Boone Pickens Just Cashed Chesapeake Out of Clean Energy Fuels: What Should You Do?

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chesapeake Energy (NYSE: CHK) has been decreasing its ownership stake in Clean Energy Fuels (NASDAQ: CLNE) for a few months as it looks to get its own house in order. Last week, Clean Energy co-founder, board member, and outspoken proponent of domestic energy T Boone Pickens picked up a $60 million promissory note from Chesapeake for its remaining Clean Energy shares, which will increase his stake in the company by about 25%, to more than 22 million shares. Is this strong vote of confidence from an insider and co-founder mean it's time for you to go "all in" too?

Momentum is building

Clean Energy and Westport Innovations (NASDAQ: WPRT) co-hosted a web presentation on June 18, aimed at helping potential customers better understand how natural gas could significantly lower costs for shippers and fleet operators. One nice bit of information that investors gained in this call was an update of Clean Energy's buildout of its touted "America's Natural Gas Highway."

There are a total of 76 locations complete, with 15 now open and another 25 in construction. This is compared to only ten open just a month ago, and less than fifteen new stations under construction. This rapid expansion and opening of locations is a very positive sign. But the real question still hasn't been answered and won't be for several more quarters: When will the rapid growth in revenues turn into positive cash flow and profits? And don't count the profits from last quarter. I documented in a prior post how they were in large part the product of new tax incentives and not improved business performance.

But right now, Capex is still a big number, even though it is expected to be much less this fiscal year than last. With many stations built and idle, just waiting for more shippers to buy trucks, the company is in a great position as first mover.

But I think Westport holds the key to the future. The Cummins-Westport ISX 12 G  natural gas engine is now in full production, and 2013 is a critically important year for both Westport and Clean Energy. Rapid adoption of these engines by shippers is central to the success of both players in the North American energy boom. And while Westport's rapid growth in China with partner Weichai seems to be moving even faster than expected, Clean Energy is completely leveraged on rapid adoption in the US.

Opportunity on the E&P side

Natural gas Exploration and Production giant Chesapeake has faced serious challenges over the past couple years, and is still early in its recovery phase. The aftermath of Aubrey McClendon's mis-management of the company is central to its decision to sell all of its stake in fast-growing Clean Energy, even as the company was just beginning to see returns from its expansion into LNG for trucking.  The bottom line is the company has a lot of work ahead of it before getting back on solid ground. It still carries a heavy debt load and is having to sell off assets to both meet its debt obligations and return to being the nimble player it was. Today, Ultra Petroleum (NYSE: UPL) is already there.

If we were to look at share prices over the past few years to compare the two companies, things actually look a lot alike. Share prices have correlated somewhat, driven by the historic low prices we've seen the past few years. Using forward PE valuations would also not tell the whole story, as both companies project a forward PE around 14. It's when we look at gross margins that we see Ultra has operated with consistently higher margins than Chesapeake, somewhere in the neighborhood of 25% higher on average. And as natural gas prices continue to increase on the growth in demand, Ultra Petroleum is better positioned to more quickly turn that revenue into income on the bottom line.

Chesapeake looks like it's turning into a real Peter Lynch "turnaround" opportunity, but I'm not convinced that it's time to jump in. Ultra just seems better positioned to profit, and sooner. 

Foolish bottom line

Boone Pickens' move to add shares is a positive sign. Nonetheless, it's still very early in the game, and we don't really know much more than we did just a month ago. I encourage you to open a small position in both Clean Energy and Westport if you haven't already, but I don't recommend going "all-in" just yet. We need to see how quickly shippers adopt NG-powered trucks before putting more money on the table. And if you're looking to diversify into E&P, while Chesapeake has made inroads to fixing its business, Ultra Petroleum is already positioned to reward us on the growth in demand for natural gas.

What do you think? Share in the comments below!

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Jason Hall owns shares of Westport Innovations, Clean Energy Fuels, and Ultra Petroleum. The Motley Fool recommends Clean Energy Fuels, Ultra Petroleum, and Westport Innovations. The Motley Fool owns shares of Ultra Petroleum and Westport Innovations and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, and Long Jan 2014 $50 Calls on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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