Shares of Clean Energy Fuels (CLNE), North America's largest supplier of natural gas for transportation, soared on news that leading natural gas exploration and production company Chesapeake Energy (CHK) plans to invest $150 million in CLNE. The infusion is intended to fund the accelerated construction of 150 new liquefied natural gas (LNG) filling stations along major trucking corridors.
Chesapeake made the first investment of $50 million on June 11th, and agreed to make two more installments of $50 million in June of both 2012 and 2013. The investments are debt issues with a 7.5% interest rate, convertible at Chesapeake's option into CLNE stock. The agreed upon conversion price, at $15.80 a share, represents a 22.5% premium to the volume-weighted average closing price covering the 20-day period prior to June 11th. Clean Energy can force conversion of the debt after two years if the stock price is above $22.12. The principal balance is due in seven years, payable in cash or common stock.
We view this transaction as very positive for Clean Energy. LNG is currently between $1.50 and $2.00 per gallon cheaper than diesel or gasoline, and the incremental cost to truck operators of a new natural gas burning engine has fallen from $60,000 to $29,000, in about 18 months. Also, major engine manufacturers, such as Cummins (CMI) and Caterpillar (CAT – Free Caterpillar Stock Report), are in the midst of designing and releasing to market new and cheaper natural gas engines, improving the availability and quality of these kinds of engines. Thus, in our view, the economics of natural gas for trucking transportation are compelling.
Clean Energy has reported plenty of interest in LNG among trucking companies in the past; the problem was that CLNE did not have adequate capital to create scale and rapid acceptance of its fuel. The agreement with Chesapeake goes a long way toward ameliorating that problem. Clean Energy management plans to build its first 70 stations over the next two years, in addition to the nine that it had in development before Chesapeake's investment. It is targeting major interstate trucking corridors, such as the massive I-10 and I-40 East-West routes, the I-5 in California, parts of I-95 in the East, and I-90 and I-70. The company also has designs on the ``Texas Triangle'' region comprised of Austin, Dallas/Fort Worth, Houston, and San Antonio, which stretches across parts of I-20, I-35, and I-45. A previous strategic agreement with Pilot Travel Centers LLC, the largest operator of travel centers in the United States, should complement this new build out, as it affords Clean Energy access to Pilot-Flying J's large cache of well located travel centers.
Clean Energy's planned refueling stations should materially increase the number of gasoline gallon equivalents it sells starting in mid-2012. Furthermore, the company's wholly owned subsidiary NorthStar will construct the new facilities, providing a healthy source of revenue for that unit.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.