Think 'natural gas' for vehicles

Good news for T. Boone

Now if you don't already know, founder Pickens is by no means a flower-powered Earth child. The industry legend launched his $2.5 billion fortune as a high-profile energy company takeover maven in the 1980s and more recently has run one of the nation's most successful commodities-focused hedge funds.

Pickens has been on a crusade of sorts lately, speaking out about the decline of fossil-fuel resources -- a topic known broadly as "peak oil" -- and the desirability of natural gas fueling as an alternative. With production at mature oil fields from the North Sea to Mexico seriously shrinking, and the lack of any recent significant oil finds, those warnings have hit home. Just last month the International Energy Agency announced its belief that crude oil will undergo a supply "crunch" after 2010 as production slows among non-OPEC nations while global demand continues to grow a bit better than 2% annually.

It doesn't hurt Pickens' position that other alternative fuels have experienced setbacks, as detailed in a recent WR Hambrecht analyst report:

• Corn-sourced ethanol is struggling to comprise 10% of the nation's fuel supply and has already inflated grain, meat and dairy prices. There are lot of questions whether ethanol is even an alternative energy, since so much fossil fuel is required to grow and refine corn.

• Biodiesel could work, but it still produces a lot of nasty nitrous-oxide emissions, and it is not likely to pass stringent new federal clean-air regulations to go in force in 2010.

• Electric/gasoline hybrid engines remain expensive, and battery-life issues are unsolved.

• Hydrogen, while promising, remains in the pie-in-the-sky category -- and requires a lot of natural gas as a base fuel.

Efforts toward energy independence also help point the way toward natural gas. The United States imports three-fifths of its crude oil and 90% of it is used in transportation. Natural gas is hard to transport overseas, so most of ours comes from domestic, Canadian and Mexican sources. According to the U.S. Bureau of Transportation, there are 7.5 million fleet vehicles operating across the United States. Considering that three-quarters of them operate on a "return-to-base standard," Clean Energy's target market is potentially worth $20 billion per year in revenue.

Natural-gas vehicles are rare in private use here but much more common overseas. The International Association for Natural Gas Vehicles estimates that there are nearly 6 million NGVs worldwide, but only 150,000 or so are in the United States. International popularity for the vehicles has been cultivated through a combination of clean-air mandates, high gasoline prices and large supplies of natural gas. It's not hard to imagine, with a spate of clean air initiatives being proposed by individual states and calls for energy independence, that NGVs will gain popularity.

Moving forward, the big catalyst for Clean Energy will be the Port of Los Angeles' push to replace 5,300 of its oldest diesel trucks with ones powered by natural gas over the next two years. Clean Energy has already won three out of the four contracts that the port has awarded for LNG terminals, and it is considered likely to win the fourth as well. The deal would boost annual gas volume by 32% in 2008 alone. Other West Coast ports, such as Oakland's and Seattle's, are said to be considering similar initiatives to help them comply with state regulations aimed at reducing carbon-dioxide pollution by 10% over the next 10 years.

When you add it all up, CNG looks like a promising transportation fuel for the next decade and Clean Energy is emerging as its leading brand. My target for next year is $20, which would be a 40% move from the current quote. But don't go wild with this stock or any others in this emerging field, and use a protective stop in case its promise doesn't materialize. Many new companies have tried to break the major oil companies' hold on transportation fuel, and most litter the roadside with failure.

Fine Print

To learn more about Clean Energy, visit its Web site. . . . The company buys gas from its own Pickens plant in Texas, Williams (WMB, news, msgs) in New Jersey, North Carolina and Washington, and ExxonMobil (XOM, news, msgs). The new California plant's supplier will be Royal Dutch Shell (RDS.A, news, msgs), BP PLC (BP, news, msgs) or Sempra Energy (SRE, news, msgs). Click here to see the proposed location of the new plant. . . . Click here to visit the Boone Pickens Web site.

At the time of publication, Jon Markman owned shares of ExxonMobil.

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