Discounting a couple spikes above $20, Clean Energy Fuels' (CLNE) stock has been dead money for years now. CLNE has struggled in solving the chicken-and-egg problem of refueling stations and the number of natural gas vehicles deployed to use them. Not helping, the struggle has been played out during a slow-growth economy due to the financial crisis and a reining in of capital expenditures. However, there is a big catalyst for why 2014 will be an inflection point for CLNE: a new natural gas engine from Cummins Inc (CMI). The acceptance of this engine in the long-haul trucking sector will have a significant effect on the gas gallon equivalents ("GGEs") delivered by CLNE in 2014. Meantime, the historical catalysts behind the move to natural gas engines (high diesel prices and emissions regulations) are still with us and provide additional tailwinds for NGV adoption. As the growth rate in GGEs delivered accelerates, CLNE will approach profitability. As investors begin to sense a change in sentiment about the stock's profitability and growth potential, CLNE's valuation could easily climb 20-25% in 2014.
The introduction of the new Westport-Cummins ISX12-G engine in the second half of 2013 was truly a game changer. The 12-liter natural gas engine delivers 400 horsepower and 1450 ft-lb of torque. And of course more natural gas engines means more GGEs delivered for Clean Energy Fuels.
US Retail Diesel Price data by YCharts
Meanwhile, the current average national price for CNG is $2.08. For a typical long-haul trucker putting 100,000 a year on his rig at an average of 6 mpg, this is a cost savings of $1.82/gallon on ~16,000 gallons, or $29,000/year. If the incremental cost of an NGV is in the neighborhood of $20-30,000 (depending on state and federal government incentives), it's easy to see that payback on the investment is now as little as 1.5 years.
Global Emissions Regulations: The Environment Matters
Upcoming global emissions regulations are a tailwind for market acceptance of the ISX12-G engine. Around the world, carbon and sulfur emissions regulations are significantly tightening through 2018. The ISX12-G engine currently meets all U.S. Environmental Protection Agency ("EPA") and California Air Resource Board emission standards. So the need for greater engine efficiency bodes well for market-share gains by this engine, which emits from 20-30% less CO2 than do diesel engines, and 100% less toxic particulates like sulfur dioxide.
As we all know, China is suffering from severe pollution problems as the combination of coal and diesel consumption is causing many city dwellers to wear masks whenever they venture outside. As a result, China is set to implement new "NS4" emissions regulations. In the Seeking Alpha Q3 conference call transcript, Cummins' CEO Thomas Linebarger commented on the NS4 effect:
In the medium and heavy duty truck market (in China) industry demand increased by 26% in the third quarter driven largely by pre-buy ahead of the anticipated implementation of NS4 emission regulations. Year-to-date industry sales are up 14% and we now expect full year demand to increase by 15% over 2012 compared to our previous forecast that the market will increase 5% year-over-year.
Engine Sales Estimates
A recent article in Barrons quoted Buckingham Research analyst Jeffrey Kauffman's estimate that by 2018, one in five trucks sold will run on natural gas. That number will increase to one in three by 2020. Clean Energy reported their customers ordered 70% more NGVs in the first 9 months of 2013 compared to 2012. And the new 12-L engine was in limited supply even in the 2nd half of the year. Obviously the growth rate of NGVs deployed is entering a new and higher growth phase.
In the Seeking Alpha Q3 transcript, CLNE CEO Andew Littlefair commented on the effect of the new Cummins engine:
Since its August launch, demand for the 12-liter 400 horsepower has surged with sales already exceeding the internal projections of Cummins, which we believe will reach 2,400 units in 2013. These engine sales are expected to grow fourfold next year surpassing 10,000 units. Today, 46 of our trucking fleet customers have ordered 549 trucks representing up to approximately 10 million gallons annually. 60% are for CNG and 40% of those are orders for LNG.
GGEs Delivered: A 2014 Growth Estimate
CLNE also reported they are in the final stages of negotiations with 107 other fleets, who have plans to deploy over 1,250 additional LNG and CNG trucks. CLNE estimates these new trucks represent a potential of up to ~20 million GGEs. The company also recently entered into a multiyear LNG fuel supply agreement with UPS to provide a minimum of 5 million GGEs for UPS's LNG trucks.
So there are about 15 million GGEs/year CLNE has either already booked or anticipates will be booked soon. But let's take a look at the 20 million GGE potential and give CLNE's estimate a sanity check.
Of the estimated 10,000 12-L engine sales in 2014, let's say half will be sold in the US (admittedly a swag). Let's also say that we'll reduce that number by the 549 trucks previoulsy discussed by CLNE and round down to 4,000 trucks. Now, lets say that half those are sold and deployed in the first half, and half in the second half. For those sold in the first half, we'll take the annual 100,000 miles/year long-haul trucking mileage estimate and reduce it to 50,000 miles. And we'll reduce that by half again for those sold in the 2nd half of 2014. Given those assumptions, here are the GGEs delivered potential:
2,000 trucks * 50,000 miles * 1 gallon/6 mpg = ~16.6 million gallons
2,000 trucks * 25,000 miles * 1 gallon/6 mpg = ~8.3 million gallons
If we total it all up, the approximately 10 million GGEs in contracts pending, plus the 5 million UPS GGEs, plus the ~20 million GGEs from the "other fleets" CLNE mentions, and which I have just verified (and reduced to ~20 from the ~24.9 million GGEs estimate) as rational given certain assumptions, GGEs delivered in 2014 could jump by 30-35 million.
Now, for the nine months ended September 30, 2013, gallons delivered totaled 158.9 million gallons, up from 143.2 million gallons for the nine months period in 2012, or up only 11%. But if we add the 30 million GGE estimate above, it is conceivable (and likely) that CLNE could deliver an additional 22.5 million GGEs in the first 9 months of 2014, which would bring the total to 181 million GGEs, for a growth rate of 14%. And remember, the additional GGE estimate shown here was based primarily off the 12-L engine sales alone. If we add in this year's GGE YTD "pre-engine" growth rate (11%) on top of it, it is not out of the question total GGE's could have a growth rate ~20-25% by year-end 2014.
Further, CLNE's non-GAAP loss for the first 9 months of 2013 was -$0.19/share compared to a loss of -$0.52 for the same period of 2012. If the company's non-GAAP loss contracted by close to 60% while GGEs only grew by only 11%, the company should be able to come close to profitability toward the end of 2014 when GGEs delivered could come close to a growth rate of twice that (20-25%).
Risks
Some point to Shell's (RDS.A) natural gas refueling initiative as a threat to CLNE. I don't see it that way. I look at Shell's activity in building out a natural gas refueling infrastructure as helping to accelerate the adoption and sales of NGVs. That can only help the market leader. And the natural gas refueling market leader - whether it's at the port of Long Beach, or across America's Natural Gas Highway, or at Pilot Truckstops - is Clean Energy Fuels.
Summary & Conclusion
CLNE has always been a story of volume and scale. Over the last few years, the company has been building out America's Natural Gas Highway even though the number of NGVs deployed didn't really grow volumes (i.e. GGEs) at a fast enough clip for the company to be profitable. But the new Westport-Cummins 12-L natural gas engine is a market game changer. As a result, the growth rate of CLNE's important GGE's delivered metric will accelerate from ~10% to ~20-25% in 2014. Clean Energy Fuels stock (and that of CMI) should follow. Clean Energy is a BUY and should hit $15.50 in 2014. Potentially large contract announcements could see the stop pop even higher. This is likely why insiders Boone Pickens and CEO Littlefair significantly increased their holdings in the company's stock during 2013.
2014 will be an inflection point for CLNE on its road (America's Natural Gas Highway) to long-term profitability.
America's Natural Gas Highway
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