On Tuesday, Piper Jaffray made the Clean Energy Fuels (CLNE) stock its top sell through 2014 based on several reasons that don't add up. The firm also lowered the target price to $4.50 from $9.50. Considering the stock was trading around $13, the research report naturally caused the stock to absolutely plunge the following day.
The company is a leading provider of natural gas fuel for transportation in North America. It builds and operates compressed natural gas (CNG) and liquefied natural gas (LNG) fueling stations. Note that the company's description absolutely lists CNG as a fuel it sells. This fact will come into play as we deconstruct the analyst call.
Piper Jaffray Call
The premise of the sell rating appears to be the theory that the engines being sold by the Cummins (CMI)-Westport (WPRT) joint venture are strongly tilted towards CNG. From the research note, it's difficult to derive whether this is accurate going forward or based on a flawed assumption that the new LNG engine hasn't ramped to full production after an August release. Remember that prior to early August, the CWI joint venture was selling a 9-liter engine for refuse trucks and buses and the 12-liter with 350 horsepower focused on CNG. As mentioned, the 12-liter engine with 400 horsepower that is focused on the LNG market only hit production recently.
In addition, the analyst appeared set that Redeem, transportation fuel made from waste, wouldn't contribute significantly to 2014 results, yet that was never a claim made by the company. In a recent article, we already highlighted that it wouldn't be a material contributor and that the CEO had overhyped it via tweets. Regardless, it will be a net benefit over the long term.
Another bizarre claim by Piper is that Clean Energy will end up shutting down the LNG highway stations next year. While I guess it is possible that the country quickly turns away from LNG, it definitely won't be for the reason expected by the analyst. Any need to shut stations would be from a lack of demand in a particular region or the unexpected spike in natural gas prices. It most certainly won't be from a switch to CNG by long-haul trucks.
Investor Relations' Response
The most puzzling statement regarding the Piper claim was that Clean Energy doesn't sell CNG fuel. In reality, around 70% of the business is currently CNG related due to a strong refuse, transit, and airport transportation business. The director of investor relations apparently made the following statement to StreetInsider:
The Piper analyst was completely incorrect and incredibly irresponsible in putting out that note.
We think the future will be a combination of CNG and LNG (lots of reasons for LNG including range, weight, and station costs).
But, for the sake of argument, let's say it goes 100% CNG:
- 70% of our business is CNG.
- We've built more CNG stations than the rest of the industry combined.
- We spent $140 million on a world-class compressor company in anticipation of a huge surge in CNG infrastructure build out.
- CNG pipelines only run in urban areas. The only way to get CNG fuel to rural and highway truck stops is through L/CNG. All of our LNG stations are designed to have this capability.
To back up the claims of investor relations, one only needs to review the quarterly reports from Clean Energy to see that results are routinely filled with more CNG related deals. Below are a few snippets from the Q2 report on CNG deals:
- L.A. Metro signed a 10-year contract for the country's largest CNG bus fleet that amounts to an average of 15 million gallons each year.
- Signed extension of Orange County Transportation Authority's contract for approximately 1.7 million gallons annually.
- Awarded contract by British Columbia Transit to build a CNG station for 50 buses or approximately 800,000 gallons per year.
- ShuperShuttle plans to add 115 CNG vans in markets such as Southern California, Austin, and San Francisco, adding around 1.1 million gallons a year.
- San Francisco International Airport signed a new 10-year contract for a growing fleet of CNG vehicles and taxis.
In total, the company claims the largest network of CNG fueling stations having completed 37 projects this year, with 41 more under construction and 54 in the constructions queue. Based on these facts, it is very difficult to understand why a respected research firm would make a claim so brazenly wild as Clean Energy is not selling CNG.
When To Use LNG vs. CNG
The main reason for having LNG and CNG fuels is that each fuel offers different benefits and costs. It is almost comical that somebody would think a company in the fuel business would only offer solutions for one or the other. This video provides a detailed explanation of when truckers should use LNG or CNG. Again, it clearly comes down to a cost/benefit analysis for the individual application.
The company announced a deal with Raven Transportation for 36 new LNG heavy-duty trucks that will require the opening of two America's Natural Gas Highway stations. Remember that several stations have been built, but not opened awaiting demand from the new CWI 12 liter engines. This fueling agreement will open stations in Jacksonville, Fla. and Franklin, Ohio. The 36 trucks will consume a total of 1 million diesel-gallon-equivalents of LNG per year, or roughly $2.5 million worth of fuel based on current LNG prices.
UPS (UPS) also released plans to invest approximately $50 million to build an additional nine LNG fueling stations to up its total to 13. In total, the operations will support 1,000 LNG tractors that will displace more than 24 million gallons of diesel fuel annually. While this deal doesn't involve Clean Energy, on the recent earnings call the CEO suggested that the recent announcements by UPS would require the opening of up to 19 fueling stations along the highway grid.
The statements by Piper Jaffray just don't add up, nor do they change the investment thesis in Clean Energy. The company is primarily focused on CNG traffic currently and has the ability to fluctuate based on demand. The company is very agnostic to whether customers want to use CNG versus LNG. Ultimately it comes down to CNG being a better fuel for return to base vehicles that can fuel at night when electric charges are cheaper, while LNG is more practicable for highway stations that lack the access to power and natural gas pipelines.
With UPS investing so heavily in LNG, the Piper claims don't add up. The leading parcel delivery service probably has the most extensive experience of any trucking firm with alternative fuels. It would not be investing so heavily in LNG if it weren't cost effective to use. Ultimately, the Clean Energy story is probably better now that the stock is cheaper and provides a better entry point after the major sell-off.
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