Tag Archives: energy
Clean Energy Fuels: Consider On The Drop
Summary CLNE shares have lost 46% of their value in the past year despite negotiating the drop in natural gas prices smartly as it has improved both its revenue and margin. CLNE’s volumes delivered have been increasing and the trend will continue in the future as natural gas is a cheaper fuel to run trucks as compared to diesel. The increase in natural gas demand is expected to provide a boost to prices going forward, but the fuel will still have a positive differential over diesel. CLNE’s customers in both the transit and refuse markets have been adding more natural gas trucks and this will act as a tailwind by increasing the addressable market. The past one year has turned out to be very difficult for Clean Energy Fuels (NASDAQ: CLNE ) on the stock market. The company’s stock price has taken a beating as the price of natural gas has dropped steeply in the past year. In fact, last quarter, Clean Energy’s revenue was down 11% year-over-year as low fuel prices affected its top line performance negatively to the tune of $5.6 million. Why Clean Energy’s drop is not justified However, I think that the 46% drop in Clean Energy’s shares in the past year is a bit harsh, especially considering the fact that the company has been able to actually improve its financial performance in the past year. This is shown in the following chart: Henry Hub Natural Gas Spot Price data by YCharts As seen above, Clean Energy’s top line performance has improved despite difficult conditions. This can be attributed to the fact that Clean Energy is seeing an increase in volumes delivered of natural gas as customers are still adopting natural gas-powered vehicles despite the drop in diesel prices. Looking ahead, it is likely that Clean Energy will continue to see an improvement in both volumes and its margins. Let’s see why. More volume and margin growth ahead Natural gas enjoys an advantage over diesel when it comes to running natural gas truck fleets in terms of both costs and emissions. This is the reason why Clean Energy is seeing an increase in gallons delivered even though diesel prices have dropped rapidly in the past year. In fact, Clean Energy saw its transit customers add more than 224 buses to their fleets in the previous quarter. This represents natural gas fuel consumption of 3 million gallons annually. On the other hand, waste haulers such as Republic Services (NYSE: RSG ) have also been enhancing their natural gas fleets. In 2015, Republic has increased its CNG fleet by 130 trucks. Looking ahead, by the end of the year, Republic plans to add 150 more trucks to its fleet. This is despite the fact that the cost of a natural gas conversion kit is $50,000 more than a diesel truck. Now, the fact that Clean Energy’s customers are still adopting natural gas trucks despite the drop in diesel prices is not surprising, as natural gas is still a cheaper fuel when compared to diesel. This is shown in the chart below: (click to enlarge) Source: Clean Energy Fuels investor relations Looking ahead, I won’t be surprised if Clean Energy’s volumes continue improving as the adoption of natural gas vehicles gains more momentum. As per Navigant Research , “global annual NGV sales are expected to grow from 2.5 million vehicles in 2014 to 4.3 million in 2024.” More importantly, apart from volume growth, Clean Energy is also focused on reducing its expenses. The company has reduced its selling, general, and administrative expenses by over 16% as compared to last year. Also, it has reduced its capital expenditure by more than 58% to $26 million in the first six months of the year as compared to the prior-year period. As a result of these moves, Clean Energy has been able to improve its EBITDA by $3 million as compared to the first quarter and $2.1 million from the prior-year period. More importantly, this improvement in EBITDA has been achieved despite a double-digit drop in revenue from last year. Thus, Clean Energy is following a smart two-pronged approach to grow its business – first by increasing volumes and second by lowering costs. However, Clean Energy will need a boost from better natural gas prices in order to enhance its financial performance. Higher natural gas prices are a possibility The Energy Information Administration expects natural gas prices to improve in the future due to an increase demand in both domestic as well as international markets. In a reference case study, the Henry Hub natural gas spot prices are expected to rise from $3.69 per MMBtu in 2015 to $4.88 per MMBtu in 2020, followed by $7.85 MMBtu in 2040 as shown in the charts below. Source: EIA The expected increase in natural gas pricing is not surprising as global gas demand is expected to grow 51% by 2035. The increase in demand will be driven by an increase in consumption from the power and industrial sectors. New gas-fired power plants are being built to meet the increase electricity demand and existing plants are being converted from burning expensive and polluting oil products to cheaper, cleaner natural gas. So, this switch from coal to gas-fired power plants will increase demand for the fuel, thereby leading to higher prices. More importantly, despite the expected rise in natural gas pricing, the fuel is expected to be cheaper than diesel. This is shown in the chart below: Source: Westport Innovations Thus, as seen above, the differential between gas and diesel price is expected to favor the former in the long run, and this will aid Clean Energy’s growth. Conclusion Clean Energy Fuels has been beaten down badly in the past year, but the drop seems unjustified. The company has been able to do well in a difficult end-market environment and its outlook looks strong as well. Hence, in my opinion, the drop in Clean Energy’s shares in the past year is an opportunity to buy as the company could do well in the long run on the back of improving NGV adoption and an expected rise in natural gas pricing. Thus, investors should consider the drop in Clean Energy’s shares as a buying opportunity since the stock could deliver 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.
EQT Corporation: Deep Utica Update
Summary EQT released early production results for its Deep Utica test. Early-time performance looks encouraging. On the other hand, the performance by Range Resources’ deep Utica well may be sub-economic. In its latest presentation, EQT Corporation (NYSE: EQT ) provided an update with regard to its deep Utica test in Southwestern Pennsylvania. As a reminder, in July, EQT reported results of its highly anticipated Scotts Run well in the dry gas window of the Utica/Point Pleasant play in Green County in Southwestern Pennsylvania. The well is one of the deepest exploratory wells in the Utica drilled to date and is located almost 2,000 feet downdip from the previous frontier well. Due to the considerable depth and very high reservoir pressure, the well was challenging to drill and took more than half a year from spud to completion. However, EQT’s effort was ultimately rewarded. The entire ~3,200-foot lateral length was successfully completed. The well tested with a 24-hour rate of 72.9 MMcf/d with ~8,600 psi flowing casing pressure. This represents the highest initial flow rate for any shale well brought on production in the U.S. to date. Performance Update Based on the slide presentation posted by EQT yesterday, the well has produced at a pressure-managed rate of ~30 MMcf/d. Judging by the plot, pressure drawdown appears to have stabilized at ~40-50 Psi/day rate. If this rate is sustained, the initial production plateau may last for approximately six months from the beginning of production, resulting in cumulative production during the plateau period of ~5-6 Bcf. (click to enlarge) (Source: EQT Corporation, September 2015) I must emphasize that the well is a short lateral, which results in even more impressive cumulative production metrics per foot. (click to enlarge) (Source: EQT Corporation, September 2015) Normalizing production to a 5,400-foot lateral length, cumulative production during the initial six-month plateau for a medium-length lateral could be as high as 8.5-10.3 Bcf. It is obviously premature to guess about the play’s type curve and EUR at this point, as the shape of tail production in this deep and highly overpressured formation is an uncharted territory. However, it is clear already now that the test is a success and demonstrates the deep Utica’s potential for “big” wells. Whether “big” means 15 Bcf or 30 Bcf is too early to tell, in my opinion. Of note, Range Resources’ (NYSE: RRC ) Claysville Sportsman Club #11H well, another high profile deep Utica test that came online in November 2014 and had 5,420′ of completed lateral (32 stages with 400,000 pounds of sand per stage) produced “only” 1.4 Bcf in the first 88 days. Given that Range did not include an update slide with the Sportsman production profile in its most recent presentation, the well is likely producing substantially below expectation. I would not rush to interpret the Sportsman well result as an indication of Deep Utica’s poor productivity (the Sportsman’s initial rate was 59 MMcf/d), as several other data points, including Rice Energy (NYSE: RICE ) wells in Belmont County, Ohio, which are located updip, and EQT’s Scotts Run well, which is located downdip, all appear to be holding up well, at least so far. Well Cost And Well Economics EQT encountered significant challenges when drilling the well. Due to the extreme reservoir pressures encountered, the company had to replace its drilling rig with a higher-specification unit, which resulted in a delay. As a result, the well’s cost came out at ~$30 million. However, the fact that the very first well could be completed, with the planned proppant volume loaded successfully, gives hope that technical challenges are not unsurmountable. Going forward, EQT believes it can reduce its well cost in the Deep Utica to as little as $12.5 million for 5,400-foot laterals. The high cost sets the bar for well performance quite high. Assuming a $12.5 completed well cost, the Deep Utica play would need to yield EURs in the 25-30 Bcf per well range to be economically competitive versus the existing “core of the core” sweet spots in the Marcellus, where operators currently drill wells with EURs in the ~15+ Bcf range for ~$6-$7 million per well. In the immediate term, the well’s success is unlikely to materially change operational outlook for EQT (or any of its peers, for that matter). EQT is hoping to have a total of two-three wells on production by early next year and will plan further steps based on the performance results. EQT believes that it has ~400,000 net acres prospective for dry gas Utica, including ~50,000 net acres that look geologically “identical” to the Scotts Run well. Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material. 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.