Caterpillar (NYSE:CAT) plans to launch natural gas powered vehicles and machinery for high horsepower applications within the next five years. Diesel has historically been the fuel of choice for high horsepower engines. However, with the increasing price differential between natural gas and diesel, buyers are increasingly in favor of natural gas as the fuel to run their vehicles and machinery. This has prompted manufacturers like Caterpillar to expand their natural gas powered engine portfolio. Additionally, this bodes well for the environment as natural gas causes less pollution compared to diesel.
Caterpillar manufactures mining trucks, equipment and machinery for mining and construction purposes, and engines for marine, energy and exploration applications, generator sets and locomotives. For all of these product lines, the company is focused on providing natural gas powered engines. We currently have a stock price estimate of $90.26 for the company, approximately 5% above its current market price.
Large reserves and low price of natural gas
Technological advancements in exploration and extraction of shale gas (natural gas produced from shale rock) have contributed to the low price of natural gas. In addition, large reserves of natural gas worldwide raise the probability that its low-cost advantage will hold for the foreseeable future. In the U.S., the Energy Information Administration (EIA) estimates the total recoverable shale gas reserves at 23.4 trillion cubic meters.  In China, shale gas reserves are estimated at around 30 trillion cubic meters.  China is also rapidly scaling up its shale gas extractions – from near zero a few years ago to an estimated output of 6.5 billion cubic meters by 2015 and 65 billion cubic meters by 2020.  Shale gas extractions are also increasing in the other parts of the world.
The low cost of natural gas results in savings of 30% to 50% compared to that for diesel for consumers who operate natural gas powered machinery.  Taking all this into account, it makes sense for Caterpillar to provide natural gas option for its machinery and vehicles.
Caterpillar aligns its product offerings to the changing fuel demand
At present, the company offers gas retrofit kits for its energy exploration and production (E&P) engines. In addition, it recently announced that its first liquefied natural gas (LNG) powered products will likely include mining trucks – CAT 793, CAT 795 and CAT 797, and locomotives. The commercial launch of these vehicles is expected within the next five years.
The launch of these vehicles and locomotives will ensure that Caterpillar benefits from the increasing preference of customers for natural gas powered engines and thereby adds to its sales growth. Earlier in the year, Caterpillar entered into a partnership with Westport Inc., a leading company in natural gas powered engines, to co-develop natural gas technology for Caterpillar’s engines.Notes: