Westport Innovations: A Growing Natural Gas Engine Business

Westport Innovations (WPRT) is based in Vancouver, BC and makes heavy duty CNG and LNG engines. The company has dedicated itself to lead the international commercial engine industry in the shift from dirty and expensive oil-based engines to those running on cleaner and cheaper gaseous fuels. Its technologies allow diesel engines to operate on natural gas, propane, and hydrogen. Its engines meet or exceed EPA, California Air Resources Board (CARB), and EURO emissions standards.

In fiscal year 2009, Westport shipped 4,038 units compared to 2,720 in FY 2008. FY 2009 revenues grew to $121.8 million from $71.5 million in 2008, an increase of 70%. Westport indicated the increase is mainly attributed to increased sales of the Cummins Westport (CWI) ISL-G engine in North America as a result of increased demand for natural gas solutions in the transit and refuse markets.

The CWI ISL-G Engine

In October of 2008, Cummins Westport Inc. (CWI), a joint venture between Cummins Inc (CMI) and Westport Innovations Inc., announced the largest natural gas engine order to date from Delhi Transport for 3,125 natural gas buses powered by CWI's 230 horsepower B Gas Plus engines. These eco-friendly engines are fueled by CNG which provide energy security and lower operating costs than comparable gasoline or diesel engines. The engines will be manufactured by Cummins India Ltd.

Mack Trucks, Inc has announced natural gas powered trucks for refuse applications. The MACK TerraPro model uses a Cummins Westport ISL-G engine rated at 320 hp. This truck can use CNG or LNG and meets EPA 2010 emissions standards, reduces greenhouse gas emissions, and offers high performance and efficiency. The announcement came amid reports of abundant natural gas supply, storage, and reserves. The resulting low price of natural gas means trucks based on these ISL-G engines deliver a competitive cost advantage when compared to gasoline or diesel powered trucks.

Daimler Trucks North America (DAI) is the largest manufacture of heavy duty vehicles in North America. Daimler Trucks is now offering the Cummins Westport ISL-G Natural Gas engine in its Freightliner Business Class M2 tuck in six LNG and CNG tractor/truck configurations. According to Roe East, President of Cummins Westport, Freightliner Trucks expects to use CWI engines in over 90% of its truck applications in North America by the end of 2010.

WPRT's FY 2009 Q4 results were disapointing and below estimates (click on chart to enlarge): loss/share of C$0.43 vs ext C$0.25. The company said the results were due to lower margins and higher expenses. Margins fell to 26% from 30% a year earlier.

However, the lower margins don't completely explain the much larger 2009 loss in the face of a 70% increase in revenues. There's something else going on here. Could it be that WPRT threw everything plus the kitchen sink into FY2009 results? If so, WPRT's solid business model, its booked orders, and its long-term strategic plan in the natural gas engine business could make it a solid investment as a hedge against high oil prices.

Its natural gas engines deliver economic and environmental advantages over engines running on diesel and gasoline. These competitive advantages should power earnings growth into the future - a future in which worldwide oil supply won't keep up with worldwide oil demand. In such an environment, cheaper and cleaner natural gas engines will increasingly become the "go to" solution for many truck (and car) markets.

Disclosure: The author does not own WPRT at the present time.

Comments

[Respirate:]

Interesting article. Good for Westport. Sounds like a step in the right direction for many reasons that have been discussed before.

It makes sense that Westport's early applications would be based on fleet use, local duty hauling and mass transit, where low emissions is paramount and refueling is centralized.

Michael, looking at WPRT as an investment, in your opinion does Westport's technology or position provide a competitive moat, ie, unique advantages that would make it difficult for other manufacturers to enter the market head-to-head? Automotive NG conversions have been around at least since the 1970s. If there is ample demand, what's to stop other engine manufacturers from jumping in fairly soon after?

In any case I would be somewhat dubious of investing in any NG technology until the current administration embraces NG as a bridge fuel.

Still, it's great to see continued development of technologies to take advantage of an abundant American resource.

Thanks.
--R

Jun 19 06:37 AM

[fran:]

FITZMAN--

you underplay their JVs with koreans, chinese and italians[JVs announced to date!]

Jun 19 09:06 AM

[Michael Fit...:]

respirate: good questions, and one reason i wrote the article was because i was hoping to find out more about the company and it's earnings potential from SA readers. it does bother me WPRT grew revenues 70% yet on the bottom line their losses increased. also, cummins makes the engine that is selling so well...so exactly what is the breakdown between cummins and westport on sales/earnings per engine? i dunno. in the fleet market, i don't think waiting for the government to support the technology is a prerequisite for investment (although i do agree this is true for consumer cars and trucks) because the advantages of natural gas are so compelling, a company like MACK trucks is going to offer nat gas solutions for over 90% of its entire heavy duty truckline by 2010. that speaks volumes i think and proves nat gas in the fleet sector will succeed. i need to do more research on this company. for now, it seems like fuel systems solutions, which has positive earnings and is growing, may be a better bet as an investment in this area.

fran: i don't know anything about the JV's. i need to do more research on WPRT. feel free to educate me :)

Jun 19 10:19 AM

[Michael Fit...:]

here's WPRT's latest earnings release:

finance.yahoo.com/news...

Jun 19 10:28 AM

[fran:]

FITZMAN--

for JVs, do web search--"westport innovations + joint ventures". many repeats, but focus on OMVL-SpA, WEICHAI, HYUNDAI.

i believe your querry on last 10Q was covered in last earnings call. should still be web cast on their site. if not clarified, nice lady to call provided on web site and call. their news releases for past two years is also source for JVs, etc.

Jun 19 11:32 AM

[one eye:]

MF: I like the Chart. But having read the Annual, I don't understand your mystification regarding revenue and associated operating losses.

"However, the lower margins don't explain the much larger than expected 2009 loss in the face of a 70% increase in revenue."

A combination of Stock sales( equity in another company), Share issuance $53 million worth, Bond Issuance $15 million at a coupon of 9% accounted for more than the entire increase in Revenue.

On the otherside, they have run out of Tax loss carry forwards, the Canadian Government has stopped funding it, they have Yet to figure out whose Accounting Standards they will use and there has been a has been a Massive slowdown in sales. Around 2,500 during the qtrs ended 6/2008 and 9/2008 vs 1,500 in the 3rd and 4th fiscal year, with the 3/2009 being below 700.

Additionally, there are 900 units in limbo, ordered but Financing unavailable.

Cummins has a 50-50 relationship with Westport.

Due Dilligence doesn't appear to be part of your vocabulary. Try it occasionally.

Jun 19 01:01 PM

[ripskii:]

Thanks for opening the discussion on Westport. They have a solid position in the heavy duty direct injection engine market by their JV with Cummings. As others have mentioned they also have JV's with Italian and Weichai the largest Chinese heavy engine manufacturer. In addition they are working with both Kenworth and Peterbuilt for heavy duty long haul truck installations for both North America and Australia. Their engines are the heart of the Long Beach/Los Angles Port clean truck program. To the extent that NG powered heavy vehicles grow they will increase sales. San Diego transit system now uses all NG buses powered with Westport engines and Waste Management is beginning to use NG powered refuse trucks.

With the current historic 18:1 spread between oil and NG prices the economic choice to use NG as the fuel of choice is compelling, especially for fleetsof heavy vehicles.

Long WPRT.

Jun 19 03:16 PM

[Respirate:]

Thanks ripskii & others for constructive input. The S&P excerpt below provides some clarification of Westport's business:

Westport Innovations Inc.: " high-pressure direct injection combustion technology allows diesels to operate on cleaner burning gaseous fuels, such as NG without sacrificing performance or fuel economy. JV w/ Cummins Westport Inc. (CWI), (mentioned previously) develops, supports & markets a line of low-emission, high performance engines and ancillary products based on joint intellectual property .

CWI has four business units:
1. CWI, focused on NG engine applications for urban fleets ranging from 5.9 liters to 8.9 liters.
2. Westport Heavy Duty, focused on LNG systems for heavy-duty trucks.
3. Juniper Engines Inc., focused on 2L and 2.4 L industrial engines. 4. Weichai Westport Inc., developing heavy-duty engines in China.

This from the company website:

"Repowering is a "Shovel/Wrench Ready" project that could qualify for funding under "The American Recovery and Reinvestment Act (ARRA)" of 2009.
Under the certified repower section of the ARRA, approved projects can receive up to 75% of the cost of an engine repower, which includes labor and equipment. The ISL G is the first engine compliant with 2010 EPA and CARB on-highway NOx and PM standards, which are applicable to urban bus applications.
Lower Emissions: Replacing a 2000 model year natural gas engine with an ISL G reduces NOx by over 90%.
Lower Greenhouse Gases: The ISL G is over 5% more fuel efficient than the lean burn natural gas engine it replaced."

I'm still not sure how large CWI's technological lead may be, if any. One apparent competitor is Deutz, with "gaseous fuelled engines derived from well-known and field proven diesel engines", ranging from 3 to 15.9 liters displacement. John Deere Power Systems has a 2005 statement: "JDPS has partnered with the DOE and the National Renewable Energy Laboratory (NREL) in the continued development of the 8.1L natural gas engine ... complies with 2007 EPA requirements & CARB low-NOx engine certification." There may be many more (Daimler or Mitsubishi, for instance), which was my original question with regard to WPRT as an investment.

WPRT shares are up about 70% in two months and 160% off the Mar08 low, possibly in anticipation of modest economic recovery and federal stimulus funding. Shares (~$8) are well off the 52 wk high of $18. Clearly speculative, which is the way I view many growth companies in the present environment.

--R

Jun 19 05:10 PM

[one eye:]

like I said, I like the Chart but people seem unimpressed by technicals, so on fundamentals, this is damn speculative. they are tryng to reschedule some debt due at the end of july.

MF: YOU made it look like some sort of HankyPanky was going on. Why?

Jun 19 08:38 PM

[Michael Fit...:]

fran: i listened to the webcast which i missed the first time i looked at their website. anyhow, i took the plunge today and picked up some WPRT. i think they may be the best proxy on HR1835, which WPRT is obviously eye-balling intensely and mentioned on the call they expect senate action the bill this month. although i'd be surprised if HR1835 came through with robust natural gas transportation initatives for consumer cars and trucks (although i surely hope it will !), i feel pretty confident even the bozos in washington see the sense of natural gas fueled fleets and large trucks. so, if the bill does go this way, i would expect WPRT to pop. time will tell.

Jun 19 11:25 PM

[Michael Fit...:]

ripskii: yeah, southern california is a great market for westport.

respirate: thanks for all the info. i think the cummins, MACK, Daimler news means that westport's technology is in the lead. and yeah, it is speculative...speculative that their revenue will at some point translate into real earnings and short-term, probably speculative on how HR1835 turns out.

Jun 19 11:32 PM

[fran:]

FITZMAN--

read this article; it gives more reason for westport worldwide success in addition to JV w/WEICHAI.

greencarcongress.com/2...

Jun 20 09:39 AM

[one eye:]

Fran: Do you actually invest in anything?

I have yet to see anything you would consider an investment vehicle or would recommend.

Since you are cheerleading Westport, can I assume that you are an investor or are you just giving kudo's without any intention of buying this stock?

I will consider purchase when it drops to $6 or so. Too expensive at these levels and definitely still in the R&D stage.

Jun 20 04:21 PM

[H. T. Love:]

Michael,

"that speaks volumes i think and proves nat gas in the fleet sector will succeed."

Recalling our previous exchanges, I see you have finally come over to "The Dark Side"? ;-)) Cummins has been aggressive with its program for a long time, even running a pickup truck over 200 MPH at Bonneville back in ... '07(?). But it was on diesel.

Anyway, when we last traded ideas, I stated that the businesses would be the way forward for NG use, getting the infrastructure in place that made it feasible for private use.

Are you now in agreement?

As to further research, you will be able to find *many* reports of port authorities, metro-transit fleets, waste processors, some taxi, some over-the-road, some shuttle fleets converted to NG. Others planning it.

This should accelerate as many metro areas are requiring harmful emissions be reduced by the public-sector services in their areas.

HardToLove

Jun 21 05:38 AM

[fran:]

ONE EYE--

i occasionally mention stock or provide worthy reference. a review of commentary would answer your question.
regards westport, i purchased CLNE[NASDAQ] and WPIVF.PK/WPTFF.PK IN 6/07 AND 9/07 respectively. sold all in 9/08. bought back in 12/08. now playing large position in both on house money. i pay to play and can support my positions.


On Jun 20 04:21 PM one eye wrote:

> Fran: Do you actually invest in anything?
>
> I have yet to see anything you would consider an investment vehicle
> or would recommend.
>
> Since you are cheerleading Westport, can I assume that you are an
> investor or are you just giving kudo's without any intention of buying
> this stock?
>
> I will consider purchase when it drops to $6 or so. Too expensive
> at these levels and definitely still in the R&D stage.

Jun 21 08:45 AM

[Michael Fit...:]

H.T. - i've always thought nat gas would be successful in fleets. if i recall correctly, where we disagreed previously was that the success in fleets would have a significant impact on foreign oil imports. i still believe the answer to this is "not nearly as much as if we converted consumer cars and trucks to nat gas". there is no "dark side" wrt natural gas transportation: it's all *positive* and reduces foreign oil imports. my only concern is that it is not happening at near the rate it needs to. we continue to pump oil money out of the country at alarming rates, while printing US dollars as fast as possible. i fail to see how these two facts combined lead to anything positive. this will not change until we convert everyday cars and trucks to natural gas. that is, natural gas use in fleets, while certainly a positive, isn't sufficient to stop the hemoraging and protect the US from the bullet of peak oil that is aimed right between our eyes.

Jun 21 11:37 PM

[H. T. Love:]

On Jun 21 11:37 PM Michael Fitzsimmons wrote:

> H.T. - i've always thought nat gas would be successful in fleets.
> if i recall correctly, where we disagreed previously was that the
> success in fleets would have a significant impact on foreign oil

Yes. And without a re-hash of all we posted, my thesis was that we really couldn't, pragmatically, get the conversion for private use without the greatly expanded infra-structure resulting from business *first* converting. It was a simple belief that business can justify large up-front costs for projected returns in a longer time-frame while individuals have a more difficult time doing that.

So it was just a case of "path of least resistance" to achieve the ends we both espouse.

> imports. i still believe the answer to this is "not nearly as much
> as if we converted consumer cars and trucks to nat gas". there is
> no "dark side" wrt natural gas transportation: it's all *positive*

<*chuckle*> I was using "dark-side" only in reference to doing business first. I didn't really think you had changed you mind.

> and reduces foreign oil imports. my only concern is that it is not
> happening at near the rate it needs to. we continue to pump oil money
> out of the country at alarming rates, while printing US dollars as
> fast as possible. i fail to see how these two facts combined lead
> to anything positive. this will not change until we convert everyday
> cars and trucks to natural gas. that is, natural gas use in fleets,
> while certainly a positive, isn't sufficient to stop the hemoraging
> and protect the US from the bullet of peak oil that is aimed right
> between our eyes.

Agreed.

But as with most things, we can't always achieve the goals in the time-frame we desire. My take is that the shortest time-frame is achieved by encouraging the "natural" course that would be followed towards the goal (in this case, get business to do even more faster) and the side-effect is that much of what needs doing to get the private automobile converted is done with mostly private capital investment and subsequent reduced public capital required to get the consumer converted.

*But*, this seems best to me *only* because we can in no way rely on our legislative/executive branch to get *any* major task done quickly, correctly and at reasonable cost. That leads me to my "pared down" strategy of limiting dependence on them to only encouraging what is naturally already happening to happen faster.

Anyway, it was good to see your post. Keep up the effort.

Thanks,
HardToLove

Jun 22 09:12 AM

[ripskii:]

MF: I wonder if you have thought about converting locomotives to NG use? Rail transport accounts for over 4 billion gallons of diesel fuel per year which is about 10% of all diesel used in the U.S (2001 data). It also emits more than 1 million tons of NOX. There are efforts to greatly reduce this, but it seems that only engine improvements on current fuels are being considered. It would appear that if heavy diesel trucks can be easily converted to NG with a huge corresponding reduction in air pollutants then diesel-electric locomotives would be amenable to a similar solution.

www.transportation.anl...

Jun 22 08:54 PM

[Michael Fit...:]

ripski: honestly i had not thought about it because i had no idea rail transport accounted for 10% of US diesel consumption. i looked around on EIA with no luck..could you point me to the source of this data? i agree with you that rail seems like a perfect place to utilize cheaper and cleaner and US produced natural gas. btw, i was driving through kansas the other day and stopped at a mcdonald's for coffee (only). i ended up in a discussion with 4 farmers and asked them about the CWI nat gas engines and would they consider it. interesting responses:
1) farmers never buy anything they don't "test drive" first
2) farmers seldom buy stuff there neighbors don't also own

so, they recommend for CWI to be successful, they should have demo units down on the farm for the farmers to try out. one older farmer said he used to use propane for all his tractors, combines, everything, but then all the engines went to diesel. i asked him how he felt when diesel went over $4.50 in 2008, and he said they just sucked it up and passed on the cost. i get the feeling they would use natural gas if the refueling infrastructure was there and they could see that all the macines performed as they currently do.

Jul 04 01:51 AM