Friday, July 15, 2011
Clean Energy Fuels (CLNE) surged 30% this week.
The manufacturer of natural gas fueling stations just received a $150 million check from natural gas producer Chesapeake Energy (CHK). The money will be used to accelerate the build-out of natural gas fueling stations for heavy-duty trucks along interstate highways.
Chesapeake is the second-largest natural gas producer behind ExxonMobil. The $150 million is only 15% of what the company plans to spend on new natural gas technologies over the next 10 years.
Following the news, Clean Energy received several analyst upgrades – including one from Merrill Lynch. The investment firm upgraded the stock from "sell" to "buy." It's not often investment firms change their rating from one extreme to another.
I've been writing about the huge potential for natural gas demand for months. More natural gas is being used for electricity generation. UPS, Waste Management, Heckman Water, and Ryder have begun switching their fleets from diesel to natural gas. That means natural gas will be used as a transportation fuel.
These events have taken place without any U.S. subsides. In other words, the economics behind changing heavy-duty truck engines from diesel to natural gas are working right now. That's because of the higher spreads between diesel and natural gas prices. Also, natural gas engines are 30% cheaper than last year.
Three years ago, trucking companies had to wait at least four years to recoup their investment. Today, the payback period is only two years. If oil prices jump to $150 a barrel, JPMorgan says the payback period will be less than six months.
Clean Energy has more upside from these levels. However, I think the better play is Westport Innovations (WPRT).
Westport is the largest natural gas engine manufacturer in the world. It has partnerships with Cummins (U.S.), Volvo (Europe), and Weichai (China). Together, these companies manufacture more than 50% of the world's engines for heavy-duty trucks.
Looking at the chart, Westport has moved significantly higher since I first recommended the company to Penny Stock Specialist subscribers in February. Based on the numbers, I think the stock could be in store for a Netflix-type move higher.
Two years ago, Westport was selling natural gas engines for over $50,000. New technologies allowed the company to push its input costs significantly lower. That means Westport is able to maintain strong margins – despite selling engines at a lower price.
Last week, 20 heavy-duty natural gas engines were sold for $30,000 each. There are over 8 million heavy-duty trucks in the U.S. If each truck switched to natural gas engines, the total market potential would be $240 billion ($30,000 per engine x 8 million trucks). This number does not include trucks operating outside the U.S.
Westport's market cap is a mere $1.2 billion. The upside potential is enormous. That's why almost every major engine manufacturer has a stake in Westport.
To be fair, not every heavy-duty truck will make the switch to natural gas engines. However, even if 20% do make the switch, Westport will be a huge beneficiary. Also, my numbers assume the U.S. government will not provide incentives to trucking companies.
To recap, major trucking fleets are switching their engines to natural gas right now. Chesapeake is accelerating the build-out for natural gas fueling stations. Soon, they will be on every major highway across the U.S. But this trend is still in its infancy.
Westport has plenty of upside. Despite my optimism, be patient on your entry. As you can see from the chart above, shares are volatile.
"Stocks in natural gas producers aren't the only way to play the boom in this sector," Frank Curzio writes. Two of his picks are up 19% and 10% in one week. Learn more here: Two Small Energy Stocks with Huge Potential.
Natural gas "is up roughly 13% in the past 30 days," Frank wrote last month. But you haven't missed the boat yet. Get Frank's advice here: Why I'm Buying Natural Gas Stocks Right Now.