Clean Energy Fuels: The Big Picture

| About: Clean Energy (CLNE)

Clean Energy Fuels (NASDAQ:CLNE) reported first quarter earnings earlier this week: the market reacted negatively to a GAAP loss of 37 cents a share and the stock closed today at $16.41. I have written about CLNE and it is important to understand how quarterly reports will play into that analysis.

My thesis on CLNE was that the company has the potential to become the dominant supplier in an important and growing energy market - the LNG market for large, long-distance trucks. Using various sources, I projected that CLNE may be able to sell as much as 2 billion gallons of diesel equivalent LNG into this market within 5 years and, if so, could become a $200 stock. CLNE is busily deploying strategically located LNG filling stations around the country and is also investing in LNG conversion capacity and LNG tank trucks. It should dominate the LNG trucking distribution market for some time to come.

The difficult question is the degree to which LNG trucking will catch on as a new technology. The large trucking manufacturers are now offering LNG fueled models - although there are "holes" in the line up. LNG has a substantial cost advantage over diesel and that should continue for some time. CLNE's conference call included descriptions of various encouraging developments but, in the early phases of a technology transition, there are always uncertainties about when and even whether the transition will actually pick up speed.

I have a very rough rule of thumb here which I think will help investors evaluate the progress of this development. To get from here to there - from the current size of the market to 2 billion gallons a year in five years - CLNE's LNG sales (12.6 million gallons in the first quarter) have to double each year for the next five years. This would produce sales of 400 million gallons in the first quarter five years from now, which with continued growth should produce 2 billion gallons of sales for that complete year. To double each year, sales have to grow on a quarterly sequential basis at the rate of 18% (the famous rule of 72).

There are a few points to bear in mind. CLNE's sales of LNG could fall well short of my target and yet CLNE could still turn out to be a monster investment - especially from today's closing price. In addition, the path from 12.6 million to 400 million is unlikely to be a straight line or even a parabolic curve; there are much more likely to be fits and starts as the technology is deployed. Looking at the past, annual sales actually declined a bit between 2007 and 2008 and then grew from 23.7 million to 26.7 million in 2009 and 33.9 million in 2010 to 47.1 million last year. Not doubling every year, but accelerating at a healthy pace.

Investing in a stock like CLNE is placing a bet on trends in the adoption of technology and the customary metrics used to evaluate quarterly financials do not necessarily apply. CLNE's recent quarterly results were adversely impacted by the expiration of a tax credit at the end of 2011 - this is not "new" news and is essentially irrelevant to the long term issue of whether LNG trucking will become a very big deal. CLNE has other lines of businesses - all of which seem to be doing well but the big bet here is on LNG trucking (CLNE is making a huge investment in the filling stations and distribution network). If it catches on big, CLNE will have a monster outlook. If it does not, CLNE's other businesses may produce decent returns but do not contain the seeds of the kind of upside my article described.

We should all start watching quarterly LNG sales closely to begin projecting exactly where this market is heading. It may also be useful to track the deployment of LNG trucks if that is possible. I am still very bullish on this stock because I think that the upside is considerable but only time will really tell.

Disclosure: I am long CLNE.