Previously we have discussed industries that are attractive investments due to the low prices in natural gas. Natural gas engines is one such industry that we have identified. As Ian Cassel pointed out in an earlier blog post, it is good to identify bullish global market trends in their infancy and find the micro caps that will benefit from the trend before other investors. This is the first article in a two part series that focuses on the opportunities in natural gas engines. This article will provide an overview of the industry and the second article will provide the investment thesis for a rapidly growing, profitable micro cap company in this space.
Natural gas in North America is at very low prices especially when compared to oil prices. This is due in large part to the abundant availability of natural gas in the US and new horizontal drilling techniques that have allowed extraction of natural gas from shale. The discrepancy in pricing between natural gas and oil based fuels such as gasoline and diesel has led many to conclude that the US should dramatically increase the utilization of natural gas as a vehicle fuel as it decreases fuel cost, decreases dependence upon foreign oil, and is better for the environment. In fact, using America's abundant natural gas to replace imported oil is a pillar of the PickensPlan promoted by the legendary oil man T. Boone Pickens to reduce our dependency on foreign oil. Right now in the suburbs of Chicago, compressed natural gas can be used to fuel a vehicle at a savings of roughly $1.20 per gasoline gallon equivalent which is a rather dramatic savings. Historically in the US, compressed natural gas has been as cheap or cheaper than gasoline or diesel since at least the year 2000 and the margin has been widening in recent years due to the drop in natural gas prices and the increasing price of oil.
The United States isn't the only country that is increasing it's use of natural gas as a transportation fuel. There are currently 14.8M natural gas vehicles worldwide and that number is growing rapidly. However, natural gas vehicles are still a small part of vehicles in use especially in the US where the estimated 120,000 natural gas vehicles on the road represent less than 0.1% of total vehicles on the road.
While much of the public discussion on natural gas as a fuel in the United States has centered around typical on-road vehicles such as trucks, buses, and passenger cars, there are also industrial applications where natural gas is rapidly becoming more popular. Example industrial applications include forklifts, power generation, woodchippers, and sweepers. The industrial market is lower hanging fruit than the on-road market because the industrial market doesn't require the development of a network of natural gas filling stations. Presently, there are only roughly 1,100 natural gas filling stations in the US and roughly only half of them are open to the public. There is a chicken and egg type situation right now as fueling station construction is limited because there are few natural gas vehicles and people are hesitant to purchase natural gas vehicles due to lack of natural gas fueling stations. While much activity is happening to increase the number of natural gas fueling stations, industrial applications are easier to implement presently because at most they require a fueling station at the industrial location (e.g. warehouse) rather than a network of on-road stations.
I expect the conversion to natural gas engines to roll out in phases based upon ease of conversion, environmental factors, and economics. It appears that the industrial market, short distance shipping, and garbage trucks are a few of the most common initial applications for natural gas engines and thus is the first phase. These applications don't rely on a network of filling stations and thus are low hanging fruit. UPS and Waste Management are large companies that have made public statements about their use of natural gas engines. The next application/phase that is gaining traction for natural gas engines is trucking across the U.S. interstate highway system. For example, TravelCenters of America just announced an MOU for creating a network of natural gas fueling lanes at TA locations along the U.S interstate highway system. Probably the toughest application and most daunting phase for natural gas engines will be automobiles as this requires the most extensive network of fueling stations. Even here there is some activity as Honda has a version of the 2012 Civic that runs on natural gas.
Most of the publicly held companies in this space that I have been able to identify are not profitable now and thus are very speculative. The most well known company in the space is Westport Innovations Inc. (WPRT) which likely will not be GAAP profitable until 2015. Westport's focus is primarily in the technology for larger engines that go into vehicles such as large trucks. On the infrastructure side, probably the most common company discussed is Clean Energy Fuels Corp. (CLNE). They design, build, operate, and maintain compressed natural gas (CNG) and liquefied natural gas (LNG) fueling stations. Again, they are not profitable and likely will not be profitable in the near future. Fuel Systems Solutions, Inc. (FSYS) is one of only two profitable companies I have been able to identify in this space. They provide a wide variety of products in the natural gas engine space. A large portion of their revenue is from engine conversions. Their revenue and profitability has dropped in the past two years due to elimination of Italian government incentives for engine conversions.
In the next installment I'll discuss a micro cap company with rapid growth that I think represents an attractive investment possibility in this industry. They are an undiscovered name that is very profitable, has been growing for many years, and likely will continue to grow for many more.