This article, which is the first of a two-part series, will discuss the role of Clean Energy Fuels (CLNE) in infrastructural developments for gas fueling stations in the U.S., and the effects of these activities on its stock price.
Clean Energy Fuels is a pure play on the adoption rate of natural gas as an alternative source of fuel. Its stock price is a derivative of the infrastructural development of natural gas fueling stations in America, the gap between natural gas and oil spot prices, market penetration of natural gas vehicles, government laws governing the energy rules in the U.S., and the ultimate rate of consumers opting for natural gas as a fuel source.
The dynamics of the U.S. energy landscape appear to be very complex. All the relevant factors seem to be tied up with one another. For example, infrastructural development is tied to the rate of switching; the quicker consumers adopt natural gas, the more willing big players like Exxon Mobil (XOM) and Chevron (CVX) will be to develop natural gas stations. Consumers, on the other hand, do not want to end up with an empty fuel tank in the middle of a highway and therefore are waiting for the infrastructure to be set. Truck manufacturers like Paccar (PCAR), Daimler AG (DDAIF), Cummins (CMI), and Navistar (NAV) have not increased their production of gas-driven trucks given the weak switching rates. That is probably why changes in natural gas prices have hardly brought about a change in the valuations of stocks that rely heavily on natural gas prices. A classic example of this is that when gas prices reached their all-time lows, companies that solely rely on sales of their natural gas engines, such as Westport Innovations (WPRT), hardly climbed up. Therefore, it seems as if nobody is willing to take the first step.
Clean Energy Fuels and Infrastructure
Clean Energy Fuels, in this context, has been an exception. Being America's largest provider of natural gas for transportation, the company has taken the lead on this issue. It has undertaken a project to build America's Natural Gas Highway (AMNGH), which will see the establishment of Clean Energy Fuels' network of LNG fueling stations across the country. In the first phase, Clean Energy Fuels aims to establish 150 fueling stations by the end of 2013, with 70 stations being built in 2012. The company has been able to accumulate $450 million for this project; Chesapeake Energy Corporation (CHK) has been one of the major lenders.
Although 150 stations will account for only a fraction of the total stations established in the U.S., they will still instill confidence in consumers and help them switch to natural gas. However, according to the JPMorgan analyst, this rate of laying down infrastructure is highly unattainable. This is again because of the slow adoption rate on the part of consumers. Around $1 million is required to establish an LNG station. Clean Energy Fuels will earn a markup of $1.76 per DGE (diesel gallon equivalent). At this rate, Clean Energy Fuels will have to sell 568,000 DGEs per station in order to recover its upfront costs, which is highly improbable given the current natural gas usage.
Nevertheless, Clean Energy Fuels is well on its way to achieving its goal of establishing 70 stations this year; 22 have been completed, 24 are under construction, and 32 are in the designing and permitting stages. Meanwhile, Clean Energy Fuels is also working with engine manufacturers to deliver 12 and 13 liter engines that suit the heavy duty truck market. It has planned this in a way that the opening of stations coincides with the availability of 11.9 Cummins-Westport engines in early 2013. The openings of the remaining 80 stations will coincide with the availability of 13-liter Navistar and Volvo engines in late 2013.
Another strategically important decision has been the placement of most Clean Energy Fuels stations near truck stops of Pilot Flying J, which is the largest truck-stop operator in North America. The company will be able to benefit from Pilot's existing station network.
Clean Energy Fuels has widespread access to LNG supplies, as it has contracts with seven LNG producers. Clean Energy Fuels itself owns two LNG production facilities, and has its own LNG design, fabrication and manufacturing company by the name of Northstar, which it acquired in 2010. It has also signed an agreement with the Metropolitan Utilities District of Omaha, which will provide the company with access to 70,000 gallons per day. This answers the market's questions regarding appropriate availability and supply of LNG to Clean Energy Fuels.
Regulatory risk was yet another factor to consider in establishing the required infrastructure. However, given the current positive approach of President Obama toward greener sources of energy, Clean Energy Fuels will likely find no problems in obtaining federal support. The Obama administration's announced plan of doubling the fuel economy by 2025 will help increase the natural gas adoption rate.
Revenues are on a rise, although the growth rate has slowed down. The company topped earnings estimates in three of its last four earnings releases. The volume of natural gas delivered by the company this quarter rose by 24% year over year. Sales are expected to grow by 30% and 50% in the next two years. Gross margins are expected to expand to 36% by 2014. Debt does not seem to be a problem, as the company enjoys financial backing from giants like Chesapeake and investors like Boone Pickens. Also, the company's current cash level almost equals its debt. The company is trading at P/S of 3 times, which is well below its historical P/S of 4.5 times. The rate at which the company is burning cash has considerably slowed down. Capex is on the rise, as Clean Energy Fuels plans to install fueling stations across America.
However, many people still believe that Clean Energy Fuels is not a good buy given the slow adoption of the market toward natural gas. Also, a high level of risk is attached to the stock, as natural gas prices are volatile and can rise to a level where the ultimate monetary benefit of using natural gas may disappear. That is probably why Clean Energy Fuels' short ratio is so high (14 days).
As oil prices rise along with the global economic recovery and the divergence between natural gas prices and oil prices increases, it is expected that the cost-sensitive trucking industry will move to the cheaper source of fuel, given that companies like Clean Energy Fuels are working hard to establish a proper gas fueling network. With a positive EBITDA expected for the next year, Clean Energy Fuels will be a star of the future. Important catalysts to look out for are as follows:
- Clean Energy Fuels is on target to set up 70 stations this year.
- Whomever gets elected president this year. (GOP candidate Mitt Romney is said to be against green sources of energy, which will significantly affect those stocks, including Clean Energy Fuels, which depend on the government's support in promoting the usage of alternative sources of fuel.)
The next part of this series will focus on Clean Energy Fuels' collaboration with various truck and engine manufacturers in a bid to bring about a change in the energy landscape of the U.S.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.