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Summary CLNE’s margin has improved in the past year despite lower revenue as its margin/gallon is steady due to a diversified base of fleet operators and protection from the retail price. The price of natural gas/diesel gallon equivalent was $0.27 last month, which is way cheaper than diesel and gasoline, which is why CLNE’s volumes will continue increasing. CLNE’s natural gas volumes will increase as the addressable market grows from 74 million gallons last year to 1 billion gallons of diesel equivalent in 2018. CLNE could also benefit from an improvement in natural gas pricing as LNG exports from the U.S. begin next year, leading to lower oversupply and a move toward international pricing. The decline in natural prices has put the brakes on Clean Energy Fuels’ (NASDAQ: CLNE ) performance this year. After recording consistent top line growth until 2014, the company’s top line performance has slid this year. This is evident from the chart given below: Don’t miss the positives However, the above chart also shows that despite the drop in its top line, Clean Energy has managed to improve its margin profile since the downturn in natural gas pricing began. This is an impressive fact if we consider that low natural gas prices should have ideally pulled down Clean Energy Fuels’ margin profile, but the company has managed to keep its margin per gallon intact. For instance, last quarter, Clean Energy’s gross margin was $0.26 per gasoline gallon equivalent, down just $0.02 per gasoline gallon equivalent from last year. This is impressive if we consider that prices have dropped massively in the past year. The reason why Clean Energy’s margins have held steady in these difficult times is because the company has a diversified base of fleet operators that use its natural gas fuel volumes, and these are protected to some extent from the retail price due to the contracts in place. More importantly, it should also be noted that despite lower diesel prices, the use of natural gas fuel has not dropped as fleet operators have continued adding more NGVs to their fleets. This is clearly reflected by the fact that Clean Energy’s volumes delivered in the previous quarter grew 17% year-over-year. Now, on taking a closer look, it becomes clear that natural gas is still a cheaper fuel option than diesel despite the decline in diesel prices this year. Take a look at the following table for more clarity: Source: Westport Innovations Hence, the price of natural gas per diesel gallon equivalent stood at $0.27 last month, which is lower than the regular gasoline price of $2.059 per gallon and diesel price of $2.421 per gallon last month. So, it is not surprising to see that Clean Energy has seen an increase in its volumes delivered this year even though diesel prices have weakened, which lowers the incentive of switching to natural gas fuel for fleet operators. Why Clean Energy’s drop is an opportunity As discussed above, Clean Energy is seeing both volume and margin growth, while natural gas has an advantage over diesel in terms of both costs and emissions. As a result, the adoption of natural gas-powered trucks and buses should continue increasing going forward. For instance, in the past few years, the adoption of CNG trucks in the refuse transit market has increased, as shown below. More importantly, the adoption of heavy-duty LNG trucks as a percentage of overall sales will increase in the coming years, leading to an increase in gallons delivered from 74 million last year to 1 billion in 2018: (click to enlarge) Source: Clean Energy Fuels Hence, due to the advantages of natural gas, its adoption will increase going forward and help Clean Energy amplify its volumes delivered. However, as we saw earlier in the article, the steep drop in the price of natural gas has made it difficult for Clean Energy to grow revenue, but this might change next year onward as LNG shipments from the U.S. start gaining traction next year. By 2020, Australia and the U.S. are expected to make up for almost the entire 50% increase in global LNG trade, with the latter expecting to become an LNG exporter on the level of Qatar. Now, if we consider that the supply situation in the global LNG market is weak and the U.S. is aggressively building its LNG export infrastructure as shown in the chart below, the oversupply situation in the U.S. natural gas market will ease going forward as exports begin. Source: Cheniere Energy Also, due to these exports, the price of natural gas in the U.S. will move closer to international levels, which are higher, and eventually lead to better natural gas pricing in the U.S. as well. As a result, Clean Energy will see an increase in both revenue and margins going forward. Conclusion The performance of Clean Energy Fuels on the stock market has been no less than disappointing this year, but there are positives that we should not miss. The company’s volumes and margins are increasing, while a potential improvement in natural gas prices will be another tailwind. So, it seems like a prudent idea to buy shares of Clean Energy Fuels on the drop as it can deliver gains in the long run. Scalper1 News
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