A few years ago, the future looked very bright for Westport Innovations Inc. (TSX:WPT)(NASDAQ:WPRT).
The perfect storm was brewing. Oil was high, which led to expensive prices for diesel, giving trucking companies a real incentive to switch to natural gas engines. Natural gas was cheap as well, which helped nudge truckers towards converting. And the environment was just beginning to become a very big factor.
Other things were working in the company’s favour as well. Fully electric engines hadn’t been yet proven as even feasible, and there were doubts they’d ever make economic sense. And the company was gaining the support of some very big partners, including Ford and Cummins, signing deals with both companies.
The company’s shares were on fire, too. On the TSX, Westport shares surged to nearly $45 per share in early 2012 and remained above $30 each until late 2013 before beginning a drop that would cause much head scratching among long-term holders. Currently, shares trade hands at just $3.66, which is flirting with an all-time low.
What happened? Many things, actually. The company just couldn’t turn a profit. Competition started to heat up from other entrants in the natural gas engine field and in advances in electric and hybrid engines. The price of oil crashed, bringing down the price of diesel with it.
These factors have led to some atrocious results. In the most recent quarter, revenue fell more than 26% compared with last year from $37.9 million to $27.9 million. The quarterly loss actually improved, going from $35.3 million to $20.5 million. Still, that’s a loss of $0.32 per share for the quarter, and a loss of $2.01 per share over the last 12 months.
Ouch.
But Westport has been making some changes lately, including announcing a merger with a competitor. Is this enough to break the company out of its funk and actually deliver some positive returns for shareholders?
Bad news on all fronts
The sheer speed at which Westport has lost customers is almost mind-boggling.
In 2014, the company did nearly $1.1 billion in sales, with about 60% of them coming from its partnership in China with Weichai Holding Group and Hong Kong Peterson Equipment, which focuses on selling natural gas engines to the Chinese market. Westport owns 35% of that partnership.
Through the first half of 2015, sales in China have collapsed. The company has done just $97.8 million in sales, which puts it on pace to be down a staggering 68.4% compared with last year. I can’t remember the last time I’ve seen such a deterioration in sales in such a short period. At least its joint ventures in North America are doing better, but total revenue is still on pace to be down more than 40% for the year.
Westport has responded, but I’m not sure it’s enough. The company has slashed its operating expenses, which has helped to slow the amount of cash it burns each quarter. Still, over the last year, the cash balance has declined from $168 million to just $61 million.
A bit of good news?
On September 1st, Westport announced it was merging with Fuel Systems Solutions Inc. (NASDAQ:FSYS). The combined company will benefit by cutting costs and by offering complementary products to customers. Westport will acquire Fuel Systems strictly with new stock, rather than depleting any of its cash hoard.
Like Westport, Fuel Systems has struggled over the last year. Sales are down almost 25%, and the company hasn’t been able to eke out a profit since oil prices were much higher.
From Westport’s perspective, I like this merger. It isn’t costing the company anything except stock, and Fuel Systems does have a clean balance sheet. The potential for synergies makes sense, too.
But unless the price of crude jumps quickly, the next year to 18 months is going to be very bad for Westport. Eventually, it’ll run out of cash and will need to raise money. If this environment continues, I’m skeptical the market will extend Westport the lifeline needed to stay afloat.
There are plenty ways to be bullish on natural gas. I don’t think adding Westport to a portfolio should be one of them.
