Clean Energy Fuels (CLNE) is a company that is investing heavily in building out a natural gas fueling infrastructure in the US. I am not sure whether the name is appropriate given that Natural Gas is not clean energy. Though the proponents of NG cite lower carbon and other emissions compared to Coal and Oil, the fact remains that NG is a fossil fuel. Clean Energy Fuels operates in segments such as manufacturing of NG equipment, operating CNG/LNG stations and producing LNG. GE has loaned $200 million to CLNE to build 2 LNG plants using GE's micro-LNG technology. CLNE's most ambitious project is the American Natural Gas Highway (ANGH) in which 150 LNG stations will be built across America to provide a complete NG solution for heavy duty fleet customers. The company can produce 500,000 gallons of fuel daily and plans to add capacity when demand picks up. It has raised around $450 million for ANGH which is expected to be complete by 2013. The whole investment thesis for CLNE depends on the success/ failure of ANGH.
- Customer Partnerships - CLNE has entered into partnerships with a number of fleet customers such as FedEx, Frito-Lay, Saddle Creek, Covanta and Pilot Flying J etc. Big fleet customers see the benefits of NG more clearly than individual car customers. They can see huge savings from converting their fleets to run on NG compared to gasoline/ diesel. CLNE has built most of its LNG stations near the fleet stops of its big customers.
- State Support - Virginia has signed an agreement with CLNE to convert all of the state- and municipal-run fleets to natural gas. Other states are too moving towards adopting NG transportation. If additional states give similar contracts to CLNE, then it will serve as a strong positive catalyst for CLNE's stock price.
- Obama administration - The Democrats are much more supportive of the green economy than Republicans. While Obama administration has not been able to pass a carbon tax or carbon credit laws, the President has imposed stringent Corporate Average Fuel Economy Laws (CAFÉ) standards. The automobile majors might adopt NG engines in the future to meet these standards. Honda has introduced the Civic Natural Gas vehicles (NGV) in 2012 with a $3,000 worth of prepaid fuel card.
- Integration and Diversification - CLNE is present in segments such as constructing CNG stations in partnerships with airports, refuse companies etc. The company also produces biomethane and LNG. This allows the company to provide fuel to its network of CNG and LNG stations internally. The company also manufactures NG equipment for vehicles.
- Profitability - The Company is making 28c/gallon in its core fueling business which is pretty decent at this stage of its business expansion. The company's margins will expand as station sales increase. The company faces almost no competition to its LNG stations as there are other alternatives for NG powered trucks and cars.
- Capex Heavy Business - The biggest risk for small companies undertaking capital intensive projects is that they run out of cash before the project turns profitable. CLNE has kept a number of its fueling stations on the standby mode as it does not have enough customers to run them profitably. The company has built 70 stations in 2012 and plans to build another 80 stations in 2013 to complete its ambitious American Natural Gas Highway (ANGH). If its fleet customers do not switch to NG fast enough, then CLNE will have to support operating and debt costs without revenues.
- Westport Dependence - CLNE has to depend on another company Westport Innovations (WPRT) for getting customers. WPRT is supposed to come out with NG engines in the 12 and 13 litres for trucks in 2013. If it fails to meet the deadline due to any reason, then CLNE will be badly affected as it was in this quarter. Westport in its recent quarterly results said that NG infrastructure was not being built too slowly leading to a sharp fall in CLNE's stock price.
- Natural Gas Prices - CLNE claims to have a $1.50/gallon advantage over gasoline currently. However, if for some reason NG prices jump sharply then that advantage could erode quickly making fleet customers reluctant to switch to NG. Some SA commentators think that the Shale Gas revolution is being overhyped and that NG price will jump up sharply at some point.
- Technology Changes - GE and Chesapeake (CHK) have come out with a new product called "CNG in a box" which would allow normal gasoline filling stations to easily come out with a CNG product. This could disrupt CLNE's business model badly if the numerous gas stations start selling CNG as well.
The company has never generated a profit, so valuing it on a P/E basis or a P/CF does not make sense. The P/S and P/B is roughly around 2x at its current stock market price of $13. This does not make the stock either cheap or expensive. The company is trading at roughly half of its peak price of $24-25 reached in the first half of 2012. The irrational exuberance in the stock seems to be over as investors have realized that they are not going to see quick profits. This has made the valuation for CLNE cheap but not a bargain.
The business model and strategy of the company makes a lot of sense. It has tied up with strong partners like GE and Chesapeake. The company continues to add to its long list of fleet customers almost every quarter even as it is executing well on building LNG stations. If you believe that NG transportation will happen in America at some point, then CLNE is the natural choice to buy. Oil prices continue to increase in relation to NG making CNG vehicles increasingly attractive. Some countries like Pakistan and Iran run almost their entire vehicle fleets on NG. Such a future is possible for America as well due to the abundance of gas reserves. It is difficult to tell when to buy a company which is midway in building a capital intensive project. Another company that shows the same characteristics is Molycorp (MCP) which has completed Phase 1 of the Mountain Pass rare earth mine project. It's difficult to give an outright buy or sell for such stocks. It's more about how much you trust the sector demand and the company's management. We think CLNE is a buy but would wait for a more attractive entry point or additional movement toward project completion.