Clean Energy Fuel – The Turnaround Has Begun
Summary CLNE has shot up 17% in a week after announcing new refueling agreements and the construction of CNG stations for a number of transit agencies. Despite the drop in oil prices, natural gas is still cheaper than diesel to operate truck fleets, which is why CLNE’s gallons delivered has increased and it is improving capacity. CLNE could see a turnaround in natural gas pricing as LNG exports from the U.S. gather steam, and this will have a positive impact on its financial performance. Clean Energy Fuels (NASDAQ: CLNE ) is in turnaround mode. Over the past week, shares of the natural gas fueling company have appreciated over 17%. A key catalyst behind this jump is Clean Energy’s announcement that it will be constructing of compressed natural gas (CNG) stations for Arlington Transit (NYSE: ART ) in Arlington County, Virginia, along with a number of other transit agencies and new contracts. In addition, Clean Energy has won more contracts in the transit segment, as I will discuss later in the article. This spike has come as a relief for investors, as Clean Energy has struggled so far this year due to weak natural gas prices. In fact, in the second quarter reported earlier this month, Clean Energy had missed Wall Street’s estimates on both earnings and revenue as its revenue dropped 11.5% year-over-year and losses widened. But, will Clean Energy be able to sustain this newly-found momentum going forward? Let’s find out. Advantage of natural gas over diesel is a catalyst The decline in natural gas prices over the past year has created pressure on Clean Energy’s financial performance. In addition, the drop in oil prices has reduced incentives for fleet owners to switch to natural gas. As a result, Clean Energy’s top and bottom lines have taken a hit. However, we should not forget that natural gas is still a cheaper alternative than diesel. This is shown in the following chart: (click to enlarge) Source: Clean Energy This is the reason why Clean Energy is encouraged to continue building its fueling network in the U.S. despite the drop in natural gas prices, as it is still cheaper than diesel. As such, in the last two quarters, Clean Energy’s NG Advantage unit has reported 10 million gallons of volume growth. Encouraged by end market demand, the company has elected to expand its station in Milton, Vermont, to add 30% more contracted capacity. In fact, this is the second significant upgrade of that station in the past year to meet increasing demand for contracted volumes. In addition, the company has signed a number of new contracts that will allow it to sustain volume growth. For instance, Clean Energy has entered into a bulk fuel sales agreement with PG&E, under which it will supply 1.5 million gallons of LNG. In light of such agreements, Clean Energy has opened 15 truck-friendly stations in 11 states in the first half of the year. Going forward, it will open another 10 stations by the end of this year, extending its network to a total of 208 truck-friendly stations across 31 states. This clearly indicates the confidence that Clean Energy has in its business, as the company believes that the price advantage of natural gas over diesel will act as a tailwind in the long run. Moreover, according to CEO Andrew Littlefair, “Despite lower oil prices, Clean Energy continues to add fueling partnerships across all our transportation markets. No matter if they are with a school district, municipality or trucking company, managers of large fleets are looking for a cleaner fuel that reliably costs less and does not have volatile price swings. Natural gas continues to meet their needs.” Improving natural gas market dynamics could be a tailwind Going forward, Clean Energy Fuels could also benefit from an expected improvement in natural gas prices. A key role in the resurgence of natural gas prices in the U.S. will be driven by LNG exports to areas such as Europe. Recently, Cheniere Energy (NYSEMKT: LNG ) announced its plan of supplying LNG to central and southeastern Europe by bringing a floating regasification tunnel to Croatia. Now, Europe is a key market for LNG exports as the EIA believes that imports of LNG into the continent will double in the next five years. This will act as a catalyst for natural gas prices in the U.S. due to a drop in inventory levels. Additionally, the initiation of LNG exports from the U.S. on a big scale will help producers benefit from higher prices abroad , as “gas sells at for $7 in Europe, and over $10 in North-East Asia, four times more expensive.” Hence, as the oversupply of natural gas in the U.S. comes down and demand increases due to switching from coal to gas-fired power plants, prices will improve. In fact, over the long run, the EIA sees natural gas prices rising at an impressive clip as shown below: (click to enlarge) Conclusion Hence, the probability that Clean Energy Fuels will be able to sustain its momentum in the long run appears to be strong. Natural gas enjoys an advantage over diesel in terms of cost and emissions, which is why Clean Energy is seeing an increase in demand for the fuel. As such, investors should consider staying invested in Clean Energy Fuels as it can continue delivering upside in the long run. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.