What the heck is “Eagle Diesel” … and will it make us rich?

OK, OK, I'll finally take a look at those "Eagle Diesel" natural gas Stocks teased by Frank Curzio!

Frank Curzio is pitching this idea of “Eagle Diesel” to get subscribers for his Small Stock Specialist newsletter (published by Stansberry & Associates, used to be called Penny Stock Specialist).

He used to focus solely on stocks that trade under $10 a share, but from what I can tell he has recently been expanding his bailiwick to encompass both low-priced stocks and small cap stocks (meaning, stocks that have a low price per share, regardless of company size, as well as stocks that have a small market capitalization of under a couple billion dollars or so).

We’ve written about many of his ideas over the years, some very good and some very bad, and I do often like his ideas and arguments — for what it’s worth, he also puts out probably the best free podcast in the investing world (S&A Investor Radio), and he’s got the marketing might of Stansberry behind him so he always gets my readers’ attention.

Here’s how he gets us interested this time:

“100% American Made ‘Eagle Diesel’ Fuel Goes Nationwide – Massive Rollout Beginning Now

“Dubbed the ‘OPEC Crusher’ by oil and gas insiders, ‘Eagle Diesel’ could soon replace traditional gasoline… end US dependence on foreign oil… and make early investors downright rich….

“A revolutionary type of fuel will soon be on sale across the United States and Canada.

“Cheaper than regular gasoline…

“Cleaner than regular gasoline…

“And 100% American made…

“… fuel promises to end US dependence on foreign oil and cut prices at the pump in half… all at once.”

That’s the lead-in — and how can you resist it?

And this Eagle Diesel pitch is not brand new — he’s used it before to promote his newsletter, but we didn’t write about it the first time he tried this ad and it recently began running again, generating a lot of questions from our readers, so I thought we’d better dig in and have a look.

Curzio tosses some more fuel on the fire for us here:

“… for early investors, it presents the kind of moneymaking opportunity that could turn a tiny initial stake into an absolute fortune.

“Says legendary oilman T. Boone Pickens:

‘I’ve been in the energy business my entire career, and I can assure you this 81-year-old has chased down more deals than anyone you’ll ever meet. A lot of those deals didn’t pan out – that’s just how the game is played – but every now and then a big kahuna comes along. When it does, you’d better jump on it.

‘Right now… that sort of game changer has landed right in our lap.’

“As the fuel source I’ve dubbed ‘Eagle Diesel’ goes mainstream – with a massive rollout beginning right now – my guess is that it will quickly become one of the most widely used fuels in America…

“And in the decades to come, it may totally replace traditional gasoline as the standard motor fuel in America.”

He then goes on for a few pages of rambling about how this fuel is cheap, produced locally, touted by T. Boone Pickens, and already being used by trucking fleets to cut costs, but I’ll save you all that and just jump to the key point halfway through: “Eagle Diesel” is natural gas. Liquefied natural gas, or LNG, for the most part, though also compressed natural gas (CNG), which we’ve heard quite a lot about in recent years as the boom in US shale gas has dropped the price of natural gas so far below the price of gasoline on an energy-equivalent basis.

That’s a big part of what we used to hear about as the “Pickens Plan” a few years back, too — using this cheap natural gas for transportation and therefore to displace our demand for imported oil. There’s been a lot of debate in Congress over whether or not we ought to be incentivizing natural gas, providing subsidies for natural gas engines or helping to build out the fueling station infrastructure that will have to come before mass adoption, but to some extent — particularly for fleet vehicles like delivery trucks and garbage trucks, the conversion is an easy sell with consistently low natural gas prices … and it’s already happening.

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And Curzio says that this is going to be a big long-term trend (he’s not alone in that belief), and that right now we can get in on the trend very early, as the infrastructure starts to be put in place for long haul trucks to use LNG but well before natural gas hits the passenger car market in the US in any significant way.

There are a couple handfuls of stocks that have some legitimate connection to the gasification of the US transportation fleet, so which ones are being teased today by Small Stock Specialist? Here are the clues for the first one:

“Once you have the gas out of the ground, you need to ship it, store it, and turn it into a useable liquid fuel.

“And to do that, you need a variety of very specialized equipment.

“The first company I want to tell you about is a forty-year-old firm that excels in that very field – the systems used for cooling and managing gas as a liquid.

“They are a worldwide leader – manufacturing and selling virtually every piece of equipment you need to make the liquefied natural gas (LNG) industry possible:

  • Liquefiers
  • Transportation vessels
  • Huge, above-ground silos
  • Smaller storage systems for use at fueling stations
  • Even the ‘gas tanks’ that vehicles need to run on LNG

“To date, they’ve designed and built more than 280 different models of natural-gas vehicle tanks….

“In the past year alone, orders for their products have doubled. Today, they’ve got a backlog of hundreds of millions of dollars.

“From 2010 to 2011, sales increased over 40%…

“And based on consensus estimates from Reuters, they’ll jump another 125% this year.”

So who is this? According to the cogitations of the Mighty, Mighty Thinkolator this must be … Chart Industries (GTLS).

And the ticker itself gives you a clue as to where this company’s futures lie: GTL is an acronym for “Gas to Liquids”, which is a key step in the process of turning a gas into a more efficiently stored liquid (you need to fit enough natural gas into your car’s tank to travel a couple hundred miles, which means you have to liquefy it to make it take up much less space … the same thing they do to gas to transport it aboard ocean tankers).

Chart Industries is indeed a leader in the infrastructure that will be required for a mass expansion of LNG fueling — particularly the liquefaction and storage facilities and tanks — and they have been growing like crazy … analysts expect them to double earnings this year and then boost earnings by another 40%+ next year, and they did boost revenue by more than 40% from 2010 to 2011, as teased (it was 43%, if you’re keeping track).

Of course, it’s also priced for growth — I wrote about GTLS for the Irregulars a few months ago too, when I was sharing my big picture thoughts on natural gas, and I’ll tell you the same thing I told them: I like it and I think they’ll capture a big chunk of the LNG tank business if expansion picks up rapidly as some folks expect … but it ain’t cheap. I’ve never been able to convince myself to buy the stock because of that valuation, which has so far been a mistake — when I mentioned them in late April the shares were under $50, and they’re now just under $70.

Value-oriented folks like the Morningstar analysts are nervous about Chart’s valuation (last report I saw from them said to “consider selling” when it got this far above their $43ish “fair value”), but analysts in general are so optimistic about the near-term growth that the stock carries a PEG ratio of just a bit over 1 — not too bad if the growth materializes. The stock is down about $10 from the recent high, perhaps partly because they’ve missed the last two earnings estimates, and stocks like this that depend in part on big orders and big backlogs often have “lumpy” earnings — meaning that the earnings don’t always move up in lockstep quarter after quarter. They’ve also taken a bit of a hit in their European business, as you might expect, and that has hurt their margins just a little bit, but they are seeing a lot of growth in the energy and chemicals segment where this kind of LNG work is taking place.

So … a great company, well-positioned … but they’re priced for an expected wave of earnings growth and they have not yet established any kind of record for consistently increasing their earnings over time. They have been profitable for eight or nine years now, which is itself notable because most of the stocks you hear touted as plays on the gasification of the transportation sector had never booked a profit … but some years have shown lower earnings than the year before, so this is a bet not on a steady grower that’s continuing but on a very solid company that has seen lumpy, inconsistent earnings over time but is well-positioned for a “story” of growing LNG usage.

And as far as stories go, it’s always worth noting that you’re not exactly — whether or not you subscribe to Curzio’s letter — the first person to hear about it. There are have been a lot of investors bidding up the GTLS share price in expectation of that growth over at least the last half-year or so, though the ride has been bumpy and has seen quite a few notable spikes up and down. Chart is big player in this business, particularly when it comes to tanks, and they’re still reasonably small with a market cap of around $2 billion, but there are also plenty of other gas infrastructure players who might enjoy a boost from new LNG distribution and storage projects … including Chicago Bridge & Iron (CBI), which was mentioned by longtime reader Myron Martin a few weeks ago when we were discussing infrastructure projects of a different sort.

And Curzio also teased at least one more stock — so what is it? This one seems like a more directly play on the refueling network that we’ll need in order to see mass adoption of LNG by trucking fleets and passenger cars:

“Long-haul trucking firms, and companies like Wal-Mart that own their own fleets and ship nationally, are just starting to make the switch.

“In order for this trend to take off, a widespread network of fueling stations needs to develop.

“And that’s what makes this such an incredible opportunity.

“Because, as I mentioned earlier, that massive build-out is beginning right now…

“The company leading the way is a small firm you’ve likely never heard of. But in the next 5-10 years, I believe it could become as well-known as Exxon.

“Today, they are already North America’s largest provider of natural gas fueling stations, supplying about 40 million gallons of fuel every year.

“Thanks in part to a recent deal with gas giant Chesapeake Energy – who have established a $1 billion fund to accelerate a build-out of natural gas infrastructure – that number is going to increase by a huge margin.

“Over the next two years, the number of stations in operation are planned to grow by 83%… covering virtually every US state along the nation’s premier trucking highways.”

This one, sez the Mighty Thinkolator, is one you’e probably heard of if you’ve done any research on the sector: Clean Energy Fuels (CLNE)

CLNE is one of the stocks that has been specifically backed by T. Boone Pickens (he still owns roughly 20% of the company), and it is the perfect example of the long-term “story stock” — they are certainly the leading developer and operator of natural gas fueling stations in the US, but it has not been a steady road as they’ve grown their footprint, both because it’s hard to build out a network like this in what would generally be expected to be a low margin business (gasoline retailing at the individual station level, at least, is extremely low margin — most of the actual operators have to sell you Slurpees and donuts to make much of a profit), and because demand for gas fueling stations has waxed and waned with regulatory changes and with the fluctuating price of natural gas vs. diesel fuel and gasoline. Some of the stations they operate are technically open to the public, but most are effectively contracted to specific customers, like fleet operators or local governments. So they’re at the very cusp of beginning to create an open network of fueling stations — as with the deal to put LNG and CNG fueling into Flying J Truck Stops

The latest push for a national network of fueling station is being called (by the company) “America’s Natural Gas Highway,” and it effectively is aiming to provide enough of a network to allow good coverage for cross-country truckers to use LNG on the major interstates. They signed up five new regional trucking companies to use their facilities late in June, though a lot of that is the same kind of regional/local stuff they’ve been doing for a long time (CNG stations for local delivery fleets). And yes, they did get an investment from Chesapeake Energy (CHK) last year and have had interest from several other major natural gas companies along the way — no surprise there, since natural gas drillers have a vested interest in developing new markets for the product to help bolster prices, and in cutting their production costs by using CNG and LNG to power their large fleets of water trucks and drilling equipment.

So yes, if you want to get in on the ground floor of the first national brand in natural gas fueling stations, Clean Energy Fuels is your play — just know that you’re investing in a story that you hope will continue to play out, and that they’re not going to become profitable in the next couple years even if they do continue to boost revenues by 20-30% per year. Analysts still believe in that revenue growth, but they’ve also been ratcheting down their earnings estimates in recent months (well, I guess it’s more accurate to say that they’ve been ratcheting up their loss estimates). On the positive side, the stock is way off its highs of just a few weeks ago so if you do love the long-term story — which does seem to have at least a chance of reaching an inflection point for profitability within the next five years — at least you’re paying less for the stock today than you would have a couple months ago.

One more? Yep, the teaser train continues. Here are our clues:

“A Pure Play on a Breakout Technology

“New fuel requires new engines. And the next company I expect to soar over the next few years makes exactly that: engines designed to run on natural gas.

“In fact, in terms of intellectual property rights and patents, this company is the dominant company in this space – despite the fact that they are still relatively small and virtually unknown.

“Let me be clear: This is a pure play on natural gas engine technology. And the company, like most small stocks sitting on an impending breakout, will likely be volatile in the near term.

“But if you’re willing to put up a small amount of capital for a chance to double or even triple your money – this is an amazing opportunity.

“Already, they are a leading supplier of alternative fuel components in Europe and Australia.

“They’ve signed deals with firms from Quebec to British Columbia to outfit their trucks with new natural gas engines…

“They also signed a deal in Los Angeles to do the same for the buses of their Unified school district…

“And with Volvo, to supply its heavy-duty truck line.

“They’ve also got deals in place with Mack Trucks to supply their cement trucks…

“And, in perhaps the biggest deal of all, with the Chinese.

“This tiny company has formed a 30-year joint venture with China’s largest heavy-duty engine maker to design and sell natural gas engines for everything from automobiles to power generation – and even in shipping…

“In the past year alone, revenues have increased 130%. And sales are expected to grow 50% a year for the next five years.

“Perhaps now you can see why I think this tiny firm could soon become a worldwide dominator in this space. And why this stock could simply explode.”

This one will be familiar to you if you’ve been aboard the good ship Gumshoe for any length of time — here Curzio is re-teasing Westport Innovations (WPRT), a stock he has recommended publicly in the past as well … and it’s also been teased over the last year or so by Kent Moors over at Money Map Press and by David Gardner at the Motley Fool, and we were covering it here more than four years ago when it was really tiny and traded primarily on the Canadian exchange.

During the time, the story has been the same — so like Clean Energy Fuels, you’ve got a stock that’s been riding a story and that has always seemed to be on the verge of getting over the top and becoming profitable. In Westport’s case, the story is big engines using their HPDI natural gas injection technology to rival the horsepower and torque of diesel engines — they’ve been generating a nice base level of revenue from their partnership with Cummins on midsize trucks engines for many years (that’s the Cummins Westport joint venture that sells engines for garbage trucks, city buses, etc.), but the push has been to move beyond that into heavy duty trucks. Initially the idea was to start with huge contracts for drayage trucks in the California ports, with a dependence on huge subsidies from the ports (and thus the CA government) to help clean up the air in those areas, but they have also developed some partnerships with major truck makers (particularly PACCAR, maker of Kenworth and Peterbilt) and with other engine makers around the world, including the leading heavy duty engine maker in China as well as Caterpillar.

So the story is still a good one, but with Westport is has been important to either be extremely patient or to be nimble — the stock bounces around a lot for a $2 billion company and, like CLNE, they’ve had their analyst estimates worsened substantially over the last few months. That was accompanied by a serious collapse in the share price, down to almost $20 just a month or two ago, but that did bring in the bottom fishers and the story investors and the stock recovered strongly with a bounce back up to $38 today. The fact that the same company with the same basic long-term outlook can trade from $48 to $22 to $38 within the course of just four months, with, I would argue, no really substantive news, is just a reminder of how little consensus there is for how profitable this business will be and how long it will take for them to become profitable.

The profits almost certainly won’t be coming within the next two years, but we do have to have some faith that the company will become profitable shortly after that, and will grow exponentially thereafter, because it’s almost certain to face increasing competition in the natural gas engine space within the next 15 years — they do keep spending heavily on R&D to develop continually more advanced technologies, but the core patents on the heavy duty injectors for truck engines start expiring in about a dozen years and there are other engine technologies being developed by other companies (including Westport’s partner, Cummins). Westport has had the natural gas engine technology space largely to itself in recent years (at least at the headline level), partly because the sector wasn’t obviously profitable, but that will change pretty rapidly if those fueling station networks develop and natural gas prices stay so cheap and drive trucking companies to move their fleets over more quickly.

I still like Westport and would love to see this story continue to develop, and I love that the business now should be able to succeed without much in the way of direct subsidies from the government (though there will have to be some, especially if oil and natural gas prices converge again in the future), but I have a really hard time justifying this price. In retrospect, jumping in on the crash to $22 would have been brilliant … but I wouldn’t be at all surprised if patient investors get another chance at buying the stock well below $30 in the future. They’re changing a small part of the world, they’re growing revenues quickly, and they get headline attention almost every day … but they aren’t and won’t soon be making money, so don’t get too caught up in the excitement — if you’re buying earnings you can pay up to get earnings growth, if you’re buying a long-term story stock it’s often better to wait until the short-term guys fall out of love with it.

So there you have it — those are, according to the almost-never-wrong Thinkolator, the three picks being teased by Frank Curzio as plays on “Eagle Diesel.” The only one I’ve owned in the past has been Westport Innovations, but if I were forced to choose at today’s prices I’d probably be cautious and profit-sensitive and look first at Chart Industries, second at Clean Energy Fuels, and third at Westport. All of them should see revenues jump pretty strongly over the next decade if the “Natural Gas Highway” does indeed become a reality, but it could easily be a very bumpy road.



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John L Woodward
John L Woodward
July 23, 2012 6:26 pm

There is another break through related to the CNG, LNG issue. Qatar has more natural gas than it has oil, so they insisted that ExxonMobil build a big plant to convert natural gas to a new form of diesel oil that is much cleaner than conventional diesel. It is said to be as clear as water and to produce almost no particulate matter when burned in a diesel engine. The plant in Qatar should be in production soon, if not already. If this technology can be applied in the US, it represents another way to use natural gas without liquefaction.

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Venture Shadow
Venture Shadow
September 17, 2012 5:32 pm

The Westport thing is stale Frank said last week. He may have said it previously. WPRT stock price is now nosediving. Pretty soon it may be a “strong buy” again.

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September 17, 2012 9:36 pm
Reply to  Venture Shadow

Frank recently said to sell WPRT. Look at it again later.

September 18, 2012 2:32 pm

Westport has done very well for me playing options, 3 for 3 so far. Get the direction right and you can make very good money on either the stock or the options. Long term i believe it will do well so my intent should it falter again is to buy LEAPS options should the price drop below $30. Definitely should be on any investors “watch list” so you can pick the best entry and exit points.

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