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How to Profit from "America's Natural Gas Highway"

Posted
1/14/2013 3:30:00 PM
By: StreetAuthority
Referenced Stocks:CLNE;HMC;UPS;WM

To say that natural gas has been on a roller coaster ride for the past 10 years would be an understatement. Gas prices soared from $1.96 per MMBtu in early 2002 to a peak of $15.78 in late 2005 and back to a low of $1.90 early last year. 

For investors, the ride has been no less wild. Natural gas explorationstocks  were irrelevant in 2002, yet were all the rage by 2008 when natural gas became a stunningly profitable business to be in. Then, these stocks fell off investors' radars again in 2011 when plunging gas prices -- and a plethora of supply -- pushed nearly all of them back into thered .

Still, the implications are clear. With an abundant supply (thanks to advanced drilling techniques), it looks like cheap natural gas is here to stay for the time being. But if the natural gas drillers aren't makingmoney , then how can investorsprofit ?

Andy Obermueller, editor of StreetAuthority's Game-Changing Stocks newsletter, has an idea.

He's identified three urgent and unmet needs that natural gas can address. [He's actually putting the finishing touches on a special report on this topic right now.]

One of those needs:  There's still not enough gas stations with natural gas pumps here in the U.S. to keep up with exponentially expanding demand.

That's right. The money to be made is in fuel.

It's still a tough idea for investors to embrace, since most people don't use or fully understand natural gas as fuel for vehicles. There are less than 1,000 compressed natural gas filling stations in the United States, and half of them only refuel privately-owned fleet trucks. Of course, why bother building a public liquefied or compressed natural gas infrastructure when there are only about 150,000 vehicles powered by natural gas in the nation and most of them are fleet trucks?

The answer is simple.

The way you drive is about to change
Times are changing, and although compressed natural gas (CNG) automobiles may seem like nothing more than a curiosity right now, this industry may be more mainstream than most realize.

In fact, Energy Secretary Steven Chu predicts that soon therewill be a natural gas filling station every 150 miles in the United States, more than adequate for trucks and cars with a range of 500 miles.

This means there's a significant opportunity for investors.

Research firm Pike Research also points out that North America's CNG vehicle growth rate is currently 10% and should keep growing at this rate through 2019. 

Moreover, last year's growth in the number of natural gas fleet trucks absolutely exploded in the United States. As an example,  Waste Management ( WM beefed up the size of its CNG fleet by insisting that 80% of its new truck purchases be CNG-powered vehicles. Several other truck fleet managers such as  United Parcel Service ( UPS )  also accelerated their adoption of CNG vehicles last year.

Most of these fleets have tapped one company to supply the equipment needed to fuel those trucks...

Being the middleman and loving it
Clean Energy Fuels Corp. (Nasdaq: CLNE)
is a player in the natural gas industry, but it's in a category by itself. The company builds natural-gas-powered motors for cars, but more than that, it owns, operates and supplies more than 270 natural gas refueling stations.

But this description doesn't do the opportunity justice. As the largest seller of natural gas for vehicles in the United States, Clean Energy Fuels is in a position to reach its stated goal of building " America's Natural Gas Highway ."

The recent numbers from Clean Energy Fuels confirm this growth trend. In November 2012, the company reported natural deliveries rose 24% on a quarter-over-quarterbasis  to 50.9 million gallons-- avolume record. 

The company has quietly been cranking up its top line every year since 2005. But it really began to grow in 2010 when fleet managers finally opened their minds (and wallets) to natural-gas automobiles. As a result,revenue has grown from $78 million in 2005 to $212 million in 2010 and to what will likely be $326 million for 2012. That's not bad for a $1.2 billion outfit. Next year's projected sales of $401 million would represent a 23% improvement.

Some investors may balk at the fact that the company has yet to produce any net profits. And, that's an understandable concern. A closer look at its history shows the losses are minimal though, and if Clean Energy Fuels can just continue to grow its top line, then its fixed as well asvariable costs may be covered before anyone expects. Indeed, this neededcatalyst is falling into place right now.

Tipping point
While compressed natural gas trucks are taking off, it's wasn't until recently the natural gas industry has started to penetrate the crucial passenger vehiclemarket in the United States. Now that it has, however, there's no going back -- drivers should quickly get spoiled to the fact that CNG costs about two-thirds the price of gasoline.

One of the early proponents for North America's CNG passenger vehicle industry is Honda ( HMC ) , through last year's unveiling of a natural-gas-powered Civic. Since then, Honda has sweetened the pot by giving $3,000 worth of CNG refills to buyers. Chrysler is getting in the mix as well with a CNG Ram 1500 truck. Though it's being built and billed as a fleet vehicle, it's the first large natural gas automobile that's also in high-demand (with a combustion engine) from non-commercial consumers. And it's not likely the last one either.

The timing couldn't be more perfect. At the end of last year, the company reported it had finished Phase One of America's Natural Gas Highway by installing liquefied natural gas stations at 70 Pilot-Flying J truck stops. At least 70 more LNG-refueling centers are in the lineup for the company this year.

There aren't many lines inbetween to read here -- the automakers are finally on board, knowing that the filling station infrastructure isn't in place yet, but confident that it will soon be. Between the advent of passenger CNG cars and the continued explosion of fleet CNG trucks, there's enough current and future business to power Clean Energy Fuels' growth for years to come. In fact, the company is planning on more than doubling the number of natural-gas-refueling stations it operates, with a total of 150 expected under its umbrella within a few years.

And let's not forget the company also supplies other CNG stations, and also performs retrofits for older, gasoline-burning fleet vehicles. Demand is also growing on those fronts.

I should alsonote that well-known energy investor T. Boone Pickens is a major stakeholder in Clean Energy Fuels, owning just a little less than 30% of the company. Given his experience and knowledge within this industry, his involvement may be all the tacit endorsement needed.

Action to Take --> While it won't convincingly turn profitable overnight, net-positiveearnings are on the horizon for Clean Energy Fuels. Investors just need to give it a year or more for this growth trend to really materialize on theaccounting statements. As more investors continue to recognize that the company is within reach of its proverbial end-zone, thestock could easily gain between 20% and 25% during the course of 2013, even before the company's first profit is turned. And after that, expect even more profits down the road.