The shift to natural gas fueled trucks has taken a lot longer than most expected causing the stock of Clean Energy Fuels (NASDAQ:CLNE) to become a hotly debated topic. The sector soared to highs back in early 2012, but it eventually plunged to new lows when the market forecasts for growth were never met.
A lot of factors have led to the stock trading at $10 today following the surge to $24 nearly two years ago. Investors can read a lot of the previous articles on Seeking Alpha to find out the reasons including my update following the Q2 report. The historical issues range from delays in new heavy-duty truck engines to the lack of fueling stations to higher initial costs for natural gas trucks. The Wall Street Journal uncovered a few new issues that caught my attention and further question the future of the industry:
- Customers of the transportation firms want the savings on natural gas fuel passed onto them.
- Payback periods for new trucks are in the 3 to 4-year period and leave limited time to profit on the savings.
- New efficient diesel engines push fuel efficiency higher.
The proof comes out in the quarterly results of Clean Energy where gallons sold typically sit around 20% annual growth and roughly match the construction of new fueling stations. Let's further flesh out these issues below.
Fuel savings: the prime benefit of switching to natural gas engines besides the environmental reason was supposedly the cost savings. Remember, this benefit is already passed on to the trucking firm by Clean Energy via the substantially lower fuel costs that average in the $1.60 to $1.70 range per gallon gas equivalent, or GGE, lower than diesel costs. For its efforts, Clean Energy only gets a margin of $0.30 per gallon. The problem uncovered by the WSJ is that retail clients of the trucking firms want those savings passed along to them. The president of Combined Transport had the following to say:
If you're paying $1 per gallon less for fuel, they'd want that money for themselves, buy you need that to pay off the equipment.
Payback period: another misconception is that the payback period for buying a natural-gas-powered truck is relatively quick. Not to mention, the mindset exists that truckers can virtually use the truck into perpetuity with endless savings into the future. In reality, the current payback period is roughly four years with the cost of a heavy-duty gas truck at $50,000 more than the $150,000 for a new diesel-powered truck. On top of that, the typical fleet looks to replace heavy-duty trucks after that time period leaving limited time to enjoy the fuel savings that the transportation company is apparently passing onto the retail customer anyway and not using to pay off the higher equipment charges.
Efficient diesel engines: the worst part of the trucking transformation to natural gas for a fuel is the time it's taken to get to market has allowed new, more fuel efficient diesel trucks onto the market. With the above issues including lack of fueling stations, more competitive diesel engines is probably the most impacting on switching. The WSJ suggests the new federal regulation has already pushed the heavy-duty truck mileage closer to 7 miles per gallon from about 6.5 mpg. A panel at the recent Commercial Vehicle Outlook Conference suggested that fuel economy is already 5% better than engines that are four plus years old and improving every year.
Keep in mind this article is not intended to fully analyze the natural gas fuel market or Clean Energy Fuels. The goal is to shed some light on more troubling signs for the burgeoning natural-gas truck market. The issues highlighted by the WSJ will undoubtedly have people that don't agree with the numbers or the conclusions reached, but the reality is that it confirms some of the hidden problems causing the delayed shift of what appeared to be a lock only a few years back.
The combination of more fuel efficient diesel engines and the inability to keep the fuel savings from natural gas leaves a structure with reduced incentives for trucking firms to switch for financial reasons. Ultimately, the numbers don't lie that Clean Energy is struggling to sell the fuel profitably. The numbers very much back up the conclusions of the WSJ article that the switch to natural gas is happening mostly for environmental reasons where the process is slower and more constrained. Investors should avoid Clean Energy Fuels unless the current market climate changes.
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.