses, pleasing both regulators and increasingly sustainability-savvy consumers.
Westport is an engineering company that designs and patents the technology to create natural gas engines, and pairs with original equipment manufacturers (OEMs) to produce and market its products. The company has already made inroads in getting its designs into garbage trucks, municipal buses, stationary power generators, forklifts, and other applications for which a wide network of refueling stations is not needed. Westport also has a joint venture with independent engine maker Cummins (NYSE: CMI) to produce natural gas engines for long-haul trucking, and this venture counts among its customers trucking giants like Paccar (NASDAQ: PCAR) and Volvo Trucks. The partnership with Caterpillar will get Westport designs into even more kinds of equipment and new markets. Even more importantly than the revenue Westport will gain from the deal, its products will gain credibility. Proving your technology is legitimate and commercially viable is critical for a small, disruptive company like Westport. In a virtuous feedback loop, the more Westport engines that are out there working in the real world, the better Westport will be able to market its products as dependable, economically efficient choices.
While Westport seems to be going strong right now in trucking and equipment, the real prize would be the adoption of natural gas engines in mass commercial vehicles. The biggest barrier to such a rollout is the lack of infrastructure for natural gas refueling, and that limits today's market to vehicles that operate on fixed routes or within close proximity to a central refueling area. Westport stands to benefit enormously from the efforts of individuals like T. Boone Pickens and companies like Clean Energy Fuels (NASDAQ: CLNE) to build out a network of fuel stations.
Of course, as with any small company in a young industry, the risks are enormous. Some manufacturers, including Westport partner Cummins, have begun creating their own designs for natural gas engines. Westport's impressive patent portfolio will protect it from some competition, but they could always be out-innovated. There is also the risk that natural gas may not remain as cheap relative to oil over the long term. New advances in hydraulic fracturing, or fracking, technology have allowed the exploitation of huge quantities of natural gas, but these techniques are being challenged on social and environmental grounds. Bans on fracking could undermine the very thesis for natural gas engines.
For those able to stomach the volatility and downside risk, however, Westport's future looks strong. It has consistently put out products that satisfy its consumers' expectations, and its strategy of partnering with established industry players helps to bolster its reputation as a responsible provider of reliable technology. Today's news only confirms Westport's ability to advance the use of natural gas in new markets.
Daniel Ferry owns shares of Westport Innovations, Cummins, and Caterpillar. He did not realize how much he apparently likes trucks and engines until just now - he's always thought of himself as more of a bookworm than a motorhead. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services recommend Clean Energy Fuels, Cummins, PACCAR Inc, and Westport Innovations. 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.If you have questions about this post or the Fool’s blog network, click here for information.