Clean Energy Fuels: A Turnaround You Shouldn't Miss

Jun.30.14 | About: Clean Energy (CLNE)


After a weak start to the year, Clean Energy Fuels has made a terrific comeback.

Clean Energy Fuels is setting itself up to profit from the growing adoption of natural gas vehicles, or NGVs, by building infrastructure and tying up with more customers.

Westport Innovations' joint ventures in the U.S. and China will further aid NGV adoption, increasing Clean Energy's addressable market.

Clean Energy Fuels (NASDAQ:CLNE) is making a solid comeback. After a sluggish start to the year, the natural gas player is on the turnaround trail and looks set to get better. The natural gas fuel provider had announced better-than-expected operating results for the first quarter, reporting a big jump in fuel deliveries in its Liquefied Natural Gas and Compressed Natural Gas segments. Now, going forward, Clean Energy looks set to get better, aided by the growing adoption of natural gas vehicles, or NGVs, and the moves of Westport Innovations (NASDAQ:WPRT) to develop natural gas engines.

In fact, Clean Energy posted a 22% jump in its gallons delivered to 59.3 million in the first quarter, signifying solid growth, as its revenue increased 43% year-over-year. However, its earnings were under pressure due to the heavy investments that it is making in building infrastructure and upgrading in-house capabilities. But, these investments should allow Clean Energy to sustain solid growth and make the most of growth in NGVs going forward.

A big market

Clean Energy has been working continuously on building fuel infrastructure and in-house capabilities for a couple of years now, as it expected a 12-liter natural gas engine to come to the market. Now, Westport Innovations has released such an engine, and this is expected to increase fuel deliveries going forward. Clean Energy has 96 truck-friendly fuelling stations, which is four times higher than its nearest rival.

According to a report on Investopedia:

Already, natural gas has made inroads as a transportation fuel- especially for truck fleets, buses and taxis- as the average "cost per gallon" is about $1 cheaper than regular gasoline. Firms like Waste Management and UPS-along with various local governments- have begun switching their fleets over to CNG or liquefied natural gas for propulsion in order to take advantage of this cost savings. That's helped sales of both light duty and heavy duty natural gas vehicles to steadily increase over the last few years.

Nonetheless, the future continues to look bright for natural gas powered cars and trucks. According to cleantech think-tank Navigant Research, global annual light duty natural gas vehicle sales will grow from 2.3 million vehicles this year to reach nearly 3.8 million in 2023.

At the same time, heavy duty CNG/LNG vehicle usage is set to explode in the U.S. sooner as more logistics and service firms switch over to realize the cost savings. The National Petroleum Council estimates that 40% of all new heavy trucks in the U.S. will run on natural gas by 2045 if diesel prices increase at current rates. However, if they jump faster than expected, that 40% number will arrive by 2025.

So, it is quite natural for Clean Energy to rapidly build its infrastructure and client relationships, in order to make the most of this opportunity going forward. This is exactly what the company has been doing. It has fueling and station construction agreements with multiple fleets from the likes of Kroger (NYSE:KR) and others, and it is continuously enhancing its list of natural gas fuel customers.

Solid growth in customer base

The company is expanding deliveries of LNG and CNG by way of new station construction, expanded use of existing stations, and customized mobile fueling solutions, so as to support fleets in the heavy-duty trucking, transit, and refuse market segments.

Clean Energy has entered into a partnership with Kroger, one of the largest grocery retailers in the U.S., to fuel its fleet of NGVs. Kroger has placed an order for its first 40 LNG trucks that are supposed to be fueled at Clean Energy's gas station. Also, Clean Energy is expected to serve Kroger's Fed Meyer and QFC grocery chains in Oregon and Washington.

Clean Energy will also benefit from the fleet additions of United Parcel Service (NYSE:UPS). It will be fueling 15 additional heavy-duty UPS trucks, taking the total to 230 UPS trucks across the country.

In addition, Clean Energy signed an agreement with a leading California-based super market chain, Cardenas Markets, to fuel its CNG truck fleet. Cardenas will be deploying nearly 15 heavy-duty CNG trucks in its private fleet, fueled at Clean Energy's network in California and Nevada.

These trucks are expected to consume approximately 300,000 DGEs of CNG per year, the equivalent of reducing greenhouse gases by approximately 695 metric tons. Besides, Cardenas is planning to convert its entire fleet of more than 50 trucks to the CNG platform going forward, which should increase Clean Energy's revenue opportunity.

The Westport catalyst

Clean Energy is also expected to benefit from Westport Innovations' progress in making natural gas engines, which are spurring demand for NGVs. Westport has entered into a joint venture with Cummins (NYSE:CMI) for the development of natural gas engines. It is expanding its wings in markets such as India by partnering with the likes of Tata Motors (NYSE:TTM). Earlier this year, Westport announced that Tata will use the spark-ignited natural gas 3.8L turbocharged engine, which is equipped with the Westport WP580 Engine Management System.

This is a big opportunity, as India is one of the fastest-growing NGV markets, according to Westport:

The US Energy Information Administration (EIA) indicates that India is the fourth largest energy consumer in the world. Vehicles are the country's second-largest consumer of energy (18%) after industry (42%), according to Thomson Reuters Foundation, and rising vehicle numbers and fuel prices have implications both for India's economy and its energy security. Westport believes that the adoption of natural gas as a transportation fuel will help reduce India's dependence on petroleum to meet the country's energy demand and improve local air quality challenges. Building upon Westport's natural gas components and aftermarket business in India, Westport is now establishing its OEM footprint with Tata Motors.

On the other hand, Westport is also in a joint venture with Weichai of China. The two develop natural gas engines for the China market, and this is again a big opportunity, since China is a fast-growing NGV market. Now, Clean Energy is tapping the Chinese market with its subsidiary, IMW Industries. So, the company commands a presence in key markets that should help it drive long-term growth.

Solid growth ahead

As Clean Energy hasn't reported a profit yet, valuing the company on earnings multiples is difficult. However, its growth projection is fantastic, with analysts expecting its bottom line to grow at a terrific CAGR of 25% for the next five years, better than the industry average of 7.7%. The company is spending aggressively to enhance its infrastructure, and has tied up with big names. So, there's every chance that Clean Energy Fuels will be able to sustain the turnaround going forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.