NEW YORK ( TheStreet) -- Westport Innovations ( WPRT - Get Report) said the adoption of natural gas engine technology is at a tipping point, and it doesn't need $100 oil or subsidies from the U.S. government for its penetration of the transportation sector to continue to increase.

TheStreet recently spoke with Westport CEO David Demers about the roadmap to profitability in the natural gas transportation sector.

Westport recently described the market as being at a tipping point. What did you mean, since for shareholders, the company still remains unprofitable?

Demers: Any technology story exhibits the same dynamic, by which I mean trying to get people to change something they've done the same way for decades is a challenge. We are trying to take a very successful technology, the diesel engine, and get people to change to a completely new fuel. It's hard to get people comfortable with that and that's why we use the concept of a tipping point.

At some point, people say, 'We need to do this and we understand the risks and see the benefits,' and you can see it has happened in other parts of the world when it comes to natural gas engines. If you look at the pattern in Argentina, Venezuela or Pakistan, these markets were at zero for years and then started to pick up and at some point reached critical mass. We think we have hit that point in the U.S. The U.S. is currently tied for last in natural gas transportation penetration, but it's not because we are stupid, but because we have a successful sophisticated transportation system. Now we are seeing the 'we have to do something' belief. It started with oil prices spiking in 2008 and now again with the latest blip up in oil.

Yet some say the commodities trade is now over, so what happens if oil continues down, say back to $60? Does the tipping point stop tipping?

Demers: The differential between natural gas and oil is the important thing, not the price of oil. We would need oil back at 20 bucks, which we think is unlikely, for that to be an issue. The more interesting thing is getting people past the tipping point in terms of a focus on high oil prices being solely driven by speculation. A few years ago, lots of people thought oil prices were all speculation and $20 should have been the price, and with that belief there was no reason to move away from the transportation status quo. Then in 2008 people started to realize that we do have fundamental oil supply and demand issues.

Whether oil is at $60, $80 or $200 is kind of irrelevant once people believe we are going to have a supply and demand-driven market that isn't a super-phenomenon of speculation. People have gotten through that and believe they have to have an alternative just in case of another oil spike, whatever the price is today, and whether they do 100% natural gas or 30% natural gas and play whichever is cheaper, I don't care. I have every belief that we will have a long-term supply of natural gas at good prices.

Ultimately, all shareholders care about is profitability? Investors haven't bought into the Westport story because it is unprofitable today, but when is the tipping point coming in reaching quarterly profits?

Demers: We've been debating this with shareholders for years. Look at the pattern of market penetration in any new technology sector. You always have to invest to get those first test cases. We started with transit buses in 2001 and that took three years to get to profitability, but since then it has been profitable and we took the profits and invested in refuse trucks and those are starting to be profitable. I think we will see 100% capture of that garbage truck market and now we are rolling that success into long-haul trucking. The critical success factor for long haul trucking is 1,000 to 1,200 trucks a year. Last year we did a grand total of 25 trucks, so we've got a ways to go, but we started this year (fiscal year, April start) with a backlog of 500 trucks, so we are getting there. Once we are profitable in trucking it's such a profitable business that I think it will be what we need to be sustainable.

The profitability roadmap is what we are trying to show people. Look at the sequence of events in these markets where we have had success. It's been three years to profitability. In trucking we will see a flood of product over the next two to three years, in our case from ventures with Volvo in Europe and Weichai Power in China, and Peterbilt and Kenworth in North America. All those things are on the horizon in the next six months to 12 months. When we talk about 500 or 1,000 trucks as year as part of a profitability roadmap, remember there are 300,000 trucks a year sold in the U.S. and 500,000 a year in China, so that will create significant cash flow for shareholders.

Your joint venture with Cummins (CMI - Get Report) has been the revenue workhorse for the company. What's the profile of this business if the long-haul trucking becomes a profitability driver?

Demers: Cummins Westport has been the real success for us, It showed that a company like Cummins doesn't need to invest billions and can be profitable early on with a new technology, but that was mid-range vehicles, the urban buses and garbage trucks, a relatively small volume market. It's been most of the revenue because it's the only product we have had, but now we are seeing wedges of revenue, such as Volvo picking up and starting to be a big wedge. We want to see every part of the transportation industry have a wedge represented by our technology and expect Cummins Westport revenue will shrink down to its market size relative to the overall transportation sector, meaning 5% to 10% of revenue. Europe, where we have the venture with Volvo, is 40% of the world market and China is emerging and is almost the same size. We expect to grow very quickly in these ventures and dwarf what we have done to date.

In the U.S., natural gas trucking stocks seem to trade, more than anything else, based on the outlook for increased federal subsidies for truck purchases. T. Boone Pickens is the biggest backer of the NatGas Act and has predicted it will pass this summer. It's the second year in a row that T. Boone has made this prediction, so will he be wrong for the second year in a row, or finally right?

Demers: Any government policy is a catalyst for change and we need to disrupt markets with a call to action or people will keep doing what they are doing. Boone has it right, and he's done a lot of work on energy security and less dependence on imported OPEC oil. The easiest path to less OPEC oil is moving heavy duty trucks from diesel to natural gas. It's almost exactly the amount of oil we import and we could do it in five years with government incentives.

That said, we are not in the game of energy policy. We are out to sell trucks and want our partners to sell trucks and be successful, and they can do that today without subsidies if they are consuming enough fuel. There is a good business case today for trucks in the 90,000-mile-a-year range. For these truck operators it is a mileage tipping point, and if the spread between natural gas and diesel continues to widen, and natural gas truck pricing continues to drop, which we are seeing occur with more volume, that helps too.

There are no subsidies for us in Europe and we are selling in Europe. We are selling in China and Canada. In the U.S., it's a question of if the government wants an accelerated adoption rate. We don't know whether the NatGas Act passes. Washington is a mystery to us. Who knows?

There's skepticism about being able to overhaul the transportation infrastructure to supply the refueling station needs of long-haul trucks. Is this a considerable roadblock?

Demers: United Parcel Service ( UPS - Get Report) has been a great customer for us and we started with delivery vans five years or six years ago and a few thousand vans on the road running on natural gas. Now UPS wants to start a long haul transfer truck project covering the corridor from Los Angeles to Salt Lake City. You don't need 100 fuel stations for that. Actually, you need one in L.A., which already exists, one in Las Vegas, which is another key point, and one in Salt Lake City. A Las Vegas refueling station will be up and running in October and Salt Lake started pumping last month. So we will see natural gas trucks working in the UPS fleet quickly. UPS has a strong economic argument to make. As they buy new trucks and develop new distribution centers they will be looking at nat gas from the start. A $2 per gallon spread on fuel is a big deal for big rigs.

It's not just the Los Angeles to Salt Lake City corridor either. It's San Antonio, Dallas, Houston, and Oklahoma City, and down the East coast to Atlanta. These are where trucks run. They don't just go out and look for a load and try to refuel. Approximately 95% of trucks are running on a reasonably predictable corridor and we could cover the entire U.S. with a few hundred refueling stations. Heavy duty trucks, and in particular large fleet trucks, don't refuel at truck stops. They manage their own fuel and put fueling stations at distribution centers where they need them. The cost averages out, whether it's a small or big fleet, to 18 cents to 20 cents a gallon. The cost can be wrapped into the lifetime cost of fueling trucks at that station.

You also recently signed a deal to supply natural gas engines to the mining industry, through your customer Heckmann (HEK), and to industrial bellwether Caterpillar (CAT - Get Report) for high horsepower engines. Investors and Westport seem focused on the long-haul truck opportunity, but are these niches just as important?

Demers: Long-haul trucking is very interesting in the near-term because it's a very large market and we have deals now with leading players in three major markets, Volvo in Europe, Weichai in China, and Cummins, Peterbilt and Kenworth in North America. Add it all up and it's a very large percentage of the world market we cover, a fast start in a big market and a cost-sensitive market. In long-haul trucking we will see natural gas engine penetration over five years to 10 years.

Mine haul trucks like in the Heckmann deal, and locomotive engine technology as an example from the Caterpillar deal, are much longer life vehicles and bigger ticket vehicles, so it will be more challenging. It could be 15 years to 25 years to get penetration, but it's the same economics and we think the same adoption curve. If we are going to penetrate high horsepower we need partnerships with companies like Caterpillar, the GEs and Alcoas of the world.

Fuel cost is the No. 1 worry today for business executives. It's a big volatile number and often the No. 1 input cost. This may not be the case for the trucking fleet, which has been smart in passing on fuel surcharges, but companies across many sectors have been stressed by the cost of the incremental fuel charge, whether they are hauling water, shoes or food.

Our deal with Heckmann is straightforward, but you need to dissect the value chain. The customer of Heckmann is Encana ( ECA - Get Report), a natural gas exploration and production company. As we talked to Encana, they asked, 'Why are we spending on oil when we are producing natural gas? We are cutting our own throats by depending on diesel. Why aren't we running on natural gas?' The Heckman trucks bringing massive quantities of water to Encana hydraulic fracture drilling sites run on diesel. So Encana supplies Heckmann with natural gas and Heckmann uses the natural gas in hauling water to the shale wells. These big mine haul trucks consume half a million gallons of diesel a year. They are unbelievably energy intensive, and even in mining, pricing becomes prohibitive. High horsepower is the same. The rail industry is a high user of diesel fuel.

-- Written by Eric Rosenbaum from New York.


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