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Who Will Be The First To Answer The Rail Industry's Call For LNG Powered Locomotives?

|Includes: Caterpillar Inc. (CAT), GE, WPRT

The CERA conference in Houston last week prompted numerous, large cap, CEOs to comment on the increasing use of natural gas as a transportation fuel. Frederick W. Smith Chairman and CEO of Federal Express spoke of his company's testing of both CNG and LNG truck engines. GM's Daniel Ackerman spoke in support of natural gas as a transportation fuel in his keynote address. On CNBC, Warren Buffet of Berkshire Hathaway spoke of Burlington Northern Santa Fe's interest in LNG as a potential fuel saying, "when you get natural gas at $3.5 and you look at where oil is you've got to look at converting any kind of an engine to natural gas". Bloomberg quoted Lorenzo Simonelli, chief executive officer of GE's transportation unit as saying,"We are entering a new era where natural gas will be a major fuel". Bloomberg goes on to report that Union Pacific, the largest U.S. railroad by revenue, burned 1.09 billion gallons of fuel last year at an average price of $3.22 a gallon, according to SEC filings. The Fort Worth Star Telegram reported that BSNF Railway, with nearly 7,000 locomotives, spent $4.5 billion on fuel last year. Transitioning any significant percentage of these fuel costs to LNG would mean huge savings at current prices.

Refueling infrastructure: Building the necessary LNG infrastructure for rail is less challenging than trucking. Unlike trucks which are relying on the steady build out of the Nat Gas Highway by Clean Energy Fuels and others, locomotives can theoretically haul very large amounts of fuel along with their cargo. This would allow widespread use of LNG on rail with much less refueling infrastructure. Savings of $1 or more per gallon have been estimated which would contribute hundreds of millions of dollars directly to each rail company's bottom line and add billions of dollars to their enterprise values. These forces could result in a faster paced transition from diesel to LNG in rail than has been so far progressing in long haul trucking.

LNG engine technology: Most trucking OEMs have chosen to license HPDI technology owned by Westport Innovations rather than develop their own in order to produce the highest performing LNG compression ignition engines. Will the same hold true for locomotive OEMs? An LNG locomotive development initiative between Caterpillar's EMD division, Canadian National railway and Westport Innovations was announced in December of 2011. The Fort Worth Star Telegram recently reported that BSNF said it will be evaluating six LNG locomotives in 2013, three from CAT and three from GE. Has GE developed their own technology or have they chosen to partner? Whose technology will ultimately be the first choice of rail customers? Time will tell and we may not have to wait long to find out.

The Wall Street Journal reported that BNSF CEO Matthew Rose said, A shift to natural gas would "rank right up there" with railroads' historic transition away from steam engines last century. LNG adoption would be equally impactful for the trucking, mining and marine industries. With stakes this high, engine OEMs do not have the time to skimp on technology. Engine customers also may not have the luxury of lengthy evaluations if and when the switch occurs.

Disclosure: I am long WPRT.