Invest Today and Profit For Years in The Fuel of The Future
Ken is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent article, I discussed some of the political headwinds beginning to blow against the concept of exporting American natural gas into the world market where the prices are much higher and the potential negative impact that opposition could have on Cheniere Energy if those efforts are successful. I also discussed a couple of businesses in the industry that should continue to thrive without regard to the outcome of that political battle. Further investigation has revealed more businesses that will win even if U.S. exports of natural gas are restricted and will win without regard to the outcome of the battle over exports.
What must come first in a new industry?
It is always interesting to notice whether a new product creates demand or demand creates the product. In the case of natural gas as an alternative fuel for combustion engines, we have an answer: The engine came first. Westport Innovations (NASDAQ: WPRT) owns the patents on the most innovative technology and designs for the conversion of diesel engines to natural gas and has been working very closely with Cummins (NYSE: CMI) for several years to introduce this alternative to the market. Over the past couple of years, many large businesses, such as Wal-Mart and UPS, that own their own internal truck lines have taken advantage of the low natural gas prices in this country and started to move their fleets to this cleaner, less expensive fuel. The highest bar to wider adoption of natural gas has been lack of readily available fueling locations for businesses that lack their own infrastructure. That bar is about to be lowered and demand will skyrocket.
The beginning of the beginning
TravelCenters of America (NYSE: TA) and Royal Dutch Shell (NYSE: RDS-A) have just announced that Shell will construct and supply the fuel for natural gas filling stations at up to 100 TravelCenters locations over the next several years. The construction cost will be paid by Shell and TravelCenters will provide the retail services and locations. This project will be a true game-changer in the adoption of natural gas as an alternative to diesel in truck fleets as it will create a national fueling infrastructure for liquefied natural gas (LNG) when combined with the implementation of LNG fueling stations already underway at Pilot/Flying J locations.
The benefit of this program for TravelCenters is that the widespread availability of LNG at their truck stops assures truckers running LNG powered rigs will be their customers. For Shell, it will give them a new market for their natural gas production and allow them to go straight to the retail market with their natural gas and price the road fuel at higher margins than what they can get selling in the bulk market. Also, for both TravelCenters and Shell, the environmental and novelty aspects of LNG fueling stations should allow them to generate quite a bit of free and very favorable publicity at each location as these stations are completed.
For investors, Shell shares currently produce a dividend yield of 5.21% and, if I am correct about the potential of LNG use exploding as an engine fuel, Shell is well positioned to improve its overall market position and will be a major force in this aspect of natural gas supply and consumption. Fortunately for new investors, TravelCenters has had some difficult times over the past several years and their share price reflects those struggles. This has created an exceptional entry point into the stock as it trades at a P/E of 10.24 times 2013 projected earnings but a paltry 7.8 times 2014 projections. Being first into this market is huge for TravelCenters as I don’t believe that it will be easy to get the truck drivers to change their truck stop preference once they are used to fueling up at a TravelCenters truck stop.
Before the beginning
Before TravelCenters and Shell can begin to enjoying the fruits of this very lucrative venture upon which they have chosen to embark, trucks powered by engines consuming LNG fuel and facilities to fuel them have got to be produced and constructed. That bring me to two stocks I have been watching for quite some time, Westport Innovations and Clean Energy Fuels Corp. (NASDAQ: CLNE). While both businesses have intrigued me, I have previously believed it was just too early in the cycle to invest, until now.
Clean Energy Fuels is in the business of constructing fueling stations that dispense LNG for use in vehicles and, as previously stated, Westport owns the best technology for converting engines from diesel to LNG. In 2012, Clean Energy completed construction of 127 fueling stations, representing an 87% increase from 2011. The company now projects that 2013 fueling stations completed will exceed that of 2012 and they are progressing rapidly toward having an effective national infrastructure in place through their existing and planned projects with Pilot/Flying J.
While both of these businesses are currently unprofitable, I believe that rapid increases in demand will collapse the cost of producing their products and move them to profitability much faster than currently expected. Both of these businesses offer the opportunity for spectacular profits for investors who are willing to accept the risk of investing in a business before it reaches profitability. For Clean Energy and Westport, the snowball is just starting to roll downhill. As it moves along, I believe it will go faster and get larger than anyone now imagines.
My final thoughts
Shell and TravelCenters both offer an excellent opportunity today for investors who want a safe play on the truck fuel of the future. I believe both of these businesses are buying opportunities right now that can be held for the next 10 years or more and produce double digit annual returns.
While Clean Energy Fuels and Westport Innovations both carry significant risk compared to the overall market, they are leaders in an industry that I believe is going to grow exponentially for years to come and these stocks could see triple digit returns as that growth occurs for those who can take the risk and stand the volatility.
As the most advanced designer of engines powered by natural gas, Westport Innovations is a small company with a big goal: To lead the world in transitioning away from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The company has a price tag large enough to match its ambition, and will need to grow revenue quickly in order to justify sky-high expectations. To help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has just released a brand-new premium report breaking down the company's opportunities, competitive advantages, and risks. To get started, simply click here now for instant access.
Ken McGaha owns shares of Westport Innovations and is Short May 2013 $30 calls on WPRT. 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!