The thesis of this post is that Clean Energy Fuels (CLNE) is a great potential stock for those who want to speculate upon a transition to natural gas vehicles for transportation in the U.S. In this post we'll look at the pros and cons of this argument.
First, I should note I have a preference for electric vehicles, as I previously noted in my writeup on changes in transportation. The main reason I regard EVs as the better value is because I think they will ultimately prove to be cheaper, for three reasons:
- Ultimately a world of EVs means a world where nuclear power plays a much greater role as the heir to the energy kingdom in the world after peak oil. Because nuclear power has much higher density, and because energy density of EV batteries is rapidly improving as well, I believe EVs will be the most economically viable form of transportation in the long run. Put another way, I think the transition away from oil is bullish for opportunities rooted in electricity as the energy carrier.
- Currently, of course, natural gas prices are very low - in fact this is part of what is driving demand for natural gas vehicles. However, it is unclear if this condition will remain; as I recently noted I do think natural gas prices will rise. EV fueling prices on the other hand are very predictable, which I suspect will lead many businesses to embrace them.
- The Natural Gas Act was rejected, but EV subsidies continue. I don't favor government subsidies and believe that more often than not they result in a mis-allocation of capital, but I think such subsidies will make EVs more tempting, and will give the whole industry a better chance at having a full-fledged infrastructure.
However, perhaps there is not an either/or situation, and that there are opportunities for both EVs and natural gas vehicles. For instance, Honda does have a natural gas vehicle ready for use, and is seeking to leverage its dealer base to build out natural gas fueling stations. Many trucking companies are also switching to natural gas, because the price difference between oil and natural gas makes it economically viable to do so. Frito Lay (PEP), for instance, has already commited to switching its trucking fleet to natural gas.
The Opportunity: Clean Energy Fuels
For those who want to invest in natural gas vehicles, one of the best plays here, in my opinion, is Clean Energy Fuels. Here's the basics of the story:
2. The company has a growing debt to asset ratio, currently coming in at around 25%. I don't view this as hugely problematic, although I still prefer to avoid investing in companies with noticeable debt burdens while we are in a debt crisis. Especially with companies that are capital intensive and not yet profitable, I prefer to invest before debt is assumed, so that there are greater options to tap into debt if it's needed.
3. CLNE is a project of Texas energy tycoon T. Boone Pickens. I think Pickens is a pretty smart individual, doubly so since he is no longer particularly interested in wind energy. So I like the idea of investing in a Pickens company.
4. CLNE is currently trading at just over 3X book value. I find this to be agreeable, although because I still find too many opportunities out there to be better - namely nuclear power and precious metals - I'll need an especially irresistible deal to invest in CLNE. If we can fall to 2.5X book value, I'll be more interested.
Bottom line: I like CLNE and think it is a great play for those who want to speculate on a transition to natural gas vehicles. However, I think EVs are a better opportunity, doubly so when one considers how subsidies are playing out. As a result, I like CLNE has a form of prudent diversification, but I need an especially favorable price to make it work. I've added it to my watchlist, and will consider purchasing if there is a sharp sell-off that can push its price/book ratio down to 2.5 or lower.