In a couple of recent articles (I, II) it was presented that Clean Energy Fuels (CLNE) had sharks circling for the great demise of a failing provider of natural gas for transportation fuel. While the stories provide tons of details regarding a market preference for compressed natural gas, or CNG, the articles fall far short in explaining that Clean Energy already has a focus on CNG. The big point of the articles was the flawed build out of America's Natural Gas Highway (ANGH) based on liquefied natural gas, or LNG. While possible, investors need to remember that Clean Energy is the leader in both CNG and LNG with no preference in the fuel to use other than economics. Did it leverage the business on a flawed concept or is it possible that competitors in the fueling industry lack the same level of knowledge and made mistakes?
Interested parties should review the video from Clean Energy discussing the reason for choosing LNG for the highway network and review why an alternative fuel transportation expert such as United Parcel Service (UPS) would utilize LNG from Clean Energy. More importantly, investors should read the market update from Clean Energy on Monday.
Lots of the short comings of Clean Energy have already been hashed in previous articles by us including the weak margins based on the savings of using natural gas passed on to the trucking firms, weak gallons sold growth, and in fact the ANGH built out prior to demand. Some of the issues presented in these articles are spun as if negatives or foregone conclusions without hammering out all of the details.
Navigant Research Report
According to the first article, Navigant Research predicts that North American sales of natural gas trucks and buses grow from 10,444 units in 2014 to 36,669 units in 2022. Whether accurate or not, the research firm still predicts substantial growth in natural gas truck and bus annual production of 250% during those eight years. Remember that the starting base in natural gas vehicles is very small and each new truck adds to the market. If production only stayed flat from 10,444 units in 2014 to 10,444 units in 2015, Clean Energy would still have double the trucks, or 20,888, to possibly supply fuel. By the way, Clean Energy claimed in mid-2013 to refill roughly 26,000 commercial vehicles on a daily basis.
The absolute amount of new trucks and buses built each year is more a matter of issue for equipment manufacturers such as Westport (WPRT) and partially Cummins (CMI) via the JV. The CWI joint venture released the ISX12 G natural gas engine in 2013. The engine is another point of debate in the bearish articles. Earlier in the year, CWI released a 350hp version more suitable for mixer, dump truck and refuse applications utilizing CNG. Starting in August, the 400hp version hit production that is built for the heavy-duty, long haul industry. It isn't yet clear from all the reports whether the 80% CNG demand for the ISX12 G is related to Class 8 trucks or all types. Details on the engine from the CWI website:
Introducing the Cummins Westport ISX12 G natural gas engine - a new, larger-displacement natural gas engine. The ISX12 G suits a variety of heavy-duty vehicles, including regional-haul truck/tractor, vocational, and refuse applications. With a displacement of 11.9 liters and up to 400 hp and 1450 lb-ft of torque, the ISX12 G is the natural choice when considering alternative fuel for demanding applications. The ISX12 G operates on 100% natural gas which can be carried on the vehicle in either compressed (CNG) or liquefied (LNG) form. The ISL G can also run on renewable natural gas (RNG).
Per the Clean Energy update, the engines produced for heavy duty trucks in 2013 were only 58% CNG. The company sees the split on 3,500 trucks in the pipeline as shifting towards 57% LNG.
According to Clean Energy, the key is excluding the refuse trucks from the totals and taking into account that some of the initial, small-scale tests can be focused on CNG due to station availability.
CNG Versus LNG
Again the numbers supplied in the bearish articles aren't necessarily inaccurate, but the manner in which they are spun questions some of the accuracy. A couple of issues were brought up that need to be addressed including the focus on ANGH and whether Clean Energy is a CNG or LNG provider and the impact of the new trucks preferring the CNG engine.
The biggest misrepresentation in the articles is that Clean Energy is somehow a LNG focused company based on the choice of LNG for ANGH. Currently, Clean Energy obtains roughly 70% of its business from CNG due to a strong refuse, transit and airport transportation business. In addition, only back in December, the company reported that customers had ordered 70% more natural gas vehicles in the first nine months of 2013 compared to the same period in 2012. A large portion of these orders was for CNG vehicles.
Clearly, the ANGH was to be a cornerstone of the company with vast use from long haul, heavy-duty trucks. As the below slide from a presentation shows, the long-haul fuel usage far exceeds that of the other transportation vehicles.
No doubt, making a mistake by focusing on the wrong fuel would be a problem, but the question still remains far from certain whether it was wrong. The big question back with the Piper Jaffray call forecasting a target price of $4.50 and the closing of the ANGH stations is far from certain.
The statements about the ISX12 G engines continue to be 80% focused on CNG. A couple of issues cloud those numbers including the 400hp engine not being in full production until the end of 2013.
Some good points from the bearish articles include the Dillon Transport shift towards CNG trucks with a stated range of 500 miles. Clean Energy and Westport have been adamant that the tipping point between CNG and LNG was 200 miles. A level now questioned by competitors, but the article provides no solid evidence that CNG is profitable at 500 miles, especially to the CNG station operators. Remember that Clean Energy has never denied the ability to use CNG at extended ranges or along ANGH, but rather that the economics didn't add up at those ranges.
The costs to build the stations and the electrical costs alone question using fast fill CNG. Note that all the examples have only recently started using CNG for long haul, but so far no one has used this long-term. Clean Energy provided the following example in the video highlighting the costs of building a highway station showing the positive economics of using LNG over CNG:
The biggest concern with the Clean Energy concept is that if the fueling stations can be built in urban centers with access to reliable power and gas supplies, the costs might be considerably lower. It isn't clear from all of the examples that the competition has found a way to avoid all of the electrical and compressor charges required to fast fill CNG for 100s of trucks on a daily basis.
In fact, the Clean Energy story provides ample proof that building stations don't equate to profits. The premise of going with LNG is that the costs to build the CNG stations would eat into profits for years. Are Loves's, KwikTrip and others selling CNG at a loss or for an extremely long payback period? The bearish articles only point to the competition implementing fast fill, CNG stations that Clean Energy stated were too expensive. None of the examples actually show any breakthrough in technology or cost reduction making those stations more competitive.
Either way, I'm not going to try to outsmart the natural gas fueling experts at Clean Energy or the other articles negative on the company. The numbers speak for themselves. Until Clean Energy shows an ability to grow profitably and open more highway stations, my investing interest is very limited. Until competitors show that the Clean Energy example video is wrong, my interest in following the stock isn't going to wane. A few examples of trucking companies switching to CNG doesn't prove that the move is right. Remember that the vaulted Dillon Transport example would've originally got somebody to incorrectly invest in Clean Energy.
The quick update conference call today did absolutely nothing for the stock so investors need to tread lightly until momentum turns in the stock. People should have no reason to doubt the statements made by the natural gas fuel experts, but investors need to understand that even if correct the company needs to get a larger portion of the ANGH stations open in order to move the stock higher. The fears will remain until more concrete proof is provided that using LNG on the highway network will lead to long-term profits.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.