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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. Scalper1 News
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