The sudden drop in crude oil prices, coupled with a volatile end of the year for the U.S. stock market, pushed shares of many energy companies lower last month. That included companies that don't sell a single drop of crude oil, gasoline, or diesel.
Shares of natural gas transportation fuels pioneer Clean Energy Fuels (NASDAQ:CLNE) fell 22.9% in December according to data provided by S&P Global Market Intelligence. The market data also shows shares of ethanol and protein producer Green Plains (NASDAQ:GPRE) slid 19.3%, while shares of sand and specialty mineal supplier U.S. Silica (NYSE:SLCA) tumbled 28.3%.
What specifically caused each company to take a tumble last month -- and can investors expect a rebound in 2019?
Clean Energy Fuels made a lot of progress in 2018. Past efforts to simplify the business began bearing fruit, allowing the company to deliver positive cash flow and earnings. It also paid off half of its debt, and launched a major program with backing from energy major Total to get more natural gas-fueled trucks on the road. That said, much of the company's rising prospects were being carried by rising energy prices for much of last year. Wall Street is worried that the sudden deterioration of crude oil prices in the fourth quarter may have derailed that momentum.
It makes sense on the surface. As diesel fuel becomes more expensive, natural gas as a transportation fuel alternative becomes more attractive. Similarly, cheaper diesel fuel may make the economic calculus a wash.
But while sliding energy prices could create a headwind for Clean Energy Fuels in 2019, it may not be enough to completely trash the company's growth plans. Many trucking fleets are considering switching to natural gas fuels because of clean fuel requirements looming over the horizon, notably in California, and diesel fuel may not be able to compete on carbon emission standards in some states within the next decade.
Similarly, there's a new global fuel standard for ocean-going vessels coming in 2020, which is expected to increase global demand for diesel fuel by at least 12 billion gallons per year. That could keep create a higher floor for diesel fuel than the market seems to be factoring in right now, and allow natural gas fuels to remain economically competitive.
Green Plains spent much of 2018 repositioning its business as well. It sold off a handful of ethanol manufacturing facilities and its high-margin vinegar business to pay off all of its term loans. Going forward, the company will focus on efficient ethanol facilities and protein sales from byproducts of the ethanol production process and from its cattle feedlot business, which it hopes can supplement the low-margin ethanol business.
Being debt-free in a commodity-driven industry is a great advantage, but it may not be enough to overcome poor market fundamentals. Ethanol prices have been reeling from a glut of domestic supply in recent years. While analysts figured booming ethanol exports and previously rising crude oil prices could result in a quick recovery once the market found more balance, sliding crude oil prices put that in doubt now. Ethanol prices in the last 12 months have averaged just $1.24 per gallon -- the lowest since 2002, before mandatory ethanol blending became national law. There doesn't appear to be much relief in sight until much more production is curtailed, which is something few producers have seemed willing to do.
U.S. Silica just can't seem to catch a break. While recent moves diversified the business with a healthy dose of industrial products, the company's bread and butter is still selling frack sand to domestic oil and gas drillers. That customer base has unintentionally put a ceiling on the sand miner's growth in recent years by drilling thousands of wells without finishing them (frack sand is used in completed wells). In November 2018 the number of drilled but uncompleted (DUC) wells in American shale regions hit an all-time record of 8,723.
Previously, oil and gas drillers said they needed more pipeline takeaway capacity before they'd consider circling back around and completing the wells. Now analysts are worried that crude oil prices hovering at or below $50 per barrel could throw a wrench into that thesis. While domestic energy producers have increased production regardless of crude oil prices in recent years, lower prices in 2019 could keep that ceiling on U.S. Silica's growth firmly intact.
As crude oil prices cool off it's not that surprising that commodity-based businesses such as Clean Energy Fuels, Green Plains, and U.S. Silica are beginning to cause anxiety among analysts and investors. That said, investors shouldn't write off Clean Energy Fuels or U.S. Silica just yet. Natural gas transportation fuels have other advantages over diesel fuel than economics, and the year-long beating taken by U.S. Silica stock -- despite the company's healthy and profitable operations -- has made it intriguingly cheap at the start of 2019. Green Plains faces the most uncertainty of this trio, as the ethanol market is facing a real economic crisis. While the shift to selling higher-margin proteins could help the business in the long run, it's much too early for investors to gauge whether that will be enough to make up for poor market fundamentals in ethanol this year.