How to Play the Progress in Natural Gas

by Aaron Levitt | October 15, 2012 7:00 am

It seems that we are truly awash in natural gas. New refined drilling techniques have allowed exploration and production (E&P) firms access to the trapped natural gas contained within shale rocks for the first time. As producers continue to tap America’s various shale formations, supplies have risen so much that prices have cratered toward historic lows.

However, that creates a bigger issue: What to do with that bounty as America heads for[1] energy independence.

Natural gas has already gained prominence for generating electricity, as many utilities have switched over to it[2] and have begun construction on new gas-run power plants. Likewise, various manufacturing processes have taken a bite out of the overabundance, and new proposed liquefied natural gas (LNG) export facilities[3] will also lessen growing supplies.

Despite the appeal of natural gas, using it as a transportation fuel hasn’t caught on — until recently.

A No-Brainer

As gasoline and oil prices continue to rise, the idea of using all that new-found natural gas for transportation has been gaining steam. For investors, that could mean big opportunities in “fueling up our fleets.”

This idea, of course, seems like a no-brainer. The premise is quite simple: Increased production[4] of natural gas here will displace petroleum imports from overseas. Overall, the move will make the U.S. more energy-independent and also speed the domestic natural gas boom — complete with economic opportunity and jobs. And there are all the green side effects to consider, including fewer toxins and carbon emissions.

Yet, the use of compressed natural gas (CNG) or LNG for transportation has been a game of you-go-first between vehicle manufacturers, consumers and infrastructure providers. However, times may be changing because some real progress is being made on all fronts.

Moving Forward

First, the critical infrastructure component is grinding forward. According to the industry group Natural Gas Vehicle Association (NGVAmerica), more than 1,000 CNG/LNG fueling stations currently operate in the U.S. — and that number is growing. Royal Dutch Shell (NYSE:RDS.A[5], RDS.B[6]) has partnered with TravelCenters of America (NYSE:TA[7]) to sell LNG at 100 sites in the U.S. Shell has ambitious plans to build out LNG fueling infrastructure in Canada as well.

At the same time, T. Boone Pickens[8]-sponsored Clean Energy Fuels (NASDAQ:CLNE[9]) has formed an alliance with Pilot-Flying J — the nation’s largest truck-stop operator — to bring CNG to its 550 locations. While this is hardly registers among the estimated 145,000 gas stations across the nation, it’s a positive development. Analysts estimate that by 2019, more than 2,000 stations will offer CNG/LNG.

Secondly, CNG/LNG vehicle adoption is growing as well. About 40% of garbage trucks sold in the U.S. last year were natural gas-powered, according to NGVAmerica. More recently, a coalition of 22 U.S. governors announced[10] that their respective states will buy at least 10,000 CNG cars and trucks annually.

The hope is that their collective buying power and giving the automotive industry a guaranteed market will cause the cost of CNG vehicles to drop. Currently, CNG vehicles can cost up to $10,000 more than their gasoline-powered counterparts. That higher cost is attributed to internal combustion retrofits. However, if those vehicles came off the assembly line set up for natural gas, the cost would drop considerably.

Cleantech analytics firm Pike Research expects natural gas-fueled trucks to see 10% compound annual growth in between 2012 and 2019, based on lower purchasing costs. That translates from roughly 3,250 natural gas trucks expected to sell this year to almost double that by 2019.

The Potential Winners

While the CNG/LNG transportation market is still in its infancy, the industry’s positive strides could make an interesting portfolio play. Aside from a direct fueling play in Clean Energy Fuels, investors have other opportunities in the sector.

Investors may want to take a look at both Fuel Systems Solutions (NASDAQ:FSYS[11]) and Westport Innovations (NASDAQ:WPRT[12]), to start. The two firms produce components that enable internal combustion engines to run on gaseous alternative fuels, such as propane, natural gas and hydrogen.

Westport is especially interesting at these levels — it has fallen about $20 from its 52-week highs — given the company’s substantial patent portfolio and strategic relationships with leading original equipment manufacturers.

That strategic relationship is highlighted with its 50/50 joint venture with international engine superstar Cummins (NYSE:CMI[13]). Combining Westport’s patents and technological know-how with Cummins’ supply chain, distribution and sales networks, the pair has created the go-to CNG/LNG engine supplier for the medium- and heavy-duty fleet industry.

Perhaps the most interesting CNG play, though, comes from beaten-down Chesapeake Energy (NYSE:CHK[14]). While the E&P firm certainly stands to benefit from increased natural usage out of its wells, the company’s new infrastructure aspirations are quite interesting.

Partnering with General Electric (NYSE:GE[15]), Chesapeake has introduced “CNG In A Box[16],” which could be a game-changer for the fueling market. The system is all-in-one, plug-and-play unit that can be set up at any service station with a natural gas utility line: It instantly provides CNG refueling. Given just how knocked down[17] Chesapeake is, “CNG In A Box” could provide the oomph shares need as the service rolls out.

Overall, using natural gas for a transportation fuel seems to be grinding forward. For investors willing to take a longer look at the sector, deals abound.

As of this writing, Aaron Levitt was long RDS.A and RDS.B.

Endnotes:
  1. America heads for: http://investorplace.com/hot-topics/energy-independence/
  2. have switched over to it: http://investorplace.com/2012/09/worldwide-coal-slide-still-setting-up-a-buy/
  3. liquefied natural gas (LNG) export facilities: http://investorplace.com/2012/04/energy-independence-boosting-lng-exports/
  4. Increased production: http://investorplace.com/2012/09/3-plays-in-frackings-secret-ingredient/
  5. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  6. RDS.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.B
  7. TA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TA
  8. T. Boone Pickens: http://investorplace.com/2012/10/5-t-boone-pickens-plays-eca-kwk-ung-chk-fcg/
  9. CLNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLNE
  10. 22 U.S. governors announced: http://www.csmonitor.com/Environment/Energy-Voices/2012/1011/Move-over-electric-Are-natural-gas-vehicles-the-future-of-cars
  11. FSYS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FSYS
  12. WPRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WPRT
  13. CMI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMI
  14. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  15. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  16. CNG In A Box: http://www.peakefuelsolutions.com/Pages/cng-in-a-box.html
  17. how knocked down: http://www.investorplace.com/2012/08/is-chesapeake-crawling-back/

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