I have written a number of articles about Clean Energy Fuels (CLNE) and recently wrote a piece detailing its various lines of business. I have been long CLNE on the theory that the surplus of natural gas in the United States will work its way into the transportation sector of the economy and that CLNE is uniquely positioned to play a key role in that transition.
In order to better understand CLNE's prospects it is important to be aware of the distinction between the two fuels it sells, the nature of the markets each fuel is sold into, and CLNE's potential market power in each of those markets. These two fuels are Compressed Natural Gas (CNG) and Liquefied Natural Gas (LNG); CLNE has other lines of business discussed in earlier articles but these two will probably be the ones which determine whether CLNE has the enormous upside I described in this earlier article. Data in this article is derived from materials on CLNE's corporate website, the Department of Energy Information Administration and CLNE SEC filings and conference calls.
1. CNG - CNG is just methane in its normal gaseous state, compressed into a canister or other container and released as used. I was first introduced to it when traveling with my wife to China and putting our luggage into the trunk of a taxi in Wanzhou on a rainy evening as we arrived. There was a large metal canister in the trunk and my wife said, "What's that?" to which I replied, "I have no idea!" We quickly learned that most urban taxis in China run on CNG and we actually stopped at a CNG filling station in Beijing.
The advantage of CNG, especially in the United States, is that the natural gas pipeline system is virtually ubiquitous and it is easy to set up a filling station by hooking up to the pipeline/distribution system. I had a good friend who set up his own filling system at his home in the 1990's when he got a CNG vehicle. The disadvantageous are: 1. filling time (it takes some time to compress the gas into the container and get a complete fill) and 2. energy density (the space taken up by a given BTU content of the fuel is roughly 2.4 times as great as with LNG). The filling time problem can be solved with a modest investment in equipment (the filling in Beijing was really no more time consuming than a typical gasoline fill). There is no real solution that I am aware of to the energy density problem. This means that CNG vehicles have to either accept a limited range or devote considerable space to fuel storage.
As a result of these characteristics, CNG appears to be catching on primarily in the urban fleet vehicle markets. It has taken the garbage truck market by storm. Apparently, Waste Management (WM) is ordering 85% of its new vehicles with CNG engines. This market is 2 billion gallons of gasoline equivalent per year (BGPY). It is also capturing 30% of new orders in the transit market (1-1.5 BGPY) and has made big inroads in the airport vehicle market (2 BGPY). In each case, vehicles tend to return to a common location at least once a day and they can be filled at a central site. They do not travel extremely long distances and tend to stay in one metropolitan area.
As a general matter, this business is expanding rapidly. However, one of the big advantages of CNG is also a disadvantage from a business strategy perspective. It will be very difficult for any fuel provider to develop a "wide moat" in this business. Because natural gas is available throughout most metropolitan areas, it will not be difficult for new market entrants to open filling stations and compete. It will be difficult to sustain high margins in this business, although CLNE's reputation and expertise may enable it to command a premium from customers. A good deal of this market is subject to a bidding process and all of the issues with that kind of a business are also present. I think CLNE has positioned itself well in this business and that it will grow rapidly as the new WM trucks come on line but it is unlikely to provide the kind of bonanza my earlier article described.
2. LNG - LNG is very different. It involves reducing the temperature of natural gas to minus 260 F degrees so that it assumes a liquid form and removing certain impurities. Needless to say, storing and transporting LNG requires special equipment and filling stations also require such equipment. Because LNG has higher energy density than CNG it is better suited for the long distance trucking market. This is the market that CLNE has targeted with the Natural Gas Highway - a national network of LNG filling stations strategically located for use by long distance truckers. The market - sometimes described as the Class 8 truck market - is potentially 25 BGPY and the competing fuel is diesel.
The LNG market has been slower to gain momentum than the CNG market. There is a chicken egg problem because long distance truckers need assurance that supply will be available over relatively long routes and the construction of the infrastructure necessary to provide that assurance in turn requires some confidence that sufficient sales volumes will support the investment in the infrastructure. Boone Pickens is a visionary and a maverick and he has tried to break the logjam by building out the infrastructure (which, of course, entails significant risks). LNG is not as readily available as CNG and so this is a business in which CLNE may be able to achieve the kind of "moat" that Methanex (MEOH) has developed in the methanol market. CLNE has two LNG plants and has an agreement with General Electric (GE) to collaborate on the construction of additional plants. With GE's backing, CLNE can assure customers that there will not be an LNG shortage and can better address a very attractive market. Its network of filling stations, storage and transport vehicles, and LNG plants will be hard for a competitor to replicate. I believe that others will build filling stations and LNG plants and capture parts of the market but CLNE is way ahead in this game and should be able to command a very strong margin for a considerable period of time.
I have tried to run some numbers and get a sense of when CLNE will hit the "take off" point. It really depends upon how many LNG trucks are sold into the US market. A savvy investor may be able to get a sense of this by monitoring the performance of Westport Innovations (WPRT) or the large engine or truck manufacturers to determine the volume of order and deliveries. At present there appear to be roughly 1800 LNG trucks (out of some 3.2 million Class 8 trucks) in the US market. Roughly 200,000 new trucks in this category are sold each year. CLNE has indicated that it anticipates that 7500 of the new trucks will be LNG trucks by 2014. Each new truck consumes roughly 20,000 gallons of diesel equivalent per year (GDPY). CLNE is presently selling LNG at an annual rate of 55 million gallons. Looking at the numbers, I believe that CLNE will hit a point of strong inflection upwards when the monthly delivery of LNG trucks equals 500 (adding monthly demand of roughly 850,000 gallons equivalent each month) and pushing annual demand up by 120 million gallons after one year. CLNE will be in a reasonably solid position with sales of at least 200 new LNG trucks each month (pushing monthly demand up by 333,000 gallons each month) and pushing annual demand up by 48 million gallons after one year. If sales stay substantially below 100 trucks per month, CLNE's prospects will take much longer to unfold in a positive direction.
The table below provides alternate monthly rates of LNG truck deliveries, monthly increases in LNG sales (in gallons of diesel equivalent), and total annual sales rates after 1, 2 and 3 years.
|Monthly Increase in Monthly Sales||Annual Sales Rate after 1 Year||2 years||3 years|
|50||83,000||67 million||79 million||91 million|
|100||165,000||79 million||103 million||127 million|
|200||330,000||103 million||151 million||199 million|
|500||830,000||175 million||295 million||415 million|
On CLNE's recent conference call, it was indicated that United Parcel Service (UPS) is ordering 700 trucks in the next 18 months and that CLNE anticipates a total of 7500 new LNG trucks in 2014. These numbers tend to provide some assurance that the more optimistic of these scenarios will play out. Of course, in reality, new truck deliveries will not stay at a steady rate at any of these levels for 3 years. As the technology catches on, we will probably see acceleration of sales (remember 200,000 new trucks of this type are deployed each year). Exogenous events like an oil price spike, problems with the technology, government policy or natural gas pricing changes may affect the number up or down. However, investors should be mindful of the rate of deployment; the above numbers give you some indication of numbers which would produce a bonanza for investors (500), reasonable growth (200), a difficult but probably sustainable transition (100) and problems (well below 100). I am still long CLNE and I am watching sales and truck deployment numbers closely to determine whether to "back up the truck" (sorry) and buy more.