A Leader Among Natural Gas Plays

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

It’s no secret that abundant domestic supply and record production have sent natural gas prices tumbling to their lowest level in years. As a result, companies in a growing number of industries are looking for ways to use it as an alternative to costlier and dirtier petroleum fuels. As we reported recently, suppliers are readying a wide array of long-haul heavy-duty trucks with gas-injection engines designed for Liquefied Natural Gas, or LNG. We also recently reported on how North America’s largest oilfield service players are spending millions to convert some of their drilling rig engines from diesel to natural gas power.

Those poised best to benefit in the short-term include Cummins (NYSE: CMI) and General Electric (NYSE: GE), which supply many of these new engines for oil rigs and Class 8 trucks, as well as for other vehicles ranging from trash trucks to tractors. Even in the transformation’s nascent stages their products are beginning to see use in North America as well as in critical overseas markets such as China, which has adopted a strategic long-term plan to support natural gas transportation. Westport Innovations (NASDAQ: WPRT) and Clean Energy Fuels (NASDAQ: CLNE) are two more of today’s major players who specialize, respectively, in the actual design of these natural gas engines and the delivery of fuel from production point to end user. Both also have strategic partnerships with the field’s most significant contenders. All four are positioned well to profit from the transformation, which is moving ahead at a quickening pace despite challenges such as the lack of an adequate fuel transport infrastructure and the higher initial cost of this alternative technology.

One company stands out in growing field

With a hand in all of these fields and more, however, it is Caterpillar (NYSE: CAT) that may stand to gain the most as the move to LNG shifts into high gear. The company has made no secret of its intention to capture as big a share of this space as possible. Early last fall it showed off many of its new LNG products at MINExpo, the giant global industry trade show held every four years in Las Vegas. Around the same time, the company announced it was “all in” for LNG at the High Horsepower Summit in Houston. “Large engines are going gas,” Joel Feucht, general manager for gas engines at Cater­pillar, told convention attendees. Diesel won’t disappear, he said, but heavy fuel users will see a definite benefit from a switch to natural gas — which currently offers a 30%-40% price advantage — and economics will mandate they do so.

The gas-powered “big iron” that CAT is counting on ranges from giant haul trucks to railroad locomotive engines. The firm’s first three off-highway mining trucks to feature LNG technology — the popular 793, 795 and 797 models — were previewed at the Vegas show, where a plethora of executives were on hand to discuss the company’s natural gas initiatives. These trucks are expected to be available within five years, they projected, when most of the infrastructure and other challenges currently facing the transition should be resolved.

Other new gas-powered products on the company’s drawing boards include locomotives expected on a similar timetable from Electro-Motive Diesel, a Caterpillar subsidiary with a rather ironic name. To facilitate the development of these and other offerings CAT teamed with Westport last summer to begin incorporating the latter’s acclaimed HDPI, or high pressure direct injection technology, which has already been well-received for on-highway applications. In addition, CAT has been developing engine retrofit kits for the conversion of existing diesel-powered oil rigs, trucks and locomotives. Looking forward, it says it has plans for LNG power-generation equipment and marine engines, as well as other industrial uses.

Bottom line

Efforts to move from petroleum products to natural gas are not without their controversies and vocal critics. They’re also costly, and diesel proponents aren’t giving up without a fight. So, at present, its definitely more talk than action. But traditional oil companies like Royal Dutch Shell are getting in on the action big-time, on-road 18-wheelers powered by LNG engines are now a part of every major truck maker’s portfolio, gas-powered trash trucks are fast becoming a standard in that industry, and the development of off-road variations are well underway. Companies willing to take a risk, such as those mentioned above, should see at least some return before long. Caterpillar, perhaps the space’s biggest proponent, arguably stands to gain the most because of its early and vociferous support.

Fool blogger Howard Rothman does not own shares in any of the companies mentioned in this entry. The Motley Fool recommends Clean Energy Fuels, Cummins, and Westport Innovations. The Motley Fool owns shares of Clean Energy Fuels, Cummins, General Electric Company, 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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