Is Biofuel the Oil Killer?

Oil and gasoline heat our homes and power our vehicles, with industry giants like ExxonMobil (NYSE: XOM  ) quickly coming to mind. However, there are alternatives to oil that are increasingly becoming viable options.

More of the same
There's good reason to like ExxonMobil beyond the fact that over 19,000 of its gas stations dot the globe. For example, it's among the largest companies in the world, with an over $380 billion market cap, and it has consistently rewarded investors via stock buybacks and steadily rising dividends. In the second quarter alone ExxonMobil bought back $4 billion worth of shares. Its dividend was 11% above year ago levels, too. 

And ExxonMobil is much more than just an oil company. For example, it is also among the world's largest chemical companies and, after the $31 billion purchase of XTO Energy at the turn of the decade, it is a major natural gas player. XTO was, at that point, the largest independent producer of natural gas in the United States.

A slight shift
So ExxonMobil isn't sitting still, making a big shift into a market it expects to expand by 25% over the next three decades or so in the United States. While a great deal of that demand is going to come from electricity generation, that's not the only thing natural gas is used for. For example, Clean Energy Fuels (NASDAQ: CLNE  ) is in the process of building a natural gas fuel station network.

Compared to ExxonMobil, $1 billion market cap Clean Energy is a pipsqueak. However, this tiny company is getting out in front of a key industry shift. It already has a notable business providing natural gas to local fleet vehicles like buses, taxis, and garbage trucks. And, although the switch is only in its infancy, Clean Energy has built out a network of natural gas stations on the interstate highway system to serve long-haul trucks.

That investment has kept the red ink flowing, but Clean Energy Fuels thinks adoption will be quick in this potentially $25 billion market. For example, about 60% of all garbage truck purchases in 2013 are expected to be powered by natural gas. Although less than 1% of long-haul trucks sold in 2013 are likely to be powered by natural gas, Clean Energy Fuels expects that to increase to 35% in just four years. It will be there to provide the fuel.

The big shift
Neither of these fuel options is particularly new, however. That's where a company like FutureFuel (NYSE: FF  ) comes into play. The company makes chemicals and bio-diesel, an alternative fuel option that has become an increasingly important part of its overall business over the past five years. That's been helped along by government mandates.

While ExxonMobil often invests in alternative fuel research, the size of its oil and natural gas operations means that bio-diesel would never be a material contributor to performance. FutureFuel, with a market cap below $1 billion, however, can take advantage of an industry that Exxon believes will see increased demand out to 2040—but that will still only account for a small share of the market.

And, unlike Clean Energy, which is a similar story, FutureFuel is profitable. Its chemicals business also provides diversification that Clean Energy lacks. FutureFuel's dividend yield, meanwhile, is 2.3% compared to ExxonMobil's 2.9%. While Exxon has more to offer dividend investors today, FutureFuel's growth potential is larger, which could, in the end, lead to more meaningful dividend increases.

No killer app
While it may be disappointing to some, the truth is that alternative fuels aren't going to kill off oil or gasoline. However, according to ExxonMobil, they will make important inroads over the next few decades. Even if the industry giant's projections are way below target, neither Clean Energy Fuels nor FutureFuel will unseat Exxon over that span. But that doesn't mean they won't provide investors with years of growth as alternative fuels take hold.

A revolution in fuel
One home run investing opportunity in the space has been slipping under Wall Street's radar for months. But it won't stay hidden much longer. Forward-thinking energy players like GE and Ford have already plowed sizable amounts of research capital into this little-known stock... because they know it holds the key to the explosive profit power of the coming "no choice fuel revolution." Luckily, there's still time for you to get on board if you act quickly. All the details are inside an exclusive report from The Motley Fool. Click here for the full story!


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  • Report this Comment On October 28, 2013, at 2:34 PM, Thinkerbus wrote:

    I understand the market for LNG (Class 8 trucks) is 25 Billion Gallons (DGE), which equates to $100 Billion Dollars (not $25 Billion), so the prize for CLNE is huge even though it is no Exxon.

    I remain bullish!

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Related Tickers

9/19/2014 4:00 PM
CLNE $8.81 Down -0.03 -0.34%
Clean Energy Fuels CAPS Rating: ****
FF $12.14 Down -0.46 -3.65%
FutureFuel Corp. CAPS Rating: *****
XOM $97.12 Up +0.51 +0.53%
ExxonMobil Corp CAPS Rating: ****

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