FedEx going green with cheaper natural gas

The CEO says 30% of the shipping company's long-distance trucks could make the switch within 10 years.

By Trefis Mar 14, 2013 2:40PM

 

logoDelivery copyright George Doyle, Stockbyte, Getty ImagesFedEx (FDX) CEO Frederick W. Smith said he expects up to 30% of long-distance trucks to be powered by liquified (LNG) or compressed natural gas (CNG) over the next 10 years. 


While there is ample research to show that the use of natural gas in transportation can reduce carbon emissions significantly, the high costs associated with these vehicles and relative scarcity of fueling stations have hindered their adoption up to now.


Here, we take a look at the key factors expected to drive adoption rates of CNG/LNG vehicles in the transportation industry over our forecast period. This trend is expected to improve EBITDA margins for the FedEx Ground segment, which makes up more than 67% of Trefis' current price estimate for the stock. 


Natural gas supply and prices

The rise in domestic supply of natural gas since the advent of hydraulic fracturing technology has been one of the biggest factors driving increased adoption rates of this source of energy. Even as demand for natural gas has been increasing at a rapid pace driven by higher adoption in electricity generation, faster growth in its production from shale gas reserves has kept prices in check. While the average diesel price is above $4 per gallon, the same amount of CNG (gallon gasoline equivalent) can be bought for almost half the price in the U.S. The efficiency of a machine in converting either of these fuels into power is also an important factor and does partially offset the price advantage of CNG over gasoline in some cases. This particular Freightliner (see YouTube) has around 10% lower fuel efficiency with CNG as compared to diesel and still provides operational gains over the traditional fuel.


Less environmental impact

Natural gas vehicles offer a significant opportunity to reduce green house gases (GHG) emissions as compared to gasoline powered vehicles. According to the Center for Climate and Energy Solutions, the use of LNG and CNG as alternatives to diesel can reduce carbon intensity (the amount of carbon by weight emitted per unit of energy consumed) measured in gCO2e/MJ by 13% and 29% respectively. The same study suggests that reductions of conventional air pollutants from natural gas vehicles are also significant.


According to the report:

A 2001 study conducted by the Department of Energy's National Renewable Energy Laboratory (NREL) found that natural gas vehicles in the United Parcel Service CNG fleet emitted 95% less particulate matter, 75% less carbon monoxide, 49% less nitrogen oxides and 7% less volatile organic compounds than their diesel-powered equivalents.


Fueling infrastructure

The absence of a robust fueling infrastructure for CNG has been the most prominent factor dampening the rate of adoption of natural gas fuel variants in transportation. Including both public and private, the total number of CNG fueling stations in the U.S. stands at 1,197, according to the Department of Energy. This compares to about 180,000 gasoline stations. However, we expect to see this number to improve over the forecast period driven by higher demand for CNG vehicles due to lower operational costs and government (both federal and state) laws and incentives to boost growth in alternative fueling infrastructure.


Vehicle cost and range

High initial costs of LNG/CNG vehicles as compared to gasoline alternatives have also negatively impacted their demand. Currently, LNG powered tractor-trailer trucks cost around $75,000 more than the ones that run on diesel. Increasing mass production and competitive forces are expected to drive this premium down in the long run as these products gain wider acceptance.


Another factor hindering the adoption rate is the lower energy density of natural gas fuel variants compared to diesel which causes fuel tanks in these vehicles to be larger than those required for gasoline. This factor is responsible for restricting the range of natural gas powered consumer vehicles as any incremental space used for fuel reduces passenger utility.


Fedex Ground EBITDA MarginOverall, we feel even though there are enough economic and environmental factors driving higher demand for natural gas as a source of energy to the transportation industry, its growth rate will be limited by the rate at which the fueling infrastructure grows and the relative affordability of these vehicles.


We currently forecast the FedEx Ground segment EBITDA margins to increase to around 30% in the long run driven by the company's cost-cutting measures. However, the higher-than-estimated rate of adoption of CNG and LNG vehicles can significantly lower operating costs of the company's ground operations and could imply potential upside to the Trefis $122 price estimate.

Tags: FDX
5Comments
Mar 14, 2013 5:11PM
avatar
Japanese taxi cabs were converted to use LP back in 1969 because the price of gasoline was 1.00/gallon in Tokyo back then. I saw hundreds of Totota taxicabs using LP so that was then why is Fedex so slow ?
Mar 15, 2013 8:04AM
avatar
Not only Fed-Ex, the question is why are WE so slow as a nation.
Mar 15, 2013 7:23AM
avatar

Natural gas is the future of energy. It is replacing dirty old coal plants, and dangerous expensive nuclear plants. It will fuel cars, trucks, vans, buses, locomotives, aircraft, ships, tractors, engines of all kinds. It costs far less.  It will help keep us out of more useless wars, where we shed our blood and money. It is used to make many products. It will bring jobs and boost our economy.  It lowers CO2 emissions, and pollution. Over 5,500 select natural gas story links on my free blog. An annotated and illustrated bibliography of live links, updated daily. The worldwide picture of natural gas. Read in 75 nations. ronwagnersrants . blogspot . com
Apr 12, 2013 7:21PM
avatar
Misleading headline - unless you're under the delusion that natural gas = 'green' energy {never mind the FUTURE thereof}... How about spending those billion$ on ACTUAL green technologies for CLEAN, NON-POLLUTING, RENEWABLE energy sources (eg. geothermal, solar...) - since you do, at least, express an interest {presumably for your kids, grandkids etc. & not just you} in HAVING a future besides riding around in rowboats to escape the rising tides, or living like goats on mountaintop - wait, those are being lopped off these days by mining co's aren't they?  Yikes -- QUITE the dilemmas your generation has helped exacerbate for life on Earth!  {JUST in case my being Cdn. suggests the views of anyone around here with a clue aligns with those of our, cough, 'energy minister'...}  Yes our govt. is corrupt - but they won't be around much longer, unless of course they're planning Civil War as a solution...
Mar 18, 2013 5:15PM
avatar
Private vehicles can be retrofitted to natural gas use for under 2000.00. The EPA inspection fees are the reason for the high prices paid by the car and truck factories to produce these vehicles. Back in 1974 the public utility vehicles were all converted to run on natural gas in my home town . They didn't need their oil changed as often as the fuel is clean burning and being a higher octane then gasoline the engines can produce more torque. Why the delay to convert trucks and autos to natrual gas is because Big oil doesn't like to lose customers. There are 15 E-85 fueling stations in the entire state of Oregon but LNG vehicles are seen on the show room floors and on the road. I saw numerous LNG fueling stations all over the Western part of Oregon last August. The E-85 fueling station in Eugene Oregon is way off of I-5 and hard to find. I use a mixture of 50/50 E-85 and non led regular and I am happy with the gas mileage
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

114
114 rated 1
278
278 rated 2
474
474 rated 3
641
641 rated 4
639
639 rated 5
663
663 rated 6
640
640 rated 7
499
499 rated 8
284
284 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.