Think 'natural gas' for vehicles

By Jon Markman

Even though the market is throwing a temper tantrum this summer over the concurrent bursting of the private-equity bubble, credit bubble and real-estate bubble, at least one truth remains self-evident: The world is still running out of oil, and the one-two punch of rising Asian demand and broadening environmental restrictions make both alternative and "clean" energy look increasingly like a sure bet.

To be sure, the alternative-energy field is filled with rogues, bogus elixirs and questionable technologies, including such weird ideas as harvesting the power of algae grown in giant plastic baggies. Yet there are quite a few serious efforts in the marketplace today that are well-grounded and potentially very profitable.

Over the next year, I'm going to try to guide you to the intersection of investment opportunity and the future of energy. We will try to make money by taking positions in companies with real-world solutions and also save money by exposing charlatans.

Cleaning up

First up this week, let's take a look at a totally down-to-earth and already almost profitable idea: Developing and expanding the use of compressed natural gas (CNG) and liquefied natural gas (LNG) as a fuel for corporate and municipal trucks, buses and cars. These fleets, which focus on making round trips every day between a central parking lot and a couple of nearby destinations, are called "return to base" vehicle applications in the trade, and account for a vast portion of total corporate and government driving -- something like a $21 billion business in the United States alone.

Compressed natural gas is an exceptionally efficient fuel for return-to-base fleets, as analysts believe it produces 50% to 70% fewer pollutants and saves $5,000 to $20,000 in fuel costs annually per vehicle than diesel, the fuel most commonly used today. There's just one company focused on this market, and it just went public a month ago: Clean Energy Fuels (CLNE, news, msgs) of Seal Beach, Calif.

Founded 10 years ago by energy industry icon T. Boone Pickens, the company designs, builds, finances and operates fueling stations that supply CNG and LNG to fleet operators. It also helps customers buy and finance natural-gas vehicles and to ensure that they get their full measure of government incentives for doing so. Through 168 stations, it already serves 200 fleets that operate 13,000 CNG vehicles.

The company makes money mostly by selling CNG and LNG and running fueling stations. It's a volume business, and Clean Energy aims to become the brand and sales leader. The plan is attractive in its simplicity: Leveraging the country's vast network of gas pipelines, Clean Energy just buys supercooled liquefied natural gas from local utilities and then compresses and transports it to its fueling stations via tanker trucks.

Last year, Clean Energy lost $4.7 million on $91.5 million in revenue, but it appears to be right on the verge of a material ramp in profitability. It did earn a profit in the first quarter of this year, and if it wins a couple of contracts that are currently on the table with Waste Management (WMI, news, msgs) and the Port of Los Angeles, it could earn as much as 3 cents a share in the current fiscal year, 23 cents in 2008 and 60 to 84 cents in 2009.

If these estimates are anywhere near correct, we're talking about a little-known but well-established company led by a much-respected energy pro that dominates a niche where growth is likely to exceed 100%. And it yet it trades at a price-earnings multiple on 2009 estimates of just 20. That seems a bit too good to be true, but what do you expect on the fringe? You're allowed to dream a little as long as you've got a firm foundation.

Continued: The search for alternatives

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