The Case for Clean Energy Fuels

When T. Boone Pickens speaks about energy, the world listens. And while Pickens made his mark in running Mesa Petroleum for four decades, he’s now betting heavily that other energy sources will play an even more vital role in quenching that thirst for fuel.

Billionaire oil baron Pickens was co-founder in 1996 of Clean Energy Fuels Corp. (Nasdaq: CLNE), a Seal Beach, Calif.-based company that has become the largest provider of vehicular natural gas in North America. It has a dominant footprint in meeting the demand for both liquefied natural gas [LNG] and compressed natural gas [CNG] for vehicles, and has 174 fueling stations in 10 states, two Canadian provinces and in Peru.

His dream: set up a string of natural-gas fueling stations not only across the United States, but around the world. A lofty goal, to say the least, and one that received a cool reception from investors when Clean Energy Fuels became a public company in May 2007.

Still, analysts tracking the progress of this young stock haven’t lost interest in it and according to Thomson Financial, two of the three analysts have Clean Energy Fuels as a “strong buy.” The other has it at “hold.” Thomson calculated a median 12-month target price of $18.

The expectations of the September 2006 IPO announcement was scaled up in April 2007, then throttled back by 50% to 10 million shares. The stock was priced below the expected $13 to $17 range at $12 on May 24, and Clean Energy Fuels finished the first day of trading at $12.04, with the company netting about $108.5 million.

Despite the lackluster Nasdaq debut, Clean Energy Fuels has climbed as high as $20.65, on Oct. 17, clawing back from the $10.81 low seen last Aug. 16. It has stayed around $15 since then, closing on Tuesday at $15.90.

Pickens’ interest in cleaner-burning natural gas as an alternative to petroleum-based fuels isn’t new. A Mesa subsidiary back in the 1980s explored the market, not long after the fuel crises of the 1970s. He’s also invested heavily in wind-power technology.

Last summer, on a swing through China with Clean Energy Fuels President Andrew Littlefair, Pickens was quoted as saying that they had been approached about a partnership to establish natural-gas filling stations there.

While ethanol and gasoline-electric hybrid power have gained fashion as ways to cope with $3-a-gallon-plus gasoline, the LNG and CNG market might be ready to see some growth, especially in commercial transportation. According to the Natural Gas Supply Association, a little more than 3% of the natural gas produced in the United States is used for transportation. Clean Energy Fuels has about 22% of the fleet-vehicle market, according to W.R. Hambrecht & Co. analyst Marvin Loh. Clean Energy also helps its clients cut through the regulatory red tape to switch to natural gas.

Southern California is a hotbed of LNG and CNG development, right in Clean Energy Fuels’ backyard. The ports of Los Angeles and Long Beach, long a source of the region’s air pollution, are banning many diesel vehicles, and many of the new ones burn LNG.

Last fall, Clean Energy Fuels announced construction of an LNG plant in the Mojave Desert, California’s first large-scale production facility. When shipments begin in the second half of this year, initial production is expected to be 160,000 gallons of LNG a day, about two-thirds of its potential maximum capacity.

Earlier this month, Clean Energy Fuels announced that it was awarded a $3.6 million contract by the Orange County Transportation Authority to build and operate a CNG refueling station in Irvine, Calif.

Clean Energy Fuels is expected to release its fourth-quarter 2007 results sometime in mid-March. In its first two reports as a public company, Clean Energy Fuels has exhibited the growing pains often seen in an IPO.

For the quarter ended Sept. 30, Clean Energy Fuels reported a net loss of $1.5 million, or $0.03 per share, compared with a net loss of $58.8 million, or $1.72 per share, the year before. Revenue increased 31% to $29.2 million, as the combined volume of liquid and compressed natural gas volume increased 10% to 20 million gallons.

Broadpoint Capital initiated coverage of Clean Energy Fuels in December with a “strong buy” rating and an $18 price target. Analysts Ron Oster and Andrew Massaro issued an update on Jan. 17, after Clean Energy announced fueling agreements for four refuse operators.

In reiterating their rating, the Broadpoint analysts told clients that they “view Clean Energy as a compelling idea in the alternative energy space in 2008, given that it has an established, profitable business model that is based on proven technology, and is not dependent on government subsidiaries.”

Hambrecht analyst Loh, who initiated coverage without a rating or price target, wrote in a Dec. 19 report that “we believe that CLNE is well-positioned in this growing market.” Loh said he is expecting the company’s revenue “will grow at an average rate of 38% through 2011” and is expecting the non-GAAP earnings per share to turn positive this year, “and ramp rapidly in 2009 and beyond.”

As the world looks for ways to cope with high energy prices, growing demand could fire up the stock price of Clean Energy Fuels (CLNE).