Why I’m Buying This Emerging Natural Gas Innovator
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Natural gas is the best transportation fuel. It's better than gasoline or diesel. It's cleaner, it's cheaper, and it's domestic. Natural gas is 97 percent domestic fuel, North America.” - T. Boone Pickens
The problem with that statement from T. Boone Pickens has never been with its truth but with its practicality. The age old problem of the chicken and the egg has continued to hold us back from unleashing our massive natural gas reserves. We have the supply in abundance but we don’t have the refueling infrastructure or the vehicles to be refueled to turn that dream into a reality.
One company has been working feverishly to provide an innovative solution to drive more engines to run on natural gas. That company is Westport Innovation (NASDAQ: WPRT), the global leader in natural gas engines. I think that now is a great time to buy this emerging natural gas innovator and here’s why.
Go West, Young Man!
Westport operates four business segments: their Cummins (NYSE: CMI) Westport joint venture which concentrates on buses and vocational trucks like refuse trucks, Westport Heavy Duty which focuses on larger 18-wheeler engines, Westport Light Duty focus on the smaller engines like cars and fork lifts, and finally Westport corporate which focuses on technology.
Westport at its core is an intellectual property company. They’ve filed over 400 patents with more than 290 issued worldwide. Their expertise is in injectors, combustion chamber geometry and control strategies, engine fuel systems, cryogenic storage, and delivery and compressors. Their technological lead has given them the leverage to partner this proprietary technology with leading diesel engine and vehicle equipment manufactures to develop, manufacture, and distribute natural gas engines worldwide.
Coming of Age
Their partnership with Cummins was formed in 2001 and to date more than 34,000 engines are now in service worldwide. Last year the venture sold 6,635 units which drove $192 million in revenue and $40 million in adjusted EBITDA. The business has grown revenue by 39% annually over the past four years and about half of those sales last year were refuse other medium duty trucks.
The reason for the growth in refuse truck conversions is because customers like Waste Management (NYSE: WM) are finding the conversion to be a very economically viable solution. Waste Management is now planning to have 80% of their refuse truck purchases over the next five years be those fueled by natural gas. Those trucks cost about $30,000 more than traditional diesel trucks but they save $27,000 per year or more in fuel costs.
While medium duty is a huge market for Westport’s technology they are not content to stop there and are going up the powertrain with bigger engines. Recently it was announced that Canadian National Railway (NYSE: CNI) was working with Westport and others on a state-of-the-art natural gas railway engine project. They expect to have a prototype set for road tests by CN in 2014. Already the leader in fuel efficiency, now CN is looking to further their leadership in greenhouse gas emissions while also saving more money on fuel costs.
According to Westport the rail industry consumes 9 billion gallons of diesel annually. Half of that is in North America where fuel represents 24% of the operating costs for US railroads. That’s huge addressable market but just one of many.
Other applications for heavy horsepower engines include mining, marine and not to mention drilling rigs and frac pumps. Last year there were 2,035 onshore drilling rigs which without question should be fueled by the resource they are drilling. As the technological leader in the massive title shift toward natural gas Westport is standing on the cusp of something great.
All Gassed Up
I want to invest in greatness before it has made its wealth building run. However, sometimes what sounds like something destined for greatness ends up being nothing more than hot air. That’s why I take a conservative and balanced approach when investing in the next big thing.
One way I’ve done can be viewed openly though the virtual portfolio I’ve been managing that I’ve dubbed the “No Drip, No Mess” Portfolio. Part of that risk management is knowing when to back off of an idea and replace it with something that’s a more compelling.
I’d recently written a put on energy underdog Rex Energy (NASDAQ: REXX) that expired with only income to show. Rex had leapt higher by more than 30% since I wrote the puts and because of that I had to send the company back to my watch list. I still think Rex is a great company, and their emerging position in the Utica Shale is very interesting. However, their shares are very volatile and I’m willing to bet that any market driven sell off nets me a better buy price.
All that being said, I’m taking that cash that was set aside on the Rex put and splitting that allocation into two emerging natural gas plays. Westport gets the first dose of capital as I’ll be virtually investing 0.5% of my portfolio into their shares. Lately, that’s about 18 shares. That might not sound like a lot, but all the capital is from funds generated by dividend and option income from the portfolio. With no drip, I’m hoping to have no mess if I use those funds to buy shares in risker companies.
A Word About Risk
Westport’s biggest risk is that joint venture partner Cummins will take a big chunk of the 18-wheeler market as a direct competitor to Westport. Those engines are not part of the joint venture agreement and they are not the only competitor aiming for this potential lucrative market. Should Westport be shut out of this market it could be a bad sign for their future.
Finally, a huge spike in natural gas prices could derail most of the progress they’ve made over the past few years. That’s why owning Westport along with a natural gas driller like Rex would make sense in the long run as they’d hedge risk when taken together. Just as rising gas prices would be detrimental to Westport they’d be a boon to Rex. Still, given the capital I have available and risk reward of both at their current prices I like Westport. That’s why I’m buying this emerging natural gas innovator instead.
latimerburned owns shares of Westport Innovations and has an options position on Waste Management. The Motley Fool owns shares of Cummins, Waste Management, and Westport Innovations. Motley Fool newsletter services recommend Canadian National Railway, Cummins, Waste Management, 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.