Falling Oil Prices Might Not Doom Clean Energy Fuels

By Matt DiLalloFool.com

Clean Energy Fuels has seen its stock drop as the result of the plunge in oil prices. As we see here, in 2014, a 50% plunge in the price of oil resulted in a horrendous 62% drop in Clean Energy's stock price.

CLNE data by YCharts

Continue Reading Below

However, Clean Energy CEO Andrew Littlefair feels the drop is unjustified because he doesn't think that the incentive to switch from diesel to natural gas has been affected as much as investors worry. On the company's third-quarter conference call he pointed this out by saying:

That being said, oil prices have come down a lot more since he made those remarks. However, as he noted, the price of diesel hasn't dropped as deeply as the price of oil. We see this in the next chart that from the beginning of June to the beginning of December the price of natural gas has actually fallen a lot more than the price of diesel.

WTI Crude Oil Spot Price data by YCharts

What this tells us is that the incentive to switch from diesel to natural gas is still there, even if investors think it is disappearing. However, the issue Clean Energy Fuels and its customers are facing continue to be the high switching cost. He called the incremental cost to switch from a diesel engine to a natural gas engine as the "biggest hurdle to widespread adoption" of natural gas as a transportation fuel. That said, his company, and others in the industry, are working hard to solve this problem so that it makes it even easier for customers to switch in the future as they will be able to enjoy more of the discount between the price of natural gas anddiesel.

Littlefair suggested on that conference call, "With higher volume, the incremental cost will come down." However, to get to those higher volumes, his company, and the industry as a whole, have work to do. That work has already begun as Littlefair noted:

The hope here is that by reducing the switching costs it will make the industry less susceptible to falling oil and diesel prices in the future. That's because natural gas is likely to always trade at a discount to oil, and therefore diesel, but that discount can contract when oil prices really take a tumble. So, in order to make the economics of switching even more attractive, no matter where oil goes, the company is working with others in the industry to get those costs down as much as possible. If the company can achieve this goal then low oil prices won't doom its future.

The article Falling Oil Prices Might Not Doom Clean Energy Fuels originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.