Most people who have read my other articles on Seeking Alpha or
subscribed to my investment newsletter have figured out by now I
believe the shale gas/oil revolution occurring within the United
States is a big deal. It is probably, in my opinion, one of the
largest investment opportunities currently available.
In past articles, I have explained my investment logic for my
favorite natural gas infrastructure, transportation and production
companies. The most important factor influencing my conclusion is
the relative value of natural gas as compared to diesel fuel.
This value comparison is so important that I developed a
proprietary chart (seen below) to help quantify my investment
(click to enlarge)
This pricing chart graphically illustrates the pricing
differential between diesel and natural gas through December 2012.
This pricing differential is the single most important factor for
investing in natural gas related companies.
Obviously, natural gas pricing continues to favor adoption.
I am going to focus on one company that will benefit
tremendously as long as pricing continues to favor adoption -
Westport Innovations (
Current market capitalization - $1.5 billion
52-week range - $21.93 - $50.19
Current price - $28.50
The phrase "lynchpin" can be figuratively defined to mean;
"something that holds various elements of a complicated structure
The lynchpin that makes the conversion to natural gas powered
transportation vehicles possible is Westport Innovations. Westport
is one of the companies that stands to benefit the most over the
next several years from the migration to natural gas as a
transportation fuel. They are a pure play on natural gas powered
engines and current global leader in natural gas engine technology.
The company controls technology that enables engines to run on
alternative fuels without compromising performance, fuel economy,
durability or reliability as compared to diesel engines. This fuel
substitution to natural gas achieves a significant reduction in
unwanted environmental pollution.
So what exactly is Westport's business?
Westport is a global leader in alternative fuel and
low-emissions technologies, which allow combustion engines to have
cleaner emissions through the reduction of greenhouse gases
produced and lower levels of particulate matter. Its technologies
allow engines to run on clean-burning fuels, such as compressed
natural gas [CNG], liquefied natural gas - LNG, and biofuels
WPRT leverages its proprietary technology by partnering with
engine, truck and automotive equipment manufacturers (the OEMs) to
develop, manufacture and distribute its engines to a wide group of
global vehicle manufactures. The partnerships provide it with
access to manufacturing capacity, supply chain infrastructure and
world-wide distribution networks without incurring the investment
associated with them.
The markets the company primarily focuses on include light,
medium and heavy-duty engines. Recently the high-horsepower engines
for large commercial applications have begun to garner attention.
Westport addresses each market separately through the use of joint
ventures or in-house development.
The light-duty market, or Westport LD, is focused on light-duty
automotive systems and components. This area also includes
industrial applications for smaller vehicles such as forklifts.
Examples of LD vehicles are forklifts, passenger vehicles and small
The medium-duty and heavy-duty segments are currently dominated
by the Cummins/Westport [CWI] and the Weichai/Westport joint
ventures. They currently include a wide range of natural gas engine
sizes depending on the JV. Examples of MD-HD vehicles are school
buses, city buses, waste-haulers and delivery vans. Westport has
developed a proprietary high-pressure direct-injection - HPDI for
the HD market segment.
The high horsepower market, or HHP, is focused on large
commercial applications for the marine, rail and mining
environment. These engines all use millions of gallons of diesel
fuel annually, and although this is not a high-volume market
opportunity, this area is certainly a high-margin opportunity. Any
time you can save a company millions of dollars in costs annually,
your pricing power should be unparalleled in the market. Just
consider how much money shipping companies or railroads could save
in diesel costs by adopting natural gas engine technologies.
The valuable strategic and business alliances
First, I should mention that almost everyone who manufactures an
engine is involved with or wants to be involved with Westport on
one level or another. From tiny fork lift engines to the largest
marine engines, just about every manufacturer on the planet is
either talking with WPRT or has signed a more formalized agreement.
The finalized contracts range from evaluation and feasibility
projects to formal joint venture partnerships where parties are
contractually bound together to perform. One thing is for sure -
Westport is a first-mover in the area and everyone wants to be
involved with the market leader.
Are the patents owned by Westport more valuable than others? Do
they represent a long-term defendable intellectual property
position that can benefit shareholders for years to
These are tough questions to answer. As time passes, a clear
winner will emerge. Perhaps a relevant parallel can be drawn with
Google and Yahoo. In the beginning, both were respected start-up
companies but Google was able to differentiate itself through its
patent portfolio and an ingenious way to rank web pages. As time
has passed, Google is without a doubt the clear winner. Yet the
original technologies were very similar and hard to differentiate.
Perhaps the competition between HPDI and SI will play out similarly
- only time will tell.
Westport has first-mover advantage in a category that could
reshape how we use fossil fuels. A firm can gain first mover
advantage when it has some sort of breakthrough in its research and
development, resulting in a direct breakthrough in technology. A
learning curve can provide a sustainable cost advantage for the
early entrant if the learning can be kept proprietary (HPDI is
owned by WPRT) and the firm can maintain leadership in market
share. This advantage results from the fact that the first entrant
can gain control over resources (patents) that followers may not be
able to match. Sometimes first-movers are rewarded with huge profit
margins and a monopoly-like status.
All of this is hard to quantify now to answer the question - Is
the technology worth a few million or a few billion? A clear answer
to this question is difficult to come up with, but Westport has the
"structure" in place to have a significant impact on an enormous
market segment, a defendable patent portfolio and key relationships
with all the major players in the industry. In other words, the
odds appear to be in Westport's favor, but only time will tell.
In the market, you can always find stocks, bonds and options you
can "trade" on various time-frames - trading or fast money is more
Wall Street's style presently than it ever was in the past. Rarely
are you presented with an "investment" opportunity that allows you
to earn compounded returns over many years (sometimes decades) no
matter what the economic situation. If the natural gas/diesel fuel
pricing differential holds, Westport Innovations might just be a
stock for the next decade.
Additionally, investors should look at other companies leveraged
to the pricing differential seen in the chart above. I believe that
now is the time to look at natural gas related investments in
companies like: KBR Incorporated (
), Golar LNG (
), Clean Energy Fuels (
) and Cheniere Energy (
) just to name just a few.
I am long [[WPRT]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
This work is based on public filings, public events, interviews,
corporate press releases, and what I have learned as financial
journalists. It may contain errors and you shouldn't make any
investment decision based solely on what you read here. It's your
money and your responsibility.
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