News last week that Chesapeake Energy (CHK) would be spending $1 billion over the next decade to further the use of natural gas in the U.S. lit a fire under Clean Energy Fuels (CLNE), one of the first recipients of CHK's seed capital.
Chesapeake agreed to buy $150 million worth of CLNE bonds in $50 million dollar tranches, with the funds being used by CLNE to build out LNG fueling stations, many of which will be built into current Pilot-Flying J Travel Centers. The investment will greatly expand the availability of LNG to truckers, making the fuel a more viable competitor to diesel fuel. In addition to the CLNE investment, CHK will spend $155 million over three years to acquire a 50% stake in Sundrop Fuels, Inc., a company with "proprietary Gas-to-Liquids technology." The funding will come from CHK's drilling budget, and amounts to 1%-2% of the budget.
News of this new venture by Chesapeake, called Chesapeake NG Ventures Corporation, caught the market off guard for a couple of reasons. First and foremost, CHK had indicated the company would focus on lowering debt by 25% and expanding production, with a focus on oil and NGLs, by 25%, executing on its "25/25 Plan." Seeing as this new program neither reduces debt nor increases production, the venture came somewhat out of left field. Second, CHK has been a big supporter of the Natural Gas Act, a bill that would provide federal money to help kick start the expansion and adoption of natural gas as a transportation fuel in the U.S. By acting ahead of the passage of the Nat Gas Act, it seems as if Chesapeake has decided that either the bill is unlikely to be passed, the government is too unreliable to continue to wait on, or both.
It may be that Chesapeake is attempting to invest in companies that it feels will lead in adoption of natural gas as a transportation fuel, allowing it to profit from natural gas all the way from underground shale to the truck engine. If this were true, the firm would be following an Exxon Mobil (XOM) like approach to owning a stake in all parts of the industry, from production to refining to distribution. Although Exxon Mobil has since shifted away from this model, it is hard to argue that it is illogical for CHK to attempt to stimulate demand for natural gas. Given the price differential between diesel and natural gas, stated at between $1.50 and $2 when compared on mileage equivalency, providing the infrastructure at already operating truck stops, and displaying the price difference, could help stoke demand among truckers to purchase natural gas powered trucks.
While the news is a positive for Clean Energy Fuels long term, I expect the stock to pull back. This volatile name is still in a build out phase, and will likely continue to see big spikes and drops based on headlines, until there is a more clear path to expanded natural gas use. I would be more interested in Pilot-Flying J, although since the name is currently private there is no action there.
Chesapeake is slightly more attractive given this news, although again given the time it will take to build out the infrastructure, it's hard to see this moving the needle anytime soon. The best case scenario for natural gas prices would be if this action jump-starts a rush of new capital into the "natural gas as a transportation fuel" space. If Chesapeake's action in seeding these small companies is repeated by one or two other large natural gas producers, the odds of success greatly improve. With new production continuing to come online, prices for natural gas will have to go low enough to spur new usage before prices begin to rise. Chesapeake is betting that the price is low enough now, and time will tell if it correctly called the bottom.