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Summary A closer look at CLNE indicates that despite the drop in natural gas prices this year, its volumes delivered have increased as fleet operators are adding more natural gas vehicles. Low natural gas prices have been CLNE’s bane, but this should improve as marketed production in the U.S. declines, consumption increases, and exports begin. CLNE’s volumes will continue increasing as its customers have increased their fleets, while products such as the Redeem renewable natural gas fuel are gaining traction due to environmental benefits. Redeem is made from organic waste and is up to 90% cleaner on carbon emissions, making it the cleanest automobile fuel available commercially, leading to higher adoption by fleet operators. Technological improvements, such as the Cummins-Westport Low NOx 9-litre engine that can cut NOx emissions by 90%, are improving CLNE’s addressable market by gaining adoption due to their environment-friendliness. The rapid drop in oil and gas prices this year has created a lot of pressure on Clean Energy Fuels (NASDAQ: CLNE ) for two reasons. First, the decline in diesel prices has hurt the conversion of diesel vehicles to natural gas, and second, low natural gas prices have hurt Clean Energy’s financial performance. As a result of these two headwinds, Clean Energy shares trade near the lower end of their 52-week band, having lost over a quarter of their value this year. Looking past the weakness When Clean Energy Fuels had announced its third-quarter 2015 results, its revenue went down 11% year-over-year. Also, for the first nine months of the year, Clean Energy’s top line performance has diminished, as shown in the chart below: Source: Press release But, as we take a closer look at the distribution of revenue, we find that in the third quarter, Clean Energy’s revenue from the sale of fuel has actually increased by 6.7% despite a 40% decline in the natural gas price. This can be attributed to the fact that Clean Energy saw a 17% increase in gallons delivered last quarter, though weak natural gas pricing took out $5.7 million in revenue from its top line. More importantly, in the first nine months of the year, Clean Energy’s gallons delivered have increased over 19%, indicating that the company is still finding traction despite the drop in diesel prices. The following chart shows the improvement in Clean Energy’s volumes this year: Source: Press release Thus, the only problem that Clean Energy is facing currently is in terms of natural gas pricing, as a result of which its financials have taken a beating. However, over the long run, the conditions in the natural gas market should improve due to a few reasons, as stated below. Gauging a recovery in natural gas pricing There are two factors that could lead to an improvement in natural gas prices going forward – lower production and the start-up of exports from the U.S. As far as the first point is concerned, marketed natural gas production in 2016 is anticipated to grow at just 1.9% after rising 6.3% this year. At the same time, natural gas consumption is expected to rise from 76.5 billion cubic feet/day this year to 76.7 Bcf/d in 2016. As a result, a slight increase in consumption and a slowdown in marketed production will ease the oversupply in the end-market to some extent. Concurrently, as the U.S. is anticipated to start with its LNG shipments in the coming year, more supply will go out of the market and have a positive impact on prices. As such, it is not surprising that the EIA expects Henry Hub Natural Gas prices are expected to increase from $2.09/MMBtu in November to $2.88/MMBtu in 2016. The following chart shows the gradual increase in natural gas prices going forward: Source: EIA So, going forward, there might be respite for Clean Energy on the natural gas pricing front that will allow it to improve its financial performance. At the same time, Clean Energy will continue seeing an increase in its volumes delivered due to the benefits of using natural gas as fuel and the increasing fleet size of its customers. Why Clean Energy’s volumes will continue increasing As already discussed earlier in the article, Clean Energy is seeing an increase in its volumes, and the trend will continue going forward. During the third quarter, Clean Energy Fuels’ customers increased their gas-powered fleets. For example , Raven Transport’s natural gas fleet has increased by 40 LNG trucks recently and it now has a total of 223 LNG trucks in its fleet. Similarly, Saddle Creek Logistics hit the 50 million mile mark of its CNG fleet and announced that it will add 50 more CNG trucks soon to the existing 200 CNG tractor fleet. Additionally, Clean Energy has signed contracts for supplying to more than 300 new heavy-duty trucks, representing a fuel volume of 4.5 million gallons annually. Going forward, the U.S. should see an increase in natural gas-powered fleets as companies take steps to reduce emissions. Companies such as Unilever, Procter & Gamble, Anheuser-Busch, and others are considering the use of clean natural gas by the trucking companies as an important plus point while signing contracts. As a result, more and more fleet and individual vehicle owners are making this transition from oil to natural gas, which is simpler and economic than other available green options like oil to electric or even hybrid. Clean Energy is able to capitalize on this trend with products such as the Redeem renewable natural gas fuel. This is the “first commercially available renewable natural gas made from organic waste and is up to 90% cleaner on carbon emissions,” which makes it the cleanest automobile fuel available on a commercial basis. As a result of the qualities of this fuel, the sales volume of Redeem has almost tripled from 13 million gallons to 36 million gallons on a year-over-year basis last quarter. In the case of electricity generation too, natural gas is among the cleanest and safest fuels. Technological improvements such as the Cummins-Westport Low NOx 9-liter engine are aiding operators’ decision to adopt natural gas as a fuel. This engine, as mentioned during the Q3 earnings call, is able to cut NOx emissions by as much as 90% as compared to current EPA standards from 0.2 gm to 0.02 gm. Thus, given the environmental benefits of using natural gas engines and fuel, their demand should increase as the U.S. is looking to reduce pollution under the Clean Energy Plan . Conclusion One would think that low oil prices would have reversed the trend of increasing demand for natural gas. But, the reason for adopting natural gas for almost all users may not be solely the economics. Environmental safety is playing a big part in that decision, which is why Clean Energy has continued to see an increase in gallons delivered. Thus, going forward, Clean Energy Fuels should be able to come out of its slump as it will benefit from both an increase in volumes and better natural gas pricing, making it a good investment opportunity. Scalper1 News
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