Big Worries For a Natural Gas Liquids Pure Play
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Clean Energy Fuels (NASDAQ: CLNE) is at the forefront of a push to switch the United States from gasoline to natural gas. While the potential benefits of such a change are huge, so are the risks for a relatively small company focused solely on that potential.
Clean Energy is supporting the shift to natural gas fueled vehicles all along the transition. For example, it switches vehicle engines from gasoline to natural gas and, at the other extreme, it owns or supplies fuel to almost 350 natural gas fueling stations.
Basically, the company is betting everything on a switch from gasoline to natural gas. That makes it a highly leveraged play on the success of what appears to be a burgeoning industry.
Growth is expensive
The demand for natural gas as a fuel and the infrastructure to support it are both lacking. That means that someone has to step in and take some risks to push the market forward. Clean Energy is doing this. However, it is a small company, with just over a $1 billion market cap.
While the company's debt level isn't notably high, it is high enough to be concerning for a company that isn't making money. In fact, building the business has kept the company in the red for all of its relatively short public life.
The current push to build a liquified natural gas fuel system to support long-haul trucks is an example of what Clean Energy is facing. Although the company has built about 70 stations in strategic locations across the country's interstate system, less than 10 are currently in operation. While this positions the company well for an eventual shift, it built over 60 stations that are just idle assets.
A problem for the company is that it isn't alone in the market. For example, both ExxonMobil and Royal Dutch Shell (NYSE: RDS-B) have made natural gas a priority. And both companies have existing fuel station networks and massive cash flows to support a quick build out of natural gas fueling stations. In fact, Bloomberg reports that Shell has plans for at least 100 such stations.
Clearly, a company the size of Shell, which would have control over both the drilling and delivery of natural gas, would be better positioned to finance a build out. It would also have a leg up on profitability, since it wouldn't have to pay a middle man for the fuel it would sell. Shell would be a better option for conservative investors.
Natural gas is a commodity
Natural gas prices in the Untied States have languished at historical lows for several years. The reason for the low pricing is a glut of natural gas created by new drilling techniques. So-called “fracking” involves pumping water and a propriety chemical and sand mixture into the ground to free up trapped gas.
Low prices have been great for companies that use natural gas as a fuel source, such as electric utilities, since costs have fallen and remain low. It's also making the switch to natural gas vehicles financially viable. In fact, Clean Energy notes that “economics are the primary driver” of the shift.
As a commodity, however, natural gas prices are subject to often material fluctuation. Energy companies are shifting away from coal fired plants to natural gas in increasing numbers, so vehicles aren't going to be the only source of demand. Moreover, with low prices, many drillers are actually shifting to more profitable oil wells. That's not to suggest that Clean Energy won't benefit from higher natural gas prices, it simply points to some of the dynamics of a complex industry.
Natural gas as a fuel could flounder
Navistar International (NYSE: NAV) has plans to build a line of engines for the long-haul truck segment. Jim Hebe, a senior vice president, noted that, “When the MaxxForce 13L is introduced in mid-2013, customers will have a capable range of natural engines and trucks, from 7.6 liter to 13 liter with horsepower ranging from 200 to 450."
Increasingly stringent environmental standards for trucks are a tail wind to the natural gas switch, but there are other ways to meet the required metrics. For example, Navistar's plan to combine its exhaust gas recirculation and selective catalytic reduction systems wouldn't require a fuel source shift. Buyers might not want to maintain a new engine type if they don't have to.
Navistar, a pick and shovel way to play the LNG transition, could easily drop its natural gas engines if they don't take off because of a lack of infrastructure. Clean Energy, on the other hand, has virtually nothing else to fall back on if natural gas for vehicles proves to be a failed effort.
High risk, high reward
Clean Energy isn't a stock that conservative investors should own. It is, however, a highly leveraged bet on natural gas becoming an important vehicle fuel. More aggressive types who see this in the future should consider an investment.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels. 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!