In Part 1 of this two-part series, we discussed the various factors that will drive the stock price of Clean Energy Fuel (NASDAQ:CLNE). That article discussed major issues with infrastructural development of natural gas fueling stations and the role of CLNE in tackling said issues. In this article, Part 2, we focus on another important driver, namely the eventual penetration of natural gas trucks in the U.S. auto market and the willingness of companies to switch from diesel/gasoline-driven trucks/vans to gas-driven vehicles.
In this context, the role of truck and engine manufacturers is very important. Whether they want to make such models or not will eventually decide the final options available to end users. Important names that come to mind are Cummins (NYSE:CMI), Westport Innovations (NASDAQ:WPRT), Paccar (NASDAQ:PCAR), Daimlar AG (OTCPK:DDAIF), and Navistar (NYSE:NAV).
Before we specify the different avenues through which CLNE is working to put more gas-driven trucks on the road, it is important to discuss the projections of the market regarding the increase in the number of gas-driven Class 8 trucks. That will eventually decide whether CLNE will be able to recover its cost through supply of natural gas at fueling stations.
By the end of 2011, there were 199 gas-driven 15-L engine fitted trucks on U.S. roads. An exponential growth of 250% is expected until the end of 2012. The following table shows the projections for the next four years:
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This shows that the market penetration of 15-L trucks will reach 16% by 2015. Also, the projections have been ascertained using the bearish figure of 50,000 total 15-L trucks by 2015 (not shown in the table). However, if the market for 15-L moves at the same pace as the overall truck market, the number of 15-L gas-driven trucks will exceed 10,000.
The gas-driven 13-L engine is also expected to hit U.S. roads in 2013. Navistar is working on the engine in collaboration with Clean Power Air, a U.K.-based gas technology developer. The following table shows the forecast units until 2015:
There are certain points of view suggesting that almost 150,000 15-L LNG engines will be in service in 2015. This means that the share of retail gas trucks will have to reach 26%. This seems like a rather far-fetched idea, given that this equals the entire market share of Paccar in the Class 8 truck market.
CLNE and NAV
CLNE and NAV have partnered together to establish a vast network of LNG fueling stations. This announcement came after NAV declared it was venturing into the natural gas truck market in early February this year. NAV will get Clear Air Power to make dual-fuel systems for NAV's trucks. Also, NAV will be using Cummins-Westport engines. Through the NAV-CLNE operated fueling stations, NAV customers will be offered rebates to offset the high upfront cost of buying a gas-driven truck. The rebate is estimated to be $500 a month, when a minimum of 1,000 DGEs are purchased at a CLNE station. Using this, the initial cost will be paid back in six years, which will incentivize customers to switch more easily.
CMI and WPRT
WPRT shareholders were infuriated when NAV and CLNE joined hands to bring about a natural gas revolution in the U.S. because, until then, WPRT was the face of natural gas engines in the U.S. However, WPRT became an indirect beneficiary of the partnership when NAV decided to get 8.9-L engines from the company. The partnership between CMI and WPRT is important for CLNE, since this will indirectly benefit the company, being one of the key suppliers to its partner.
It is encouraging for CLNE to know that all major OEMs are providing natural gas options in their trucks in the form of factory-fitted equipment or aftermarket conversions. Freightliner of Daimler AG, Volvo's VNM, PCAR's Kenworth T440. and Ford's 250 SuperDuty trucks are all prime examples.
People like Carl Icahn and T. Boone Pickens (CLNE's largest shareholder who has been increasing his stake in the company) are highly bullish on the growth of natural gas-related stocks, as they believe natural gas is not going anywhere in the next two decades. CLNE has strong financial backing. Capex is on the rise. Other than the trucks, CLNE has a market for its product in the form of transporters like FedEx (NYSE:FDX) and United Parcel Services (NYSE:UPS); fleet operators like Ryder Systems (NYSE:R), which has already planned to introduce a fleet of gas trucks for its customers like retailer Staples (NASDAQ:SPLS) and carpet manufacturer Mohawk Industries (NYSE:MHK); and waste management companies like Waste Management (NYSE:WM).
However, there are certain risks related to the usage of trucks that can slow down the adoption rate, such as high maintenance charges and customers not being able to benefit from the CLNE-NAV rebate structure, especially if CLNE does not meet its expansion targets. Also, the added weight of an LNG tank will eat up some space in the trucks, thus reducing space for the truck user.
Despite these risks, CLNE has huge potential to go up, as the divergence between oil and gas prices rises and fueling infrastructure is properly laid out.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Industrials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.