If you own natural gas stocks, should you jump up and down because Burlington Northern -- the train company owned by Warren Buffett's Berkshire-Hathaway (BRK.A) -- is going to sample natural gas engines for its locomotives? Should you decide that the revolution is here at last?
No, because, quite simply, it will take years and years for this change to take place, if it is to take place at all. That's because, once again, there is no infrastructure available to make this change work, and the costs for the change are incredibly steep.
In other words, it is a bit of a pie-in-the-sky trial. (For more about how U.S. energy policy might be impacted by the new heads of the Energy Department and the Environmental Protection Agency, click here for my exclusive interview with Dan Dicker. Dan also talks about the best values in the energy patch.)
Now, everyone knows natural gas is much cheaper than diesel. Plus, the rails are the biggest users of diesel other than the Navy, so it makes a ton of sense to try to switch. Westport (WPRT) and General Electric (GE) have engines that work on natural gas.
But the conversion for 6,000 locomotives would be a brutal one. Further, despite the fact that diesel is incredibly dirty, and a big greenhouse-gas-creating fuel that is largely imported, there is no national imperative for this change to happen. Without that change, the economics still do not work for big users of diesel, such as the 18-wheelers in the trains themselves.
Let me give you some dirty little secrets about natural gas engines. At the moment, they are entirely inefficient for their size. Once the trains are on the go, the infrastructure needed to fuel them is nascent, to say the least -- and the need to fill the tanks is much more frequent. For trucks, this is entirely problematic. Right now there isn't even a natural gas truck engine big enough for long haul. Cummins (CMI) is working on a 12-liter, but it is late and the big truckers need a 15-liter if they are going to start to convert.
The fueling for locomotives should be more frequent, too, but they at least have more space for more tanks, and can put the tanks near the locomotives. Still, when I asked CSX (CSX) CEO Michael Ward about this, he wasn't even certain the government would support something that might be too dangerous to use. Also, needless to say, the people who actually work on these trains sure don't want this fuel. They know what they are dealing with now, and they have no idea about what to do with natural gas engines. They are the equivalent of the aborted Wankel engine for the Mazda of years back: Too complicated for most mechanics to handle.
Even though Burlington Northern is the second-biggest diesel guzzler, it is far more important to get the trucks to convert. Right now, of course, the short-hauling waste trucks work best, because they are put back in depots each night. There is no such equivalent for long-haul trucks that will need 66% more filling up with natural gas.
The good news is that a division of Chesapeake (CHK) is doing plenty of work on a hybrid diesel nat gas engine, and it is possible that train engines might have the same characteristic. But, without incentives from the feds to switch -- and those prospects are stillborn -- the changeover is truly years and years away.
My conclusion: If you are buying natural gas stocks because of this revolution, you'd better have a five-to-10-year time frame. Because without government help, that's how long it is going to take to convert. Despite the benefits -- cleaner skies and domestic security -- it just isn't an imperative for anyone who could really make a difference in Washington.