Clean Energy Fuel Co (CLNE)
Has CLNE's stock bottomed? That is what some people were heard saying when the stock went up by 11% after CLNE forged a partnership with General Electric (GE) to build two liquefied natural gas (LNG) plants using GE's technology.
The stock is currently trading at almost half the price it achieved in March this year. After Obama's re-election, many have high expectations for the stock. Everyone agrees with the fact that Obama is a staunch admirer of green technology. They are well-aware of the episodes of Solyndra (solar power provider), Tesla Motors (TSLA) (the electric car manufacturer) and A123 (AONE) (the electric car battery manufacturer). However, Jim Cramer thinks that it is highly unlikely that State will embrace natural gas as cheaper and greener source of fuel. This means that any natural gas related project may not be aided by Washington in the near future.
On the other hand, CLNE's CEO Littlefair believes that CLNE does not need government's assistance. The economics are enough to compel people to switch to natural gas. In fact, he believes that recent agreement with GE shows that major players are seriously thinking about the natural gas market.
CLNE Earnings Release
The company topped the revenue estimates and met the profit estimates. The revenue of $91.5 million was 28% higher Y-o-Y and 12% more than the expected revenue of $81.5 million. The loss per share turned out to be 19 cents, 72% less on a Y-o-Y basis. The main feature of the earnings release was that CLNE reported a Y-o-Y rise of 24% in the gallons delivered for the quarter. Gallons are defined by the company as the sum total of gallons delivered for compressed natural gas (CNG), LNG, renewable natural gas (RNG), and those associated with providing operations and maintenance services to its customers during the period. The rise in gallons delivered sent bullish signals to the market as the bulls have started to believe that natural gas adoption rate might be on a rise.
The company aims to establish a network of 150 LNG fueling stations by the end of 2013. 70 stations are to be built this year and the rest are to be constructed in the next year i.e. 2013. American Natural Gas Highway, the name given by the company to this project, will provide LNG fueling to the trucks in 33 states. Earlier on, the bears claimed the natural gas infrastructural development was not going at a pace expected by the market. However, these claims were falsified after CLNE disclosed in its conference call that it had already built 48 stations and is well on its way to complete the rest of 22 stations for this year. A full implementation of this plan will mean that the truck users will find an LNG station, every 250 miles, on the American Natural Gas Highway.
Recently, GE and Chesapeake (CHK), a producer of natural gas, launched 'CNG in a Box' system, which can compress natural gas from a pipeline into CNG onsite at a traditional filling station. According to the bears, GE-CHK collaboration was the last thing that CLNE wanted given that currently CLNE has such a small target market. In case 'CNG in a box' becomes a success with the market, CLNE will lose a big chunk of its revenues.
No doubt this is a potential risk for CLNE but I believe CLNE has taken some positive steps that will give it edge over any competition down the hill. Firstly, CLNE has placed most of its LNG stations near truck stops of Pilot Flying J, the largest truck-stop operator in North America. in this way, CLNE will be able benefit from the existing network of Pilot Flying.
Also, with the passage of time, CLNE has become a vertically integrated force in the natural gas industry. It has built a network of subsidiaries across North America. The subsidiaries include refining and distributing operations, engine conversions (BAF Technologies) and commercial filling stations (Northstar).
Agreement with GE
The recent partnership of CLNE, the largest provider of vehicular natural gas fuel in North America, with GE, the largest conglomerate in the US, has sent bullish signals to the market. According to the agreement, CLNE will buy GE's technology that will be used in liquefying natural gas to supply to its filling stations. GE has agreed to lend CLNE $200 million to buy two GE-made plants equipped with the afore-mentioned technology. MicroLNG, the name of the technology, is a small modular system that will help to lower the temperature to -260 degrees Fahrenheit in order to liquefy the gas.
This partnership is a big success for CLNE as well as the natural gas industry. A loan from GE shows that GE realizes and acknowledges the potential in the industry. Recently, GE announced that it sees liquefied natural gas equipment as becoming a $1 billion market over the next five years. According to CLNE's CEO, the partnership with GE has acted like an 'endorsement' for CLNE and the overall natural gas industry.
The Natural Gas Adoption Rate
Following shows how the natural gas adoption rate is picking up:
- Frito Lay has signed a 2-year fuel agreement under which the CLNE will fuel the first 75 natural gas trucks that Frito will be running. Frito plans to expand its natural gas fleet to over 800 heavy duty trucks.
- Staples (SPLS), a retailer of office supplies, is using natural gas trucks for store deliveries in Southern California.
- United Natural Foods (UNFI), a distributor of natural foods, is using gas-driven tractors.
- Con-way Freight (CNW), a trucking company, has purchased two natural gas trucks that will fuel at CLNE's stations in Chicago
- Green White Logistics, Lily Transportation and Saddle Creek Logistics - all have added natural gas vehicles to their fleets.
- 125 CNG taxis were added in New York and Chicago in the last 3 months.
Other important developments have been:
- 22 governors of different states have decided to issue an RFP (request for proposal) for the Detroit-3 to provide natural gas vehicles for the state-run fleets. By Detroit-3 I mean, General Motors (GM), Ford (F) and Chrysler.
- CLNE has recently signed an agreement with Commonwealth of Virginia to convert their state-run fleet with natural gas and provide them with fueling option.
- FedEx (FDX) is in a testing phase for gas-driven trucks. If FedEx switches to natural gas vehicles, that will be a big success for CLNE and the natural gas industry as many companies will be ready to switch to gas after they see that the idea has proven to be successful with FDX.
- American Trucking Association (ATA) is hosting a natural gas summit in which the truckers and shippers will get together to decide how to switch to natural gas.
Valuations and Conclusion
Currently, 28% of the stock's total float has been shorted. Poor availability of natural gas fueling infrastructure has been one of the most significant hindrances in the rapid increase of natural gas adoption rate. No one wants to end up in the middle of a highway with an empty fuel tank. CLNE is actively working on developing 150 fueling stations in 33 states of US. A properly laid natural gas fueling infrastructure will mean an improved natural gas adoption rate and therefore more revenues for CLNE. A GE 'endorsement' has given CLNE's investors confidence. Also, development of natural gas engines by major OEMs like Cummins (CMI) is telling the market that US energy landscape is soon going to be changed.
CLNE's earnings are expected to increase by 23% per annum for the next five years. Given the expected rise in the natural gas adoption rate, I recommend a long position in the stock.