Any Westport in a Storm
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The epic drop in natural gas prices in the U.S. has renewed interest in converting the U.S. transportation fleet to running on it as opposed to gasoline. The price drop has been due, mostly, to the rapid rise in supply without the commensurate rise in usage domestically; resulting in a huge divergence in the price of natural gas with respect to oil. Since the beginning of 2010 to mid-April of this year the ratio of WTI crude rose more than 400%, a ratio of ~12 to 55 (barrel of WTI crude to 1MM BTU of natural gas). Since that peak the ratio has collapsed to 28 – 30. But it remains extremely volatile as the commodity markets are in upheaval due to the events unfolding in Europe.
Westport Innovations (NASDAQ: WPRT) designs and builds engines to run on natural gas, both dry and liquid, as well as bi-fuel engines, which are currently in use in the Volvo C-70 wagon and will be an option on the Ford (NYSE: F) F-250 and F-350 pickup trucks. Westport just signed another development agreement with GM (NYSE: GM) to develop more efficient engines for use in small, light duty vehicles. This makes the second big deal with month for Westport after they and Caterpillar (NYSE: CAT) agreed to develop natural gas engines to replace diesel.
For GM they are beginning their conversion to natural gas with, appropriately, their conversion vans, which is where it needs to start. There just is not the infrastructure in the U.S. yet to put CNG refueling stations where they need to be for mass adoption. Looking to Washington for leadership in building the infrastructure is likely to be folly. If it will come it will happen regionally, where the CNG is being produced and transported and an organic growth path can be carved out.
Westport’s Wing system is a drop-in addition administered through Ford dealerships and creates a bi-fuel system for the truck to run on either CNG or gasoline. It is a $10,000 conversion system that at current cost differentials can pay for itself in under 4 years without federal tax incentives.
But that is the real question -- current price differentials. The natural gas rig count in the U.S. is very volatile as the supply and potential demand mismatch plays havoc with pricing. Since the U.S. has no continental liquefaction plants except the one in Alaska, exports of LNG to starving Asian markets won’t be increasing dramatically in the next few years until the one that Cheniere Energy was recently granted the permit for.
Westport at this point looks like it’s all potential and no earnings. The company’s still hemorrhaging money as their partnerships have not yet borne stable revenue/earnings fruit. They are still a research and development play. Revenues are likely to be volatile for at least another year until the market is convinced that this drop in natural gas prices is here to stay and their engines start getting serious adoptions. The stock was hit hard in the recent washout by the general markets and the 25% drop in oil prices, skimming off the enormous speculative froth that had crept in.
With the markets signaling at the end of June that risk was back on and commodities were finished being beaten up because, in essence, Europe was fixed there will be a continued push for natural gas vehicle infrastructure in the U.S. and Canada. LNG as a transportation fuel is definitely a part of that future; the question is whether at this point Westport is good value to play that thesis. I’m willing to wait on the next earnings report and would prefer to sell short dated puts below $30 and follow it in time, taking small profits to build a position over time.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.