Can You Clean Up with Clean Energy Fuels?

Inflation, with respect to oil, has been incredible. This price move has spurred other energy sources that were once not cost-effective to be possibilities, going forward. The United States embraced the gasoline engine and now currently uses 75% of the world's oil (according to T. Boone Pickens' interview on CNBC). The amount of energy we are using is disturbing, the the price of oil has strapped the consumer, and if the United States isn't buying the rest of the world suffers along with us. Clean Energy Fuels (CLNE), the largest provider of vehicular natural gas in North America, could see some major increases on speculation that their technology will be embraced here and abroad.

CLNE has many customers with respect to government and business vehicles. Their fueling stations are located throughout the United States and Canada. Customers include Waste Management (WMI), Los Angeles International Airport, and Sysco (SYY). Clean Energy Fuels is devoted not only to lowering emissions, but to decreasing our dependence on foreign oil.

It could take 15 to 20 years for hydrogen vehicles to be ready to operate, as stated by Michael Scarpino, of the US Department of Energy. George Pataki, Governor of New York, praised the use of natural gas because of its better mileage and lower emissions. Natural gas vehicles are more of a Band-Aid than a fix, but it is important to remember that anything done will help for the next decade or two to lower our dependence on foreign oil.

Hydrogen will be the best scenario long term, but in the short term hybrids and compressed natural gas are the best for small to medium duty vehicles, and large vehicles are suitable for compressed and liquefied natural gas. To prove its value, currently, 22% of all buses on order run on natural gas.

The argument for natural gas is best represented with a list of current advantages. Most importantly, we have it here, in the United States. It provides for lower emissions. It is less expensive than diesel, gas and hydrogen. Contrary to popular belief, natural gas is safer as it has a higher temperature to ignite lowering the chances of explosions. It is becoming more available as there are 250 natural gas fueling stations (lead by California).

Natural gas is also the most efficient with respect to hydrogen production. Hydrogen costs are currently estimated at $8 per gallon. Hydrogen and natural gas can also be blended to create fuel, efficiently with low environmental impact. This is by far the most important aspect of CLNE. Their current stations can easily be converted to hydrogen. This is stated by T. Boone Pickens himself, making CLNE a play on upcoming hydrogen fuel access.

I know it seems far away, but being ahead of technology can make an investor quite a bit of money. CLNE operates under long-term contracts which help to hedge the price of natural gas going forward. Since CLNE produces its own natural gas in its Willis, Texas, plant, its costs are relatively stable. This not only motivates customers, but CLNE will realize large price increases at the end of the contract period. In 2008 alone, this company has signed many new contracts. On January 17th of this year they started natural gas refueling stations for Texas, California, and New York with respect to refuse trucks. On February 21st, Long Beach, California, stated they would replace half of their diesel vehicles with alternative energy propulsion. This vote specifically stated they would pursue liquefied natural gas. CLNE opened the world's largest compressed natural gas refueling station in Lima, Peru. On April 24th CLNE was awarded a Las Vegas contract to provide compressed natural gas to their transit fleet. On April 29th they also brought their services to San Francisco.

I am bullish this stock, because it helps to reduce some of the problems in the United State's economy while setting itself for a movement of hydrogen fuel down the road. I don't believe $8 a gallon hydrogen is out of line, but I think production of this will cheapen somewhat and gasoline is only going higher. Current revenue estimates have CLNE increasing revenue this year by 29.1%, 2009 approximates an increase of 50.4%. Earnings growth is estimated at 31.8% this year and 326.7% next year. The forward PE of 44.38 seems relatively cheap on that basis.

Buy this stock at your own risk, as the current chart is still bearish; it has not broken the current trend. Downside risk looks to have support at $12 and resistance is at $16. If $16 is broken tomorrow on the good earnings quarter, we could see $18 before the day is done. Good luck and happy trading.

Comments

[NOWHEREMAN:]

Eventually, not fast enough to matter to anyone right now.

Be happy, dream on, eat, drink and be merry...

Who pays for the consumer's new cars, where are the refueling stations, how far can you travel before you run out of "gas".

Infrastructure, infrastructure, infrastructure.

THERE, Isn't any...be happy, dream on.

2008 May 16 11:29 AM

[legmaker:]

This is a good long term play even though they missed badly. Take a look at their current contracts, but it isnt for the publc, centered in government contracts and refueling stations are set up by the company. Not for the faint of heart, but T. Boone Pickens doesnt miss much.

2008 May 17 12:15 PM

[jjason:]

Thanks for the article Mike. I would not buy stock in this company based on the information you have supplied. If this company has a PE ratio over 25, a total debt to equity ratio over 2 and pays a dividend less than 4 percent, I would not be interested.

2008 May 18 07:59 AM

[legmaker:]

jjason, Thank you for your comment. The debt ratio is suspect, but remember who is backing them. Looking long term especially if one has quite some time to wait for a return this looks solid. Much of the debt is due to their massive expansion that they have not yet realized earnings on. With respect to your comment, you are right, I am not interested yet either, I have more of a three to six month time frame ahead and their missing badly is cause for negativity in the short term, much better plays out there.

2008 May 18 11:37 AM

[10Q Detective:]

The one point of disagreement I have with your thesis is that current LT contracts are fixed-price, negotiated when fuel prices were much cheaper. Operating Margins will improve as they expire --such as the Phoenix Transit contract.

industry.bnet.com/ener.../

2008 Jun 24 03:50 PM