The Future of Natural Gas
Ben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the country slowly moves from gasoline/diesel to natural gas, investors are faced with the challenge of finding the right natural gas company to invest in. The company that comes to mind for me is Clean Energy Fuels (NASDAQ: CLNE). The company provides an efficient energy source to trucks who travel long distances every day in the U.S. and Canada. The problem facing Clean Energy is the rate at which this fuel is used. The slower it takes to move to natural gas the longer it will take for Clean Energy to reach profitability.
What the numbers tell us
|Qtrly Rev Growth (yoy)||0.27||0.07||-0.25|
|Gross Margin (ttm)||.25||.38||.42|
|Operating Margin (ttm)||-.21||.21||.13|
|PEG (5 yr expected)||-0.92||N/A||5.09|
In comparing Clean Energy Services to their direct competitors a couple things stand out. Atlas (NASDAQOTH: ATLKY) and Chesapeake Energy Corporation (NYSE: CHK) both have better margins, but as the whole industry goes they have also struggled to keep profitable. Quarterly revenue growth was very low for Atlas and Chesapeake actually lost revenue growth. But strangely enough Clean Energy posted a healthy revenue growth around 27% and a negative PEG ratio also indicates they have strong growth potential.
Is Debt an Issue?
The biggest concern I have with Clean Energy's lack of profitability is their large debt load. As the natural gas adoption rate reaches a tipping point profitability becomes a distinct possibility, so there is room for optimism. Although Clean Energy has a large debt load, it is still lower than their competitors. If Atlas and Chesapeake continue with their recent trends of declining revenue growth then they will be the ones scrambling to cover their debt, not Clean Energy.
What are the chances of profitability?
Clean Energy's chances of achieving profitability are ultimately dependent on an increase in the natural gas adoption rate. A lot of the cash they do have goes out to building natural gas fueling stations across the country. So obviously production is not the issue, but whether or not the immense supply can be equaled by demand. So far Clean Energy has provided their services to Frito Lay, Staples and United Natural Foods. They have also forged a strategic relationship with Westport Innovations who uses Clean Energy's natural gas in their engines. If more trucking companies make the transition from diesel to natural gas powered engines, both companies should profit handsomely.
What can we take away?
Initiating a long position on this stock right now may not be the smartest of moves, but watch closely what happens with natural gas. If we see an uptick in natural gas usage and a stabilization in natural gas prices at or above current levels, Clean Energy's fueling stations could become a hot commodity. Looking forward there's a lot to like about this company but for now, just be patient as it may take awhile for the natural gas movement to find its legs.
gomonkies23 has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels. The Motley Fool owns shares of Clean Energy Fuels and Staples and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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!