Cheap Natural Gas A Double Edged Sword For NGVs

| About: Clean Energy (CLNE)

Gas to liquids technology another speed bump on Clean Energy Fuels' Natural Gas Highway

T. Boone Pickens just can't catch a break. First, his plan to free up natural gas by promoting more wind power was thwarted by a gas glut. Now, cheap gas is allowing a fledgling gas-to-liquids industry to compete with the real stuff.

This is bad news for Clean Energy Fuels (NASDAQ:CLNE). The company co-founded by Pickens and Andrew Littlefair has bet the farm on consumers switching from gasoline and diesel to less expensive natural gas. The momentum for natural gas as a vehicle fuel is swinging in the right direction, but not fast enough. The company is still in the red and the market has reacted, sending the company's share price to a 52 week low.

Pickens is attempting to free America from fossil fuel imports and make a buck in the process. Along the way, he has had to adapt to unforeseen events. The first steps of the Pickens Plan included utilizing wind power to generate electricity. The wind-generated electricity was supposed to free up domestic natural gas for use as vehicle fuel, and in turn lower America's dependence on OPEC oil. Even he didn't expect fracking to be so efficient at extracting gas from shale beds. I doubt he was expecting cheap natural gas to inadvertently threaten the expansion of NGVs either.

Clean Energy isn't the only company betting heavily on NGV growth

One company well positioned to gain from America's Natural Gas Highway is Westport Innovations (NASDAQ:WPRT). This Canadian tech company has partnered with engine builder Cummins (NYSE:CMI) and heavy equipment manufacturer Caterpillar (NYSE:CAT) to produce highly efficient natural gas engines. Westport recently warned that revenues wouldn't grow as fast as expected for Q3 2012 blaming slow growing natural gas refueling infrastructure in the US. If gas-to-liquids technology gains a foothold in North America, they'll have another scapegoat for downward guidance.

Both Clean Energy Fuels and Westport Innovations have been beaten up recently on sluggish development of natural gas refueling infrastructure.

Gas-to-Liquids products coming soon to a pump near you

Sundrop Fuels Inc., a company half-owned by Chesapeake Energy (NYSE:CHK), is in the planning stages of a plant in Louisiana. The gas-to-liquids plant is expected to produce up to 50 million gallons of gasoline per year without using any oil as a feedstock. Cellulosic biomass from forestry waste and natural gas are the only necessary ingredients. Outside of the US a much larger GTL plant in Qatar can produce 260,000 barrels a day of distillates like gasoline, diesel and jet fuel. The $19 billion plant run by Royal Dutch Shell (NYSE:RDS.A) is performing well enough that the company is planning a similar project in the US.

The difference

Using $3.89 MMBtu gas as a feedstock, Oxford Catalysts (OTCPK:OXFCF) can produce premium diesel for about $1.57 a gallon. Using crude oil as a feedstock, the same gallon of diesel would cost about $2.95 to produce. Currently compressed natural gas and liquefied natural gas cost about $1.50 per gallon equivalent less at the pump than gasoline or diesel. The problem is, you need a natural gas vehicle, or one that's been converted, to take advantage of it.

Technology will eat itself

I don't consider gas-to-liquids a threat to the natural gas highway, or Clean Energy's bottom line, any more than ethanol and biodiesel. In much the same way that corn prices have risen in response to its increased usage to produce ethanol, I expect natural gas spot prices to rise along with its continued use as a feedstock by a growing gas-to-liquids industry. Even before the Midwest drought, the gap between crude and corn was getting thinner and at times disappearing altogether. It is reasonable to assume that LNG and CNG prices at the pump will stay relatively even with distillates produced from natural gas feedstocks.

Reducing active natural gas directed rigs to 13 year lows is having little effect on stubbornly low spot prices in the US.

A win-win for producers

Regardless of which industry pulls ahead, the real winners in this equation are natural gas producers like Chesapeake and Devon Energy (NYSE:DVN). Since bottoming out in April 2012 natural gas prices have stubbornly risen to $3.50. That's hardly enough for producers to get excited and redirect their rigs from oil and liquids rich plays. However, if either growth in NGV usage or gas-to-liquids takes off it will provide some much needed demand for the glut of natural gas in the US. Chesapeake is fully aware of this as they have invested in both Clean Energy's natural gas highway and gas-to-liquids startup Sundrop Fuels. Natural gas usage as a vehicle fuel is going to rise one way or the other, the best way to take advantage this trend might be through its producers.

Disclosure: I am long CLNE, CHK, WPRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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