It is always fun touching base with old friends. In this case, it has been a while since I have written about natural gas, and I miss it. Actually, there are a few interesting developments. One of the most important things is the price of natural gas inching up. All the amazing projections about the natural gas economy depend on low prices, though suppliers want higher prices. Natural gas needs to consistently be better than oil until it is established.
Price Could Slow Road to Profits
Early in 2012, the spot price of natural gas bottomed and has gone up quite a bit. In absolute terms it might not seem like much, and the rise does not match up to the decline from 2011 prices. However, the price is about double the bottom.
For a company like Westport Innovations (Nasdaq: WPRT) that is problematic. As happy as the market seems to be with the company, it is not profitable. There are various reasons for this, such as building production capacity and R&D spending to have better technology. One of the more important reasons is that they are not selling enough to overcome the expenses.
Westport is one of the most well known names when it comes to natural gas engines, but even it cannot generate a profit. That is because the market is new, and adoption of the engine is growing. However, Westport did worse in 2012, than in 2011. Westport lost $1.83 per share in 2012 versus $1.26 per share in 2011. The company forecasts profitability in 2015, but will this be true if the price of natural gas increases further? The year 2015 is about 2 years from now, and a lot could go wrong in that time.
Westport is also going to stop reporting consolidated earnings with its joint venture with Cummins (NYSE: CMI). For followers of Westport, do not get shocked if you see a significant drop in revenues. The joint venture will report its own earnings from now on. I am focusing on the lack of profitability here, and I would not trust any forecasts. For what it is worth, Westport projects an increase in revenues of 16% to 29%, as the company is a growing one top line gets the focus over the bottom line.
I would recommend caution regarding Westport, but that does not mean jump ship. Despite the rising natural gas prices, Westport is doing pretty well for the year so far with a return of almost 14%. People still like Westport, and natural gas prices are not rising so high so fast that you need to hit the big red eject button.
Regarding Cummins, it is a huge company compared to Westport. The company will benefit from a switch to natural gas, but not as much as Westport would. The diversity of Cummins’ business means that it is probably safer. The company made $8.67 per share in the last 12 months.
For the sake of safety Cummins is the better choice. It is profitable, has low debt, and offering a 1.70% dividend yield. It will run you over $110 a share though. I think growth for the company has remained weak, which might explain the joint venture. Natural gas engines are a growing market, and it could help Cummins’ growth. If natural gas trucking really takes hold in the U.S. it would be great for both companies. Westport’s share price will probably move more. Cummins is better if you like playing it safe, after all it is not losing money.
Fueling Stations Would Suffer From Weak Engine Demands
Everybody loves a good superhero team-up. Westport is teaming up with Clean Energy Fuels (NYSE: CLNE) to market the liquefied natural gas engine and refueling stations. The overall goal is to encourage the use of LNG in heavy-duty transportation. This is through incentives, but the most important thing is places to refuel along major transportation corridors. Clean Energy already has 70 stations completed with more planned.
The goal is to make it easy for truckers to use the Cummins Westport LNG engines by offering them convenience in refueling at better prices than the alternatives. That will be difficult if natural gas goes up too much in price. It would be pretty terrible for Clean Energy, which has already made the outlay for the stations. Clean Energy shattered the chicken and egg problem through the only way possible, by taking the risk and just doing it. That means Clean Energy has a lot to lose if natural gas does not take off for trucking. The company is losing money as well and has a –$101 million net income ttm.
A Chinese company has decided to build 50 natural gas refueling stations in the U.S. This is actually a very good development. These companies are not at the point that they are scrapping with each other for market share. More companies means a lower burden for the individual companies. Every station that the Chinese company builds is one less Clean Energy has to build in order to make sure natural gas refueling is omnipresent. Right now it is more important making sure that customers are confident they can make the switch to natural gas without running into refueling trouble.
I think Clean Energy working with Westport is a good development. Syncing the engine maker with the refueler should allow them to effectively entice natural gas converts, but until the LNG system from Westport is widely available everything remains tentative. I think I like Westport better than Clean Energy. I liked Clean Energy months ago but now that I consider it you would be better off with Westport as your speculative investment on the future of natural gas. You can save Clean Energy for later unless you can accept the higher risk. If you are looking to benefit from natural gas being darling of the market, Westport will see a massive push. You do not need Clean Energy to benefit from natural gas sentiment. You can wait till Clean Energy starts making more money before investing in it.
Additional Riffing:
I am fairly concerned about the price of natural gas. The thing you need to remember is that with natural gas comes oil. Canada also has their cheap oil sands. The gold age of refiners is occurring because of cheap crude. The last thing natural gas needs is to be more expensive as its competitor is having a nice time of it. Oil has like 100% market penetration. It is what the world uses. How are you supposed to unseat that? It won’t happen through higher prices, large upfront costs, high maintenance fees, and annoying refueling issues.
I personally am not sure if I would want to have normal exposure to natural gas. It seems like I would cut any investment in half and share it with a supplier just in case. Natural gas’s lack of widespread use will mean good things for suppliers, at least initially. CNG and LNG present some interesting opportunities though, but they present some significant challenges. I discussed before how crude oil and gasoline are almost a gift to civilization. Low (ish) viscosity liquid at room temperature and standard pressure with a high energy content per unit. Well as I learn more about natural gas you will learn more.
Related articles
The post Rising Natural Gas Price Signals Caution Not Eject, Yet appeared first on The Market Archive.