"The thing that I want to stress, is we are the leader of both. We have built more CNG stations than anyone else."
--Clean Energy Fuels senior official, Feb. 5
Shares of Clean Energy Fuels (NASDAQ:CLNE) were hammered yesterday, largely as a result of a short attack launched in an article on the Seeking Alpha website claiming that the company's bet on LNG was a mistake and would lead to the company failing. Part of the author's claim is that new technology is allowing CNG-powered vehicles to attain the necessary fuel range and refueling speeds to make LNG a "niche-within a niche" for transportation, and the superior price of CNG would make LNG a non-starter
With privately held Love's Travel Stops and Integrys Energy Group (UNKNOWN:TEG.DL) subsidiary Trillium CNG investing heavily to expand CNG stations, while privately held Blu LNG has reportedly put the brakes on its plans to expand LNG stations, what's the reality for investors in Clean Energy Fuels? Is it time to get out while the gettin's good, or double down? Let's take a closer look.
Reality of the natural gas engine cycle
Much of the truck market has so far gravitated to CNG; this has been well publicized. However, it's worth noting that a big part of this is due to the lack of a viable engine to support over-the-road trucking demands before last Fall. Westport Innovations (NASDAQ:WPRT) and partner Cummins launched the CWI ISX12 G engine for class 8 trucks early in 2013. The higher horsepower, 400hp variant that fits the needs of long-haul and heavier load trucking was not launched until the end of last summer. Simply put, the majority of engines shipped to-date being the CNG variant shouldn't surprise anyone. It's old news.
Additionally, the engines -- whether LNG or CNG -- are really the same thing. The only difference is whether the fuel is stored as a liquid or a gas. As time passes, and the CWI engine proves to be dependable and performs as well as anticipated, all indications are that more shippers will begin augmenting their fleets with LNG for their longer deliveries, while still utilizing CNG for "out and back" or "return to base" deliveries that don't need the range advantage that LNG provides.
Physics and economics
A senior Clean Energy official had the following to say when reached by phone:
"The [Seeking Alpha] author is vastly underestimating the complexity of these Fast Fill CNG stations. If you're out in the middle of the country, there's no guarantee you're near one of these interstate pipelines. And these things are akin to the amount of power needed to power a small hospital."
Simply put, refueling CNG in high speeds and high capacities probably isn't quite as simple as the companies that are only touting CNG make it sound. After all, even one of the companies the short-attack author cites, Agility Fuel Systems, carries LNG, not CNG, in its largest tanks in terms of fuel capacity.
The Clean Energy official I spoke with also took issue with the author's claim that it would cost Clean Energy "additional capital of $1 million or more per station to add LNG-to-CNG" capacity at its stations, calling the authors' claims "just not true," and putting the actual cost at "about half that."
He continued, "And you do it where the demand justified it," versus the need to redevelop all its facilities. Additionally, he pointed out that IMW, the company's subsidiary that makes the refueling systems for LNG and CNG stations, is making Fast Fill systems, which is what the company installed at its two newest stations at LAX airport in Los Angeles. These stations are supporting buses and taxis, meaning that it's no problem to maintain fill rates for low-volume tanks.
"Scaled up to refueling class-8 trucks all day," he says, "isn't as easy as these guys make it sound."
Where are the engines now? What does the math look like?
UPS has ordered almost 1,000 LNG tractors so far, and they will all feature the ISX12 G engine from Cummins Westport. All indications are that somewhere around 10,000 of these engines will be sold in 2014. If 20% of these engines are running LNG, and if Clean Energy can command 75% of those trucks as customers, it would net 1,500 LNG-based trucks over the next year. If we follow the logic that only the longest-distance trucks will run LNG, then we can extrapolate the following:
1,500 long-haul trucks would average around 15,000 DGEs (diesel gallon equivalents) per year), at a price of $2.20 per DGE, that's $33,000 per year per truck-- $49.5 million per year in new fuel sales. If Clean Energy can net a 20% margin on that fuel, that's $10 million to the bottom line, based on 20% of the market adopting LNG for this one engine. And that's just the first year of this one engine. And with the company currently opening two or three stations for business every month already, that's an indication that, indeed, adoption of LNG is happening.
Follow the money
There are no guarantees that Clean Energy Fuels will remain the dominant player in natural gas for transportation, but that has little to do with anything in this latest attack on the company. Essentially every claim so far that LNG is a bad bet has been made by those that were either poorly informed -- such as the Piper Jaffray analyst last year -- or had significant financial incentive for LNG to fail, or to be perceived as going to fail, like the anonymous author of this recent short attack, who holds short positions, and competitors like Trillium CNG and Love's, which are only investing in CNG so far.
So far, the company's position as the largest seller of both LNG and CNG does give it a strong advantage, despite those who are being compensated to say otherwise. While that alone is no guarantee of future success, it is a reminder to, as Morgan Housel recently wrote, understand how the guy on the other side of the table is being compensated.