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 since. 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 Inc. (USA) (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 Innovations Inc. (USA) (NASDAQ:WPRT) is also going to stop reporting consolidated earnings with its joint venture with Cummins Inc. (NYSE:CMI). For followers of Westport, do not get shocked if you see a significant drop in revenue. 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 revenue 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 rising natural gas prices, Westport is doing pretty well with a return of almost 14% so far this year. 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 Inc. (NYSE:CMI), it is a huge company compared to Westport. It 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 offers a 1.70% dividend yield. 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 Innovations Inc. (USA) (NASDAQ:WPRT) is teaming up with Clean Energy Fuels Corp. (NASDAQ: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 Inc. (NYSE:CMI) Westport Innovations Inc. (USA) (NASDAQ:WPRT) 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 loss ttm.
More developments
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 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.
The takeaway
I think Clean Energy working with Westport Innovations Inc. (USA) (NASDAQ:WPRT) 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 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.
The article Rising Natural Gas Price Signals Caution Not Eject, Yet originally appeared on Fool.com and is written by Nihar Patel.
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