It is hard to call which industry, company or technology will rise, let alone how fast it will happen. However, there is an unquestionably titanic movement going on in the United States as it relates to the natural gas market, and, as this movement slowly gains momentum, we are on the cusp of some very interesting times.
The natural gas glut is old news. Fracking, ground penetrating mapping technology that allowed for more precise drilling as well as horizontal drilling changed everything. Though natural gas has always been a byproduct of oil, many companies realized that fracking technology worked really well for natural gas, so pursued the money. As fracking became a proven technology and the numbers it could produce became a reality, oil companies pursued legislation resulting in the Federal Energy Policy Act of 2005 which exempted companies from the Safe Drinking Water Act (SDWA). Other exemptions were also passed to the Clean Air Act and Clean Water Act. Like magic, the companies who used fracking were given carte blanche by the government.
It was like a gold rush. Suddenly companies were rushing to snap up and develop as many leases and options in a quest to outgrow their competitors and maximize profit. Exorbitant fees were paid for leases. However, there was a problem: natural gas had no infrastructure or market for all the gas being produced and we simultaneously had a recession. The result: the spot market glutted on natural gas because there was not the national demand or export capacity to support production and since companies could not just turn off natural gas production like a spigot, the wind down drove prices through the floor. What was learned? At minimum, everyone learned how enormous United States natural gas resources were, corporations learned a lesson in unfettered greed and the boardrooms of companies who use a lot of energy or petrochemicals listened, thought and met to discuss their businesses.
Fast forward to 2012. This "side effect" of the gas boom caused the price of natural gas to plummet and created a wider crack in the energy choke hold of oil. See, the world of natural gas has two competing views on pricing: spot pricing and oil indexation. Spot pricing (a purely capitalistic model), bases the price of gas at delivery to centralized locations i.e. hubs. It was started in the United States and is presently spreading via the UK to European markets. Oil indexation (pricing parity between natural gas and oil) was invented in the 1960s out of Europe and spread to Asia. Oil indexation was originally put in place to create long term contracts that tamed the problem industrial sovereign countries had in getting reliable long term petrochemical power. The instability of pricing, and the attempts at OPEC to form a cartel in the 1960s probably factored into this heavily. Countries needed to protect themselves from unstable energy prices. It worked ok for a long time as natural gas was not as portable as oil and oil was cheap. The global recession combined with fracking created enormous disparities between these two forms of contract and the US spot pricing plunged in comparison to the long term oil indexed pricing. This disparity and the size of United State's natural gas reserves has put enormous pressure on these fictitious contractual ties between the cost of oil vs. natural gas. The issue of spot pricing vs. oil indexing is very much alive today, and tectonic shifts are afoot.
Gas spot prices have been traditionally controlled by swaps, futures and options that allow less commitment and greater flexibility. Long contracts are like marriage, spot prices are like dating. Traditionally, companies prefer dating, however, with prices so low and reserves so established, companies must seriously consider the long term contracts they traditionally stayed away from as the energy market has a tradition of being highly unstable and up seems a likely direction for the short term, as for now there remains a persistent problem: America does not have infrastructure or demand. Big established corporations have lifespans that outlive the humans that run them, and as such, they tend to act and move at a more measured pace. They have not forgotten the natural gas reserves, they are just thinking and planning.
The news of an "alternative energy" revolution in United States has been dominated by what I like to call the "higher technology alternative energy" (wind/solar/wave etc.). HTAE is fascinating to humans as it is scientifically cool and makes for great news. These great ideas caught the eye and vision of our recent Secretary of Energy Chu, but there was a very real problem. The market for HTAE has always been limited by the cost to producing and transporting each unit of power created by HTAE compared to cost of producing and transporting the unit of energy from oil or some other resource. It is hard to sell energy that costs more (incentives and environmental concerns aside) than the going cost of energy in oil. In addition, oil is a liquid: pump it or put it in a container and you can easily move it around. Oil has infrastructure is in place. Solar power or wind farms, for example, create electricity, that requires expensive power lines, permits, material costs, grid connections, maintenance et cetera. The machinery used to harvest readily available "natural energy" is intensive in expensive materials and manufacturing (can you say rare earths?). To be fair, natural gas also requires piping, transportation infrastructure and storage as well, but it can also be turned into a liquid and moved by truck or rail instead. This gives it the same flexibility of oil, and as the technology becomes common, this is a very important fact.
A lot of money has changed hands over HTAE, but media, government and the hard truth behind our economy (we are in debt) has lead to less of a boom and more of a slow fizzling. HTAE has great potential, but absent very specific applications, widespread application is further down the road. We just can't afford or completely justify it yet, though government incentives have helped HTAE make early inroads. At a time when our federal government is accruing massive national debt, there needs to be another solution before we run out of money to borrow (there is an endpoint to borrowing: look at Greece).
Fast forward to present. It is a fact that oil and gas companies are very well versed in the art of supply and demand and it was only a matter of time till they reestablished some control. The glut of natural gas over the last couple of years has resulted in a remarkable drop in deployed natural gas rigs compared to a year ago, and voluntary shut-ins i.e. voluntarily limiting production, to drive the spot price of natural gas back up. The drop in price had turned into a plummet as gas producers frantically tried to slow down the gold rush of production, but this was not easy. Wells continue to produce, leases had been signed, budget and bottom lines needed to be met and readjusted, finance deals had been signed, rigs needed to be stopped and leases with deadlines need to be used or lost. Ouch. A number of big companies who got their carts in front of their horses got burned in 2012.
Gas companies claim that they cannot remain profitable producing natural gas at its present price. Probably a more accurate statement is they cannot continue to get financing and expand at these prices and volumes. (Look at Ultra Petroleum Corp (NASDAQ:UPL), touted as a cheap pure natural gas play. Read the Q4, 2012 earnings transcript and you will see some wells are profitable at present prices and are providing capital, however, in order to get more capital to expand, they want prices to go up and UPL management is voluntarily limiting production to help make this happen. It is like the old joke: do you want me to cut off your head or your finger? Well, I would like to live so would you pretty please cut off my finger? Keep in mind, as the price of gas goes up (to whatever number the future spot pricing settles on), volume of sales will actually produce the same or more money at lower prices. Again, we are back to the persistent problems of demand and infrastructure in a capital system. Clean Energy Corp (NASDAQ:CLNE) has taken it upon itself to build this infrastructure and is positioning itself to move and sell a lot of natural gas (demand) and in the process, pay itself money that would otherwise be exported to pay for oil.
So it appears that the locally produced United States natural gas resource will be finding a new reasonable price for production based on spot pricing and the boardrooms of producers and commercial consumers are continuing to watch and plan courses of action. One should be concerned that the price of natural gas will go up to the point that it is no longer profitable to use as an alternative to oil, however, look at that Q4 2012 earnings transcript again. There is a lot of gas that UPL could sell now if they wanted to, however they are afraid of driving the price down again. They must survive, they must qualify for more financing. My point: UPL is waiting. They have learned a lesson in unfettered greed and now want to play nice with someone. The question is what are they waiting for? Demand and volume.
The near term natural gas pricing, discovery of massive and untapped national gas reserves, new technology to access it effectively as well as government awareness of the need to become more energy self sufficient (Obama mentioned natural gas in is 2013 state of the union speech and has been actively shuffling around a new energy team) has created a lot of real questions about where we are going with natural gas vs. oil as it relates to the United States' need for energy. Though we use a lot of natural gas for power generation, we don't use a lot of natural gas for commercial transportation, we use oil.
On the residential front, GE (NYSE:GE) and other players are in the process of making, or have made, the technology available to pump natural gas into cars at home. The infrastructure and piping is already in place. However, when you consider it, this will have a slow adoption rate, as it requires citizens to invest significant amounts of their own money in vehicles and infrastructure for long-term returns at a time most people are not sitting on the funds to do so. Short of a massive uptick in the price of gasoline or government subsidies, this will not happen fast. However, to be fair, we have a change in our Secretary of Energy, and Obama's most recent proposals includes modifying our present alternative energy incentives to include natural gas, though such a proposal would have to survive the web of competing interests that is Washington. This is all great, but in terms of creating demand and infrastructure relatively quickly (though it will produce some), it doesn't change anything. Natural gas has been stuck in the perpetual chicken or the egg argument repeated time and time again in various articles. However, there is an answer: chickens don't lay eggs, corporations do.
The boardrooms of larger companies with centralized locations for trucks and fueling, who consume enormous amounts of somewhat refined oil (diesel), have been considering the news and picking up natural gas test engines. Eggs. The economy of scale (imagine how much diesel is used and paid for by UPS, FedEx, cross country shippers, buses, garbage haulers, taxis, short haul freight etc.) and competition dictate their every decision. If an alternative to diesel can safely and cost effectively provide comparable energy, and, in a spot market economy, it can be provided in a stable manner that assures their numbers work out right, and, it is perceived as environmentally sound enough to get bipartisan support (oil executives and environmentalists agreeing on something, now that's something), and, it is good for reducing our dependence on an more unpredictable resource, i.e. oil, and, there is a well thought out infrastructure in place that makes sense, well . . . the idea is boardrooms will start to go for it.
The questions these large companies must ask themselves include, but are not limited to: Is it cost effective to add to their fleet? When is the next purchase cycle? How stable will natural gas prices be? Is there a fueling system already in place? How do they store it? How often to they need to refuel? Will natural gas remain cost effective in the future? How much new equipment do they have to buy? How easy is it to get parts if machines break down? How easy is it to get warranty work done? Is the equipment easy to fix? Westport (NASDAQ:WPRT) and CLNE have worked hard to give answers to these questions and more and more it appears the boardrooms are listening, testing and incubating their eggs.
Westport Engines: In the early 1980s a mechanical engineering professor at University of British Columbia researched using natural gas as an alternative to diesel engines to reduce particulate and greenhouse gases while preserving the longevity and power diesel engines are known for. In the incubation of an academic environment (a good argument for funding college think tanks), they designed, fabricated and experimented with components and concluded that with a squirt of diesel to start the combustion, followed by an injection of natural gas under high pressure (HDPI - high pressure direct injection), they could produce power bands similar to diesel engines, and they could modify preexisting diesel engines to do it. In 1994, Hill met a guy name David Demers (who has a physics and law degree), and in 1995 Westport innovations was formed. It bodes well that Mr. Demers still sits on the Board. Also, still on the Board is John Beaulieu, who joined in 1997 from a venture capitol fund. If you read the rest of the board's background, you see a nice mix of finance, politics, media, scientist, engineers, sales, distribution (Gottfried Muench is the Cummins distributor for all of Western Canada). Most of these folks, oddly enough, joined the board at about the time that the fracking boom was starting to cause ripples; none have yet to jump ship.
So what has this group of smart people done? Well back in 2001, someone at Cummins or Westport saw a certain synergy between the two business's goals and pushed for a Joint Venture (50/50). It went something like this: you design your parts on our engine platform and we will build them, but a little different. Make engines that work on a little lower pressure that can use a spark to ignite the natural gas instead of a squirt of diesel. Remember, Westport's goal was not to make new engines; its goal was to modify diesel engines to produce engines that produce less pollution, and to design onboard fuel storage systems that could fuel them. Well, this worked well for both of them. Cummins had some really smart people interested in making natural gas components, designing parts that fit onto their engines and all Cummins needed to do was sit back, wait, then manufacture and distribute them through its network. Westport got instant access to a distribution and marketing network without spending money it wanted to spend on research and development. Cummins got a foot into the natural gas market at no real cost. This was smart. In addition, Westport got instant recognition, distribution and sales people. Perfect. This little adventure not only allowed both companies to market natural gas engines and fuel containment systems, but this joint venture allowed both Cummins and Westport to work out any kinks in production, part failure and test how well these engines performed in real world conditions. At present, it is safe to say, Westport/Cummins engines lower pressure spark engines are a time-tested design, and so are Westport HPDI engines for that matter. Since then, there have been some modifications to this original joint venture but no end to it. The Cummins/Westport joint venture has been busy making more connections and Westport has been doing the same. It is worth noting that many of these connections are international as well as national. European engine designers, Asian Engine designers (Weichai and ENN), Indian engine designers, and even the middle east (less pollution really is a legitimate selling point) have sought out Westport or Westport/Cummins. Others have as well. I will explain in a little more detail, the difference between these two engines later but the pattern is obvious. Westport is seeking to be the gutter that catches the rain of money that a cleaner fuel revolution will produce, while Cummins is positioned to be the shingles. Eggs and gutters, what's next? A guy named Boone Pickens?
Clean Energy Fuel Corporation's management is a little easier to understand and yet its product is a lot more murky. It really reduces down to one man: Boone Pickens. His history in finance, government and business is well documented. This man, who is over 80, has been a very successful farmer of businesses and has the ears of a lot of very powerful boardrooms. Boone has a lot of experience in the energy sector, is a believer in peak oil (limited finite resource that only will last so long), US energy independence, and making money, among other things. He financed and formed Pickens Fuel Corp in 1997, which was reincorporated as Clean Energy Fuels Corp. in 2001. The board of CLNE is full of educated, experienced natural gas businessmen and, of course, they have Boone Pickens on their side. He has put his reputation and more than 140 million into CLNE. CLNE is more than the "natural gas highway" built to supply liquefied natural gas (LGN); CLNE already fuels more than 21,200 fleet vehicles at 224 locations in the United States and Canada using compressed natural gas (CNG). It is very important to understand the difference between these two types of natural gas storage to understand why CLNE is really well positioned: more on this later as well. Pickens is pushing to embrace a national resource to fix our debt problems and our addiction to oil that has caused United States no end of headache. Look at OPECs members: we have been at war, sanctioned or had major differences with half of them and this has caused a lot of instability.
Adoption of this argument means the money that would otherwise be going out of the country to pay for oil and nations hostile to the US, would end up in our country and in Boone Pickens' pocket. No one should be faulted for making money doing the right thing right?
Finance is the most concerning aspect of considering an investment in these companies, aside from the long term cost of natural gas, as neither company is profitable. As an investor friend of mine said, it's calculated speculation. I agreed with him. My friend likes proven technology, positive cash flow and dividends. He is not interested in CLNE and WPRT and he shouldn't be; it doesn't fit the risk he is willing to take. CLNE is in a massive cash burn building out their infrastructure, and WPRT, Wesptport/Cummins is chewing slowly but steadily through its last round of financing in 2012 on research and development. WPRT will likely not need financing till at least 2015, if at all (depending on how well its new engine and fueling system is received and how fast the United States and the international market adopt natural gas), after its last round of financing in 2012.
CLNE may need more money for its ambitious build out plan, however, do not underestimate CLNE and Boone Pickens' management. Note that GE will fully finance the micro-LNG plants that CLNE is planning on building, up to the full price of $200 million. Remember the nature of the US "spot market" pricing? These units sound a lot like mini-pricing hubs for local spot markets that would give CLNE the ability to draft contracts that promise long term stable pricing for natural gas. Locations have not been picked, but they will be telling. On March 19, 2013, Westport and Clean Energy Co just announced a co-marketing program. In conjunction with Westport's new engine, CLNE will be offering long-term re-fueling contracts (I would give up a finger for a copy of these, any takers? OK, three fingers). But wait, I thought US originated spot pricing? Long-term refueling contracts? Remember the problems with spot market pricing? Remember those questions boards have, specifically, long term contracts that assure stable pricing? Remember how gas companies appear to be waiting for something? Some transportation companies will be happy with spot pricing, but some transportation boards will want long term stability to base their financing and numbers on. On the other side of the equation, natural gas/oil companies want known profits when they go to the bank to borrow (long term pricing would help . . . remember, they chased away financing after the natural gas glut). Trucking companies want a fuel infrastructure and engines that work without needing a lot of recalculations, new mechanics, or lots of specially designed parts. Westport and Westport/Cummins parts bolt on to Cummins engines. Westport's new LNG fueling system (coming out this year) works on LNG engines as well as CNG spark ignition engines (more below as it solves a major problem of CNG engines). CLNE and WPRT have been planning for years to have the right answers.
One can spend hours analyzing and critically examining the balance sheets of these companies. A recent negative report did, though I do not agree that the underlying research was thorough, but that was not the focus of the article. The impact of the new LNG fueling system on CNG engines was not even considered. I am not going to get lost in the numbers in this article (they are in black and white and not arguable), but pull either stock and look at the income statement. In particular, look at the sales, because after CLNE finishes the first step in its LNG highway this year, and Westport wraps up its research and development-spending spree, over the next 5 years, these are the numbers that are going to mean something. Balance sheets tell you how much a company needs to make but can never predict whether they will make it. My father used to tell me that command decisions are decisions you must make when there is not a perfectly clear answer, and that doing this is part of being an adult. Boards make them all the time, and so do investors.
Bigger Corporate Interests and Technology
The Westport/Cummins Joint Venture has changed a couple of times since its inception in 2001. There has been speculation, that this Joint Venture will reach a point where Cummins no longer needs or wants Westport, however, the law gives Westport some protection from this sort of backstabbing in the form of patents. Also, lets not forget, Cummins has a player on Westport's board. This generally bodes well for trust and fair dealings. Generally. There was a recent article on Westport's patent portfolio that lays out how significant this patent moat really is, and this is very important for a company who is so focused on research and development. Patents in the United States last 20 years (Westport has patents elsewhere but about 75 here), with one article giving Westport protection till the mid-2020s. I think now is a good time to talk about the difference between liquefied natural gas and compressed natural gas (CNG) and give those answers I have been promising.
If you took a volume, let's say a 1x1x1 foot cube of natural gas and compared it to diesel, there is no real comparison. Diesel is a liquid and dense with energy, natural gas is a gas, and as such, is no where near as dense with energy. If you want to use natural gas as energy, you need to do something about volume or every car would need a fuel tanks that look like hot air balloons to travel any distance (anyone remember these?). So to get more power, you compress natural gas down to 1/100 of its original size. Now you have CNG. More power less space. There is still a problem though, and CNG owners will tell you about it. CNG has greater density of power but it is no where equivalent to diesel or gas. So so companies with centralized local trucks and nightly fueling love it (the garbage industry for example), but, without enormous tanks (simply not reasonable), power and range is always limited. In addition, to fuel with compressed natural gas, you need an electric compressor to compress the natural gas into your tank, and the bigger the tank, the bigger the compressor (compressors require lots of power or time: think about filling your car tire with a small compressor or a larger more powerful one). Big compressors use a lot of power. This is easy in the city but at truck stops in the middle of nowhere, not so easy. Liquified natural gas is the same as compressed natural gas, but more compressed. You can compress natural gas till eventually it reaches a liquid state, but the pressure and energy expended to compress natural gas would be outrageous. So, instead you cool it. At -260F, natural gas liquefies and you don't have to spend time compressing it, it takes 1/600 of the space it originally took, you can pour it like any other liquid, or transport it without needing pipes and it has roughly 60% the energy of diesel. As long as you keep it insulated, cold and allow for occasional venting if necessary (there has been a lot of misinformation out there: per US and Canadian code, LNG tanks must be designed to to hold LNG for 5 days before releasing NG, and when it does release, it only releases enough NG to drop the pressure), it works. CLNE's "natural gas highway" is designed to fuel with LNG, because, you can transport it by truck, pour it relatively quickly like a liquid (cold liquid, but liquid nonetheless), and it has sufficient "energy density" to make tanks small enough to compete with diesel. (A nice, factually accurate video explaining much of this in detail is here.)
So back to Westport, Westport/Cummins and this LNG highway. So what exactly is the difference between Westport and Westport/Cummins. Well, Westport designed high-pressure direct injection (HPDI) natural gas engine modifications for Cummins engines that allow LNG to perform like diesel, but required a bit of diesel to get the high-pressured natural gas to ignite. Under this kind of pressure (very high pressure), natural gas does not like to ignite. This setup makes power bands like diesel and the engines are equally reliable. HPDI engines are fueled by an onboard LNG fueling system also designed by Westport. Westport/Cummins has designed a lower powered engine (lower pressured) that operated on natural gas so it can be ignited by a spark (natural gas just has problems igniting under very high pressure), instead of diesel. As the engine uses only natural gas, the exhaust is relatively clean and the EPA loves it. Up to now, these spark ignition natural gas engines have been fueled by CNG because LNG is too high in pressure.
The reason the market has been holding its breath for ISX12G (fueled by CNG, LNG, or bio methane (which is nice for waste company's future plans)), heavy duty 12 liter, low pressure spark ignition 400hp engine set to roll out this year, is not just that this engine fills a void in Westport/Cummins, Westport power band (the 8.9 liter spark ignition engine of Westport Cummins, jumped to the 15 liter HPDI engine for Westport with nothing in between and there is a real need). Westport is coming out with a LNG fuel tank, that is purpose built to fuel the ISX12G as well as work with any OEM vehicle powered by natural gas, including duel-fuel engines. What that means is the CLNE "natural gas highway", can now fuel both HPDI engines or lower pressure spark ignition natural gas engines, or any dual fuel engine made (as long as they use a Westport LNG fuel tank), and these tanks last 5 days before they vent some natural gas. Suddenly, the very real distance limitation problems of CNG fuel, that is, the traditional way storing fuel for the lower pressure spark ignition engines, goes away. Thanks to Westport's new fueling system, LNG can now fuel Westport, Westport/Cummins and any other kind of dual fuel engine. CNG now has the range to use CLNE's highway. Big transportation/hauling businesses will have a complete power band of engines to choose from (from heavy duty to light duty), they will have CNG and LNG engines to choose from and CLNE is sweetening the deal by bundling Westport/Cummins engines with stable long-term fuel contracts if companies want them. A last point for those who are still worried about Cummins: Cummins is an old elephant that will likely outlive all of us reading this article. It is well positioned when Westport's patents expire, and meanwhile, it is making money selling engines. If they buy Westport, well investors aren't worried about this, right?
So a bet on Westport is a bet that the patents are well written and the last 20 years of research have produced a unique product that is well thought out. It is a bet that the natural gas engine market is emerging globally and nationally, especially with the roll out of Westport's new fuel tank design. It is a bet that CLNE is well positioned to supply CNG and LNG rigs because Westport's new LNG gas tank can run on either and help CNG rigs travel distance. It is a bet that the infrastructure for LNG natural gas will be built out (70 stations by the end of 2013) and grown by CLNE's management on either spot pricing, for those who are comfortable with it, or CLNE's own long-term, stable contracts if companies want it. It is a bet that selling a nationally produced energy source cheaper than an imported one will be profitable (dollars presently exported to buy oil, will become CLNE and WPRT dollars) and it is a bet that Westport will achieve profitability and stability before its patents run out. It is some comfort that major national and international corporations have been coming to Westport and Westport/Cummins. So will another company with massive manpower and a passion for spending on research and development come out with a better HPDI product or LNG fuel tank? Well anything is possible, but not yet. Patents make it unlikely. International engine companies are coming to Westport and forming their own relationships. Perhaps it is safe to say, it is safe for a while.
Clean Energy Fuel Corp has operated for the last couple of years with no real competition. Who else had the vision or desire to invest 140 million into a natural gas highway before there were trucks to run on it? Who was in a position to capitalize on the natural gas glut and recession? Who had the connections to the industries necessary to make this happen and knew about the emerging technology? Boone Pickens, an American billionaire. However, in March 2013, it was announced the Chinese Company ENN Energy Holdings Ltd. entered the natural gas fueling business in America, and Shell made its own announcement for 200 LNG stations with TravelCenters of America starting 2013 (if the agreement works out), and others are following in Canada (Royal Dutch Shell Plc is planning on building a similar infrastructure in Canada for example). One could be reassured that other billionaires and big businesses see money to be made in this sector, or, become nervous that Clean Energy Fuel Corp has competition by companies that dwarf it on scale, or just be comfortable that Boone Pickens might be onto something and has a solid lead. It is worth noting ENN is limited to Utah for now. It is also worth pointing out that building a LNG natural gas station for trucks requires quite a bit of money, time and a stable long term supply of spot priced or long term contracts of natural gas. It requires a willingness to invest, work and wait. It requires permits, a responsible crew to build stations and the equipment to make it. Though ENN Energy Holdings Ltd has made a lot of noise entering the market, all the above takes time. Boone Pickens and the CLNE board have been doing business and building relationships in the US culture for a long time. CLNE has had a lot of time to put thought into its decisions, like using an existing long haul trucking route (Flying J) to build the infrastructure. Corporations don't want their employees to have to search for new stations, nor do they want to create new routes. Trucking is all about making it as easy and economical for drivers to get from point A to point B using built out infrastructure. When trucks break down, companies want a pre-existing and tried infrastructure to repair them. There are also hundreds of other calculations, from trip permits to tire consumption that must be considered. It requires time and money to change these things, so the less change the better. CLNE has clearly been working hard to plan and develop the supply of natural gas for its dedicated CNG and LNG fueling infrastructure (see GE remark earlier and bet other things are afoot no one knows about). These are the answers big established companies want when considering their investment, as no one is flush with cash right now. ENN and others can compete but they have some catching up to do.
Westport's patent moat and alliance with Cummins and others has already been discussed or referenced. Will someone invent a better or cheaper way to use natural gas to create the power and torque of diesel on an existing commonly used diesel engine platform? Not yet, and when you put it this way, not likely. Will someone invent and get to market quickly a LNG fueling system optimized for any natural gas vehicle without infringing on patents? Highly unlikely. Note that bigger engines are in the works but Wesport is still involved. There is a reason Westport has relationships with all these companies, and its not because they like to share. Could someone invent a new engine all together avoiding Westport's patents . . . what business or repair shop wants a warehouse full of engine parts that no one has ever used before. It would take time and, most importantly, Westport and Westport/Cummins engines have already been time tested.
CLNE has already built a lot of stations, and is familiar with the leasing, permitting and building process. Practice makes perfect and the legal and environmental concerns surrounding repeatedly building these stations shouldn't increase (especially if they are done on land already dedicated to fueling), nor should there teams get slower at it. CLNE is now starting to put together long-term fuel packages, as an option to spot pricing, based on utilization of Westport/Cummins engines for boards to consider. Westport/Cummins engines are in harmony with the EPA (trucking companies in harmony with the EPA?). CLNE and WPRT have a lot in common right now and boards of companies who use fuel for cross-country transportation have been listening, thinking and planning. One thing is for sure: fuel is probably the biggest expense on all their books and no one likes the pricing uncertainty of imported oil (see the earlier OPEC remark and consider whether the pending death of Chavez wil increase or decrease oil stability, and consider Libya, Iraq, Iran are far from stable and happy suppliers) or the spot pricing market for natural gas. Another thing for sure, none of the transportation companies want to be left behind, and a way to hedge against oil prices is to change some of their fleet to LNG or CNG, especially if it allows spark ignition engines to travel distances. A telling number will be the number of 12 liter spark ignition engines and/or new LNG tank ordered over the next next pricing cycle (generally 5 years). I expect it will be more than the analysis think, especially if the option for long-term natural gas contracts by CLNE will work the way I think they will.
Fracking and government: Companies that once avoided close scrutiny of the chemicals used in fracking and the long-term consequences of the technology are now being scrutinized. Texas, to my personal surprise, is one of the first few states to have has passed legislation requiring companies to divulge the names of the chemicals they use in fracking, while other states have passed moratoriums to better understand the consequences and application of this technology. The days of carte blanche fracking is over, but fracking, as a technology and method is not finished, it just appears to be heading to a more controlled application. This was probably a good idea and politics to begin with (it probably would have avoided the natural gas glut by forcing a more measured pace to things), and this may explain why Texas, an oil state, is leading the march in this direction. Remember, there is a big difference between fracking 1000 feet underground with little research as to the water table, while improperly capping the well afterwards and fracking 10,000 feet underground after proper research and properly capping the well afterwards. Fracking is not over, it will just be better controlled.
The US federal government is under a lot of pressure, both from a nation security prospective and an employment prospective to keep the natural gas ball rolling. It cannot afford to throw subsidies around willy-nilly anymore. Our economy needs a boost, and a cheap natural energy source that would slow down our foreign oil problem would do it. Despite the carnival barking, fracking is not all bad or all good. Also, do keep in mind that the gas boom wasn't solely the fault of fracking. Advances in underground mapping have allowed more precise and effective drilling where "natural" fracking has already occurred i.e.. small fault lines. That being said, there are some situations where fracking should be limited, but there are also plenty of situations where fracking should be done. It appears this is being figured out State by State and so eventually the federal government will follow. Well, at least that is how it is supposed to work with law. States are incubators that the federal government uses to make decisions. A word of caution though, I used the word should as the federal government is notoriously gridlocked now between chemical companies who like cheap gas and oil/gas companies who want to burn gas, and oil/gas companies who want to export gas. However, an interesting sign that the federal government is doing what it should is the shuffle mentioned earlier, and specifically the Secretary of Energy. Steven Chu is out: and if you like natural gas, this is a sigh of relief. Chu, was an academic and was deeply entrenched in all things technical (HTAE mentioned earlier), but had no interest in something as common and related to petrochemicals as natural gas. Chu tried to incentivize and fund other alternative energy resources with the best of intentions but there were always lingering problems with his decisions. See the energy and transportation arguments mentioned earlier for starters. Mr. Obama just appointed Ernest Montiz, to replace him and many in the oil and gas industry see this as a positive event. If you read his background, and stances on fracking, they are probably right. Mr. Moniz's appointment can only be an indication, among other things, that Mr. Obama and the government are starting to understand that natural gas could really help our country transition from oil to the HTAEs that hold long-term promise to a clean and healthy living environment. It means a democratic president appears to be finding common environmentally safe ground with the petrochemical industry. Funny.
I think the take home lesson from Mr. Chu's tenure is that their needs to be an intermediate product to ease our nation's transition from oil to more renewable methods of energy generation, and oddly enough, this is exactly what Boone Pickens has been saying.
The last big issue for CLNE and WSPT (aside from political gridlock and maneuvering that tests all our patience) is whether the government will focus on an export policy or use our new cheap energy source to drive new business back to United States. Chemical companies like natural gas for energy and the molecules they can create with it and the byproducts derived from extraction. Natural Gas Liquids (NGLs). Given the disparity of natural gas prices in the US vs. abroad, United States could export itself right into high natural gas prices if it does not pursue an export policy in steps. At present, given the limited number of terminals presently approved (the present number vs. proposed is astounding), the time it will take to pass legislation (export is an issue of national security) and the time it will take to permit and build such terminals, it is hard to say that this issue will be a major factor in the immediate future, though it will be an issue. Keep in mind, as time passes, if you believe in peak oil and/or unstable oil, oil prices will rise. I will leave speculation on the long-term effects of exporting natural gas to those better informed, as, I think there are just too many variables to really know what will happen, especially in a spot price market, I am just pointing out it will take a while before it could or will even happen on a scale to jeopardize Boone Pickens plans. Hopefully, if history is an example, a compromise will be found, and a stepped approach will be approved, as it appears there is enough to go around. Government studies take time, big lobby firms are in the mix on both sides of the table and every day that goes by increases the chances that a transcontinental highway powered by natural gas will become a reality because while our government is busy discussing it, CLNE is busy building it.
The Unites States economy needs a boost from the stagnant place it has been in, and so does natural gas. Imported oil is a major drain on our economy. With production down and voluntary shut-ins a reality, it is inevitable that the price of natural gas will go up to some degree, however, demand will flatten out the rising graph and financing will come back around to natural gas. Money needs to find places to grow. LNG bypasses pipes, the traditional hubs used fro natural gas pricing and can be shipped on rail (run by natural gas trains?) or truck. The United States government will inevitably export more natural gas but how much remains to be seen and a gradual stepped approach is likely. Over time, as demand increases, the production and drilling numbers will go up as the equity to finance it comes back. Meanwhile oil will continue to be used as emerging industrialized nations are finding it as addictive as the United States did. Look at China. A cheap national energy source would be a step towards greater competition and through natural gas is not the perfect answer; it appears to be perfectly positioned to ease our energy dependent society from a peak oil problem to the next chapter of higher tech alternative energy solutions. HPDI engines are what companies need to hedge against higher oil prices and Westport is hedging by playing to the global market for them.
Consider the data given in this article and calculate the risk; consider how far is the downside and how far is the upside. Consider the players. If your going to commit, make sure you factor setting aside some of that capitol to buy in the dips that may happen in the next 18 months as the market sorts out the drop in drilling and natural gas spot prices, however, sales numbers will be coming in this year and the next, and the next. Keep in mind CLNE and Boone Pickens are marketing long term contracts or trucking companies could risk the spot market, but either way, both options are on the table.
Best of luck with your decision. I never said this was a safe, dividend-producing investment; however, with risk comes reward.
Do post any relevant data. I wrote this to share my research and views but also to learn more. We are in interesting times.
Disclosure: I am long CLNE, WPRT, UPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.