In late May, shipping giant UPS (NYSE: UPS) announced a seven-year deal with natural-gas-for-transportation leader Clean Energy Fuels (NASDAQ: CLNE), to purchase 170 million gallon equivalents of renewable natural gas. UPS will buy between 22.5 million and 25 million gallons every year through 2026. This is the biggest purchase of renewable natural gas in American history.
UPS called RNG "a key part" of the company's strategy to make alternative fuels 40% of total ground fuel consumption by 2025, an effort it expects to reduce the greenhouse gas emissions from its ground fleet by 12% over that period.
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For investors, there are other notable takeaways, including a clear winner in this deal -- Clean Energy -- and the implications for other alternative fuels for commercial transportation, including electric and hydrogen vehicles. Let's take a closer look at the deal, and what investors can learn.
Looking at this deal in proper context
The saying "perspective is reality" certainly applies to this UPS-Clean Energy agreement. If you're UPS, this deal is a veritable drop in the bucket. The company operates over 120,000 road vehicles globally, with more than 10,000 of those already utilizing some sort of alternative fuel, including RNG, but also electricity, biodiesel, and others. Before this deal, the company already drove around 1 million vehicle miles on natural gas -- both renewable and conventional -- every day.
However, if you're Clean Energy Fuels, this is a significant deal even for the biggest seller of both conventional and renewable natural gas for transportation in North America. The company's shares surged almost 10% on the news, as this single deal will increase its total annual fuel delivery volumes by 6%. UPS confirmed in an email that the volumes of RNG it was buying were incremental sales above and beyond any current fuel it was sourcing from Clean Energy Fuels.
What does this mean for the alternative fuels landscape?
On one hand, UPS -- as the scale of its global fleet and current utilization of alternative fuels demonstrate -- will continue to invest in multiple alternatives. The company announced in 2017 a pre-order of 125 Tesla fully electric semi tractor-trailers, and has made commitments to be the first commercial user of Diamler's medium-duty eCanter electric truck when it comes to market.
However, neither of these vehicles is commercially available at this point, and history tells us that they will likely face multiple delays before commercial launch. Moreover, UPS' commitment to both represents an incredibly small portion of its fleet, and would be part of what the company calls its "Rolling Lab," a test platform to determine both the operational and financial viability of various alternative-fueled vehicles.
The biggest takeaway is that UPS seems to view RNG, which Clean Energy produces from organic waste and markets under the Redeem brand name, as the current leader in low-carbon fuels. For some context, 25 million gallons of RNG per year would fuel 1,000 or more UPS tractor-trailers consuming an average of 20,000 to 25,000 gallon equivalents of fuel per year. That's eight times more Tesla Semi electric vehicles than it plans to bring onto its fleet for testing, whenever Tesla eventually gets the product to market.
Despite it still being a small amount of fuel in relation to UPS' global spending, it's still a substantial outlay, and indicates that UPS is clearly comfortable with natural gas drivetrains and fuel access if it's willing to commit such a substantial portion of its U.S. ground logistic operations to this single fuel.
And that bodes well for Clean Energy Fuels. Over the past decade, the company has built the biggest network of both public and private natural gas stations in North America, and over the past five years has seen sales of Redeem skyrocket. In the first quarter of 2019, the company said total natural gas volumes increased 12%, but Redeem volume increased almost 90%; that's before its agreement with UPS was in place.
Can investors profit from RNG?
UPS is the rare commercial transportation fleet operator with enough scale -- and money -- to dedicate large resources to testing alternative fuels. It's not just a matter of training a driver how to operate a new vehicle; this affects every aspect of fleet operations, including vehicle maintenance employees, equipment and facilities used for maintenance, where vehicles access fuel, and a litany of other things that cost the company not just money, but also time to train people and modify facilities that it may get little or no long-term return on. For UPS to make this significant of a commitment to RNG is a clear signal that it's a commercially viable fuel.
Moreover, it emphasizes what Clean Energy CEO Andrew Littlefair has been saying for some time: Natural gas is a viable, low-cost, low-carbon fuel that fleet operators can use today. When it comes to most medium- and heavy-duty applications, electric and hydrogen vehicles simply don't yet exist and are likely years away from commercial availability. There hasn't even been any large-scale testing of these vehicles yet.
And Clean Energy Fuels has already proven it can make money in this business. It generated almost $40 million in cash from operations last year, and with lower expenses and higher volumes in 2019, it has a good chance of generating even more positive cash flow. The stock price is up 47% since the beginning of the year, but it's fallen 26% from the peak in April.
It's likely to remain volatile as energy prices fluctuate and investor sentiment ebbs and flows (often based on headlines about the future of energy). But while other technologies remain expensive and unproven, UPS and Clean Energy have made a clear statement that RNG is a real and viable solution to reducing carbon emissions from transportation right now. Considering Clean Energy's cash flow, falling expenses, and huge stamp of approval from UPS, investors could profit handsomely by investing in this "ready now" provider of alternative fuel.
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