Natural-gas cars merge into Wall Street fast lane
By Steve Gelsi
Oct 12, 2012 13:14:17 (ET)
NEW YORK (MarketWatch) -- Business owner Veerachart Murphy didn't flinch when U.S. gasoline prices neared $4 a gallon on average at the pump this summer, because he runs his car on much cheaper fuel.
Murphy bought his first compressed-natural-gas vehicle back in 2000 to offset the fill-up cost of his fuel-hungry Chevrolet Suburban. While his hometown of Phoenix now has five filling stations for compressed natural gas, or CNG, he fuels his cars with his own CNG pump, which typically costs about $1,500 to more than $5,000.
"I've been paying the equivalent of 96 cents a gallon for gasoline for the past 12 years," he said. His satisfaction with CNG led him to launch CNG Motors, a specialist in converting vehicles to run on natural gas.
Yet many on Wall Street don't share his enthusiasm and have taken a wait-and-see approach to the business of natural gas as a transportation fuel.
But lately that attitude is starting to change on some fronts. With so much supply that energy companies are pulling rigs out of the ground to cut back on production, natural gas is starting to look more appealing as a cheaper and cleaner alternative to gasoline and diesel.
And a few stocks are showing up on Wall Street's radar as a way to ride the trend, though the road ahead is long.
Also lending support: The technology for converting cars and trucks to natural gas has a longer track record on American roads than electric cars, which have been capturing attention as a gasoline-free form of transportation.
Mainstream electric cars such as the Model S from Tesla Motors Inc. are hitting showrooms. Nissan Motor Co.'s Leaf and General Motors' Chevrolet Volt are also available as are plug-in versions of the Toyota Prius.
By contrast, Honda Motor Co. has the CNG car market all to itself, after other auto makers pulled models in recent years, when oil was cheaper and natural gas was more expensive.
Honda focused on fleet customers when it introduced the natural-gas-burning Civic GX in 1998, but now it's bearing down on the passenger-car market.
The Honda Civic Natural Gas is being offered at 200 dealers in 37 states, up from 71 dealers in five states two years ago. Honda doesn't break out sales numbers for the model. To sweeten the deal, Honda is handing a $3,000 credit to buyers for the purchase of CNG at participating stations. Without the credit, the Honda Civic Natural Gas costs around $5,650 more than gasoline-burning models. Read more: Honda tries to capitalize on California drivers' gasoline woes.
Brian Salerno, manager of the Huntington EcoLogical Strategy ETF , said he's skeptical about any big surge in CNG car sales for now because of a lack of places to fuel up.
"The problem is it's a convenience thing," Salerno said. "We're a nation that won't move 12 feet to turn the channel on our TV because we need the remote control. So the likelihood of a lot of people buying CNG vehicles ... it's just not going to happen."
Salerno said natural-gas-powered vehicles are more popular in Europe, where gasoline costs about twice as much as it does in the U.S. In Italy, about 3.5% of the cars run on natural gas, he said, citing industry sources.
In the U.S., most of the movement toward natural gas has been with municipal fleets, which often fuel up at converted depots.
On this front, Salerno said he's keeping an eye on shares of Westport Innovations Inc. , which makes equipment for truck engines to burn natural gas. Also on his list is Fuel Systems Solutions Inc. , a maker of components that control the pressure and flow of propane and natural gas for combustion engines.
"We don't own either of them right now because we don't like to base our investments on what we hope happens," he said. "Westport is still not at the scale where they can report sustainable profits. They're still emerging. They're almost there, but still on the edge of being speculative."
While holding off on Westport and Fuel Systems Solutions, Salerno said BorgWarner Inc. remains a long-term holding for his fund, partly because of the auto-parts maker's involvement in boosting fuel efficiency and cutting emissions in vehicles.
To be sure, the trend toward natural-gas vehicles could slow or even stop if natural-gas prices rise.
In 2008, for example, prices shot up well above $10 per million British thermal units, nearly three times where they are now. Wider use of natural gas could cause a drop in supply, which would also stoke prices.
Much of the U.S.'s supply of natural gas comes from the decades-old method of hydraulic fracturing, or "fracking," which uses pressurized water to break up the earth far underground to free up natural gas. That practice has come under fire from environmentalists.
But the economics of natural gas remain compelling, even if prices move up, mostly because crude oil has stayed relatively expensive, about $90 a barrel in recent weeks.
For now, natural gas costs $1.50 to $2 less per gallon to fill up compared to gasoline, according to industry estimates. The CNG cost is about half the cost of diesel fuel.
With the prospects of saving their customers tens of thousands of dollars per year in fuel costs per vehicle, commercial truck manufacturers are gearing up compressed-natural-gas and liquid-natural-gas vehicles.
"Next year is probably going to be the most critical time to date for the industry," said Shawn Severson, a buy-side analyst for JMP Securities. "People in the car, truck and fleet-vehicle industry ... know this stuff works. It provides an economic advantage in fuel costs and better emissions."
While it costs as much as $60,000 more to buy a big, long-haul natural-gas-powered truck, a typical vehicle could save about $40,000 a year in fuel costs, he said. He figures long-haul fleets will have to switch to natural gas just to stay competitive.
For medium-duty and regional trucks, Cummins Inc. and Westport Innovations are rolling out an 11.9-liter engine that runs on CNG in the first quarter. Thirteen-liter engines from Navistar International and Volvo that run on CNG will follow by 2014, according to industry projections.
JMP's Severson said his top pick for the expected adoption of natural-gas vehicles is Westport Innovations, the same stock that fund manager Salerno is tracking but not buying for now.
While acknowledging some volatile moves in the stock, Severson argued that the Vancouver-based maker of fuel-system technologies for gaseous fuels now sits in the middle of the value chain of the coming trend, through its alliance with General Motors and others.
He said investors may also want to consider Fuel Systems Solutions Inc., Clean Energy Fuels Corp. and Chart Industries Inc. .
St. Denis Villere, portfolio manager at the Villere Balanced Fund , said he sees natural gas gaining traction as a transportation fuel because it'll remain cheap for the foreseeable future. But for now he's funneling his energy investment dollars more into oil producers such as SandRidge Energy Inc. .
"It's probably too early for us to invest in natural-gas vehicles," he said. "We do like things that are young and growing but want to make sure they're established first. The jury is still out on which direction this is going."
Kent Croft of the Croft Value Fund said he owns shares of natural gas companies partly because of the fuel's potential in the transportation sector. Yet he's taking a long-term view.
"This is wonderful stuff, but it's not right around the corner," Croft said.
The fund manager added that he has moved into natural-gas producers based on the low price of the fuel relative to oil.
Other trends helping natural gas include plans to export it from the U.S. and Canada in the form of liquid natural gas; also, natural gas-fired power plants continue to gain traction.
While natural gas prices may rise, the U.S.'s big supply could keep domestic price levels well-below that of Europe and Asia, Croft said.
In a move to boost use of the fuel, Royal Dutch Shell Plc has teamed up with TravelCenters of America to sell liquefied natural gas at 100 sites in the U.S. Royal Dutch is also building up its LNG infrastructure in Canada for truck fleets.
"Nobody in their right mind would build out an infrastructure for this unless they were assured of a very, very long term supply of the commodity," Croft said. "That's the reason why we're even talking about transportation."
Croft noted that his fund owns Southwestern Energy Co. and Ultra Petroleum Corp. as potential beneficiaries of natural gas as a transportation fuel. He also likes shares of pipeline firm Williams Cos. for its "vast network of gathering and pipelines around the country. They will benefit from increased use of natural gas."
For investors seeking exchange-traded funds with exposure to natural gas, the United States Natural Gas Fund ranks as a top-ranked energy ETF by assets. The Energy Select Sector SPDR offers access to the energy stocks in the Standard & Poor's 500 Index . Vanguard Group, meanwhile, offers the Vanguard Energy ETF .
In meetings with industry analysts, many executives have been talking up their company's natural gas prospects to entice prospective investors.
Cummins CEO Norman Linebarger, for example, told analysts over the summer the company's natural-gas-engine sales doubled in the second quarter.
"We're definitely seeing more demand," he said. "With gas prices where they are ... there's going to be a lot of people that are going to try to get natural gas into their highway truck engines ... because prices are really attractive today."
Cummins estimates a total of 10,000 heavy-duty commercial trucks in the U.S. currently use its natural-gas equipment and about 120,000 of all types of vehicles use natural gas. By comparison, U.S. residents bought new cars at a seasonally adjusted annual rate of 14.9 million in September, automobile makers reported earlier this month.
Worldwide, the number of light-duty vehicles fueled by natural gas is expected to increase to more than 3 million by 2019, up from about 2 million in 2012, according to estimates by Pike Research.
One well-known figure on Wall Street, billionaire T. Boone Pickens, is a big booster of natural-gas vehicles as co-founder of Clean Energy Fuels, a specialist in natural-gas filling stations with a market capitalization of about $1.1 billion.
Clean Energy Fuels has been addressing the lack of CNG filling stations in the U.S. Electric vehicle-charging stations now outpace CNG stations by a score of 13,392 to 1,107 in the U.S., according to estimates from the U.S. Department of Energy.
And both are dwarfed by the estimated 145,000 gasoline stations, big-box and supermarket pumps and fleet stations around the U.S., according to Oil Price Information Service.
Clean Energy Fuels and natural-gas producer Chesapeake Energy Corp. are building natural-gas filling stations in an alliance with Pilot-Flying J, the largest truck-stop operator in the U.S. with 550 locations.
With about 70 natural-gas stations expected by the end of the year, the two companies aim to build a network that will service big trucks, especially on long-haul routes.
"One of our major focuses is building the infrastructure that will enable natural gas to become a viable transportation fuel," Clean Energy Fuels Chief Executive Andrew Littlefair told analysts last August.
Back in Phoenix, CNG Motors owner Murphy sees CNG vehicles picking up steam if gasoline prices remain near or above the $4-a-gallon mark. In California, for example, gasoline prices spiked near $5 a gallon this month on tight supply tied to refinery outages.
"There's a public outcry for these vehicles because people don't want to pay so much to fill up," Murphy said. "The more your drive, the faster it pays for itself."
