ALTERNATIVE FUEL

Movement to clean energy places Westport in driver's seat

RICHARD BLACKWELL

June 6, 2008

The surge in fuel prices and intense interest in clean energy have created an enormous opportunity for Westport Innovations Inc., a Vancouver company that makes truck and bus engines that run on natural gas.

The big question - as it is for many companies in the alternative energy sector - is whether Westport can execute over the long term.

Certainly, investors have been enthusiastic lately. Westport stock spiked to $5.50 on Tuesday, more than triple its value in January. The shares have subsided by 91 cents since then, as some analysts expressed concerns after weak year-end financial results were announced early in the week.

Westport chief executive officer David Demers said he's not surprised investors have been enthusiastic about the potential for growth at the firm, despite uneven profit numbers. "It's all about the future," he said.

Print Edition - Section Front

Enlarge Image

The market for mid-range natural gas-powered engines for buses, garbage trucks and other specialty vehicles "is lifting off around the world," he said, and it is already very profitable for Westport.

But the company is not yet making money on its heavy-duty engines for highway transport trucks.

This is likely to change soon, Mr. Demers said, partly because of a huge project under way at the ports at Los Angeles and Long Beach, which is forcing 17,000 trucks that serve the facilities to switch to cleaner engines. About half those trucks will run on natural gas, and Westport is the only natural gas engine supplier chosen by the truck makers who have won contracts.

At the same time, skyrocketing diesel prices are prompting thousands of other truck owners in the United States to consider switching to gas engines, especially because federal tax credits are available to help. "That's driving the share price," Mr. Demers said. "A lot of U.S. [investors] are seeing our trucks hit the road and realizing that we're the monopoly supplier right now."

There have been a number of other positive developments for the company recently, including a deal that will see Kenworth Truck Co. building trucks using Westport natural gas technology at its plant in Washington state.

The fact that a Nasdaq listing is under consideration, and that iconic U.S. investor T. Boone Pickens has picked up 12 per cent of Westport stock, also haven't hurt.

Still, a weak fourth quarter, where revenue fell 26 per cent to $15.3-million, and a loss of $8.1-million compared unfavorably to the year-earlier profit of $1.7-million, has unnerved some analysts and investors.

Analyst MacMurray Whale of Cormark Securities Inc. succinctly described the financial numbers as "bad results," and questioned whether the company will ever make much money without the subsidies that prompt many of its customers to buy the engines.

At the current price Westport stock is "well ahead of itself," Mr. Whale said in an interview. "I haven't seen anything here that gets me all that excited." He has a $2 target on the stock and a "market perform" rating.

At the other end of the spectrum, Sara Elford of Canaccord Adams has an $8 target and a "speculative buy" on the company, and is much more enthusiastic about its prospects.

While the year-end results were "modestly" below her forecasts, "the outlook more than offset this," she said in a report. "Westport made it clear that it is witnessing an 'unprecedented' increase in interest for its product due to the lower cost of natural gas compared with oil-based fuels coupled with the environmental benefits, [and it] plans to capitalize on this interest," Ms. Elford said.

Even with its market booming, Westport acknowledges that natural gas-powered vehicles are a transition technology that may eventually lead to the use of hydrogen as the key fuel for transportation.

There are still technical obstacles to overcome, but Westport's expertise with natural gas will put it in a good position to eventually tackle the hydrogen market, Mr. Demers said.

The company is already working on hydrogen technology with several partners, he said. "But it's going to be a long time before we've got pure hydrogen infrastructure and hydrogen production that's economical. In the meantime we've got [natural gas], which is a great fuel and cheap and clean and available, so why don't we get started that way."

*****

Westport Innovations

SHARE PRICE, DAILY CLOSE, (WPT-TSX)

Yesterday's close

$4.59, down 23¢

At a glance

Westport runs several of its businesses as joint ventures. Here are some of the key ones.

Cummins-Westport Inc. is a 50-50 joint venture with Columbus, Ind.-based engine maker Cummins Inc. CWI produces Westport's natural gas engines for buses and medium-sized trucks.

Westport is a partner in Clean Energy Fuels Corp., which runs about 165 natural gas refuelling stations across North America. Westport is selling off its holdings in Clean Energy to generate cash.

BTIC Westport Inc. is a 50-50 joint venture with a Chinese company. It sells and markets tanks for natural gas vehicles.

Juniper Engines Inc. is 49 per cent owned by Westport and 51 per cent by Italian firm OMVL SpA. It plans to make alternative fuel engines for smaller vehicles.