Climate-Bill Winners: Clean Energy Fuels

Shares of Clean Energy Fuels are spiking on Thursday as the Senate's climate bill provides short-term support for the natural gas vehicle stock story.
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SEAL BEACH, Calif. (

TheStreet

) -- Stocks predicated on a big move to natural gas-fueled vehicle fleets, like

Clean Energy Fuels

(CLNE) - Get Report

, have traded up and down as the fortunes of the climate bill has waxed and waned in Washington D.C. On Thursday, shares of Clean Energy Fuels are up 5% and surpassed their average daily trading volume by midday, as the climate bill unveiled by the Senate again fuels hope that the U.S. government is getting behind natural gas vehicles in a big way.

Nevertheless, investors need to keep in mind the volatility in these natural gas vehicle stocks. A few weeks ago, when Sen. Linsdey Graham (R-S.C.), said he was pulling his support for the climate bill as a result of Senate majority leader Harry Reid's decision to put immigration at the top of the Senate's agenda,

shares of Clean Energy Fuels slipped by close to a double-digit share price decline in one day.

This type of trading volatility -- a bonanza for short-term traders -- is part and parcel of any industry that has its fortunes pinned to government subsidies. It's the case for many alternative energy plays, from wind to solar to natural gas fueled vehicles. The introduction of the Senate climate bill is just the latest example of the volatile trading pattern inherent in these stocks.

The Senate climate bill introduced on Wednesday still has no support from Republicans, after its major republican backer, Lindsey Graham, backed out weeks ago. Senator Graham said again on Wednesday after the Senate bill was introduced that he doesn't see how it can pass in legislative this session.

In the least, the fate of the Senate bill is an uncertain, so should Clean Energy Fuels' shares be back up on Thursday by as much as the Clean Energy Fuels shares had slipped weeks ago when Senator Graham first said he would not support the bill?

It was no surprise that Clean Energy Fuels was out with a press release -- one among many companies directly affected by potential passage of the climate bill -- offering its endorsement of the Senate measure.

One reason to be cautiously optimistic about Clean Energy Fuels shares as a result of the Senate bill is that it finally takes what had only been introduced in natural-gas industry legislation and frames support for natural-gas vehicles as part of overall U.S. energy policy. Whether the climate bill passes in this legislative session or not, "We finally have something that shows politicians don't think the language in the existing natural gas industry act was too extreme or tilted too heavily to natural gas specifically," said Shawn Severson, analyst at ThinkEquity.

Previously, big natural-gas backers like

T. Boone Pickens

had been out saying that natural gas legislation would be introduced by Memorial Day, however, the Senate climate bill shows a much more comprehensive support -- from less directly interested parties -- for natural gas vehicle support.

A second reason is that the Senate climate bill doubles the tax credit -- from $30,000 to $60,000 -- for the purchase of natural gas vehicles over the next ten years, and that could provide a big incentive for potential purchasers of natural gas vehicle fleets to speed up their capital spending, as it would significantly reduce their payback period.

(For each purchase of a natural gas-powered vehicle, a buyer has to pay the premium over a conventional truck or van, and then make back the difference between the existing tax credit and reduced fuel costs over time. With the doubling of the tax credit, that payback schedule would be compressed, or possibly even make the price of natural gas vehicles comparable to conventional trucks.)

In the least, "That's a big incentive for any buyer, potentially making the payback period four months as opposed to two years. You might be more inclined to delay on spending when it's a two year-payback schedule, " ThinkEquity's Severson said.

Other natural-gas vehicle stock plays include

Westport Innovations

(WPRT) - Get Report

,

Fuel Systems Solutions

(FSYS)

and Italian company -- only traded in London --

Landi Renzo

. Landi recently set up operations in the U.S., as subsidies to support the sale of natural gas vehicles in Italy -- one of the largest markets in the world -- were curtailed.

Westport Innovations and Fuel Systems -- which until now has been focused on the European market -- have not traded with the same level of short-term volatility as Clean Energy Fuels in the past, and were not trading with high volatility on Thursday. Westport Innovations shares were up less than 2% at midday, and Fuel Systems Solutions shares were up less than 1%.

Whereas Westport and Fuel Systems Solutions focus on the actual design of natural-gas engines and technology to support natural-gas vehicles, Clean Energy Fuels is focused on provided refueling stations for natural-gas vehicles if the major buyers of natural-gas vehicles commit major capital expenditures to the transition away from conventional fuel fleets.

For traders, the short-term play on the back-and-forth in Washington D.C. over climate policy and the natural gas vehicle link is clearly Clean Energy Fuels.

The ultimate goal -- and support for shares of Clean Energy Fuels -- would be the opportunity to create a series of refueling stations along all the major truck routes in the U.S. to service natural gas vehicle fleets of the major trucking companies, such as

J.B. Hunt Transport Services

(JBHT) - Get Report

and companies like

UPS

(UPS) - Get Report

and

FedEx

(FDX) - Get Report

.

Even if the climate bill does not pass, ThinkEquity's Severson said, "it gives you a good look at what an eventual bill that passes may include and that the previous provisions included in a natural gas act are realistic."

However, given the volatility in clean energy stocks, it's also realistic to conclude that days of volatile swings in trading are still ahead as the Senate climate bill searches for bipartisan support in an already crowded and contentious legislative session.

"You have to look at it two ways: It's a magnet for short term trading based on a single news event, but, over the long term, the development of the natural gas story is hard to dent," the ThinkEquity analyst said.

Ultimately, for investors it has to come down to a realistic timeline for the nat gas story playing out over which it makes sense to pay for a premium in the stock. ThinkEquity's Severson says that even if the Senate climate bill doesn't pass immediately, he is confident that by mid-2011, investors will be rewarded for owning natural gas vehicle plays.

"Investors should get nervous about bidding up and paying a lot for something that's not three months away but two years away, before its six months away. You don't want to be too early, but there is nothing wrong with a premium on a stock if real earnings potential will accelerate in six months," Severson said.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>Climate Bill Stalls Natural Gas Stock

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