The Natural Gas Investment You're Ignoring

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club

The Natural Gas Investment You're Ignoring

by Matthew Carr, Investment U Research Analyst

Friday, July 15, 2011: Issue #1557

Stand at any metropolitan bus stop. Chances are, a city bus will rumble by advertising, “This Bus Runs on Clean Burning Natural Gas.”

Hear that garbage truck squealing and grinding gears through your neighborhood on trash day? Chances are it's also running on natural gas. Waste Management (NYSE: WM) boasts the largest natural gas fleet in the United States, with 1,000 trucks.

In total, there are 112,000 vehicles fueled by natural gas in this country - more than the number of battery-powered electric cars. There are 1,000 natural gas fueling stations. Almost a quarter of all new transit vehicles run on natural gas. With these totals expected to increase, investors are once again betting big on LNG.

Chesapeake Energy Teams Up with T. Boone Pickens

By now, you already know that on Tuesday morning, the natural gas sector got a shot in the arm when Chesapeake Energy (NYSE: CHK) announced that it would pour $1 billion into pushing forward natural gas as a vehicle fuel over the next 10 years.

For over a decade, oil tycoon T. Boone Pickens was leading the charge, even starting his own company, Clean Energy Fuels Corp. (Nasdaq: CLNE). And of course pushing his Pickens’ Plan and the NAT GAS Act.

Not surprisingly, the two are teaming up. Chesapeake will throw its weight behind CLNE by buying $150 million in the company’s bonds over the next three years ($50 million in June, and another $50 million in June 2012 and June 2013).

CLNE will use that to begin constructing 150 liquefied natural gas (LNG) filing stations for heavy-duty trucks along the nation’s highways.

The deal's impact to CLNE's share price is undeniable - up 29.7 percent in the two days after the deal. It retreated heavily yesterday, but bounced back a bit this morning.

Outlook on Natural Gas Vehicles Turns a Corner

So why Clean Energy Fuels Corp.?

For one, its customers already include garbage, transit, ports, shuttles, taxis, trucking, airports and municipal fleets. Each day, the company fuels more than 21,200 vehicles through 238 locations in the United States and Canada.

It’s the largest provider of natural gas for fleets and related turnkey services in North America. And it even touts Walmart (NYSE: WMT) as one of its customers.

Retailers like Walmart– which has one of the largest trucking fleets in the world – are trying to cut fuel costs by switching to compressed or liquefied natural gas. AT&T (NYSE: T) has a goal of 15,000 alternative fuel vehicles by 2018. Unfortunately, the infrastructure isn’t there. So Walmart’s LNG fleet is merely eight trucks operating in southern California.

And that’s the real fly in the ointment...

Build It And They Will Come?

Worldwide, the International Association for Natural Gas Vehicles (IANGV) puts the number of natural gas vehicles (NGVs) over 12.6 million. And globally, there are more than 18,000 natural gas fueling stations.

Considering that, we can see that the U.S. NGV market is minuscule at the moment. Last year was the first time NGV numbers in North America increased since 2004. Since then, the North American NGV fleet decreased 15 percent.

Right now, only 0.04 percent of the vehicles on the road in the United States run on some form natural gas.

Outside of California, the infrastructure for NGVs is practically non-existent. The 1,000 existing natural gas fueling stations are a fraction of the more than 115,000 conventional gas stations in the United States (and that number’s even been steadily declining since 1994).

To build a coast-to-coast system of fueling stations would cost billions.

Years ago, when I first began covering the oil and natural gas markets, we were sure NGVs were the future. The fuel is considerably cheaper than gasoline – right now, it’s about $1.50 to $2.00 cheaper per gallon. It’s cleaner than gasoline and is domestically produced, great news for those looking to curb foreign oil imports.

Natural Gas Vehicles Introduced to Curb Rising Oil Prices

We thought the U.S. NGV industry would heat up as manufacturers introduced them throughout Asia in an attempt to curb rising oil demand there… Because we all know that if those heavily populated countries discovered a thirst for oil, that would create a real mess for the global economy – skyrocketing oil prices and all that…

In a sense, it was sort of a success. In Asia, the average annual growth rate of NGVs has been 42 percent over the last 10 years.

Natural Gas Vehicles by Region, 1991 - 2010

There are more than a million NGVs in India and 450,000 in China. Pakistan boasts 2.7 million NGVs, and then we have Iran, Argentina and Brazil each with more than 1.5 million apiece.

IANGV believes the global NGV fleet will increase at least 10-fold by 2020 – topping 50 million.

Natural Gas Vehicle Growth Worldwide

The real question is: Is the United States ready to catch up? Four of the top-10 selling cars in the United States are pick-up trucks and SUVs.

Investing in The Natural Gas Vehicle Market

So here’s the deal: Chesapeake is on a NGV blitz, now converting 4,500 of its light truck fleet, 400 heavy-duty trucks and 100 drilling rigs to run either compressed natural gas or LNG. The company stated the moves would save it $250 million per year in fuel costs.

It wasn’t really a surprise to see CLNE begin to trail back down yesterday.

I’d be more interested in a company like Fuel Systems Solutions (Nasdaq: FSYS), which makes alternative fuel engines.

  • The first-quarter results weren’t great for the company – the debacle in Europe hurt and its share price slid.
  • But it’s expanding its U.S. operations, and has a deal with General Motors (NYSE: GM) and Chevrolet.
  • Plus, it continues to invest in Asia – where a lot of the NGVs are currently located. That’s a key word… currently.

The NGV market in the United States is still in its infancy. Broad adoption by consumers is still some years away, if it does happen. That’s why CLNE is such a speculative play… trading at more than 100 times earnings!

In the near term, the real money is in industrial, mining and exploration fleets switching over to natural gas. And the companies that supply those alternative or bi-fuel engines.

Good investing,

Matthew Carr

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