As Chesapeake Sells Clean Energy Fuels, You Should Be Buying

by Aaron Levitt | March 8, 2013 8:37 am

While things are finally grinding forward[1] at long-suffering Chesapeake Energy (NYSE:CHK[2]), the company is still facing a cash crunch due to its large debt loads. Chesapeake expanded rapidly during the first half of the fracking and advanced drilling boom, but as that boom created a glut of natural gas and drove down prices, Chesapeake was left holding the bag.

That’s caused the natural gas producer to sell a boat-load of assets. Chesapeake has auctioned off about $11 billion in oilfields, gas-processing plants, mid-stream pipelines[3] and other properties over the last year. With its cash crunch still persisting, the company has targeted about $7 billion worth of additional sales this year as well. And like before, it’s reaching deep into its asset base to find items to sell.

As we’ve seen with its sale of Access Midstream (NYSE:ACMP[4]), there can be retail investor’s gold in what Chessie tosses away. In fact, its latest castaway could be one of the most promising ways to shrink that glut of gas the company helped create.

See, one of the main issues with our natural gas glut is that there just isn’t enough domestic demand for the fuel. While new liquefied natural gas (LNG) export facilities and ethane crackers will spur new claims to the glut, another idea — using it as a transportation fuel for fleet trucks and locomotives[5] — could be one the real drivers for increased usage going forward.

That’s where Clean Energy Fuels (NASDAQ:CLNE[6]) comes in.

As of the end of 2012, Clean Energy owned more than 340 compressed natural gas (CNG) fueling stations across 32 states, which serve more than 650 different fleet vehicle customers. The company is also developing a national network of LNG truck fueling stations that it is calling America’s Natural Gas Highway. At the end of last year, Clean Energy operated 70 of these stations and the company anticipates opening 50 to 70 additional stations in 2013.

Chesapeake first invested in the service station operator back in 2011 as a way to help support and expand the use of natural gas in U.S. long-haul trucks. Over time, Chesapeake came to own 7.7% of the firm. But in order to plug its cash shortfall, Chesapeake plans to divest most of its stake[7] in the refueler. Its interest in CLNE will drop to 1.1% after the planned stock sale.

Chesapeake’s[8] sale could be coming at a bad time because Clean Energy’s long-term potential could finally be coming to pass.

CLNE estimates that a taxi or shuttle bus using CNG instead of gasoline will save $5,000 to $10,000 annually in fuel costs, while a bus or truck that uses LNG[9] rather than diesel will save $25,000 to $30,000 annually. Those potential cost savings have plenty of firms lining up to use the company’s fueling stations. More than 100 shipping and trucking companies have begun exploring using CLNE’s facilities to fuel their fleets.

Most recently, Clean Energy announced a pilot project with YRC Worldwide (NASDAQ:YRCW[10]) to operate several LNG trucks under a fueling contract in Southern California. Overall, for all of 2012, gallons delivered totaled 194.9 million gallons as more and more fleet and long trucking deals roll in. That’s up 25% from 155.6 million gallons the company sold in 2011.

Plus, even bigger gains are set for down the line. Why? Because a consortium of the nation’s biggest railroads- — like Union Pacific (NYSE:UNP[11]), CSX (NYSE:CSX[12]) and Burlington Northern Santa Fe (NYSE:BNI[13]) — are looking to cash in on some of those cost savings by also using LNG instead of diesel.

After employee compensation, fuel costs[14] are American railroads’ number one expense. For example, Union Pacific — which is the largest U.S. railroad by revenue — burned 1.09 billion gallons of fuel last year at an average price of $3.22 a gallon. According to Clean Energy Fuels Corp., it only costs truckers $2.99 to buy LNG with the same energy content as a gallon of diesel. Volume discounts push that down to as little as $2.10 a gallon.

While it’s still early in the switch from locomotive diesel to LNG, several industry executives anticipate it happening within the next year or so. That could provide a new side business for Clean Energy Fuels, as it’s already the leader in building the necessary infrastructure for CNG/LNG fueling stations. Being a first mover sure has its advantages.

On top of that, as Chesapeake gets ready to sell its stake, shares of CLNE could be under pressure. That could provide investors a prime opportunity to snag up the promising end-user natural gas play.

Of course, also keep in mind that Clean Energy isn’t yet profitable and debt is a little on the high side. However, considering the heavy CAPEX required to build out its network of fueling stations, that debt seems a bit more reasonable. Plus, the firm is only trading at 2x book value, which again isn’t that extreme for a firm that hasn’t made any money yet. CLNE’s valuation is nowhere near the non-profit dot-com style multiples of the past.

Additionally, considering that shares have already fallen about 30% over the last year, any good news could provide a nice bump upwards.

Overall, Clean Energy is an interesting play on the growth of natural gas[15] as a transportation fuel. Investors should definitely look to pick up what Chesapeake is throwing away.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

  1. grinding forward:
  2. CHK:
  3. mid-stream pipelines:
  4. ACMP:
  5. locomotives:
  6. CLNE:
  7. plans to divest most of its stake:
  8. Chesapeake’s:
  9. LNG:
  10. YRCW:
  11. UNP:
  12. CSX:
  13. BNI:
  14. fuel costs:
  15. growth of natural gas:

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