What is Holding Back Clean Energy Fuels?

Clean Energy Fuels (NASDAQ: CLNE  ) has long been one of the best ways to play the growing natural-gas-fuel market. The company's rapidly growing infrastructure of fueling stations has resulted in a viable alternative for trucking fleets around the country, and better technology from engine companies like Westport Innovations (NASDAQ: WPRT  ) is making the switch viable.

But is this going to be a long-term high-growth business or is if a flash in the pan? Let's take a look at two risks investors shouldn't ignore.

Natural gas won't dominate the passenger-car market
There's no doubt that natural gas is, and will remain, attractive to the trucking market. In the third quarter, Westports Cummins and Weichai partnerships shipped 2,409 and 9,080 units, respectively, up 52% and 88% from a year ago. Clean Energy Fuels' customers ordered 70% more natural-gas vehicles than a year ago last quarter. It's clear that trucking fleets are seeing this as a viable alternative. 

But what trucking success hasn't translated to is the passenger-car market. Natural-gas cars haven't been a hit in the U.S., and the growing popularity of cleaner, higher-performance electrical vehicles is a challenge for natural-gas fuel's upside.

The trucking industry will likely see natural gas as a viable alternative as long as prices are low, but there's not a lot of upside outside of the trucking market. That will keep a cap on Clean Energy Fuels' upside. 

Natural gas might not always be so cheap
There's no disputing that natural gas is less expensive for trucking fleets than diesel today, but will that be the case long term?

The chart below shows that natural-gas prices have definitely trended lower over the past decade while diesel has become more expense. The challenge is that drilling for natural gas suffered over the past two years as prices plummeted, and the imbalance between supply and demand may not maintain long term. If supply goes down or demand goes up, so could prices, which would kill any price advantage.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

The U.S. is already working hard to increase natural-gas exports, which can be sold into markets around the world at much higher prices. That will also increase demand and prices.

Then there's the oil market, which I don't think will see higher prices in the next decade and may even see prices fall. Demand in developed countries is already starting to decline, and as fuel-efficiency standards increase and alternative vehicles become more popular demand could begin to fall worldwide, resulting in falling (or at least stable) prices.

Foolish bottom line
I simply see limited upside for Clean Energy Fuels because what makes it a viable alternative today probably won't last forever. If diesel prices fall, trucking fleets won't see a reason to switch, and the consumer market has never been enamored with natural gas. Worse yet, consumers are beginning to adopt electric vehicles at a rapid rate, passing over natural gas. 

Clean Energy Fuels will still grow in 2014; there's just limited upside in building a natural-gas-fueling infrastructure. 

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  • Report this Comment On December 28, 2013, at 11:11 PM, flyawaynow wrote:

    We are in the middle of a hydrocarbon revolution in America led by natural gas. It is real, growing, and will feed a rebirth of industries such as fertilizer and plastics. Buy well run gas pipeline MLPs and get rich. Avoid green energy.

  • Report this Comment On December 29, 2013, at 2:00 AM, Risky88 wrote:

    Really? you think semi trucks will be electric so therefore clne doesn't have a future?

    oil prices will fall that substantially? Even if they did it wouldnt be viable to drill oil in the us and as a result wells would be capped which in turn shoots back up the price of oil.

    you only find what your looking for and obviously it wont be profits

  • Report this Comment On December 29, 2013, at 2:00 AM, Risky88 wrote:

    put your money where your mouth is

    short it!

  • Report this Comment On December 29, 2013, at 8:39 PM, Dahun wrote:

    Natural gas prices have fallen as the US has become independent of foreign supply. Continuous supply should keep prices steady.

    The big and maybe only drawback to NG vehicles is fueling stations.

    Electric cars are not affordable or deso\rable except to the top 1% who are interested in parking a 'green badge' in their driveway.

  • Report this Comment On December 29, 2013, at 9:30 PM, taloft wrote:

    Travis, I think you may be conflating different issues to draw your conclusion. For one thing electric vehicles cannot go the distance or have the convenience of LNG or CNG for fueling purposes. Charging takes awhile and most EV's are limited to approx. 400+ miles with a full charge. That isn't going to cut it for commercial trucking.

    Therefore, LNG & CNG wins the trucking market over electric. At least until the research for EV technology over comes the issues of distance and charge time.

    To say that commuter vehicles won't embrace CNG is to overlook the deal Ford is cutting with Westport for conversion kits and full motors for both the F-150 and the super duty line of trucks. The F-150 is the largest selling model of personal truck in the country. Once people see it in action they will come around to the concept. Which is the easier and more convenient fuel source? Plugging your car in and waiting for it to charge or, pumping NG into the tank? People don't like waiting when they need to get somewhere. Do I think it will dominate the market? Not likely but, it doesn't need to. Long haul trucking moves industry, not personal cars. There is plenty of market to run in without getting the commuters on board.

    Despite all of that, you're overlooking the fact that CLNE has their foot firmly in the market for both rail and maritime use of Natural Gas as a fuel source. Westport is pondering the train market as well.

    The one salient point you made was pricing movement between Natural Gas and Oil. Since Natural Gas is a very common byproduct of drilling for Oil, I don't think supply will be a problem. At least not in the near future. Pricing fluctuations might have some impact on sales but, not for some time to come and demand would need to skyrocket dramatically for the price of Oil to be below NG. That would require a mass adoption of the technology.

    The biggest concern I see for the near term is the lack of fueling stations from one coast to the other that provide CNG and LNG. Hard to sell a car you can't get fuel for. CLNE is trying to rectify that. The big boys have a vested interest is seeing that happen.

    A bigger threat in my opinion is hybrid gas/electric vehicles. At least in the short term. They get great mileage and are easy to fuel up. Battery drains out, you can still run on gasoline. Gives you both ease of use via fueling and distance. Problem is the batteries are pricey and massively bad for the environment.

    Thanks for the article, it made me think. I just though your ideas needed a foil so others can see more than one side of the issue.

    Fool on.

  • Report this Comment On December 29, 2013, at 9:50 PM, taloft wrote:

    Almost forgot, some of these new engines are dual fuel. Meaning they can run on either NG or Diesel with minor adjustments. This allows fleets to run on whichever is cheapest at the time.

  • Report this Comment On December 30, 2013, at 7:19 AM, Chishiki wrote:

    Electric trucks will could be viable once we have battery swapping stations as that is the only way to fuel them up fast enough in the near term. Then again, there is the possibility that they save so much money from using electricity of natural gas or diseal that they find it viable to higher more truckers and buy more trucks and just expect their truckers to be at charging stations more often. This would require much higher throughput chargers distributed all over the country.

    In the mean time, natural gas trucks will most likely expand due to cheap fuel.

    Electric cars will never take off until the charging network is made and until an electric car with decent range per charge time is made that can be afforded by the general public. None of this has happened yet but the charge network is just a matter of time.

  • Report this Comment On December 30, 2013, at 2:55 PM, taloft wrote:

    Time is one of the things I consider most vital to trucking. They could do it in relays simply by switching tractors, or batteries as you suggested. While that solution would readily solve some problems such as distance and refueling times, I don't think it would be as cost effective as NG at this point in time. Let's face it, EV's are expensive and the batteries are one of the most espensive parts in the vehicle. Things could change as the technology advances. How much would the price of electricity jump if suddenly there were fleets of vehicles being charged?

    The one advantage for EV's is that we have a national power grid to build charging stations off of. On the road charging may provide a long term solution a some point but, we are far away from that. NG fueling stations will require a bit more infrastructure to get rolling but, the tech is already there and implementation isn't much more expensive than building your basic gas station.

    I think EV's have some major hurdles to overcome before they are accepted at a commercial level. NG is already being adopted by waste management companies, UPS/FedEx, municipal bus fleets, and school systems. That gives it quite the leg up in the market. CLNE has already built a number of fueling stations, including a couple for UPS.

    Travis is right about the threat of pricing from diesel. Especially with demand for NG climbing from Mexico and Asia. If it isn't cost effective, it won't get adopted en mass. I'm betting that engines that can readily be switched from NG to diesel will be a big seller. Dual fuel answers a lot of problems with early adoption and acts as a hedge against pricing fluctuations between the two . Plus, most NG engines still require some diesel in the mix for ignition purposes so conversion from one to another isn't as difficult as some might think.

    My opinion is that the future is bright for NG vehicles in the commercial market. Hopefully, it will take off in the commuter market at some point.

    In the interest of disclosure, I have a position in WPRT, KMI, and I'm in the process of acquiring a stake in CLNE as well.

  • Report this Comment On December 30, 2013, at 4:17 PM, Fire1 wrote:

    And don't for get that ev battery cost are high .

    I just replaced my Prius battery after 4 years at a bout $3600.00

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