It's been a wild ride for natural gas fuel distributor Clean Energy Fuels (NASDAQ:CLNE) and related engine technology company Westport Innovations (NASDAQ:WPRT) over the past few years as investors bought into and then sold off the natural gas revolution.
For this stock to become hot again we need to see further adoption of natural gas vehicles and for that to happen there are a few things that need to go Clean Energy Fuels way.
Gas prices have to stay in check
Clean Energy Fuels will downplay the impact of natural gas commodity costs on its business, saying that only about $0.50 of the cost of a gallon equivalent of natural gas comes from the commodity. But the fact is that CNG or LNG for fuel is affected by the commodity price and it also needs to be significantly less expensive than diesel or no trucking company will make the switch.
That's why it has to be a little concerning that natural gas prices have risen since early 2012 as drillers have slowed drilling for natural gas and on the horizon we have natural gas exports from a number of export facilities that are under construction. In the chart below, you can see why exporting natural gas is a big concern and is so attractive to places like Japan or the EU, where natural gas is far more expensive than it is in the U.S.
Any significant rise in natural gas prices will hurt Clean Energy Fuels, even if it doesn't completely eliminate the cost advantage the fuel has. For Clean Energy Fuels and Westport Innovations to grow in the future natural gas has to stay in check or risk becoming less competitive.
Trucking has to buy into natural gas
At this point, I don't see natural gas being adopted on a wide basis in the passenger market -- at least short term -- so Clean Energy Fuels will maintain its focus on the trucking market where it has an economic advantage and no competition from electric vehicles.
On that front we're seeing progress. Westport Innovation's joint venture with Cummins shipped 89% more units in the first quarter than a year ago to 2,480 units. A partnership with Delphi Automotive is developing and manufacturing high pressure natural gas fuel injectors for multiple engine OEMs, expanding offerings for heavy-duty engines.
Clean Energy Fuels itself projects that the savings for trucking companies is over $1.50 per gallon of diesel fuel equivalent, so as more engines become available we'll see further adoption, which drives demand for their network of fueling stations.
The economy needs to grow again
What shouldn't be understated is that the economy also needs to keep growing at a steady clip for trucking companies to invest in new equipment, oil prices to remain high, and for buyers to see the return on investment they're promised by moving to natural gas.
According to Freightrateindex.com, freight rates plunged nearly 50% when the recession hit in late 2008 and early 2009 and didn't return to old levels until 2012. The industry can't see that same drop in demand and still invest in new equipment, so Clean Energy Fuels will also want to see a growing economy.
Can Clean Energy Fuels pop again?
As you can see below, revenue has been growing steadily for Clean Energy Fuels but as it has net income has dropped. That's in part because expensive stations aren't being fully utilized, meaning that return on investment is low right now.
The hope is that as adoption picks up the operating leverage that's built into the business will drive results higher. If adoption is slow, losses will continue, putting the company in jeopardy.
At the end of the day, this is a high-risk bet and not one I'm ready to make given the headwinds facing natural gas prices and trucking adoption of natural gas. I'd rather buy in after operations have started to post a profit because otherwise we're projecting and hoping instead of buying a solid operator. For now, I don't think Clean Energy Fuels will be a hot stock any time soon.