Considering that Clean Energy Fuels (NASDAQ: CLNE), North America’s largest provider of natural gas for transportation, largely depends on natural gas being cheaper than gasoline or diesel, things might not look too rosy on the surface. Yet Clean Energy has consistently grown fuel sales by around 20% or more every quarter for the past couple of years, and actually had two of its strongest quarters in the midst of the oil-price decline that began about one year ago.
Yet even with the growth in fuel sales, there are some real concerns with debt, cash burn, and less-than-stellar results in other parts of its business. What should we make of it all?
Here are four things that Clean Energy management talked about on the call that really stood out. They deal directly with some of the major concerns about the company. Let’s take a closer look.
Even with gas and diesel prices down, natural gas is compelling
One of the biggest drivers behind natural gas as an alternative is price. Last year, natural gas was between $1.50 and $2.00 per gallon cheaper than diesel. Since then, the oil-price drop has significantly cut into the price advantage. However, natural gas wholesale prices have also fallen about 40% during the same period.
NG fuel has a higher percentage of fixed costs like compression and liquefaction, so the “at the pump” price hasn’t fallen quite as much as gas or diesel — but it remains significantly less expensive. CEO Andrew Littlefair used UPS as an example of companies with a commitment to the cheaper and cleaner alternative:
UPS continues to be leader in the deployment of natural gas vehicles, with their recent announcements of increased orders of both LNG and CNG [trucks], over 800 tractors and 600 delivery vans. In fact, UPS is on record saying they haven’t purchased a diesel truck in the last two years.
But it’s about more than just price. UPS also made a major commitment to using biogas, renewable natural gas that’s a byproduct of landfills and can be produced from animal and plant waste in farming. The company signed an agreement to purchase about 1.5 million gallons per year of Redeem, Clean Energy’s branded renewable natural gas product, which produces 90% less emissions than diesel.
Focus on fuel-volume growth
Clean Energy does several things, including building stations, manufacturing and selling CNG compressors, and of course, selling natural gas. However, Littlefair has regularly stated that growth in gallons of fuel delivered (gallons refers to gasoline gallon-equivalents) is the single most important metric to follow. From the earnings call:
We had a $9.1 million in construction projects that were essentially complete at the end of the first quarter, but the revenue cannot be recognized — most of this money is in the bank so this is just a timing matter. Lower natural gas commodity prices affected our revenue by $3.7 million. And finally IMW [compressor business] was a challenge as we told you it would be on our last call, due to a global equipment slowdown resulting from declining oil prices, as well as the strength of the US dollar which affected international sales. Despite all of these our margins increased $0.02 to $0.28 per gallon and because of the increased volumes our fuel sale revenues increased by $8.4 million.
Building stations and manufacturing compressors are secondary businesses that exist to facilitate increased fuel sales. They are also much more cyclical, and it was this cyclicality that caused the company’s revenues to decline, not weakness in the core refueling business. Over time, fuel-sales growth will minimize the impact of the “lumpy” parts of the company’s business.
Cutting capital expenditures
After several years of big-time spending (and accumulating debt), Clean Energy is cutting capital expenditure spending significantly, even with the incremental costs of growing NG Advantage, the CNG supplier for industrial users it bought a controlling stake in last year. Littlefair again from the call:
Regarding our CapEx plans for the year we are still on track to spend $38 million for Clean Energy and $21 million related to NG Advantage growth opportunities. Remember, this is down from $87 million last year.
Since the beginning of 2012, the company has spent more than $365 million in Capex, paid for with the majority of its $575 million in debt. Bringing capital expenditures down will go a long way toward preserving the $220 million stockpile the company is counting on until it can reach positive cash flow.
Speaking of debt…
With $145 million in debt coming due in mid-2016, investors are worried about the potential impact. CFO Robert Vreeland directly addressed this:
…these notes are payable in cash or common stock at our election. … In addition to the equity option, we also have over $500 million in encumbered long-term assets, along with our own internally generated cash as we look forward toward positive EBITDA and a possibility of further VETC or asset sales. The key takeaway here is we are actively addressing this matter and we have a variety of choices. Our goal is to satisfy the notes in an effective manner while maintaining adequate cash and operational flexibility beyond August 2016.
In other words, the company has some options regarding how it can deal with those notes. It’s likely that it will use a combination of some stock conversions, some cash, or possibly an asset sale. It could also use an asset as security on longer-term debt to replace the expiring notes, and potentially at better, cheaper terms.
Clean Energy Fuels is far from risk-free. But where there is risk — and that risk remains priced in the company’s stock even after the run-up this year — there’s opportunity. There are real concerns about debt and cash burn, but management is taking serious steps to improve the company’s position, which will reduce risk and move the company toward profitability. As things stand today, Clean Energy strikes me as a compelling stock, even with the risk of real losses factored in.
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Jason Hall owns shares of and options for Clean Energy Fuels.