By Jason HallThe North American energy boom is creating enormous potential. From the massive reduction in reliance on foreign oil, to keeping more American dollars in the domestic economy, to directly generating lots of well-paying jobs, the benefits to our country are many. And for investors, it’s also opening up doors to profit in substantial and sustainable ways. Clean Energy Fuels (NASDAQ: CLNE) is one of the companies with much promise, but so far it’s yet to live up to the potential. Let’s take a deeper look and see what’s happening.
Bridge fuel to nowhere?
Much of the promise for Clean Energy Fuels’ growth is expected to be driven by the America’s Natural Gas Highway (ANGH). So far, the company has completed 76 of the projected 300 total stations, yet only a couple dozen have been opened. Simultaneously, the company has continued to expand its core CNG refueling services business, and is the dominant provider in its field for “return to base” vehicles like public transit and waste removal.
And there has been some growth, as measured by gallons-equivalent delivered, which was up 13% versus last year’s quarter. The company also reported that revenue increased 26%. However, when we back out two things — namely the $15.5 million sale of BAF Technologies to Westport Innovations (NASDAQ: WPRT) and $6 million in VTEC tax credits attributable to 2012 results — we have a $3.2 million decrease in sales versus the year-ago period.
For a company in growth mode, that isn’t reassuring.
Station’s don’t matter if there are no trucks
And this is the key to the kingdom. Westport’s results for the quarter, with revenues down 29%, were similarly poorly received on the lack of growth that the company wasn’t able to hide behind the sale of a subsidiary and some bonus tax credits from 2012’s results. However, understanding how Westport accounts for sales is central to seeing the whole picture.
Westport’s most important businesses today are arguably its joint ventures; Weichai Westport in China, and its domestic partnership with Cummins, CWI. These two joint ventures are up a combined 43% YTD, on the back of strong and growing demand for NG engines. However, as Westport doesn’t recognize these revenues, and only a small part of the income for each JV reaches its bottom line, what was another period of strong growth and large investment in expansion was viewed by the market as a disappointment.
The linchpin in the wide-scale adoption of NG engines for heavy-duty trucking is the 400hp version of CWI’s ISX12 G engine. This is the first legitimate replacement for short- to medium distance truckers, offering both the power and fuel economy to match the traditional diesel burners. And this engine didn’t start shipping until August 1, so we are still another quarter or two from knowing how quickly truckers are going to make the change.
There are some positive early indicators, as Clean Energy CEO Andrew Littlefair mentioned on the Q2 earnings call:
UPS has already ordered 900 NG-powered trucks to be delivered this year
UPS has stated it will not order any diesel engines in 2014 — only NG
Procter & Gamble has specified NG as the fuel source for its replacement fleet of trucks
So the trucks are coming soon
That appears to be the case. Littlefair also stated that heavy-duty truck engine shipments were “a couple thousand ahead” of where he expected them. He also said that seeing 10,000 big rigs running the CWI ISX12 G engine a year from now was a reasonable projection. And at 15,000 gallons of fuel per truck per year, that’s a lot of opportunity.
At $2.25 per gallon equivalent, the $337 million worth of fuel, is more than Clean Energy’s TTM total sales. If Clean Energy can grab half of that market share, the company’s revenue just went up 50%. And if you think that’s a reach, consider this:
Key partners Pilot/Flying J and Mansfield currently have access to about 11 billion gallons of the current 25 billion gallon diesel market. That’s access to pretty close to half of the market, and ignores the potentially massive first-mover advantage the company has right now, with far more stations in place and ready to open than any competitor. – Yahoo News
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