Do Questar's Earnings Give Us Any Insight on Clean Energy Fuels?

Questar Fueling, the subsidiary of Questar Corporation that provides CNG for natural gas vehicles, is working to expand its network. With a few days before Clean Energy Fuels reports, does Questar's earnings report give us any insight into Clean Energy Fuels?

May 4, 2014 at 10:18AM

Clne Seville Lng Station

Questar and Clean Energy Fuels are both addressing the lack of natural gas fuel stations for cars and heavy trucks. Source: Clean Energy Fuels.

Questar Corporation (NYSE:STR) released its first quarter results last week, and earnings were up 17%. The company is investing in growth through its Questar Fueling subsidiary, which is building a network of natural gas refueling stations across the country. What can we learn from this earnings report about both the potential for future growth for Questar Corp, as well as the prospects for Clean Energy Fuels (NASDAQ:CLNE), the only "pure-play" in the natural gas refueling game. Let's take a deeper look and see what insight we can find.


Questar is very early in developing a refueling network, with only two stations in operation so far. Source: Questar presentation

Questar's Q1 results
Questar generated $456.9 million in revenue in the quarter, but doesn't disclose exactly how much of that was from Questar Fueling sales. What we do know is the business unit where Questar Fueling resides -- "Corporate and other" -- showed sales of $300,000, and a loss of $2 million -- likely a product of investment in building out new stations in addition to corporate expenses. 

Questar operated two CNG refueling stations in the quarter, including a Dallas, TX location that is reportedly the largest CNG station for vehicles in the country. The second location is in Topeka, Kansas. There are another five stations scheduled to open this summer, and another three on the books for later in 2014 and 2015. 

Competitive risk for Clean Energy Fuels?
Questar is one of a few natural gas utilities expanding into refueling for transportation, so additional competition is always worth following. The thing is, CEO Andrew Littlefair reminded me when I interviewed him last month that competition from utilities isn't a new thing, or something he's really concerned with. To the contrary, increased competition is an indication that demand is indeed growing. 

It's worth considering that Questar Fueling is a dedicated CNG supplier, while Clean Energy Fuels is betting that trucking will adopt CNG as well as liquefied natural gas, or LNG, as well. So far, Clean Energy Fuels has built some 86 stations for truckers that will offer LNG, or a combination of both LNG and CNG. This is above and beyond the 300 public and private CNG stations the company has built or operates.

LNG vs. CNG again?
Why isn't Questar Fueling rolling out LNG stations? While the knee-jerk reaction would be that LNG -- which costs more than CNG and does have some limitations -- won't have the demand, it's probably an oversimplification to make that judgement, especially considering how early we are in this story. Chances are, Questar Fueling is starting with CNG because of easy access, development costs, and a specific target market.

The CNG stations it's building are located in areas that have both access to a high-volume natural gas pipeline, and high demand from trucking operations, especially those doing short-haul deliveries and "return to base" work, and don't necessarily have problems with the shorter range that CNG trucks typically have versus trucks running LNG. This is more or less the low-hanging fruit of the market, because these kinds of fleets can get the biggest return for their buck with CNG, and it's cheaper and easier for Questar Fueling to build stations in these areas. 

Metric that matters: Natural gas has taken a tiny drop of the diesel market so far
Right now, trucking fleets are testing trucks with natural gas, and many of these test trucks will use CNG, simply because of better access to fuel. Over time, the market will develop, and we will get a better idea of what the demand for CNG and LNG both will be. Think about it this way:

Right now, the diesel market for trucking is somewhere around 30 billion gallons, between public fueling (25 billion) and "behind the gate" (5 billion-7 billion) refueling. Clean Energy Fuels is the dominant supplier of both today. Last year, the company delivered around 214 million gallon equivalents of natural gas, both LNG and CNG. That's not even 1% of the addressable market.

Clean Energy Fuels could grow fuels sales by 10 times its current size, and still be less than 8% of the addressable market. The point is, there's a ton of room both for growth, and for competitors like Questar Fueling to take market share from diesel. 

Final thoughts: It's very early in the game 
Clean Energy Fuels and Questar are two very different companies, so they aren't really investing parallels. Questar is primarily a regulated gas utility and pipeline operator, as well as a natural gas explorer and producer (Wexpro). If you're looking for relatively predictable, if somewhat moderate growth, and a steady dividend, Questar is an interesting company. Questar Fueling does offer some small upside, but it's part of a business that already generates more than $1.2 billion in annual sales. 

Clean Energy Fuels is a pure-play growth stock, and a beaten-down one at that. With that said, 2014 looks like it could be a turnaround year in terms of fuel sales and growth. If you're patient and willing to ride out a lot of volatility, Clean Energy could be a great long-term pick today.

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