Searching For The 'Shovels' Of The LNG Revolution

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 |  Includes: BRK.A, BRK.B, CAT, CNI, CSX, GE, UNP, WPRT
by: Jeff Williams

It was January of 1848, and gold was discovered by James W. Marshall in Coloma California. By May of 1848, reports were stating "there is gold in them thar hills". Positive news about the gold were reported, and some 300,000 people arrived with dreams of getting rich. One of the ways that Samuel Brannan seized this opportunity was by opening a small store at John Sutter's Fort, right in the heart of the gold rush. Apparently he bought up all the picks, shovels and pans he could find and sold them at his store. According to reports, he would buy the pans for 20 cents each and then sell them for $15.

Samuel Brannan never found any significant amounts of gold, but selling shovels, picks and supplies to miners was one of the ways that made him California's first millionaire.

With the inevitability of rising fuel costs and stricter emissions standards for locomotives set to take effect in 2015, major railroad companies such as Berkshire Hathaway Inc.'s (NYSE:BRK.A) (NYSE:BRK.B) Burlington Northern Santa Fe LLC, Union Pacific Corp. (NYSE:UNP), Canadian National Railway (NYSE:CNI) and CSX Corp. (NASDAQ:CSX) are researching alternatives to manage the increases in expenses. An alternative that these companies are exploring is powering their locomotives using LNG instead of diesel.

The idea of LNG in the transportation industry is not a new one, as the trucking industry has been using LNG since the mid-'90s. Railroad companies such as Burlington Northern Railroad and Union Pacific also flirted with the idea in the late 1980s and 1990s, but the final engine technology was not completed, and the projects were shelved in the late 1990s, in part due to the rising costs of natural gas.

Motivated by the gap between the cost of diesel fuel and LNG, the idea of using this commodity has again sparked the interest of railroad companies. According to Bloomberg's Lorenzo Simonelli, chief executive officer of GE's (NYSE:GE) transportation unit, stated:

If you believe the price advantage over diesel is going to stay here for the next 10 to 15 years, then LNG is a revolutionary fuel.

Because of the potential savings and environmental impacts that the switch from diesel to LNG could produce, railroad companies, along with General Electric, Cummins Inc.(NYSE:CMI) and Westport Innovations (NASDAQ:WPRT), are currently exploring different avenues to capitalize on this potential shift.

In the same Bloomberg article, Tony Hatch, an independent transportation consultant based in New York, stated:

Like the move from steam to diesel, if it's going to be that radical a transformation, that's a lot of opportunity for sales in a lot of places.

One way to invest in the potential change in fuel is through Westport Innovations. Recently Westport teamed up with Canadian National railroad to provide the railroad company with four liquefied natural gas tenders. These tenders are designed to immediately help railroads validate the value of LNG in their operations today. These tenders offer a number of advantages that include: reducing the need for LNG refueling infrastructure and refueling stops. They are designed supply fuel to natural gas locomotives from virtually any manufacturer, and each tender can support two locomotives, reducing the capital investment required to move to LNG. Investors of Westport Innovations should be expecting positive revenue from the sale of these tenders to the "new market and off-road segment" of the business in the Q4 2013 reports.

Another company looking to take advantage of the potential fuel switch is General Electric. GE Transportation offers a retrofit kit that enables existing Evolution Series locomotives to operate on both diesel and LNG. These kits are designed to substitute up to 80% of diesel fuel with LNG. Even with the two sources, GE states its use can reduce fuel costs by 50% without diminishing their performance. These retrofit models currently meet US EPA Tier 3 emission standards and also allow a fully-loaded train to travel further distances without refueling stops.

Caterpillar (CAT) and General Electric are currently teaming up with Union Pacific to begin field testing liquid natural gas-fueled locomotives. As field testing has begun, Union Pacific indicates that they are still very much in the early analysis phase:

We are working closely with locomotive and engine manufacturers, cryogenic fuel-tank suppliers and natural gas/LNG suppliers to complete our analysis.

Final results from these tests are expected come fourth in at least one to two years, and according to railway magazine, if these tests are positive, "LNG locomotives could be in widespread use by 2016 or 2017."

Conclusion

As Railroad companies continue field testing LNG powered locomotives, researching companies that provide the "shovels" for this transformation should provide positive results for the investor. If you are looking for companies on the leading edge of this technology outside the railroad sector, Westport Innovations, Caterpillar Inc. and General Electric are three companies that provide products to the railroad companies that are the "shovels" in the transformation to LNG.

Disclosure: I am long CNI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.