Last week, natural gas engine manufacturer Westport Innovations (NASDAQ:WPRT) made headlines with the announcement of a significant co-marketing program with Royal Dutch Shell (NYSE:RDS.A). The agreement between Westport and Shell launches a co-marketing program in North America aimed at providing an integrated commercial solution for customers in the natural gas vehicle field. You can read a full discussion of the program in the following article here.
In essence, the agreement aims
at providing customers a better economic case when purchasing and operating liquefied natural gas–powered vehicles (LNGVs) by consolidating key value chain components such as fuel supply, customer support and comprehensive maintenance into a single, user-friendly package.
The fact that an oil company is putting its muscle behind natural gas as a fuel for the trucking sector is unequivocally good for the future of natural gas transportation. It is also clearly very bullish for Westport, particularly since the agreement is intended to apply 'initially in North America', implying that if successful it could be rolled out elsewhere. The Shell deal also follows on Westport's success in securing an agreement with GM over the development of natural gas engines.
However, although this move is supportive for the future of the natural gas industry, as a whole it raises some question marks for Clean Energy Fuels (NASDAQ:CLNE). The latter company's strategy has largely been based on the aim of rolling out a natural gas refueling infrastructure before the mainstream oil companies move into the market, hopefully aided by the passage of the Natural Gas Act. Unfortunately, voting on the Natural Gas Act was postponed last year and it has yet to pass. And now Clean Energy Fuels faces serious competition.
Since Westport provides natural gas engines, it makes little difference to the company's strategy who provides the natural gas fueling infrastructure. All that is important is that trucking companies will be assured that the infrastructure will be there. If, however, Shell is going to roll out such an infrastructure across the main trucking corridors, there is less of a clear roll for the much smaller Clean Energy Fuels.
Indeed, following the announcement, Westport CEO Demers gave an interview on CNBC which only served to underline the issues which the deal may raise for Clean Energy Fuels. You can read a fuller discussion of the interview, with detailed quotes, here.
What is most striking in terms of Demers' comments is his repeated suggestion that customers have been waiting for the entry of an oil major to assure them that long-term availability of natural gas fueling will be there:
The question we get from everybody, whether they're in trucking or rail or mining, is well is this sustainable. Can we really see the fuel that we need, in the scale that we need, in the price we need for decades into the future to justify a move of this whole economy into a new fuel...And I think that people have been waiting for a move from one of the majors and this move from Shell is clearly the starting gun for a whole new energy era.
Shell has clearly got a lot of ability to help make this transition easy for fleets. They have the billing systems, the credit card, the networks, the experience, the technical expertise, it’s going to give people a lot of comfort that this is not a big scary, risky move to go into this new fuel.
Shell is, of course, starting out by offering natural gas from 2012 in selected Shell Flying J truck stops in Alberta Canada. Initially, the LNG will be supplied by third parties. However, by 2013 Shell expects to be producing LNG at the company's Jumping Pond gas processing facility. Moreover, the agreement with Westport is for North America as a whole and if Shell's move in Alberta is successful they will no doubt roll out LNG availability in trucking corridors across the States.
This will also spur the natural gas transportation market as a whole. However, this level of competition will no doubt limit the growth of a much smaller company such as Clean Energy Fuels, which simply does not have the capital to compete in terms of infrastructure roll-out.
One final point is worth noting. CLNE's backer T. Boone Pickens and the company's CEO Andrew Littlefair have both disposed of a reasonable amount of stock in the company recently. Most significantly, in the three days between August 30th and September 1st, Mr. Pickens sold 1,319,488 shares for a total value of $17,632,200.
There can be no doubt that T. Boone Pickens and Clean Energy Fuels have done an excellent job in putting the case for natural gas trucking before the market. However, in the end, Shell may well just represent too much competition for a relatively small pioneering outfit.
On the other hand, the news is unequivocally good for Westport. At present, I have no positions in my clean energy portfolio due to a negative view of the risk in the overall stock market (more detail here). However, from a long-term perspective, Westport looks set to grow its business very strongly. Natural gas increasingly looks like a good bet in the trucking sector. However, the risk-reward for Westport looks much more clear cut than it does for Clean Energy Fuels.