October 3, 2012 / 5:53 PM / 5 years ago

Natgas engine developer Westport can grow without incentives: CFO

6 Min Read

(Reuters) - Westport Innovations Inc WPT.TO (WPRT.O), a Vancouver-based developer of technology that allows truck and bus engines to run on natural gas, doesn't need tax incentives in the United States to build its business, Chief Financial Officer Bill Larkin says.

In fact, he says, the prospect of future tax breaks for vehicle operators to switch to natural gas can be a disincentive to invest.

"We do not need incentives for natural gas technology to drive adoption," Larkin said in an interview on Tuesday.

"It actually hurts the investment in this technology because they (the U.S. government) have been dangling this carrot ... and so investments are delayed," he said.

"It is finally put on the backburner, hopefully permanently," he said, referring to the U.S. Senate's rejection in March of proposed tax incentives for long-haul trucks and commercial vehicles to switch to the cheaper fuel.

Westport, whose top shareholders include Soros Fund Management LLC and Fidelity Management & Research Co, develops technology that makes engines operate on clean-burning fuels such as compressed natural gas (CNG), liquefied natural gas (LNG) and renewable natural gas fuels.

The Canadian company has yet to post a profit since listing on the Nasdaq in 2008, but expects revenue of $400 million to $425 million this year from its contracts with companies such as General Motors Co (GM.N), Caterpillar Inc (CAT.N), Cummins Inc (CMI.N) and Ford Motor (F.N).

Revenue in 2011 was $265 million, up more than 80 percent.

Analysts, like Larkin, are also positive, although the company's stock has lost 16 percent this year. Of 18 analysts covering the company's U.S.-listed stock, 15 have ratings of "hold" or above, according to Thomson Reuters I/B/E/S.

UBS started coverage with a "buy" rating on Wednesday, saying the company was riding "the golden age of natural gas".

"The potential for long-term, low cost and easy accessibility of natural gas provides the economic driver for the increased use of natural gas as a fuel for transportation," the brokerage said in a note to clients.

Natural gas is emerging as an alternative to gasoline because it produces lower emissions of nitrogen oxides, particulate matter and greenhouse gases than gasoline or diesel, it is also significantly cheaper.

While natural gas prices have risen 15 percent this year, they are coming off decade lows as production soars from U.S. shale fields. And at about $1.33 per gallon, the cost of CNG is almost half that of gasoline.

Natural gas prices would have to move sharply higher or oil sharply lower to be a worry, Larkin said.

"If oil goes down substantially where it reduces the spread (between natural gas and oil), that would have a negative impact," said Larkin, who took over as CFO in February 2010.

"Westport Inside"

Natural gas vehicles make up less than 0.1 percent of vehicles on U.S. roads the road today, but commercial and institutional fuel users such as airports, bus fleets and refuse truck operators are gradually switching to CNG and LNG from conventional fuels.

The number of natural gas vehicles is expected to reach nearly 36 million by 2018 due to rapid adoption in Asia, the Middle East and elsewhere in the developing world, market research firm Global Industry Analysts said in a recent report.

"China is a huge market," Larkin said. "The China Class A truck market is two times the size of North America and Europe combined."

Westport has already joined with heavy duty engine maker Weichai Power to launch a high pressure direct injection (HPDI) truck in China. It is also working with Alternative Fuel Vehicle Sweden AB, sole supplier of natgas fuel systems to Volvo cars.

Westport, which has a market value of C$1.52 billion ($1.54 billion), plans four product launches over the next 18 months that it hopes will drive it toward profitability.

"2014 is definitely a good opportunity because we have got Volvo coming on line, we got Weichai coming on line ... the new programs can generate cash flows," Larkin said.

He stopped short of forecasting a profit, however. "I am not committing that we are going to be profitable in 2014."

Despite positive reviews, Westport's stock has tended to be volatile.

"Although unfounded, there continues to be concern about the competitive advantage of Westport's technology," analyst Matt Gowing of Mackie Research Capital said.

"Westport has just started to catch up, the momentum is back and I expect continued gains," said Gowing, who has a $50 price target on the stock.

Shares of Westport, whose competitors include alternative-fuel components maker Fuel Systems Solutions Inc FSYS.O and Landi Renzo SPA (LR.MI), were trading at C$29.83 on Wednesday.

So does Westport ultimately plan to produce its own car?

"No", said Larkin. "If it is a natural gas vehicle, we want to be 'Westport Inside', more like an ‘Intel Inside.'

($1 = 0.9880 Canadian dollars)

Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Ted Kerr

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