Will Automakers Switch to Natural Gas?

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Includes: CHK, CLNE, WPTE
by: Jim Kingsdale

The drum beat for substituting natural gas for petroleum to power cars and trucks has begun to get louder.  It’s been part of Boone Pickens’ plan, of course.  And now Jim Cramer has picked up the theme with support from Aubrey McClendon of Chesapeake (NYSE:CHK).

The concept is potentially practical since natural gas is currently much cheaper than oil on an equivalent power basis and since converting cars to NG is done in many parts of the world and is not terribly expensive.  Apparently conversions are popular in Australia and  I’m told that one third of cars in Brazil run on natural gas.

What would make natural gas conversions to take off in America?  I suspect it would require a mainstream corporate endorsement.  If a credible company starts up a Starbucks-of-NG-conversion chain of superstores (let’s say Lee Iococca came out of retirement to do it), we could see substantial movement.  It would need to be coordinated with the insurance industry to assure owners that their coverage would not be impaired somehow.

Cramer mentioned three public stocks that are tied to natural gas transportation.  One is Pickens’ Clean Energy Fuels (NASDAQ:CLNE), which focuses on local commercial vehicles.  Another is a Canadian company, WPT Enterprises (WPTE). and the third is Fuel Systems Solutions (NASDAQ:FSYS), a company that makes conversion equipment and which has already enjoyed a huge run in the past year. Both American companies’ stocks seem overpriced on a P/E basis.  That fact by itself suggests there could be legs to this idea.   

One negative indicator is that a General Motors (NYSE:GM) executive is now talking about using natural gas to power the Volt.  Since GM never does anything right, GM’s endorsement could be the kiss of death for natural gas.  Of course GM has not officially announced they will go that way (and they may well be bankrupt before having a chance to make that announcement), so their mention of natural gas is not an official sell signal for the commodity.

On a serious note, if natural gas conversions were to become a significant trend I have little doubt that the price of natural gas would eventually rise to the energy equivalency of oil.  That would make such conversions economically uninteresting (although still useful from a reduced greenhouse gas viewpoint). 

Therefore, my sense is that using natural gas for personal transportation will probably not become a major U.S. trend.  If it did, it would only be a temporary palliative that might delay the ultimate solution we need to achieve: electric transportation with renewable electric generating capacity.