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By Brendan Coffey

My neighborhood is home to a typical New England mix of vehicles. There are older Volvos, a few SUVs, a couple of pickup trucks, some run-of-the-mill sedans and a smattering of collector’s cars like an antique MG a neighbor parks on the street in the summer months.

But there is one car that catches my eye more than any other. About a block away, neighbors have a compressed natural gas-fueled Honda Civic. I know it’s a natural gas version (the Civic GX) because it’s emblazoned with NGV lettering on the side, and when I walk past the house I see the refueling pump outside the garage. Because I live in a town that is actually an island connected by a causeway to the mainland and that does not have a gas station of its own, I find myself envying the fact that my neighbors can fill up their car from a pump that receives its gas from the utility’s natural gas feeding into the house. But I don’t relish the thought of not being able to fill up the tank at any old gas station along the road on a longer trip.

There are places to find CNG, but they are few and far between, which is one reason Honda (NYSE:HMC) doesn’t sell many of the GX, reportedly producing just a few dozen each month. Still, it’s not terribly complicated to convert a car from gasoline to natural gas. A few companies make kits that run a couple of thousand dollars and don’t require a great deal of alteration to your engine. In a few countries, such as Italy, some months have seen as much as 25% of auto sales go to vehicles fitted by manufacturers such as Ford (NYSE:F) and Fiat (OTCPK:FIATY) to run on natural gas.

It’s for industrial purposes, though, that natural gas is gaining a foothold. This is largely because of air quality concerns at high-pollution areas like seaports and airports. To address those concerns, equipment such as forklifts, buses and even 18-wheelers are being run on liquefied or compressed natural gas. The reason is that natural gas burns cleaner than other fossil fuels, which means engines running on natural gas exceed EPA emissions standards fairly easily. It’s also wildly abundant in the United States, thanks to new technologies and more accurate estimates of sizeable deposits sitting in a vast region stretching from New York to Michigan to Texas.

In fact, the International Energy Agency, which follows world energy demand, issued a report earlier this month predicting that a “golden age of gas” (and the IEA means natural gas, since outside North America, what we call gas is known as petrol) could be coming, thanks to its wide availability in non-OPEC nations, its tendency to burn cleaner and the increasing pressures on oil prices and much of the world’s distaste for nuclear power since the Japanese disaster. Here’s what the IEA had to say:

Global uncertainties afflicting the energy sector can be seen as opportunities for natural gas. When replacing other fossil fuels, natural gas can lead to lower emissions of greenhouse gases and local pollutants. It can help to diversify energy supply, and so improve energy security. It can provide the flexibility and back-up capacity needed as more variable capacity comes on-line in power generation. Gas is a particularly attractive fuel for regions, such as China, India and the Middle East, which are urbanising and seeking to satisfy rapid growth in energy demand. These are the very regions that will largely determine the extent to which gas use expands over the next quarter of a century.

In fact, China’s demand for natural gas is expected to rise from the equivalent of Germany’s demand today to the demand level of the whole European Union by 2035. In the U.S., the majority of the many hundreds of power plants expected to be built in the next 15 years will be natural gas, according to the Department of Energy. Japan’s energy mix will undoubtedly include more natural gas now that the tsunami has effectively destroyed the nuclear industry there. These trends and more are reasons why the IEA sees natural gas demand growing over 50% in the next 15 years to account for as much as 25% of the world’s total energy mix.

We’ve been discussing natural gas investments in Cabot Global Energy Investor, the stock investing newsletter for which I am analyst and editor. There are a myriad of ways to play natural gas, depending on your interests. With the market on uncertain footing at the moment, we’re being very selective in adding to the newsletter’s portfolio. What we recommend buying now is information reserved only for subscribers, but I do have a list of natural gas-related stocks that are worth keeping an eye on, researching some more and perhaps adding to your watch list to buy when the time is right.

Fuel Systems Solutions (NASDAQ:FSYS) is an American company that makes the kits that convert gasoline engines to run on compressed natural gas (CNG) or propane (LPG) and even offers systems that allow vehicles to switch easily between gasoline and CNG and LPG. Its subsidiaries supply both the aftermarket and automaker assembly teams, with a very strong presence in Italy, which has a robust CNG automobile market, as well as in California, where it supplies equipment to run industrial equipment from forklifts to generators to construction vehicles. Since 2000, the number of CNG/LPG vehicles has grown 29% annually, so it’s been a good market to be in. Last year, Fuel Systems also acquired Phill, the company that makes the home CNG gas pump, which many Honda Civic GX owners, including my neighbors, use to fill up with.

Westport Innovations (NASDAQ:WPRT) is a Canadian company that supplies kits to convert engines to run on natural gas. Unlike Fuel Systems, which has a strong automobile presence, Westport is concentrated in the market for tractor trailers. Generally, I’ve felt Fuel Systems management has done a better job executing in recent years, but Westport is worth exploring too. The main reason is the company’s alliances with truck engine makers including Cummings, Peterbilt, Volvo (OTC:VOLAF) and others. Natural gas is preferable to diesel because strict emissions regulations put in place by the EPA mean costly modifications to diesel engines need to occur now to be allowed on the highways. Natural gas engines already fall well within the emissions parameters. Westport also aims to expand into heavy duty construction and mining equipment.

Clean Energy Fuels (NASDAQ:CLNE) develops and operates natural gas filling stations. You’ve probably heard of it; oil billionaire T. Boone Pickens, who has been tirelessly working to get natural gas incentives passed in Congress since 2009, controls it. The company focuses on opening stations in strategic locations where there is a critical mass of natural gas vehicles that need fueling. That means it works with seaports and airports to encourage conversions and opens filling stations to service those areas. To date, the company has 238 stations in the U.S. and Canada. With gas well over $3 a gallon, the math is compelling: In the heart of Los Angeles, a gallon of gas equivalent of CNG costs just $2.75, a full dollar less than a gallon of gasoline.

With natural resources, it’s always a good idea to keep an eye on the companies that pull the commodity out of the ground. One to consider is Devon Energy (NYSE:DVN), a leading independent energy company that operates primarily in North America, pulling natural gas and oil out of shale formations. About two-thirds of its production is natural gas, the balance being oil and related products. Proven reserves have been growing, to 2.9 billion barrels of oil equivalents, and the company has a 99% success rate on the thousand or so wells it drills annually. Unlike the other companies listed here, Devon is a large-cap ($35 billion) and management does an excellent job focusing on creating shareholder value with share buy-backs and modest dividend payments.

With energy demand booming around the world and with emerging economies growing fast, I don’t think you can have an effective stock portfolio without a good portion of holdings in new energy technologies as well as fossil-fuel based companies, including natural gas.

Source: Betting on a Future for Natural Gas Vehicles