Clean Energy Fuels (CLNE) was recently downgraded at Piper Jaffray after Westport Innovations (WPRT), manufacturer of gas-driven trucks and natural gas engines, reduced its revenue guidance, claiming that the availability of liquefied natural gas infrastructure was delayed. Infrastructural development remains the most major obstacle in the adoption of natural gas in the U.S. CLNE has been one of investors' favorite stocks in the market after the shale gas boom, as the company is one of the leading players involved in natural gas fueling infrastructural development.
The company reported its third-quarter results yesterday, Oct. 5, after the market closed. It topped revenue estimates and met EPS expectations. Investors were delighted to know that gallons delivered by the company increased by 24%. Gallons delivered increased to 50.9 gallons from 40.9 gallons in the third quarter of last year. The company defines gallons delivered as the sum total of gallons delivered for compressed natural gas (CNG), liquefied natural gas (LNG), renewable natural gas (RNG), and those associated with providing operations and maintenance services to its customers during the period. This is a good indication of how quickly the economy is switching from diesel/gasoline to natural gas as an alternative source of fuel.
Qineqt covered CLNE in a two-part article recently; the first part discussed infrastructural development, whereas the second part discussed how different truck manufacturers and OEMs are playing a role in increasing the adoption rate of natural gas in the U.S.
American Natural Gas Highway
CLNE, with the help of $450 million gathered from different sources -- including Chesapeake (CHK) -- aims to build 150 gas stations by the end of next year. The company has set a target to build 70 stations this year and 80 stations in the next year. During the conference call, management claimed that 48 stations are ready to operate, 21 more stations are under construction, and the rest of the 11 stations are passing through the stages of entitlement, design, and permissions. CLNE openly criticized last week's comment by WPRT that infrastructural development of LNG stations is delayed. The company claims that it is well on its way to achieve its target of 70 stations by the end of this year.
Investors were also concerned about the damage that Hurricane Sandy had caused to CLNE's operations. Around 49 of CLNE's stations were in the path of the storm that hit the East Coast a week ago. However, with around-the-clock efforts by CLNE's technicians and other employees, the stations were up and running without wasting too much time. This helped the refuse trucks to refuel and conduct critical relief work in the hard-hit area.
OEMs and Other Contributions
Recently, the governors of 22 different states joined together to issue a request for proposal (RFP) for the Detroit Three -- Ford (F), General Motors (GM), and Chrysler -- to provide natural gas vehicles to be used for state affairs. Not only will this benefit CLNE by bringing in additional revenues, as CLNE is one of the premier fuel providers in these 22 states, but it will also help expand the CNG vehicle base.
Recently, CLNE signed an agreement with the Commonwealth of Virginia to convert all of the state- and municipal-run fleets to natural gas. CLNE has a wide spread network of fueling stations to benefit from this agreement.
One of the most important recent developments for CLNE, which is expected to trigger the gas adoption rate, is that FedEx (FDX) announced it will be testing two LNG trucks that it recently bought. The Kenworth-Peterbilt trucks -- a product of Paccar (PCAR) -- fitted with Cummins-Westport 11.9 litre engines will be driven for 1,000 miles in one go (with slipseating). Transportation costs form a large chunk of the operating costs of FDX. If the test goes according to expectations FDX might adopt LNG trucks, which may indicate a turning point in the overall transportation industry. Most companies, including the likes of United Parcel Service and truckers such as JB Hunt (JBHT) and Conway (CNW), might shift to natural gas driven fleets.
Frito-Lay recently signed an agreement with CLNE under which it would fuel its first 75 trucks for two years from CLNE stations. Frito-Lay is expected to expand its natural gas fleet to 800 heavy duty trucks.
In addition to the Corporate Average Fuel Economy Laws, some OEMs are also providing incentives to users of natural gas driven vehicles. Honda Motors (HMC) recently declared that it will offer prepaid fuel cards worth $3,000 to purchasers of the new Honda Civic Natural Gas vehicles (NGV), introduced in 2012. Therefore, it is becoming evident that growth in the NGV market is being stimulated by both the demand and supply side of the market.
CLNE is also waiting for the 11.9 liter engine, a product of collaboration between WPRT and Cummins (CMI). The engine, which will provide the best mix of torque and economy for heavy-duty trucks, is expected to hit the market in the first three months of next year.
Another major upcoming event is a summit to be hosted by the American Trucking Association, from Nov. 28-30, in which all the major stakeholders -- including trucking companies, shippers, truck stop companies, and government representatives -- will sit together and deliberate on ways in which the trucking industry could switch to natural gas.
CLNE is a pure play on natural gas adoption rate. The adoption rate itself depends on how quickly the infrastructure is put in place and how much variety in products the OEMs have to offer to end users. With natural gas prices still way below gasoline prices, most people are expected to switch to natural gas once the infrastructure is put in place. The recent downgrade of CLNE to neutral by Piper Jaffray sent the price down by 4% the next day. This has given investors a better entry point to go long on the stock. With a growing adoption rate (indicated by the growing number gallons of natural gas sold) and cheap valuations, the stock is recommended as a buy.