3 Things That Could De-Rail T. Boone's Nat Gas Plan

NEW YORK ( TheStreet) -- For investors who have watched the recent trading in shares of Westport Innovations ( WPRT), the new all-time high territory for the natural gas vehicle stock play can only mean one thing: the legislative game is afoot (yet again) for the Nat Gas Act and stocks in the nat gas vehicle sector will rise and fall based on the latest legislative rumors from Washington.

In the case of Westport Innovations specifically, it's not just the introduction of the Nat Gas Act in the House of Representatives, which occurred on Wednesday and featured 76 co-sponsors, that led to Westport shares reaching above $27 two days this week.

Westport Innovations announced a big deal this week for its HD (heavy duty) division, with Heckmann, a water services company, putting in an order for 200 Westport HD truck engine-powered Peterbilt trucks. It's a big deal for Westport because most of its sales to date have come through its Cummins Westport joint venture, where not only is its name second in the branding, but the money split 50%/50%. Increasing sales in the Westport HD division is a bigger bang for the buck financial driver for the natural gas engine company.

In any event, the big story was the introduction of the Nat Gas Act, which is the single most important driver for the outlook in the natural gas vehicle space. T. Boone Pickens recently said the Nat Gas Act is a no-brainer and has at least 300 votes in the House. Of course, every bullish statement T. Boone makes about the Nat Gas Act has a potential translation into a fatter T. Boone Pickens wallet, and any investor who rode these stocks through the legislative highs and lows of 2010 knows that for all of T. Boone's enthusiasm and the legislative "no-brainer," as he puts it, for the legislative reality one must drill a little deeper.

T. Boone Pickens predicted in 2010 that the Nat Gas Act would pass by Memorial Day 2010. Perhaps that wasn't a "no-brainer." Indeed, the Nat Gas Act was really no more than a pawn in last year's legislative chess game. Take the questionable sign of support from Senate Majority Leader Harry Reid (D-Nev.), who introduced the Nat Gas Act and then removed the Nat Gas Act from consideration within the span of a few days, saying there wasn't the legislative will to get it done at the time (though one would have thought that Reid might have done some congressional math before introducing and pulling the Act in a span of time that's not even as long as a cricket game). Natural gas market and natural gas vehicle stock analysts criticized Reid's 2010 Nat Gas Act stunt as nothing more than a PR maneuver. In any event, Reid's 2010 intentions don't matter today.

Yet a few Reid and T. Boone Pickens-related questions do remain essential to the Nat Gas Act's fortunes.

Will T. Boone Pickens be correct this time around and the Nat Gas Act will be sitting on the President's desk by July 4th, 2011? Or, in keeping with the failures in the history of the Nat Gas Act, and in keeping with T. Boone's predilection for national holiday-inspired "calling of his shots," will T. Boone be predicting before long that Groundhogs Day 2012 will be the V-Day for the Nat Gas Act?

As for Reid, will last year's PR stunt be replaced in 2011 by a Senate that is serious about some kind of alternative fuel/alternative transportation legislation? A "no-brainer" in the House does not equal a Senate super-majority.

It's not just Westport Innovations that has a big stake in the Nat Gas Act legislative game. Clean Energy Fuels ( CLNE), where T. Boone Pickens sits on the board, is up 25% over the past five trading sessions.

Fuel Systems Solutions ( FSYS), which announced this week that it was moving one of its key executives, Matthew Beale, to head up the North American business, is up 16% over the past five trading sessions.

Add $4 gasoline at the pump ... a Middle East in flames ... a President that wants to transition away from foreign oil and natural gas coming out of our ears in the this country ... and maybe it is a "no-brainer" after all. Or maybe what's fair to say is that the Nat Gas Act has more momentum than it did last year, but the devil is still in the details.

Here are 3 reasons for investors to worry about the Nat Gas Act, no matter what T. Boone says....
  • Standing Alone Isn't a Good Thing for Legislation
  • The Nat Gas Act was introduced on Wednesday as a stand-alone piece of legislation, but it remains the minority opinion among experts that it can ever see the light of legislative passage without being attached to a larger bill. The more interests there are, the more complicated the legislative game. Robert W. Baird analysts noted in a green energy policy review this week, "Alternative fuel and vehicle legislation has the best chance of passing if multiple technologies are included and the package is offset for budget purposes. Stand-alone legislation of any kind is unlikely to move on its own."

    As for the Nat Gas Act specifically, Baird policy experts wrote, "We do not expect this bill to successfully move as a stand-alone effort, but given its bipartisan support, it has the potential to become a core piece of a broader bill that is "comprehensive" in addressing vehicle and fuel-related issues."

    Likely "me-too" legislative partiers from within the alternative fuel ranks include the ethanol industry and the controversial ethanol excise tax credit, and the electric car vehicle lobby.

    On the other hand, likely complicating factors include a legislative agenda related to the traditional oil and gas lobby. The pace of new drilling permits in the Gulf of Mexico, the liability cap for oil spills, and the issue over fracking in shale plays all remain traditional energy headline items that could complicate any alternative fuel bill making its way to the President's desk.

    Finally, as the legislative game is played, investors should keep in mind that the natural gas vehicle lobby, in particular, is nowhere near as powerful as the corn lobby (i.e. ethanol) and the traditional energy market lobbying interests. As one Capitol Hill watcher told TheStreet, it's not that there is a lack of bipartisan support for the Nat Gas Act, but the simple fact that "no one ever got elected, or unelected, based on the outcome of the Nat Gas Act."

    Raymond James analysts recently wrote, "As far as we can tell, no-one in Congress is substantively against the NAT GAS Act. However, simply having no opponents is not always enough. The current reality is that there is no politically powerful interest group actively pushing for the NAT GAS Act, within the context of a busy legislative calendar. While NGVAmerica (the industry's main trade group) and a few other groups are obviously lobbying in favor of the legislation, they simply do not have the massive clout of, say, corn farmers -- especially in Midwestern swing states, and most especially in an election year, when Iowa will soon be on front pages every single day."
  • Time Is Short
  • The alternative fuel/alternative transportation lobbies ran out of time last year and each interest group had to scurry to find a way into the massive tax cut legislation.

    Time is not necessarily on the side of the Nat Gas Act again, and there is a reason why T. Boone Pickens zeroed in on July 4th as the national holiday of choice this year for the legislation. Number one, he was a little overanxious last year with Memorial Day. Yet more importantly, if there is no legislative agreement in principal by the July 4th recess, and the bill is not seen through to passage at latest before the end of the summer, experts say it will be much more difficult to get the Nat Gas Act onto the legislative agenda.

    Once Presidential election season begins and the Republican contenders for the White House throne are in campaign mode, the outlook for significant legislative action dims.

    Rob Brown, analyst at Craig-Hallum Capital Management, said, "It goes through the political process now, and it will take a lot of time to move through the process, and timing is always a wild card."
  • It's the Budget, Stupid
  • It's not an insignificant fact that on the same week that the Nat Gas Act was again introduced, the government was on the verge of a shutdown over the budget.

    Make no mistake, the Nat Gas Act is spending. It may be good spending, and it may have broad support, but the issue of how to offset new spending in the budget is a significant hurdle for legislation.

    Baird analysts wrote in their policy review, "We do not yet know how the bill would be offset, nor has the Joint Tax Committee or Congressional Budget Office price estimate been completed. We expect the total cost of the legislation will be less than last year's original legislative proposal, or roughly $4 billion."

    On the positive side, the Nat Gas Act is now only asking for subsidies for the purchase of heavy duty nat gas engine vehicles through 2016, as opposed to the original Act which sought the same incentives through 2027. That lowers the price tag considerably.

    On the other hand, the inclusion of bi-fuel vehicle support (capable of operating on natural gas and diesel/gasoline), manufacturing tax credits and increased incentives for infrastructure increase the size of "the ask," Baird noted.

    One Natural Gas Act policy expert said, "No one on the Hill will say this is a bad idea, but they are going to ask, 'How do we pay for it?'"

    Specifically, the Nat Gas Act asks for an extension of the $0.50/gal excise tax credit for natural gas fuels (CNG and LNG) for a period of five years. At present, this tax credit is set to expire at year-end 2011. This component of the Nat Gas Act is has direct revenue implications for Clean Energy Fuels, and shares of Clean Energy Fuels rallied late last year even after the Nat Gas Act failed when the excise tax credit made it into the tax cut package.

    The bill provides an infrastructure tax credit of 50% for the cost of CNG/LNG stations, up to $100,000 per station. This is a big improvement over the existing credit (30% with a $30,000 maximum). Along the same lines, this credit would also extend to home refueling units, which would be eligible for $2,000. Any incentive related to the re-fueling infrastructure for natural gas vehicles is a positive for Clean Energy Fuels directly.

    Most importantly, the bill restores the expired tax credit for up to 80% of the additional cost of an NGV (in other words, the cost difference between the NGV and an equivalent conventional-fueled vehicle) -- $7,500 for passenger vehicles and $64,000 for heavy trucks. Analogous incentives would also be offered to bi-fuel vehicles (which run on natural gas or petroleum) and dual-fueled vehicles (where there is a mixture of a small amount of petroleum with the natural gas).

    "The higher cost of the legislation, the more challenging the path to passage," Baird concluded.

    If there is a risk to the Nat Gas Act based on spending, the best outcome of legislative triage for a Westport specifically might be if the $64,000 upper limit on incentives for heavy duty nat gas truck purchases is untouched, while "low hanging fruit" like R&D incentives and production tax credits in areas like bi-fuels are negotiated away.

    In any event, these are some of the key reasons why the Nat Gas Act is no "no-brainer" even if its legislative outlook has never been better. Yet these aren't the only potential hurdles, even though they are the main hurdles within the bi-partisan support for the bill.

    There are fringe issues on both sides of the debate, from environmental lobbies that will equate the Nat Gas Act with fracking and yet another fossil fuel dependent society, to extreme budget hawks who will chalk it up as spending and no more than spending, and the traditional energy lobby, which will look none too kindly on an alternative fuel spending item paid for by higher taxes on oil and gas profits.

    One policy expert looked at the Nat Gas Act issue more simply in providing an explanation for his hesitation to make a bet, "This is the third reincarnation of the Nat Gas Act."

    The investment community remains optimistic.

    Craig-Hallum analyst Rob Brown concluded, "I'm more optimistic because fuel prices are up 30% since the last time it was introduced and that creates political pressure to act, and the geopolitical environment has changed. I believe it will ultimately win," the analyst said, though he added, "it's too early to predict how it will go in Washington. It's never a straight line."

    Indeed, never a straight line, even if it is a "no-brainer."

    -- Written by Eric Rosenbaum from New York.

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