Tag Archives: author

Clean Energy Fuels – Expect A Turnaround In 2016

Summary A closer look at CLNE indicates that despite the drop in natural gas prices this year, its volumes delivered have increased as fleet operators are adding more natural gas vehicles. Low natural gas prices have been CLNE’s bane, but this should improve as marketed production in the U.S. declines, consumption increases, and exports begin. CLNE’s volumes will continue increasing as its customers have increased their fleets, while products such as the Redeem renewable natural gas fuel are gaining traction due to environmental benefits. Redeem is made from organic waste and is up to 90% cleaner on carbon emissions, making it the cleanest automobile fuel available commercially, leading to higher adoption by fleet operators. Technological improvements, such as the Cummins-Westport Low NOx 9-litre engine that can cut NOx emissions by 90%, are improving CLNE’s addressable market by gaining adoption due to their environment-friendliness. The rapid drop in oil and gas prices this year has created a lot of pressure on Clean Energy Fuels (NASDAQ: CLNE ) for two reasons. First, the decline in diesel prices has hurt the conversion of diesel vehicles to natural gas, and second, low natural gas prices have hurt Clean Energy’s financial performance. As a result of these two headwinds, Clean Energy shares trade near the lower end of their 52-week band, having lost over a quarter of their value this year. Looking past the weakness When Clean Energy Fuels had announced its third-quarter 2015 results, its revenue went down 11% year-over-year. Also, for the first nine months of the year, Clean Energy’s top line performance has diminished, as shown in the chart below: Source: Press release But, as we take a closer look at the distribution of revenue, we find that in the third quarter, Clean Energy’s revenue from the sale of fuel has actually increased by 6.7% despite a 40% decline in the natural gas price. This can be attributed to the fact that Clean Energy saw a 17% increase in gallons delivered last quarter, though weak natural gas pricing took out $5.7 million in revenue from its top line. More importantly, in the first nine months of the year, Clean Energy’s gallons delivered have increased over 19%, indicating that the company is still finding traction despite the drop in diesel prices. The following chart shows the improvement in Clean Energy’s volumes this year: Source: Press release Thus, the only problem that Clean Energy is facing currently is in terms of natural gas pricing, as a result of which its financials have taken a beating. However, over the long run, the conditions in the natural gas market should improve due to a few reasons, as stated below. Gauging a recovery in natural gas pricing There are two factors that could lead to an improvement in natural gas prices going forward – lower production and the start-up of exports from the U.S. As far as the first point is concerned, marketed natural gas production in 2016 is anticipated to grow at just 1.9% after rising 6.3% this year. At the same time, natural gas consumption is expected to rise from 76.5 billion cubic feet/day this year to 76.7 Bcf/d in 2016. As a result, a slight increase in consumption and a slowdown in marketed production will ease the oversupply in the end-market to some extent. Concurrently, as the U.S. is anticipated to start with its LNG shipments in the coming year, more supply will go out of the market and have a positive impact on prices. As such, it is not surprising that the EIA expects Henry Hub Natural Gas prices are expected to increase from $2.09/MMBtu in November to $2.88/MMBtu in 2016. The following chart shows the gradual increase in natural gas prices going forward: Source: EIA So, going forward, there might be respite for Clean Energy on the natural gas pricing front that will allow it to improve its financial performance. At the same time, Clean Energy will continue seeing an increase in its volumes delivered due to the benefits of using natural gas as fuel and the increasing fleet size of its customers. Why Clean Energy’s volumes will continue increasing As already discussed earlier in the article, Clean Energy is seeing an increase in its volumes, and the trend will continue going forward. During the third quarter, Clean Energy Fuels’ customers increased their gas-powered fleets. For example , Raven Transport’s natural gas fleet has increased by 40 LNG trucks recently and it now has a total of 223 LNG trucks in its fleet. Similarly, Saddle Creek Logistics hit the 50 million mile mark of its CNG fleet and announced that it will add 50 more CNG trucks soon to the existing 200 CNG tractor fleet. Additionally, Clean Energy has signed contracts for supplying to more than 300 new heavy-duty trucks, representing a fuel volume of 4.5 million gallons annually. Going forward, the U.S. should see an increase in natural gas-powered fleets as companies take steps to reduce emissions. Companies such as Unilever, Procter & Gamble, Anheuser-Busch, and others are considering the use of clean natural gas by the trucking companies as an important plus point while signing contracts. As a result, more and more fleet and individual vehicle owners are making this transition from oil to natural gas, which is simpler and economic than other available green options like oil to electric or even hybrid. Clean Energy is able to capitalize on this trend with products such as the Redeem renewable natural gas fuel. This is the “first commercially available renewable natural gas made from organic waste and is up to 90% cleaner on carbon emissions,” which makes it the cleanest automobile fuel available on a commercial basis. As a result of the qualities of this fuel, the sales volume of Redeem has almost tripled from 13 million gallons to 36 million gallons on a year-over-year basis last quarter. In the case of electricity generation too, natural gas is among the cleanest and safest fuels. Technological improvements such as the Cummins-Westport Low NOx 9-liter engine are aiding operators’ decision to adopt natural gas as a fuel. This engine, as mentioned during the Q3 earnings call, is able to cut NOx emissions by as much as 90% as compared to current EPA standards from 0.2 gm to 0.02 gm. Thus, given the environmental benefits of using natural gas engines and fuel, their demand should increase as the U.S. is looking to reduce pollution under the Clean Energy Plan . Conclusion One would think that low oil prices would have reversed the trend of increasing demand for natural gas. But, the reason for adopting natural gas for almost all users may not be solely the economics. Environmental safety is playing a big part in that decision, which is why Clean Energy has continued to see an increase in gallons delivered. Thus, going forward, Clean Energy Fuels should be able to come out of its slump as it will benefit from both an increase in volumes and better natural gas pricing, making it a good investment opportunity.

Time To Throw Out The Rising-Rate Playbook?

Summary Relying on “tried-and-true” rising-rate playbook strategies in today’s markets may not be helpful because we’ve never been in this exact economic environment before. The “typical” conditions that have accompanied tightening cycles during the past 35 have mostly run their course in the present cycle, which is more than six years old. Unprecedented conditions call for active management because rules-based approaches that rely heavily on historical playbooks often break down at inflection points. Today’s markets are in uncharted economic territory, where ‘go-to’ strategies require prudent skepticism By Clint Harris, Senior Client Portfolio Manager We’ve seen daily references to what has worked – or hasn’t worked – when interest rates have risen in the past. Strategists, asset managers and pundits have dusted off numerous “tried-and-true” historical playbooks for investing in a rising-rate environment. But here’s the problem with applying those lessons to today’s markets: We’ve never been in this exact economic environment before, so relying too heavily on what’s worked in the past may not be particularly helpful. What makes today’s environment unique? In my view, the current torrent of rising-rate analyses should be taken with healthy dose of skepticism. Why? Here are three reasons. First, the “typical” conditions that have accompanied tightening cycles during the past 35 years include rebounding margins and improving credit conditions and sales growth. But these conditions have mostly run their course in the present bull market cycle, which began in March 2009. Today, margins are plateauing (Figure 1), credit conditions are worsening (Figure 2), and sales revisions are showing declines in growth. Figure 1 Source: FactSet Research Systems. Past performance is not a guarantee of future results. What happens when monetary policy tightens in the midst of these conditions? We don’t know because we’ve never seen it happen. It’s unusual for the Federal Reserve (Fed) to begin monetary tightening so late in the profit cycle. The Fed has rarely, if ever, started to raise rates when sales growth is disappointing, delinquency rates for commercial and industrial (C&I) loans are worsening (Figure 2), corporate margins are narrowing, and other major central banks are loosening monetary policy. Figure 2 Source: FactSet Research Systems. Past performance is not a guarantee of future results. Second, the federal funds target rate, currently between zero and 0.25%, 1 hasn’t seen these levels since the 1940s (Figure 3). The 10-year US Treasury bill, at 2.32% for the week ending Nov. 13, hasn’t been this low in 60 years. 1 We have simply not seen a tightening cycle from these levels in modern times. Figure 3 Source: US Treasury. Past performance is not a guarantee of future results. Third, many asset classifications in use today – for example, value stocks, growth stocks, core plus bond strategies, emerging market debt, master limited partnerships (MLP), floating rate securities and convertibles – either didn’t exist or didn’t have widely available proxies in the 1920s and 1930s. As a result, no one has been able to write a playbook that goes back far enough in history to be applicable to today’s environment. Even if we could, the economy is so different today that the interpretation may be misused. Where do we go from here? Unprecedented conditions call for active management. Why? Rules-based approaches that rely heavily on historical playbooks often break down at inflection points. This is particularly important today as I believe we face the most expected tightening cycle in history. Active management uses sound fundamental research to anticipate potential changes in conditions to position client assets accordingly. Our Invesco Dividend Value team has often remarked that results for our clients are made or broken at inflection points. It’s important to exercise a healthy degree of skepticism and a willingness to go against consensus when supported by bottom-up analysis. This is particularly important today as everyone seems to be using the same rising-rate playbook. Our team has successfully navigated numerous economic environments by maintaining a full market cycle perspective. We believe this experience becomes even more important as investors, who are less focused on the signs of a mature profit cycle, seek a revised rising-rate playbook for today’s environment. Learn more about Invesco Diversified Dividend Fund and Invesco Diversified Income Fund . Sources US Federal Reserve System, Nov. 16, 2015 Important information Profit margin measures the profitability of a company by dividing net income by revenues. A master limited partnership is a publicly traded limited partnership in which the limited partner provides capital and receives periodic income distributions from the MLP’s cash flow and the general partner manages the MLP’s affairs and receives compensation linked to its performance. Floating rates are interest rates that are allowed to move up and down with the rest of the market or with an index. The federal funds target rate is the interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis. An inflection point is an event that results in a significant positive or negative change in the progress of a company, industry, sector, economy or geopolitical situation. Credit conditions denote the availability of loans, or credit. About risk A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund. Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved. Time to throw out the rising-rate playbook? by Invesco Blog

Can Airlines Funds Take Off On Profit Outlook, Low Fuel Cost?

The Airline sector is witnessing improving trends right now, and the momentum is much needed to ensure profits for investors in this space. While much of the encouragement comes from fundamentals within the airline space, another key catalyst for the sector’s growth is the slumping oil price. Airline stocks will likely continue their bull run into 2016 as recently reinforced by the encouraging outlook provided by the International Air Transport Association (IATA). Separately, weakness in oil prices, which has lasted for well over a year now, is nothing short of a godsend for the airline space. Airline profits depend largely on fuel prices, which form nearly 30% of operating expenses and are also the major variable component in the industry. Operating expenses of airline companies have gone down considerably as fuel accounts for one of the major input costs for air carriers. Thus, it is time to focus on funds that have investments in the airline space. Please note that there is hardly any fund that focuses solely on airline stocks. However, the sector attracts heavy investments from many mutual funds that focus on the transportation sector. The funds we discuss may not carry a favorable Zacks Mutual Fund Rank at the moment, but an improving trend in the airline space demands attention on them. Airliners Fly High as Crude Hits Ground Stocks in the airline space soared following the Dec 4 decision by the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – to not curb output of crude. A blip came thereafter as Southwest Airlines (NYSE: LUV ) revealed a disappointing outlook with respect to its operating revenue per available seat miles (RASM) for the fourth quarter of 2015. Nonetheless, the low oil price environment makes airline stocks attractive. The drop in oil prices has reduced airline companies’ operating expenses significantly, thereby boosting the bottom line. OPEC’s decision not to curb output despite the slump in prices means that the oversupply will continue to haunt the energy space. This implies good times ahead for airline carriers. Weak oil prices have resulted in tremendous savings and improved bottom lines for carriers in the past quarters. The massive savings have certainly supported the financial health of carriers and prompted them to launch share buyback programs, hike dividend payments and significantly reduce their debt levels. Buoyed by their sound financial health, several carriers intend to invest heavily in upgrading overall facilities for better customer satisfaction. This is likely to result in greater travel demand, improved goodwill and eventually, a higher top line. Although it is true that most carriers struggled to post meaningful revenue growth in the third quarter of 2015 courtesy of a strong US dollar, their bottom lines benefited owing to low fuel costs. IATA’s Outlook Buoys Airliners Further The International Air Transport Association now expects profits in the aviation industry to touch $36.3 billion in 2016 with a net profit margin of 5.1%. IATA also projects profits of around $33 billion in 2015 with net profit margin of 4.6%, marking an improvement from the previous guidance of $29.3 billion, which was released in June 2015. Christmas holidays and summer vacations will contribute to traffic. IATA projects 6.7% and 6.9% growth in air traffic in 2015 and 2016, respectively, with load factor or percentage of seats filled by passengers pegged at 80.7%. IATA also believes that 3.8 billion passengers will travel in 2016. Moreover, increased fleet restructuring programs, retiring older and less efficient aircraft and new aircraft orders are anticipated to enhance the performance level of the company by trimming fuel and operating costs, and rendering a comfortable flying experience. Moreover, most carriers are focused on augmenting ancillary revenues by launching value-added services at affordable rates. Funds In Need of a Turnaround Although there is no airline-specific mutual fund category, the space represents a substantial portion of the transportation sector. Mutual funds from the transportation sector with significant focus on airliners are the ones to watch out for. Not all of them may be carrying a favorable rank right now, but the positives are much needed to turn the tide for them. Fidelity Select Transportation (MUTF: FSRFX ) seeks growth of capital. FSRFX invests the majority of its assets in common stocks of firms mostly involved in providing transportation services or ones that design, manufacture and sell transportation equipment. FSRFX is the only fund that carries a Zacks Mutual Fund Rank #2 (Buy). FSRFX has not been able to stay in the green in recent times, as its year to date and 1-year returns are -16.7% and -13.7%, respectively. The 3- and 5-year annualized returns are, however, respectively 19.2% and 11.8%. Annual expense ratio of 0.81% is lower than the category average of 1.14%. FSRFX carries no sales load. Among the top 10 holdings, FSRFX holds airline companies such as Southwest Airlines, American Airlines Group Inc (NASDAQ: AAL ) and Delta Air Lines Inc. (NYSE: DAL ). Rydex Transportation Fund Investor (MUTF: RYPIX ) invests a large chunk of its assets in domestically traded companies from the transportation sector and in other securities including futures contracts and options. RYPIX may allocate a notable portion of its assets in companies having market capitalization within the range of small to medium size. RYPIX may also invest in ADRs in order to gain exposure to non-US companies and may also invest in US government securities. RYPIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year to date and 1-year losses of RYPIX are 12.4% and 8.6%, respectively. The 3- and 5-year annualized gains are 19.4% and 11%, respectively. Annual expense ratio of 1.35% is higher than the category average of 1.14%. RYPIX carries no sales load. Among the top 10 holdings, RYPIX holds airline companies such as Delta Air Lines, Southwest Airlines and American Airlines Group. Fidelity Select Air Transportation Portfolio (MUTF: FSAIX ) seeks long-term capital growth. FSAIX invests the major portion of its assets in companies primarily engaged in providing air transport services all over the world. FSAIX focuses on acquiring common stocks of companies depending on factors such as financial strength and economic condition. FSAIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year to date and 1-year losses of FSAIX are 6.5% and 3.2%, respectively. The 3- and 5-year annualized gains are 23.1% and 15%, respectively. Annual expense ratio of 0.83% is lower than the category average of 1.14%. FSAIX carries no sales load. Among the top 10 holdings, FSAIX has airline companies such as Southwest Airlines, American Airlines Group, Delta Air Lines and Spirit AeroSystems Holdings (NYSE: SPR ), which is one of the largest independent suppliers of commercial airplane assemblies and components. Original Post