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Clean Energy Fuels (NASDAQ:CLNE) and Westport Innovations (NASDAQ:WPRT) are both involved in the effort to apply natural gas technology in the transportation sector. CLNE builds and operates filling facilities while WPRT develops natural gas vehicle engine and storage systems. Their activities are complementary in that CLNE gets volume at its filling stations only if vehicles are deployed and WPRT sells its engines only if customers are confident that there is an infrastructure of filling stations. In a real sense, they are two parts of a solution to a typical "chicken-egg" problem.

Both companies have decided to address primarily commercial markets. This makes sense because - at least at this stage - natural gas vehicles would have trouble penetrating the mass passenger vehicle market (although there is now some activity in this area). The main target markets have been refuse trucks, buses, airport vehicles and heavy duty trucks. The table below provides information concerning the billions of gallons of diesel fuel equivalent (DGE) used by each sector, as well as the number of vehicles on the road and the average number of new vehicles deployed each year.

DGE/YTrucksNew Trucks Per Year
Transit Buses1-1.5 billion 5-6,000
Airports2 billion
Refuse Trucks2 billion179,0005-7,000
Heavy Duty Trucks25 billion3,200,000200,000

The heavy duty truck market is obviously the "big casino" here both in terms of fuel consumption and number of new vehicles each year. This market is generally understood to include "Class 8" trucks (trucks over 33,000 lbs.). If you review conference call transcripts, you will sometimes see references to "Class A" trucks. This is a typo and a result of phonetic confusion; the speaker doubtlessly said Class 8" and must have used a soft "t." Class 8 trucks are the battleships of the trucking world. They are used for cross country freight and other large load situations. They are the trucks you see pulling tandem trailers and large single trailers on the Interstate. There are a lot of them and they use a lot of fuel.

Natural gas has had more success penetrating the bus, refuse truck and airport vehicle markets than it has had in penetrating the heavy duty truck market. CLNE has targeted the heavy duty market with its Natural Gas Highway - a network of liquefied natural gas (LNG) filling stations along major truck routes. As I have described in an earlier article, natural gas can be used in form of either LNG or compressed natural gas (CNG). LNG is generally preferred for long haul situations because it has higher energy density so that considerable range can be achieved without the use of an inordinate about of fuel storage space on the vehicle. CNG is usually used for fleet vehicles which return to the same location once a day and can be refilled. I have seen an average daily range of 200-250 miles suggested as the dividing line between CNG and LNG vehicles.

For a number of reasons, 2014 is shaping up as the year in which it is likely that we will learn whether the heavy duty trucking industry is going to embrace natural gas fueled vehicles. Vehicle manufacturers now have vehicle choices available in size ranges which should be attractive to purchasers. Industry participants are projecting that 4 to 5 percent of new heavy duty trucks will be natural gas fueled this year as discussed in the recent WPRT conference call. That translates to between 8,000 and 10,000 new vehicles. There is some uncertainty about the CNG/LNG mix although there appears to be a consensus that it will be roughly a 50/50 split. Taking the high point of the range and assuming 10,000 total natural gas vehicles and 5000 LNG vehicles, we can begin to estimate the impact.

The table below shows LNG sales by CLNE for 2012 and the first three quarters of this year, assumes the fourth quarter stays at third quarter levels, and then projects quarterly sales through 2014 assuming 1,250 new LNG heavy duty trucks are sold each quarter, each new truck uses 20,000 DGE per year, and CLNE gets 80% of the new sales.

QuarterMillions of DGE LNG Sales
Q1 201212.6
Q2 201214.4
Q3 201214.5
Q4 201214.0
Q1 201313.7
Q2 201314.8
Q3 201316.7
Q4 201316.7 (estimate)
Q1 201419.2 (estimate)
Q2 201424.2 (estimate)
Q3 201429.2 (estimate)
Q4 201234.2 (estimate)

This table assumes that the 5,000 new trucks are delivered at an even pace throughout the year and it is very possible that the deliveries will be backloaded in the later months of the year. But the table gives us an idea of the "break out" impact of large scale heavy duty LNG truck deployment upon LNG sales. Sales barely inched higher for six quarters ending in Q2 2013. Assuming truck sales projections pan out, sales should skyrocket in 2014 reaching a level roughly double the current quarterly level by the end of the year. As 2014 progresses, CLNE's quarterly LNG sales statistics will begin to tell the story as to whether heavy duty LNG truck deployment is taking off. It may be interesting to note that there was an uptick in the third quarter of 2013 which may suggest the beginning of the trend.

WPRT's numbers will also be affected by the extent of heavy duty LNG truck deployment. It has a joint venture with Cummins (NYSE:CMI) and other arrangements under which reported revenue will increase markedly if the anticipated truck sales materialize. I have not seen specific Class 8 quarterly vehicle numbers but one should be able to get an idea from other numbers in WPRT's quarterly reports and there are likely to be questions in the conference call Q & A session which develop further information.

If the numbers break right, WPRT and CLNE could each be off to the races. If 5,000 Class 8 LNG trucks are sold in 2014 and this is part of a continuing trend upward, CLNE's Natural Gas Highway is likely to be a huge success. Its "first mover" advantage will provide it with market power. Its LNG facilities will give it a competitive advantage over later entrants and it should be able to earn a nice margin with lower unit costs as volume continues to increase.

Similarly, WPRT is likely to reap substantial benefits from the deployment of a large number of Class 8 natural gas trucks. WPRT will benefit whether the trucks are LNG or CNG because it designs both types of engines. Assuming there is follow through to higher levels going forward, WPRT will break out into profitability.

We also have to look at the other side of the coin. Both of these companies have burned a lot of cash and investors are getting impatient. Of course, they each have businesses that do not depend upon the deployment of Class 8 LNG trucks in the United States. I think that CLNE is really more dependent upon this deployment because its huge investment in the natural gas highway will be difficult to support without such a deployment. To be sure, it has a thriving fleet CNG business and also a facilities construction business but it is unlikely to be able to attain the competitive advantages in these businesses that the LNG filling station business promises. Unless there is at least a bright light shining at the end of the tunnel by the end of 2014 promising large scale Class 8 LNG truck deployment, CLNE's stock could take a header.

WPRT probably has a few more alternate irons in the fire - sales aboard - especially in China (which look promising), passenger vehicle prospects, marine applications and other applications. Still, the Class 8 market is a big deal for WPRT as well and a major disappointment here could lead investors to get impatient unless there is some major offsetting positive development.

So these two stocks could be way up or could be down significantly in the next year. This is not a binary situation like an FDA approval of a drug. Thus, there may be outcomes between the two extremes. Looking at the extremes first, if total Class 8 natural gas truck sales are below 2,000 in 2014 and LNG truck sales are below 1,000, I suspect that there will be significant investor morale problems. If total sales are 8,000 or above and LNG truck sales are 4,000 or above, I think both of these stocks will take off. Of course, if numbers are somewhere between these two levels, we will see a less decisive response and other developments may become the main drivers of the market. But it is very likely that we are poised to see decisive developments here in the Class 8 truck space. In any event, investors should monitor conference calls and quarterly reports carefully to determine which way the wind is blowing. Data provided in CLNE reports may be relevant to WPRT and vice versa. Any information about the pace of Class 8 natural gas truck deployment is critically important and will help an investor evaluate both of these stocks. Once the direction is unambiguous, it will probably be too late because it will be priced in.

I am optimistic and I am long CLNE and I am kicking the tires on WPRT. I think that savvy truck operators will decide that having a portion of their fleet in LNG or CNG will help cushion the blow if there is another oil shock down the road. In that regard, the Middle East may provide an oil price spike as the Sunni-Shiite animosity escalates. The potential for this sectarian conflict to spill across national borders (as it already has) may be the most dangerous development in the region in recent years. It is a reminder that the dependence upon oil imports still has potentially high costs. For investors in CLNE and WPRT, 2014 may be the year that patience finally pays off.

Source: 2014 Will Be The Turning Point For Clean Energy Fuels And Westport Innovations