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Clean Energy Fuels' niche
Clean Energy Fuels (CLNE) is the largest provider of natural gas as an alternative fuel for vehicles in the United States and Canada. This figure is based on the number of fueling stations owned, and the volume of compressed natural gas (CNG) and liquefied natural gas (LNG) distributed. The company occupies an important niche in a marketplace that holds considerable promise. According to the Department of Energy, utilization of natural gas for vehicles has more than doubled over the past ten years. We expect continued expansion.
The benefits of natural gas as auto fuel are many. It is a less expensive alternative to both gasoline and diesel fuel. This will become more pronounced if refineries are forced to comply with tougher regulatory standards as a result, and gas prices move higher. Natural gas vehicles are also supposed to be a cleaner alternative to their gas guzzling counterparts. With the mounting concerns about greenhouse gases, consumers and politicians may look a bit harder at natural gas and other alternative energy vehicles.
Converting vehicles to natural gas can be easily done. Natural gas engines operate on the same principles of combustion that hold for traditional cars, making conversion to natural gas easy for manufacturers. Nonetheless, there are only a small handful of natural gas vehicles being commercially produced in the U.S. at the current time. With the exception of one Honda model, other natural gas passenger cars are offered mostly by small specialty manufactures, one of which is a subsidiary of Clean Energy Fuels. Elsewhere, the truck market has made more substantial progress. Trucks equipped for NGL fuel are currently being manufactured directly by the large auto manufacturers in several models.
Clean Energy Fuels has a large potential customer base. So far, it has dedicated much of its capital to securing contracts with large commercial fleet operators in the waste disposal, trucking, and airport transportation industries. The company also has been working to secure contracts with transportation firms servicing large seaports. Commercial fleets have regular routes, making it easy for them to use centralized refill stations. The passenger vehicle market will be a bit more difficult to serve. However, if a market unfolds, we expect the company to enter the passenger vehicle markets more aggressively, in the future.
The company, however, faces several risks. Foremost, it is offering a product that has to compete with gasoline and diesel fuels, which are the de-facto fuels of choice. Despite what looks like an easy win, the natural gas movement may not ultimately pick up enough market share to pay off. Other alternative fuel sources, such as electricity and batteries, could emerge as the leaders in the auto markets. In the event that this industry does gain traction, many larger companies may enter the game. Although CLNE is the first to the marketplace, other major gas companies could end up dominating this arena. There is limited patent protection to stop larger corporations from converting their network of gas stations to NGL fuels. Despite some large supporters, the big rivals also have access to financing that CLNE does not.
Clean Energy Fuels had about $130 million in revenues last year. The company earns most of its revenue from selling CNG and LNG fuel to customers. It also designs, constructs, leases, or sells fueling stations. Although still unprofitable, we expect better things for the year ahead. The company should be able to achieve better cost advantages, as the top line expands and starts to offset some fixed costs. The company has little long-term debt, which is a positive, but is spending a considerable amount on capital expansion.
At the end of the day, the company may emerge as the leader in this market. It could also make a good acquisition target.