This week, Clean Energy Fuels (NASDAQ: CLNE ) announces earnings. This coincides with ACT Expo 2014, one of the largest fleet conferences in the U.S., and the largest for alternative fuels. There are sure to be a number of announcements this week from fleet operators, fuel providers, and truck & equipment makers, expanding the market for natural gas vehicles. Already, we've seen Royal Dutch Shell (NYSE: RDS-A ) (NYSE: RDS-B ) announce that it is opening the first of 20 natural gas stations that were ordered built in 2013.
What will this kind of expansion by Big Oil into natural gas refueling mean for Clean Energy Fuels? What can we expect in the earnings announcement on May 8?
What's happening right now?
First, let's take a closer look at Shell's expansion into natural gas refueling for heavy trucks. There are some 115,000 gas stations in the U.S., but the reality is only about 6,000 stations refuel diesel for heavy trucks. Almost none of these are owned by large, multinational oil companies like Shell, with the vast majority being privately held.
Shell's decision to expand into natural gas -- and specifically LNG -- at these 20 stations is unique, and looks to be primarily an activity to help "seed" the market for natural gas vehicles, and specifically heavy trucks. In 2013, Shell announced a partnership with TravelCenters of America to build up to 100 stations, but so far, no progress has been made on that front, and there is no further mention from either company. Simply put, only Shell -- with these 20 stations and a number of stations already opened in Canada -- and Clean Energy Fuels, have made any efforts to expand the availability of LNG for heavy trucks.
A number of operators have begun building public CNG stations, however. It appears that this has both guided the adoption of trucks toward CNG, and also been guided by the fleet operators' purchases as well.
Why this is the case
It's important to remember that there are two things behind the -- so far -- more rapid addition of public CNG stations:
- Low hanging fruit/infrastructure access.
- Large fleet testing.
To expand, high-population, high-traffic areas tend to have both a lot of heavy truck traffic, and high-pressure, high-volume natural gas pipelines nearby. What this means is, it's feasible to build and operate a "fast-fill" CNG station that can handle large volumes of fuel and trucks at a reasonable cost, while also having the demand to support it.
Second, since CNG is just more readily available, fleet operators that are still testing can be reasonably assured that any trucks purchased for testing -- these trucks can cost well over $120,000 each -- will be able to be refueled just about anywhere with CNG, even if it's not a "fast-fill." It's also worth pointing out that Clean Energy Fuels is the largest builder of CNG stations in the country, and that CNG sales have been the largest source of growth for the company. So growth in CNG is just as good for Clean Energy Fuels as it is for its competitors.
However, large fleets like UPS are demonstrating that LNG has an important role in the market. Just this week, the company announced that it was adding another 10 LNG trucks to its fleet, and that they would refuel at Clean Energy Fuel's Jacksonville, FL station. Once more fleets move from the testing phase, and into the acquisition phase, the numbers of trucks hitting the road -- featuring CNG and LNG both -- will rapidly accelerate.
What does this mean for Shell?
Let's start with Shell. As a massive multinational "integrated major," opening 20 stations, or even the 100 it has planned with TravelCenters, doesn't move the needle. However, Shell does generate a significant share of its business from natural gas production, so it's reasonable to expect more investment into natural gas for transportation.
Just don't expect it to really add to the company's ability to generate profits in a meaningful way.
What about Clean Energy Fuels?
Clean Energy Fuels has -- by far -- invested more in building out natural gas refueling infrastructure for trucking than any other company. It's likely that the company has done as much as its competitors have combined to do over the past two or three years. The problem, of course, is this has yet to lead to meaningful growth.
However, seeing Shell begin opening stations in the U.S. is less of a competitive threat, and more of a sign that adoption has begun ramping up in earnest. In recent weeks, both Westport and Chart Industries have released earnings reports that included strong growth in deliveries of their LNG tank systems for heavy trucks.
Final thoughts: Here's the caveat
It's important that investors remember that much of the information that we are hearing from suppliers won't impact fuel providers like Shell and Clean Energy Fuels immediately. It takes time for trucks to get delivered and fully integrated into a fleet, and this means it's probably best to keep expectations for fuel delivery growth in the first quarter relatively modest.
The projections all point at most of the activity being backloaded in 2014, so it's important to remain patient. While we may not see fuel delivery growth in Q1 as strong as we want, there's plenty of evidence that it will indeed begin ramping up in 2014. When it does, Clean Energy Fuels is positioned for big-time growth.
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