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CAT Partners With Westport for Nat Gas Engines

NEW YORK ( Trefis) -- Caterpillar (CAT) has signed an agreement with Westport, a global leader in natural gas-powered engines, to co-develop natural gas technology for Caterpillar's engines. The company will incur R&D costs under the agreement and the commercial production is expected to start within the next five years.

Caterpillar competes with other global industrial equipment and engine manufacturers such as CNH Global NV (CNH), Komatsu (KMTUY: PK) and Volvo AB (VOLVY: PK).

We currently have a Trefis price estimate of $108 for Caterpillar's stock, which is 20% above its current market price.

A Competitive Advantage

Natural gas offers a significant price differential compared to diesel, which is presently used in the majority of Caterpillar's engines, and therefore Caterpillar's clients stand to benefit from fuel cost savings with natural gas-powered engines. Moreover, the natural gas-powered engines are targeted to offer similar levels of operational effectiveness as diesel engines. Hence, the combination of lower cost and similar levels of operational effectiveness would provide a significant competitive advantage to Caterpillar.

Also, upgrading its older diesel-powered engines in several applications to natural gas-powered engines may bring added revenue to the company.

The agreement will initially focus on developing a natural gas fuel system using Westport's High Pressure Direct Injection technology for Caterpillar's mining trucks and locomotives engines. The companies will also develop a similar technology for Caterpillar's off-road engines used in a variety of applications such as industrial, marine and petroleum drilling, among others.

Emissions Standards Compliance

Regulatory emissions standards of the U.S. Environmental Protection Agency and similar standards in other developed economies have forced the industrial companies, including Caterpillar, to invest heavily in R&D aimed at reducing air emissions.

The agreement with Westport will go a long way in addressing these regulatory concerns and also provide Caterpillar a competitive advantage, particularly in the U.S. and European Union markets, in connection with emissions standards compliance.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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