The Vancouver-based company and the global heavy-equipment heavyweight will co-develop technology that can use natural gas to power off-road heavy equipment such as mining trucks and locomotives that typically use diesel.
Westport's shares closed up $5.02 or about 22 per cent at $28.17 on the Toronto Stock Exchange, however the stock remained well short of a high of $49.68 set in March.
Under an agreement between the two companies, Caterpillar will fund the development, while Westport expects to supply key components for products developed under the initiative.
Westport chief executive David Demers called the agreement a significant opportunity — although the companies didn't disclose financial details.
"We are working with the global leader in engines, locomotives and off-road equipment to develop an attractive natural gas offering for their customers," Demers said in a statement.
"The substantial price difference between natural gas and diesel fuel is resulting in a strong financial incentive to enable off-road applications to take advantage of low natural gas energy costs without sacrificing operational performance."
Work is expected to start immediately on both new and existing engines, however commercial production is not expected to begin for about five years.
The companies said the agreement will initially focus on engines used in mining trucks and locomotives, but they will also develop natural gas technology for a variety of other applications.
Steve Fisher, vice-president of Caterpillar's large power systems division, said customers have been asking for natural-gas powered equipment.
"The program positions Caterpillar to become the first manufacturer to bring Westport HPDI technology to the high horsepower off-road market, offer the broadest product line of natural gas-fuelled machines and equipment, and capitalize on the attractiveness of natural gas as an alternate mobile fuel," Fisher said.
The locomotives work will be done by Electro-Motive Diesel, a subsidiary of Caterpillar's Progress Rail Services unit. Electro-Motive closed a plant in London, Ont., earlier this year after locked out workers rejected pay cuts at the operation.
Jason Zandberg, an analyst with PI Financial in Vancouver, said the deal was good news for Westport and adds to its high-profile partnerships.
"Westport has done a good job of aligning themselves with good brands," he said.
"It makes a nice fit with Caterpillar but from my perspective as an analyst I still need to see this company get closer to profitability.
Zandberg said the potential is there for Westport if natural gas is used more widely, but the market isn't there yet.
"It has just been very slow in developing," he said.
"We've seen their joint venture with Cummins be very profitable for many years now ... but that hasn't translated into Westport themselves being profitable."
In February, Westport signed a new agreement with Cummins Inc. that will see the company take a larger share of the profits at its 50-50 joint venture with the engine maker if it is able to grow the business faster than expected.
In addition to the deal with Cummins and now Caterpillar, Westport also has a joint venture deal with Chinese heavy-duty engine maker Weichai Power Ltd. and Hong Kong Petersen (CNG) Equipment Ltd.
Interest in natural gas-powered vehicles in North America has increased as the price of natural gas fallen, making it more economical than gasoline or diesel in addition to being cleaner burning.
New drilling technology has unlocked massive new reserves in parts of Pennsylvania, Colorado and Wyoming that were previously unavailable because the gas was trapped in shale rock.