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Summary

  • Clean Energy is down 30% this year, but long-term prospects are bright.
  • Clean Energy has landed a number of contract wins that should lead to strong financial performance in the future.
  • Westport Innovations’ moves should also help Clean Energy’s growth.
  • An earnings growth CAGR of 25% for the next five years looks enticing for Clean Energy investors.

Natural gas provider Clean Energy Fuels (NASDAQ:CLNE) has plunged 30% this year and shares are trading close to their 52-week low. But, considering the fact that Clean Energy is focused on providing an alternative fuel in the form of natural gas, its prospects look bright in the long run due to various reasons. Also, Westport Innovations (NASDAQ:WPRT) is making an effort to push its engines that run on natural gas, with the company targeting truckers primarily. So, the growth of Westport could be another reason why Clean Energy can blossom going forward.

A clean road ahead

Several big established markets like refuse and municipal transit have been successfully fueling with natural gas for years. It is important to note that the percentage of new natural gas refuse trucks and buses are increasing, leading to growth in Clean Energy's customer base and volume in these markets.

The transition of the heavy-duty trucking industry to natural gas was strong last year, with the introduction of the Cummins Westport 12 liter engine being a big driver. Natural gas trucking companies all over the country, such as market leader UPS, are placing orders ranging from a few test natural gas heavy-duty trucks to several hundred trucks.

The decision to purchase IMW, a CNG compressor manufacturing company in 2010, in anticipation of the significant increase in the demand for CNG fueling has proven right for Clean Energy. Clean Energy has made comprehensive managerial and structural changes, developed new product offerings, and beefed up the sales force post the acquisition, strengthening its prospects.

Contract wins across the board

In the transit segment, Clean Energy's customer, the Southern Nevada Regional Transit Commission of Las Vegas, added 125 CNG busses and 35 CNG Para-transit vehicles last year and volumes jumped by over 25% year-over-year to 2 million gallons a year. Also, Clean Energy recently landed the contract to expand and upgrade two stations for the transit commission, which will provide additional capacity to serve their growing fleet.

Clean Energy completed a new station for LA Metro Transit, which operates over 2,200 CNG buses and uses over 35 million gallons annually. Additionally, it signed a new 10-year operating and maintenance contract for four of LA Metro Transit's locations, allowing it to operate all 10 CNG bus fueling stations.

Clean Energy also got the operating and maintenance contract for the four CNG stations built for DART, Dallas Area Rapid Transit.

These stations will fuel 500 buses and are expected to use approximately 5 million gallons per year once they are up and running. It is building three stations to service the expanding fleet of the City of Los Angeles transit buses expected to be completed in 2014.

Also, Clean Energy completed the new station for Norwalk transit in California and was awarded the operating and maintenance contract for Long Beach Transit's new station. In addition, it secured contract renewals with Foothill Transit and Orange County Transportation Authority.

Expanding into new markets

Clean Energy's refuse segment is also setting a good pace, with volumes growing 30% over 2012 and expanding geographically. On the other hand, Waste Management also continued its CNG expansion by adding over 800 trucks to its fleet in 2013, while Republic Services added 485 new trucks and 9 new CNG stations which it built during the year. Moreover, apart from large national players, Clean Energy is also building stations for numerous local and regional haulers.

Clean Energy is expanding into new markets, like the state of Missouri, where it has already completed a public/private station in partnership with Lee's Summit School District, which recently deployed approximately 140 CNG school buses. This is believed to be one of the largest single CNG school bus procurements in the nation.

Clean Energy believes that as the trucking market continues to mature, both fuels will be widely used. As expected, many of these early adopting fleets are deploying CNG trucks.

Clean Energy is extremely focused on expanding its list of trucking customers and shippers, and is working with them to help provide whatever fueling solution works best for their particular application. To help support the trucking industry's transition to natural gas fuelling, Clean Energy announced a strategic alliance with GE's (NYSE:GE) transportation finance unit to help potential customers offset the upfront cost of transitioning natural gas trucks by offering a fair market value lease and fuel rebate program.

NGV market's prospects

Moreover, the market for natural gas vehicle is going to expand going forward. A mix of low-cost natural gas and higher prices for gasoline and diesel are expected to drive natural gas demand going forward. In fact, according to Navigant Research, the number of natural gas vehicles on roads worldwide will reach 34.9 million by 2020 worldwide.

Natural gas vehicle penetration in other parts of the world is much greater than in the U.S., and there is an increasing demand for high-quality compressors. IMW is securing deals with the right foreign partners in the fast growing NGV markets of China and Russia, and this is the biggest development over the last six months for Clean Energy. Clean Energy is seeing strong demand from various markets in transit, refuse, airports, and fleet services, illustrating the company's bright prospects.

So, it can be clearly seen that Clean Energy's prospects for the long run remain quite bright as the number of natural gas vehicles ((NGVs)) are expected to rise.

Westport's role

Clean Energy's prospects will be helped by Westport Innovations' moves as well. Westport is investing heavily in technology and product development with its partners. The company is developing a sustainable, competitive position in the alternative fuels market. As the market for natural gas vehicles opens up in the future, Westport will be the leading partner for OEMs as they launch new products. So, the growth in the number of engines sold by Westport will lead to a jump in Clean Energy Fuels' addressable market as it sells fuel for such engines.

Westport's earnings itself are expected to grow at a CAGR of 30% for the next five years, signifying its solid growth prospects.

Moreover, according to the EIA, U.S. total natural gas consumption is projected to grow from 24.4 trillion cubic feet in 2011 to 29.5 trillion cubic feet in 2040.

Out of this, 8% will go toward heavy-duty vehicle energy consumption from almost nothing in 2012. However, this estimate might rise as use of natural gas grows and price drops.

Moreover, the rising deployment of NGV fleets is yet another reason why investors should be upbeat about the company's prospects. In fact, the number of natural gas filling stations has been on the rise and President Obama himself is championing this cause as evident in his State of the Union address.

Also, natural gas prices are expected to stabilize this year in the spring season after a period of volatility, leading to increased demand.

Conclusion

Clean Energy Fuels might have been beaten down badly this year, but its long-term prospects are still intact. Over the next five years, its earnings are expected to grow at a CAGR of 25% in the next five years, and this projection can move higher as NGV vehicles gain steam. So, investors should definitely consider Clean Energy for the long run and ignore the short-term pains.

Source: Clean Energy Fuels: Down But Not Out