Will Westport Innovations and Clean Energy Fuels' Big Plans Go up in Blue Flames?

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Famed billionaire oil tycoon T. Boone Pickens recently wrote an op-ed for the Omaha World-Herald, and there are a couple of key points that sums up in large, what Clean Energy Fuels' (NASDAQ: CLNE) - which Pickens helped found and sits on the board of - opportunity is:

"As to our heavy-duty vehicles — 18-wheelers, trash and refuse trucks, municipal buses and the like — there are more than 8.5 million of those and not a single one can be pushed using batteries. Even ethanol will not produce enough energy to fuel an over-the-road truck. There are only two available fuels: imported diesel or domestic natural gas."

And while I would argue that given time, the technology for batteries to power electric haulers could be a reality, it's going to be many years before that happens.  And that's the real key.  Pickens continues:

"About 50 percent of the oil we import is refined into diesel fuel, so it is a big target. Most over-the-road trucks run the same routes on a regular schedule, so the need for a refueling facility on every street corner, as we have for passenger cars, isn’t an issue."

And that's the key:  The trucking industry, at a fraction of the number of vehicles compared to passenger vehicles, consumes a massive chunk of the oil we use.  Factor in that the cost of this domestic fuel costs tens of thousands of dollars per year less for every truck, and it's an opportunity, on the surface, that is incredibly compelling. 

If it's such a great opportunity, why hasn't it happened yet?

Great question.  Have you ever heard the phrase, Mexican standoff?  Essentially, that's what we've been facing.  On one hand, there is the transportation industry, well-knowing that natural gas is cheaper than diesel, but watching for both trucks that can reliably run on the fuel and perform at the levels needed for long-haul trucking, and for someone to build out a fueling network.  Then you have the truck builders and engine makers like Cummins (NYSE: CMI) waiting for that same fueling network, knowing that there would be no demand from the truckers, without a reliable source of fuel.  Enter Clean Energy Fuels, which has been providing natural gas fuel for return-to-base fleets for years, seizing on the opportunity to be first-mover.  It's in the middle of building out a network of stations along the major trucking corridors in the U.S.- something it's calling "America's Natural Gas Highway."  To date there are more than 80 of the planned 300 stations built, just waiting for those trucks to start rolling off the line. 

Which brings us to Westport Innovations (NASDAQ: WPRT), which in many ways, holds the keys to the kingdom with their Cummins-Westport joint venture, and the most important engine, maybe in the last 50 years or more, to the trucking industry:  The ISX12G.  What makes this one engine so critical is that it is, right now, the last piece of the puzzle.  It's hard to overstate how important this engine is, but I'll give it my best shot: 

It could very well simultaneously shift billions of dollars away from foreign oil to a domestic fuel, while simultaneously saving the trucking industry tens of millions of dollars and massively growing the wealth of investors in Westport and Clean Energy Fuels. This one engine could save billions of dollars, measurably reduce our trade deficit, and drive job growth in the domestic energy production industry.  It's that big. 

With that said, the standoff should be over now.  The stool has three good legs.  I'm sure there's a few more metaphors that I could use, but the point is that the release of this engine, which is being phased in over the next few months in multiple types and power ratings, is as close to a binary event as you'll ever find for a fuel company or an engine maker.  The reception of this engine by the trucking industry is the last step to take. 

So it's not without risk?

Of course not.  The bottom line is that Clean Energy Fuels is taking a very leveraged bet, as has Westport.  Both companies have been using equity to pay for expansion:

<img alt="" src="http://media.ycharts.com/charts/db68c00fce2a31c4e04f93776ade04c7.png" />

CLNE Cash and ST Investments data by YCharts

Revenues are growing:  Clean Energy Fuels generates more than double the revenue that it did five years ago; but the company is cash flow negative due to the high cost of building America's Natural Gas Highway.  Westport has increased revenue nearly three-fold, but its expansion efforts have also been at the expense of shareholder dilution and negative cash flow.  And as the chart above shows, cash and equivalents on hand for expansion, which were generated with an equity offering about a year ago, are getting burned through very quickly.  Clean Energy management has already indicated that the likelihood of another equity offering this year is very high.  The bottom line is that free cash flow won't turn around until - and unless - the trucking industry rapidly adopts the CWI 12 liter engine, and soon.  So it's a race against time. 

As to Cummins, they are certainly in the best position of any company tied to natural gas as a transportation fuel.  As the engine maker of choice for truckers and truck manufacturers, generator manufacturers, and essentially every kind of heavy equipment that you can imagine, its success isn't a matter of which fuel is the long-term winner.  Natural gas or diesel, Cummins' engines will be there, and investors who've held shares over the past decade can attest to the success of this long-term industry stalwart.  Think about it this way:  Cummins generates in Free Cash Flow nearly three times the combined total revenues of Clean Energy Fuels and Westport.  Cummins can only benefit from adoption of natural gas for truckers, and its downside is minimal at best. 

Foolish bottom line

The annual shareholder meeting is this week, on May 7, and I will be in attendance, looking to learn what Management is planning to do to address the cash-flow and cost of expansion.  I will also be listening intently to the quarterly earnings announcement the following day.  As much as anything, I want to see what management's tone is.  Westport's management was incredibly upbeat on its recent earnings call, and reiterated that 2013 was not only a critical year to the company's future, but also, and even more importantly, reiterated guidance on 30% growth for 2013. 

And that's as positive of an indicator as I can imagine, for both Westport and Clean Energy Fuels.  What do you think?  Share your thoughts in the comments below. 

The movement toward alternative energy is gaining momentum. One potential opportunity in this field is Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It's poised to make a big impact on an essential industry. Learn everything you need to know about Clean Energy Fuels in The Motley Fool's premium research report on the company. Just click here now to claim your copy today.

Jason Hall owns shares of Westport Innovations and Clean Energy Fuels. The Motley Fool recommends Clean Energy Fuels, Cummins, and Westport Innovations. The Motley Fool owns shares of Cummins 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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