In the 1970s, Britain seemed on the brink of an ‘auto-gas’ revolution – cars that could change over from petrol to gas at the flick of a switch were mooted, as were plans for a mass roll-out of gas-filling stations. The advantages were clear. Gas-powered vehicles were more environmentally friendly than petrol or diesel engines, and after the 1973 oil shock, cheaper as well.
So what went wrong? The main hurdle to the gas revolution was cheap oil. As the price fell back in the 1980s and 1990s, there was little incentive for car makers to pursue alternatives. A lack of refuelling infrastructure in North America and Europe made the relatively limited range of natural-gas vehicles (NGV) a serious issue. And those countries that did have the gas reserves and distribution network were typically developing or middle-income countries – not, until recently, an attractive enough proposition for car makers. Instead, people would retrofit petrol or diesel cars with alternative gas technology.
There are different types of gas vehicle technology. Most NGVs run on compressed natural gas (CNG). The problem with CNG is that it needs to be stored in bulky pressurised tanks that take up space and reduce the range of a car to around 200 miles. That’s better than many electric rivals, but still far less than conventional cars. Another option is liquefied petroleum gas (LPG). LPG is a by-product of processing natural gas or petroleum. It offers a marginally cheaper alternative to petrol with some environmental benefits. Unfortunately it, too, gives cars too limited a range and can cause starting problems in cold weather.
All this doesn’t sound promising. Yet, despite these barriers, the number of NGVs has grown rapidly over the last 12 years, jumping from 0.8 million in 1998 to 10.1 million in 2009. This is primarily due to strong demand in Latin America and Asia Pacific, and to an extent in Europe. Meanwhile, LPG vehicle numbers have also shot up, from 10.3 million in 2003 to 14.5 million in 2007. There are several reasons why this sector should continue to grow. In the past ten years, rising oil prices have rekindled interest in alternatives to petrol engines. And as Trevor Houser notes in the Financial Times, unlike in the 1970s, the high oil price has survived the recession. This “gives entrepreneurs and investors confidence to support cleaner vehicles”.
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Another major push has come from environmental legislation. The European Union has committed to a 20% cut in carbon-dioxide emissions by 2020. This has pushed member countries to improve fuelling infrastructure – between 2003 and 2008 the number of CNG filling stations in Europe doubled – as well as use gas for government vehicles, and create tax incentives.
Even the US – where only 0.4% of vehicles run on gas compared to a global figure of 1% – is turning to gas. One key aim of the American Power Act, currently sitting in Congress, is to promote gas vehicles. This is not solely for environmental reasons. There is a growing call, championed by energy financier T Boones Pickens, for America to rely more on its vast shale gas resources rather than import oil from “unfriendly and unstable governments”. As a result, car manufacturers are responding to rising demand by designing purpose-built gas-powered cars. Below, we look at the best way to cash in.
The best bet in the sector
Italian auto-engineering firm Landi Renzo (Milan: LR) is the world’s largest maker and installer of natural gas conversion parts and systems for CNG and LPG motors. It sells directly to either car manufacturers or to garages that retrofit vehicles. It has partnerships with major car makers including Fiat, Chevrolet, Tata, Daimler, Toyota, Volkswagen and Ford.
The group has a global market share of 33% and direct sales in more than 50 countries. It has manufacturing facilities in key emerging markets such as Pakistan, Brazil, China and Poland, and recently bought US CNG producer Baytech to capitalise on “a bigger focus on natural gas in North America over the past couple of years”. It also bought Italian rival AEB to increase its footprint in Argentina, the world’s second largest CNG market.
The firm has cashed in on the recent growth in the market with revenues rising at a combined annual growth rate of more than 32% over the last three years. EBITDA fell by 11% to €41.6m in 2009, but this was down to one-off expansion costs. Landi Renzo’s leading position and global footprint mean it is well placed to profit as the number of gas-powered vehicles increases. On a forward p/e of 12.2, the shares look good value.
• This article was originally published in MoneyWeek magazine issue number 506 on 1 October 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don’t miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.