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Will T. Boone Pickens' Big Bet on Natural Gas Vehicles Pay off in 2014?

By Jason Hall – Jan 5, 2014 at 2:16PM

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Momentum is picking up for natural gas vehicle plays like Clean Energy Fuels, but so is the competition from big players like Royal Dutch Shell. Will partners like GE and Westport Innovations be difference-makers in 2014?

Investors were looking at Clean Energy Fuels (CLNE 1.06%) with high hopes a year ago. Despite giving up some massive gains in spring of 2012, and ending that year essentially flat, there was momentum with the business itself heading into 2013. "America's Natural Gas Highway" was underway and strengthening sales of natural gas vehicles to Clean Energy's "return-to-base" customers in the refuse and public transit sectors was growing. 

Despite steady growth in fuel deliveries and sales revenue, 2013 left as many questions as answers for many investors. When would the ANGH stations begin opening en masse? Would the company have to do a stock offering to raise cash? How much longer before the company makes a profit? Let's take a closer look at what we learned in 2013, and what it could mean for 2014 and beyond. 

Insider bets and strong partnerships
CEO Andrew Littlefair bought $1.5 million in shares in September, and founder T. Boone Pickens' massive $60 million investment in the spring took his personal stake to nearly one-quarter of the company. For Littlefair, who has been a regular seller of at least part of his stock grants that are part of his compensation, this was his first large buy on the open market since Clean Energy's IPO. For Pickens, it was an emphatical vote of confidence, as well as seizing the opportunity to cash out Chesapeake Energy, which had made an early investment in Clean Energy Fuels to help create a larger market for the natural gas that it produces. 

Source: Clean Energy Fuels

Additionally, the company formed two separate partnerships with General Electric (GE 2.29%): The first will see the companies work together to develop plants to convert compressed natural gas (CNG) to its liquefied form (LNG), which is then used in industrial applications and as the preferred fuel for long-range transportation due to its higher energy density versus CNG. The second is a deal with GE Capital to open up financing options for shippers, helping shippers get a faster return on their investment into NG-powered trucks.

GE has made a number of large bets on natural gas vehicles, including its work with CSX and Berkshire Hathaway subsidiary BNSF Railways to develop natural gas-powered locomotives. BNSF is also working with Caterpillar, which is partnered with another close ally of Clean Energy, Westport Innovations (WPRT 11.77%), to develop locomotive engines that will run off natural gas and make the kind of power needed to pull more than 100 train cars. 

Lastly, and likely most important, are Clean Energy's partnerships with private companies Pilot/Flying J, where it will co-locate at least 150 LNG refueling stations for heavy trucking, and Mansfield Energy, one of the largest private fuel services company in the U.S. and a major player in "behind the gate" service to large trucking fleets. These two partners open up major access to the largest fleet operators in the country.

Focusing on core businesses

Westport iCE Pack tank system. Source: Westport Innovations

When Clean Energy sold BAF Technologies to Westport in June, there was some concern that the company was giving away an important part of the business. However, by removing this area where Clean Energy actually competed with Westport -- maybe the most important company for Clean Energy's near-term success -- this allowed the two to more formally partner with less potential conflict of interest. With both companies agreeing to invest $5 million for co-marketing, and Clean Energy taking its payment in the form of Westport stock, the two companies are more aligned in seeing the other's success. 

And at the end of the day, Westport is in the business of natural gas engines, Clean Energy is in the fuel services business, and taking BAF (which Littlefair claims was a slight money-loser for Clean Energy anyway) out of the equation means more direct investment in the core business of growing access to NG for fleet vehicles. 

Competitive risks
Royal Dutch Shell (RDS.A) is the only big player to make any public moves in LNG refueling, having announced early last year that it will add as many as 100 LNG stations to existing TravelCenters of America locations. So far, it seems that the rest of "Big Oil" is content to focus on production, with ExxonMobil producing the most natural gas of any company in the U.S., while Chevron is focusing its efforts on liquefaction in Australia and exploration and production in Southeast Asia and China. Whether these integrated majors decide to remain focused on making money in production, or step back into the retail distribution, remains to be seen. With that said, Clean Energy has a massive head start, and establishing long-term agreements early with shippers will give it plenty of long-term advantage even as the Shells of the world add retail distribution. 

Momentum is strong; Clean Energy is in a great position

Cummins Westport ISX12 G engine. Source: Cummins Westport

Maybe the single largest catalyst (for both Clean Energy and Westport) this year is the ISX12 G, the first "real" engine that can provide both the power and fuel economy to make switching from diesel to NG cost-effective for heavy trucking. Selling only a couple thousand in 2013 after being launched late in the summer, expectations are for more than 10,000 units to be sold in 2014. Even without this engine being available for much of the year, Clean Energy's existing customers ordered 70% more NG vehicles the the first nine months of 2013 than the same period in 2012, indicating massive pent-up demand. 

The company had more than $350 million in cash on hand at the end of Q3 -- versus only $100 million one year before -- meaning that the risk of dilution to fund the business or expansion is very low in 2014. An investment in Clean Energy Fuels is still speculation that shippers will adopt NG en masse, but it looks like many of the things that investors have been waiting for over the past few years have finally started to happen. Add it all up, and Pickens' big bet could very well pay off in 2014.

Jason Hall owns shares of Clean Energy Fuels and Westport Innovations. The Motley Fool recommends Clean Energy Fuels and Westport Innovations. The Motley Fool owns shares of General Electric Company and Westport Innovations. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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