Nat Gas Prices Drive the Transport Politics

NEW YORK ( TheStreet) -- President Obama chose an interesting way to voice his latest support for a U.S. transportation future less reliant on oil in referring on Wednesday to an "all-of-the-above" approach to American energy. It was interesting because as far as Congress is concerned there is only one correct response when it comes to Obama's transport ideas: none of the above.

Natural gas transportation is a good indicator of the divide between Obama's plan and Capitol Hill reality, and legislation related to natural gas transportation may continue to be a victim of difficult legislative timing and Capitol Hill divisiveness.
As gasoline prices rise, so does President Obama's enthusiasm for an 'all-of-the-above' approach to the transport future.

Meanwhile, natural gas transport-linked stocks continue to find support, even if legislative priorities of the president falter or get pushed off to a second term, which there is good reason to suspect could become reality. This dilemma applies most directly to natural gas transportation infrastructure company Clean Energy Fuels ( CLNE) and natural gas engine maker Westport Innovations ( WPRT).

Right now, it's Clean Energy that continues to push a 52-week high level , up 60% so far in 2012.

Investors have been here and done this before with these stocks. While it's always a good time to take some profits, Westport continues to defy any sustained bearishness. Even coming slightly off a 52-week high while Clean Energy tests its highest level, Westport shares are up 141% in the past year: it's done so well, in fact, that it was recently able to use a 52-week as a good time to issue more equity.

What keeps these stocks going, and what gets the president talking about natural gas transportation more and more, comes down to three key factors, and they are more credible as reasons to be bullish on natural gas transportation than the most supportive words from politicians: oil prices and the related price at the pump, the historic slide in the natural gas price, and the failure of electric cars to take off.

President Obama's administration had focused more on the electric vehicle story than the natural gas story as it evolved an energy and transportation strategy, but its migration to a full-throated support of natural gas transportation has increased as the electric car story has stumbled, and more recently as a president running for re-election has had to deal with high gasoline prices.

The election cycle also includes rhetoric about where the Obama administration has spent its stimulus dollars as gas prices rise, and the "Solyndra Effect" has spilled over into the electric car market. The Department of Energy recently decided to deny loan funding -- from the same program that bankrolled bankrupt solar power company Solyndra -- to electric car makers Fisker and Bright Automotive.

It's important to remember that the electric car story has been about passenger vehicles, while the natural gas transportation story is about truck sales, and in particular fleet purchases by heavy-duty truck buyers like UPS ( UPS) and Fedex ( FDX). However, positioning the energy and transport future as one encompassing both natural gas and electric vehicles is clearly important to the president. Ultimately, technology is a game of scale, and while the payback period for a pickup truck driver adopting natural gas is many more years than a heavy-duty truck where economics works today, that gap closes over time as technology is adopted and the price of new engines comes down.

"The delta between gasoline prices and the natural gas equivalent is the most important argument and the struggle of electric vehicles is a real tailwind to the natural gas argument," said Benjamin Salisbury, energy policy analyst at FBR Capital Markets. "There isn't traction for electric vehicles today and gas prices are high," Salisbury said.

Last week, GM ( GM) announced a temporary shutdown of Chevy Volt production as supply runs ahead of demand. This week, GM announced plans to manufacture natural gas-powered pickup trucks. At the same time, GE ( GE) and Chesapeake Energy ( CHK) announced an agreement to work on the deployment of natural gas vehicle refueling infrastructure, Clean Energy Fuels' sweet spot in the emerging market. Chesapeake created a venture capital fund last year to support Clean Energy Fuels, among other companies.

These are just the latest in what has been a many-pronged approach by big business interests to enact the "if you build it (natural gas infrastructure), they (the truck buyers) will come," approach.

Obama's latest proposal, announced at a Daimler plant on Wednesday, includes "fuel neutral" support for local communities to put in place infrastructure for alternative transportation, whether it is electric, natural gas, or other sources; expanding a current tax credit for electric vehicles to alternative vehicles; support for the natural gas transportation corridor concept that is key to getting truck companies to embrace the concept; and a new tax credit for alternative fuel trucks, all of these adding up to a $1 billion Community Deployment package.

The specific natural gas transportation act, the NatGas Act, has also received the support of Obama since last year, and yet it has failed to make it through Congress for several years running -- some Republicans bailed specifically because Obama came out in support of the measure last March and it became one more focus of Tea Party anti-spending rhetoric.

What has changed? Not much. Salisbury noted in a summary of the outlook on Capitol Hill on Wednesday that "the struggling effort to extend highway bill funding (scheduled to expire March 31) may be the last opportunity before the November elections to pass the Natural Gas Act. We detect little appetite in Congress for compromise and few 'must-pass' vehicles to attach the proposal to ... even if the Natural Gas Act gets the 60 votes needed to pass the Senate, it remains unclear how the House will respond."

On Thursday, the Senate said it reached a deae on the highway bill and over the next several days would be negotiating over tack-on items like the NatGas Act.

Salisbury noted that the natural gas transport issue is so convoluted on Capitol Hill that it has even pitted Republicans versus Republicans: "Natural gas vehicle subsidies have split conservatives between those seeking energy independence or more closely aligned with gas-producing regions and those arguing for a free market approach or more closely aligned with oil and refining regions. The split also divides lawmakers between influential patrons T. Boone Pickens and the Koch brothers. Fiscal conservative groups have ramped up pressure against the bill, leading several Republicans to withdraw support last year."

The NatGas Act was revised last November to include a pay-for proposal -- in subsequent years buyers of natural gas fuel would pay a tax to cover the subsidy for engine purchases -- taking away from the argument against it as a spending measure. However, even with that revision Tezak said there is no reason to suspect the Congressional status quo will change, and arguments against spending today won't be overcome by the idea that it will all be repaid in subsequent tax revenue.

With the president unveiling on Wednesday the $1 billion Community Deployment initiative as part of his expanded alternative transport priorities, Christine Tezak, energy policy analyst at Robert W. Baird, said, "It's a great idea and too bad Congress isn't listening." Tezak said it's better to think of Obama's support for natural gas transportation and his new all-of-the-above approach as laying out priorities for a second term.

Excitement about natural gas vehicle legislation can supersede market fundamentals. Investors do need to remember that both Clean Energy Fuels and Westport Innovations are expected to lose money this year.

"Just because the NatGas Act fails doesn't mean the cheap natural gas prices don't continue to support these companies even if there is a temporary roll back in the stocks, because at the base of the stocks is excitement about natural gas being cheap and staying cheap," Salisbury said, though he stressed that he is an energy policy, and not stock analyst. He added, "I wouldn't expect Congress to take up what the President said but he is trying to respond to high gas prices and it will have the impact of moving the ball forward and that is takeaway here: Obama continues to beat the drum on nat gas vehicles."

Previously, it has always been a good thing to take money off the table with these stocks any time a legislative issue is providing hope but likely to disappoint. This time, though, maybe the most important change of all from previous years, the one that provides more support to these stocks than Obama, the poor Chevy Volt and the high price of oil combined, is the growing acceptance of the belief that natural gas will remain cheap for a long time. When all is said and done, to get the big fleet buyers of vehicles to step up and convert from diesel, the comfort level with long-term natural gas pricing could be the most important driver of all.

Westport's CEO David Demers has told TheStreet in the past that it doesn't need need $100 oil prices or the NatGas Act. Maybe so.

Natural gas prices hit a fresh 10-year low on Thursday morning.

-- Written by Eric Rosenbaum from New York.

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