The market was impressed by the convenient infrastructure solution presented by General Electric (GE) and Chesapeake (CHK), which aimed to raise the adoption rate of natural gas. Along with its convenient plug and play onsite fueling solution, the deal has been made extremely attractive by the fact that financing is being offered by GE Capital at competitive rates and flexible payment options. We have already discussed what the deal is all about, but the main beneficiaries from this innovation still have to be discussed.
Even though the list of companies that will benefit from this fueling solution is a long one, some names do stand out and are, therefore, expected to be the main beneficiaries/losers.
WPRT is a pure play on the natural gas adoption rate. The natural gas truck and engine manufacturer has long committed its operations to produce clean energy vehicles and engines. However, the company has not been rewarded with a single quarter of profits as yet. Nevertheless, the sell-side expects the company to make its first cent of earnings in the next year.
WPRT has struggled, but not because of its product quality or range. In fact, it has been the natural gas switching rate that has been much slower than what the market had anticipated after natural gas prices declined continuously due to abundant gas supplies from shale rich areas. Although gas prices have rebounded slightly and are hovering around $3, almost 50% higher than the price it once reached in April this year, there still remains a huge gap between oil/diesel and gas prices. Therefore, 40% of the fuel costs can still be saved if the end consumer decides to switch to the cheaper fuel source.
WPRT is set to benefit from the revolution in the U.S. energy landscape. Its successful light and heavy duty products have received positive reviews from users. High Pressure Direct Injection (HPDI) for the heavy duty truck segment is one of its most famous products. The company has managed to forge alliances with some of the top OEMs of the world, like Cummins, Caterpillar (CAT) and General Motors (GM). The company is trading at cheap valuations. Morgan Stanley's analyst expects the company's revenues to double in two years and triple in three years.
Cummins also produces natural gas engines with WPRT, under what is known as the Cummins - Westport (CWI) division. Therefore, in this situation, CMI will be a secondary beneficiary of the new invention in the market.
Clean Energy Fuel Corp (CLNE)
Most people agree that the biggest hindrance in natural gas adoption has been the slow infrastructure development rate of CNG fueling stations in the U.S. Nobody wants to end up in the middle of a highway with no fuel in their tank. It has been a chicken and egg issue, as truck manufacturers like Paccar (PCAR) and Navistar (NAV) have hardly produced any models of gas-driven trucks because end consumers are not fully prepared to switch to natural gas. Also, oil giants like Exxon Mobil (XOM) and Chevron (CVX) are also willing to invest in this potential, as they are waiting for truck manufacturers to produce such models that can drive up to their fueling stations.
CLNE very boldly took the first step after taking finances of $450 million from Chesapeake, and has set about on a plan to build 70 and 80 natural gas fueling stations in this year and the next, respectively. Given the pace at which they are working, they are sure to meet their targets.
However, as discussed in our earlier article on CLNE, we identified that only 199 15-L engine-fitted trucks currently move on U.S. roads. Therefore, CLNE has a very small market to address right now. Although growth is expected to be exponential in the future, with 10,000 such trucks in 2015, at the moment, competition in the form of GE-CHK collaboration was the last thing that CLNE wanted in the prevalent small market. In case CNG in a box becomes a success with the masses, CLNE will surely be at a big risk in the future.
Like Cummins is for Westport, so is Navistar for CLNE in the natural gas scenario. NAV and CLNE have partnered together to build a network of gas fueling stations, through which NAV customers will be offered rebates to offset the high cost of buying a gas-driven truck. This invention has made the situation tricky. It can go either way for both CLNE and NAV. The customer, for the sake of rebates, might buy NAV trucks, which will benefit CLNE. The customer could also go to some other fueling station having the new "CNG in a box" and CLNE will see its revenues going to competitors. However, the situation tells us that since NAV's revenues depend more on the final customers quicker transition to natural gas as compared to CLNE's revenues, NAV is in a win-win situation in both cases.
Ryder, the largest truck lessor in the U.S., has already been upgraded by Suntrust Robinson Humphrey. The company is quickly converting its fleet into natural gas trucks. In this way, its fleet will become more attractive to customers, and will therefore generate higher revenue levels.
Waste Management is also thinking of shifting more of its fleet to natural gas-driven trucks. The company has already shifted 1,400 of its trucks to CNG, which are expected to save $27,000 per truck. The company is expected to control its costs in case of switching.
FDX and UPS, the two economic bellwethers, have a lot of potential to save money after turning their fleets into gas-driven vehicles. However, up till this point, they have been reluctant given the lack of fueling infrastructure available. An improvement in the infrastructure will make this decision an easy and obvious one.
The market is extremely excited about the new innovation that can almost single handedly change the energy landscape of the U.S. What needs to be analyzed now is how efficient it is in producing the desired results. In case it works as promised, we will definitely see a sudden and rapid change in the relevant stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.