Pickens' Clean Energy Fuels (CLNE) Could See Pressure from Warrant Exercises, Subsidy Uncertainty - Barron's (XOM, T, WMT, More...)

T. Boone Pickens has been pushing natural gas as a viable alternative to oil for the past 22 years or so, and now believes that prices of the invisible gas should finally be making the moves that they should've so many years ago. One of his holdings, Clean Energy Fuels (NASDAQ: CLNE), provides that equivalent of 120 million gallons of gasoline to natural gas trucks and buses annually. However, with the expiration of government grants and potential exercise of stock options by Pickens and other major investors, Clean Energy investors just may be setting themselves up for a little more downside before the ship rights, according to a recent Barron's article.

Shares of Clean Energy have tripled over the past 12 months, to about $21 today. Additionally, natural gas is now trading more cheaply than crude oil, and T. Boone Pickens thinks that the U.S. government will offer subsidies to convert more trucks and buses to run on nat gas.

His "Pickens Plan" does just that; attempt to ebb America's reliance on foreign oil. Wall Street is already liking it, boosting Clean Energy's market cap to $1.3 billion, which is about 45x cash flow that analysts are predicting for the duration of the year, and 20x FY11 estimates.

Clean Energy also has a rather large gross margin, at about 5x industry average. However, the company has had a large cash need as well, in order to expand. Barron's thinks that investors should prepare themselves for a 30% dilution of value, as management awarded itself a mess of stock options, and those warrants will need to be exercised in the near future, in particular by T. Boone himself as he might lose up to $150 million post-2012: Most of his shares are pledged to a bank.

Many companies and municipalities are switching to natural gas operations. Since owning just two nat gas stations in 1997, the footprint has extended to over 200 stations in 23 states. Companies like UPS (NYSE: UPS), Wal-Mart (NYSE: WMT), and AT&T (NYSE: T) are leading the charge as well. Muni's are using up to five billions of diesel and gas to run heavy vehicles.

Amazingly, there are over 11 million vehicles running on nat gas in the world right now; Fiat sold more than 140,000 nat gas powered cars last year in Italy alone. Only about 130,000 vehicles in the U.S. run on nat gas, and a slim margin of those are actual cars. Honda (NYSE: HMC) makes the only nat gas car for the U.S., the Civic GX, for use in California and New York.

A big pitch for Pickens is the larger heavy-haulers in the U.S., because they simply cannot switch over to batteries right now. Instead, the haulers and work trucks could utilize compressed natural gas (CNG) or liquefied natural gas (LNG), as its lighter, cheaper, and has the power to drive the trucks down the road.

CLNE CEO Andrew J. Littlefair says that the annual fuel consumption of the nation's buses is around 2.5 billion "gasoline gallons equivalent" (GGE). Waste management trucks account for 2 billion GGEs, and airport vehicles use about 1.5 GGEs. Littlefair doesn't expect that every bus and large truck will run on nat gas, but expects that they will deploy billions of nat gas to targeted trucking fleets.

Sales for CLNE have risen from 75 million GGEs in 2007, to 101 million GGEs in 2009, with the ratio of 2/3 CNG and 1/3 LNG. Revs were $118 million in 2007, and $132 million last year.

LNG is also a super-cheap alternative to gasoline. At today's prices, LNG costs about $0.48 per GGE, and not much more after compression and transportation costs are factored in. CLNE estimates that each 18-wheeler semi uses approximately 20,000 GGEs per year, but it would cost about $8,000 to convert their rigs to run nat gas. This is where Pickens is hoping for subsidiaries to help truckers, governments, and corporations with the cost.

CLNE gets a federal excise-tax credit of approximately $0.50 per GGE, but has still reported U.S. GAAP losses of $0.98/share in 2008 and $0.60/share for 2009. The current credit expired in December last year, as the government was working to push through the current health care bill, but Pickens and Littlefair are confident that the credit will be renewed and be made retroactive.

A passage of a new energy bill would allow grants and subsidiaries for the 30 billion GGE regional trucking market for Clean Energy, but it would then need to compete with the big-boys. CLNE has built a few of its own plants over the years, but acquired many of them from ExxonMobil (NYSE: XOM) and Williams Gas Processing.

The market doesn't have a stringent barrier to entry for competitors, but Littlefair notes that they have key contracts with Exxon, and are trying to push into the truck stop market, making them further down the road than most give them credit for.

Though the company has come far, Barron's believes that an investor at this price probably won't get a chance to enjoy much more upside in the stock. Should the company report a profit, investor's might expect Pickens to exercise his warrants for 15 million shares.

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