David Ebner

Vancouver — Globe and Mail UpdatePublished on Tuesday, Jun. 08, 2010 7:00PM EDTLast updated on Tuesday, Jun. 08, 2010 7:11PM EDT

Natural gas is rapidly becoming a significant force in the world’s fuel equation, moving from a small environmental niche toward the mainstream in transportation.

The commodity’s role as a transportation fuel is gaining amid growing awareness of its environmental benefits, along with favourable economics thanks to abundant supplies and low costs. Discoveries of vast new deposits of shale gas are adding to long-term supply sources.

For natural gas to become a major player in powering vehicles, companies and governments need to commit big dollars to infrastructure and technology. In some parts of North America, that commitment is under way.

In Quebec, Robert Transport is among the early adopters in Canada. The large trucking company, based in Boucherville, has a fleet of 750 trucks and plans to buy 80 new rigs with natural gas engines, with the first rigs arriving early next year.

Fuelling stations are a crucial part of the needed infrastructure, and remain a significant challenge. Robert Transport plans to build three for itself along the Montreal-Toronto corridor, in a partnership with Gaz Métro LP.

Natural gas emits fewer greenhouse gases compared with diesel refined from crude oil. Beyond the environmental benefits, the cheaper cost of gas compared with diesel was the big factor in the decision, said Daniel St-Germain, vice-president of asset management at Robert Transport.

“The economic aspect is very important,” Mr. St-Germain said.

Robert Transport is looking at trucks from two companies, both of them using engines designed by Westport (WPT-T17.430.090.52%) of Vancouver, which works in a long-term partnership with Cummins Inc. of Indiana, the large engine maker.

To date, demand for natural gas engines has been mostly limited to environmental initiatives, such as Beijing’s purchase of cleaner-burning gas-fuelled buses ahead of the 2008 Olympics to reduce smog from diesel. In other examples, ports in the Los Angeles region were required to go green and bought natural gas engine trucks for short-haul operations within port facilities.

“It’s really become an economic story,” said David Demers, chief executive officer of Westport, which designs natural gas engines for buses and trucks.

“There’s been a big change in the market enthusiasm. For Robert Transport to come out and say natural gas, it’s a huge vote of confidence.”

Last week, after Westport reported a quarterly revenue increase of more than 30 per cent from a year earlier, Mr. Demers told investors and analysts that this year will be seen in future as the tipping point for natural gas as a fuel. “We’re now seeing a global and all-markets shift toward natural gas as a mainstream fuel.”

Governments are part of the mainstream push. Incentives for natural gas as a fuel are in several bills before Congress in the United States. In Quebec’s provincial budget in March, the province introduced a large tax break for trucking firms that buy rigs fuelled by liquefied natural gas. The incentive benefits companies such as Robert Transport and adds to the economic decision to buy the natural-gas-fuelled trucks.

While Robert Transport is working with Gaz Metro to build three of its own fuelling stations, a real critical mass for natural gas will require widespread infrastructure. Encana Corp., the country’s No 1 gas producer, has led a lobbying effort in Ottawa to build corridors from Quebec City to Windsor, and Edmonton to Vancouver, but the federal government hasn’t yet backed it. The only region of North America with any significant infrastructure is Southern California and Utah.

For Westport, this moment has been a long time coming. For years, it was overshadowed by Vancouver’s much better-known technology company, Ballard Power, which developed fuel cells for vehicles. Now, however, Westport is significantly larger, in revenue and market capitalization.

Investors have buoyed Westport stock, as it has more than doubled in the past year to a market cap of close to $600-million, large enough to possibly merit inclusion in the S&P/TSX composite index as a quarterly review of the index is conducted this month.

One skeptic, analyst MacMurray Whale of Cormark Securities Inc., said investors are excited about the promise around shale gas, and the low gas price compared with oil, and they invest in Westport as a way to play the trend. But he recommends investors sell the stock, arguing the shares are worth less than half their current value.

“I don’t believe a lot of people are investing in it because they really believe we’ll all be driving natural gas vehicles,” Mr. Whale said.

Analyst Ian Tharp of Dundee Securities Corp. is “neutral” on Westport stock, calls it high risk, and titled his report on the company’s latest quarter: “Building the business, and hoping the market will come.”

Westport has never made money: Since its birth in 1995 from research at the University of British Columbia, it has posted annual losses that have added up to $310-million. That includes the loss of $38-million in fiscal 2010 ended March 31 on revenue of $131-million that was reported last week.

Revenue growth is predicted to remain rapid, having risen at a compound rate of 45 per cent the past four years. CEO Mr. Demers said 30 per cent annually over the next three years is realistic, which would push revenue close to $300-million.

Westport is backed primarily by foreign money. It listed on the Nasdaq Stock Market in the summer 2008, just before the financial crisis, and there are no Canadians among its top 10 investors, a list led by prominent names George Soros and Boone Pickens.

North America – primarily the U.S. – is Westport’s most important market, with two-thirds of sales made on the continent. The joint venture with Cummins accounts for most of the company’s revenue and it has worked in the past several years to develop its own large heavy-duty engine. In 2008, it spent about 30 per cent of its revenue on research and development, $23-million, a figure that has climbed to $28-million but has fallen as a percentage of revenue to about 20 per cent.

Beyond its own work and with Cummins, it has several other joint ventures, including a deal signed last November to work with Volvo AB.