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Founded in 2001, Clean Energy Fuels (Nasdaq: CLNE ) is realizing its time may have finally come. As natural gas prices crashed earlier this year, the alternative-fuel supplier soared to new heights, over $24, giving investors who had bought in just six months earlier a 150% return. Gravity has caught up with the share price since then, but excitement still abounds for Clean Energy, one of several companies riding a bullish wave of natural gas plays thanks to the supply boom from hydraulic fracturing. The company provides natural gas fueling to approximately 530 fleet customers with 273 fueling stations in 23 states, Canada, and Peru. The T. Boone Pickens-led firm has also embarked on an ambitious project called America's Natural Gas Highway, which will attempt to provide natural gas fuel across the nation's interstate highways.
While there may be plenty of reasons to invest in Clean Energy, let's take a look at a few factors that may make you want to skip a ride on the Natural Gas Highway.
Prices won't stay this low
Whatever your take on Clean Energy, this is clearly a high-risk investment. If natural gas fuel goes mainstream, then this innovative company could turn into a 10-bagger or more for investors. But in order for that to happen, several pieces need to fall into place, perhaps the most important being that natural gas prices need to stay low. Prices touched bottom at under $2 in April and have since bounced back above $2.50, and while supply has boomed, demand has been slow to catch up. Utilities have been switching over from coal, but not fast enough to keep up with the supply glut. The warm winter this year also kept inventory levels abnormally low, and natural gas producers have started scaling back production. In other words, the fracking boom has created a market totally out of equilibrium, and the various stakeholders have only begun to adjust. While production costs differ among natural gas producers depending on their reserves, almost all of them are losing money at today's prices. Many of them have continued to produce gas because they are locked into contracts obligating them to do so. As those contracts expire, the supply economics will change.
Natural gas fuel won't go mainstream
For some observers, the conversion to natural gas fueling seems like a foregone conclusion. Excitement about the alternative fuel has helped drive up stocks like Clean Energy and Westport Innovations (Nasdaq: WPRT ) , designer of natural gas engines, but the market for natural gas fuel has focused almost exclusively on the short-haul market. Many localized fleets such as public buses and garbage trucks have converted to natural gas, but almost all long-haul trucks still rely on diesel. In this light, Clean Energy's Natural Gas Highway looks a bit like a fantastic "If you build it they will come" move, and it suffers from the same chicken-and-egg problem that prevents a widespread conversion to natural-gas fuels. Clean Energy began building ANGH this year, and by the end of 2013 expects to be done with the first phase of the project, which includes 150 fueling stations in 33 states. But analysts don't seem to expect the highway project to significantly boost revenues, projecting just 21% revenue growth this year, and 35% in 2013. By comparison, analysts expect Westport's sales to grow 56% this year. If natural gas is the fuel of the future, then those numbers should be skyrocketing.
Show me the money
Related to the last point, it's difficult to see how and when Clean Energy would become profitable. The company seems to be a ways away from its breakeven point, and revenue is not growing fast enough to get there anytime soon. Analysts are projecting a loss of $0.34 a share in 2013 and have revised those estimates downward in recent months.
Founder T. Boone Pickens seems to be motivated as much by the social and political mission of weaning the nation off foreign oil as by any financial incentive. "Pickens Plan" calls for taking advantage of the U.S.' abundant natural gas resources and promoting renewable energy to create jobs and restore our economy and infrastructure. While that may be a commendable goal in and of itself, it's not necessarily a compelling reason to invest in his company.
The real problem with Clean Energy Fuels lies with the business model. America's Natural Gas Highway is certainly a bold move that could jump-start a transition to the alternative fuel, but even if it's successful, there is no sustainable competitive advantage or barriers to entry in that business. Seeing the profits, competitors will jump in with their own natural-gas fueling stations, and the business will become as much of a commodity as gasoline retail, one notorious for its thin margins. There may be a short-term advantage in the ANGH, but I don't see it lasting. Clean Energy seems to have found a niche providing fueling services for short-haul fleets, but the future of the business looks to be riding on the ANGH, which just doesn't seem like a great business to be in.
If natural gas fueling truly takes off, Clean Energy could be a great investment despite these concerns. Investors would be wise to keep an eye on complementary companies like Westport and the price of United States Natural Gas (AMEX: UNG ) . If prices stay low and natural-gas engine technology advances to the point where it's comparable to diesel engines, Clean Energy will benefit. The road ahead looks difficult, but if all the pieces fall into the right places, Pickens Plan could be a success.
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