American Power Group Overcomes Low Diesel Price With Innovation

American Power Group (APGI – $0.25), which provides a cost-effective natural gas conversion technology for vehicular, stationary and off-road mobile diesel engines, is going through a rough patch.

The sharp and unexpected fall of oil prices, from $100 per barrel less than a year ago to about $50 per barrel today, has resulted in a drop in diesel prices. Because natural gas prices at the pump have remained relatively stable in the $2.00 to $2.25 per gallon range, the price spread between diesel and natural gas has tightened.

Because APG’s dual fuel technology displaces higher cost diesel fuel with lower cost, and cleaner burning natural gas, the recent oil/diesel pricing and tighter price spread have impacted inventory replenishment and implementation schedules of existing and prospective customers.

While the wait-and-see attitude of potential customers has its impact on the Company’s financials in the short term, it’s making headways with its technological innovations and in specific niche markets. As such, American Power Group has plenty of growth opportunities. In addition, it’s significantly expanding the number of engine families that it’s allowed to retrofit by the Environmental Protection Agency (EPA).

Intermediate Useful Life Engines Approved

The Company’s dual-fuel technology is a non-invasive system that enables stationary and vehicular engines to run on diesel fuel together with either liquefied natural gas, compressed natural gas, pipeline or well-head gas, and bio-methane, with the flexibility to return to 100% diesel fuel operation at any time.

The use of dual fuel conversion systems in the United States is subject to the regulations of the EPA. The primary requirement is that the addition of a dual fuel conversion system to an existing diesel engine doesn’t negatively impact the current emission profile of the engine or the engine’s original emission profile. So in order to convert a certain type of diesel engine with a dual fuel conversion system, the EPA needs to give its approval.

The EPA’s testing and compliance procedures to get approval differ based on the age category of the vehicle or engine that is being converted. There are three categories:

• Full certification for new or relatively new engines, which is defined as engines less than two years old;
• Intermediate Useful Life engines (IUL), which is defined as engines older than two years but having fewer than 435,000 miles, and
• Outside Useful Life engines (OUL) which is defined as engines with more than 435,000 miles or 10 years old.

The initial focus of the Company was on obtaining approval to install a dual fuel conversion system for a large number of engine families within the OUL category. These engines types account for 2+ million of the estimated 3 to 4 million Class 8 trucks on the road today in North America. During the past couple of years, APG received an astonishing 456 approvals from the PEA that cover engine model years from the mid 1990’s to 2009 for six of the top seven OEM engines.

With OUL approvals practically complete, the Company turned its attention on obtaining approvals for Intermediate Useful Life (IUL) engines. Another 600,000 to 700,000 Class 8 trucks fall into this designation. Although the IUL approval process is more expensive than OUL because of additional testing requirements, the IUL addressable market is strategically important because it allows APG access to the medium to larger fleet owners who operate 300+ vehicles and who keep their trucks 4-5 years.

The past three months APG successfully received 40 IUL approvals for several Volvo/Mack and Detroit Diesel engines. These engines cover approximately 21,000 U.S. registered owners representing over 156,000 trucks. These are now actively being approached.

Lyle Jensen, American Power Group’s President and CEO commented: “One of the most important attributes of APG’s non-invasive Dual Fuel System for truck owners who rotate their fleet every four to five years is the ability to transfer the APG system and natural gas tank to their next vehicle at the time of rotation. For a few thousand dollars, the next truck in rotation can be up-fitted with the existing APG Dual Fuel System and natural gas tank and APG’s read-only electronic control module will be re-programmed to the next applicable EPA approved engine model. APG’s system and third-party natural gas tanks are rated for a 15 to 20 year operating life that can generate estimated lifetime fuel savings measured in the hundreds of thousands of dollars or multiples of the total dual fuel investment.”

Financials

As mentioned above, APG’s sales have declined due primarily to slower Canadian oil and gas conversions and delayed vehicular orders. Net sales for the first quarter of fiscal year 2015, ended December 31, 2014 decreased approximately $787,000 to $1.06 million, compared with the first quarter last year.

	Three Months Ended December 31
Amounts in $000’s	2014	2013
Net Sales	1,056	1,843
Net (Loss)	(1,383)	(409)
(Loss) Per Share	(0.02)	(0.00)
Most important income statement data for the quarters ending December 31, 2014 and December 31, 2013. Source: Company Filing

North American stationary revenues for the three months ended December 31, 2014 were approximately $981,000, which was $341,000, or 26%, lower as compared to the three months ended December 31, 2013. The decrease was primarily due to an initial $750,000 inventory stocking order placed by a Canadian dealer/installer last year, which wasn’t repeated this year. Domestic vehicular revenues for the three months ended December 31, 2014 decreased $444,963 or 86% to $75,075 as compared to the three months ended December 31, 2013.

Despite the lower revenues in the first quarter, the Company’s backlog was $1.6 million at December 31, 2014, which is 4.5X higher than the backlog a year ago. In addition, APG closed a new $3.2 million expanded and extended bank credit facility as well as a $2 million capital raise with a strategic investor. The Company now has enough money in the bank to execute its growth plans.

Growth Opportunities

And there are plenty of growth plans and opportunities for American Power Group.

• Because the California Air Resources Board (CARB) has more stringent requirements than the EPA, American Power hasn’t been able to market its dual fuel solution in California yet. Given the thousands of Class 8 trucks operating in California and over 150 public CNG/LNG fueling stations in operation, the California vehicular market is critical to enter. As a result, the Company is setting up a testing procedure to meet CARB’s requirements. A proposed vehicular conversion test plan is currently under review at CARB, while a stationary conversion test procedure has already been established.
• Late last year, APG’s in-house and WheelTime Network sales and marketing team were supplemented with sales representatives from third party dealers and numerous national and regional CNG and LNG fueling suppliers. Especially the new relationships with some of the largest national and regional natural gas suppliers in the U.S. are gaining momentum and showing results. The Company is working on the joint deployment of multiple in-field dual fuel vehicular evaluations with high profile customers who operate fleets ranging from 1,000 to 10,000+ units.
• A Freightliner Glider Kit is designed, engineered and assembled alongside new Freightliner trucks giving the prospective fleet owner everything a new truck offers except for two of the three main driveline components (engine, transmission, or rear axle). The fleet owner can either recapitalize any of the driveline components from their existing unit or specify a factory installed remanufactured engine or rear axle. Freightliner Glider Kits are available in day cab or sleeper units with a wide range of options at a much lower cost compared to a new diesel truck. APG has an industry leading 459 EPA engine family approvals covering a wide range of engine models that are eligible to be installed in glider kits.

  Brian Harrison, Harrison Truck Center’s President and CEO, stated, “We are truly excited about adding APG’s Dual Fuel solution as a glider kit option and are even more pleased that we now have a viable mainstream solution to address the underserved high horsepower natural gas engine market. With the exception of APG’s Dual Fuel solution, we have not found a natural gas engine solution above 400HP that can meet the demands and power performance of heavy-haul and severe-duty vocational trucks, especially in extreme and severe operating environments.”

• Although a reduction in the number of oil and gas rigs operating in the U.S. and Canada is underway, the ability for APG to use conditioned well-head gas with a variety of diesel engines is expected to continue to attract interest due to the positive impact on operating margins.
• Strong marketing efforts in Latin America for the vehicular market have produced over $1 million in backlog with deliveries in four Latin American countries scheduled to begin in the March thru July time period. These prominent customers in global industries are expected to create follow-on orders during the balance of 2015.

Conclusion

Because of the current low diesel/natural gas price gap, there will be customers that adopt a wait-and-see attitude before making their initial commitment to natural gas or commit to additional follow-on dual fuel related capital expenditures. As a result, we expect APG’s year to start slow, but gain momentum as it continues its sales training with the natural gas supply partners’ sales teams, adds more IUL engine approvals, and completes the multiple Latin America evaluations currently in place.

In addition, there are many fleet owners who are looking for long term overall cost efficiencies and appreciate that it’s only a matter of time before $3.50+ diesel prices return. We believe those who have the foresight to build competitive strength in a down market will use 2015 to complete their dual fuel natural gas testing in order to hit the ground running for the next cycle of diesel prices. Hold on to your shares of American Power Group.

Sign up for our weekly e-mail newsletter and be the first to receive our best ideas and updates.

For important disclosures, please read our disclaimer.