Why I Wouldn't Bet Against This Natural Gas Play

The past two years have been great ones for shareholders of Westport Innovations (NAS: WPRT) . The company is one of the few that has been able to design an engine that can run entirely on natural gas. I'll be the first to admit that the stock looks a little pricey now, as it's up more than 280% since the beginning of 2010.

But I'm a big believer in the company, as my money and my All-Star CAPS profile are riding on its success. In an effort to emphasize the "motley" in Motley Fool, I'll be taking on fellow Fool Jeremy Bowman's recent article, which questions the wisdom of an investment in Westport.

The bear's case
To better understand the valid concerns that Jeremy brought up, I've summarized the big points here.

  1. "A mass conversion to natural gas-fueled vehicles cannot happen overnight," Jeremy says, citing the relatively small number of natural gas fueling stations built out by Clean Energy Fuels (NAS: CLNE) .

  2. "The higher prices internationally mean a dramatic shift to natural gas fuel is unlikely." Jeremy believes that, given that natural gas is far more expensive abroad, a nat gas conversion is only a stateside movement.

  3. "The time horizon for Westport to take advantage seems relatively slim. Domestic natural gas prices should either go up in the near future as producers curtail output or around 2015, when exports begin."

All of these points are valid, and worthy of investigation. But I'll show why none of them should worry you.

Why the bulls will be right
I'll address all three points in order. First is the issue of filling stations. It's true that currently there are only 1,100 natural gas fueling stations in the country -- which is small when compared with the 116,000 standard stations in operation.

The problem with the bear argument is this: At this point in the adoption curve, no one is hoping for a massive transformation. Instead, long-haul trucking is the first industry looking to make the conversion -- as evidenced by Westport's partnership with Cummins (NYS: CMI) -- and by Navistar's (NYS: NAV) recent announcement that it'd be buying Westport-Cummins engines for its new fleet of natural gas trucks. If you take a look at Clean Energy's plan for filling stations, you'll see there should be more than enough stations to meet the trucking industry's needs.


Source: Clean Energy Fuels publication.

Source: Clean Energy Fuels publication.

As far as consumer adoption (in terms of standard cars) goes, that would probably come after the trucking industry is able to show that natural gas' size, scale, and cost-savings could apply to everyday folks as well.

Natural gas prices
Yes, natural gas prices are higher abroad. But I think that fact alone misses the bigger point -- because I know another thing that's more expensive in foreign countries: the cost of standard gasoline.

The price of natural gas is important only in terms of how it relates to the price of a gallon of petroleum-based gasoline. Here's the average price of a gallon of gas, and a gallon equivalent of natural gas in the countries Jeremy cited.


Sources: Fool.com, International Energy Agency, MyTravelCost.com. Natural gas assumes 7.9 gallons per 1,000 cubic feet. Europe includes France, Germany, Italy, Spain and the U.K.

Sources: Fool.com, International Energy Agency, MyTravelCost.com. Natural gas assumes 7.9 gallons per 1,000 cubic feet. Europe includes France, Germany, Italy, Spain and the U.K.

As you can see, the assertion that higher natural gas prices abroad would discourage natural gas adoption simply doesn't make sense. In fact, I think countries like Japan and those in Europe have even more incentive to make the switch over.

A disappearing glut?
Finally, Jeremy argues that because of the current glut in natural gas supplies, prices will inevitably go up. And sure enough, major providers like Chesapeake Energy (NYS: CHK) have announced cutbacks in production to help ease the glut.

But here's the thing: Natural gas producers aren't stupid. They know that the only way to drive demand for their product -- while still making a hefty profit themselves -- is to make sure the value proposition natural gas offers is superior to standard petroleum-based fuels. And as that graph shows, there's a long way for prices to rise before they'd lose their cost advantage.

In the end, I simply think Westport -- and others riding this wave like Clean Energy, Navistar, and Cummins -- has too much going for it not to be invested. Sure, natural gas plays may take a slump over the short term, but I'm very bullish on them all in the long term. That's why I've backed up these sentiments by giving all four of these companies a thumbs-up on my All-Star CAPS profile.

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At the time thisarticle was published Fool contributor Brian Stoffel owns shares of Westport. You can follow him on Twitter at @TMFStoffel.Motley Fool newsletter services have recommended buying shares of Westport Innovations, Chesapeake Energy, and Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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