Clean Energy Fuels Corporation (CLNE) is the largest U.S. and Canada operator of compressed natural gas ("CNG") and liquefied natural gas ("LNG") vehicle fueling stations. This is a new business - natural gas vehicle fuel stations have never existed in significant numbers before - so the savvy investor should be asking these key questions:
- How important is natural gas as a fuel for vehicles?
- How well-positioned is CLNE to benefit from natural gas?
- Is CLNE attractively valued?
In this article, I will attempt to answer these questions.
How important is natural gas as a fuel for vehicles?
Currently, natural gas represents no more than 1% of vehicle fuel consumed in the United States. Thus, if natural gas is to become important for the powering of vehicles, there must be a significant shift away from gasoline and diesel. Let's consider reasons for and against this happening.
There are two principle reasons most frequently given for believing that natural gas will become an important vehicle fuel: its relative cost and cleanliness. There is no doubt that natural gas is cheaper than gasoline or diesel. According to CLNE, the average California driver paid $4.03 per gallon for regular unleaded gasoline; CLNE's price for an equivalent amount of natural gas was $2.85, 29% less. At the wellhead, on a dollar-per-BTU basis, oil is about seven times more expensive than natural gas. CLNE estimates that a taxi or shuttle bus using CNG instead of gasoline will save $5,000 to $10,000 annually in fuel costs, while a bus or truck that uses LNG rather than diesel will save $25,000 to $30,000 annually (from the CLNE 10-K report). The U.S. has far larger natural gas than oil reserves. Experts are suggesting that natural gas may even allow the U.S. to become energy self-sufficient.
Natural gas is also cleaner than gasoline or diesel. According to California's Low-Carbon Fuel Standard from "well to wheel," natural gas reduces greenhouse gas emissions by 23% for medium- and heavy-duty trucks and by 29% for light-duty trucks. With transportation responsible for 27% of total U.S. greenhouse gas emissions, this is a compelling argument for natural gas powered vehicles.
There are many problems with natural gas that have inhibited its adoption. One problem is the limited availability of natural gas vehicles for sale. Today, the only large natural gas engine for purchase is manufactured by Cummins Westport, a joint venture of Cummins Inc. (CMI) and Westport Innovations (WPRT). This 8.9 liter engine generates 250-320 horsepower and is suitable for buses, refuse hauling trucks and other medium-duty applications; it is not suitable for long-haul trucking or heavy duty machines. In regards to automobiles, until recently the only natural gas powered choice available to the public has been a Honda Civic.
The availability of natural gas vehicles is rapidly increasing, however. Larger (12 or more liter) natural gas engines that are suitable for long-haul trucking will become available in a matter of months. A new Cummins Westport engine is now being manufactured and shipped to OEM truck manufacturers; these trucks will be in the hands of customers and on the road later this year. In 2014, Cummins Westport is expected to launch an even larger natural gas engine and Volvo will also introduce its first large natural gas engine. For automobiles, General Motors has announced versions of the Chevrolet Silverado and GMC Sierra that will run on either gasoline or CNG. Chrysler and Ford are now offering pickup trucks with natural gas fuel options.
A second obstacle for the adoption of natural gas powered vehicles has been the limited numbers of natural gas fueling stations. Today there are just over 1,000 natural gas fueling stations in the United States, as compared to almost 160,000 gasoline stations. Yet even these numbers overstate the availability of natural gas fueling stations, because many of the stations that exist are not open to the public and they are not well distributed geographically - about 20% of them, for example, are located in California.
Increasing the availability of natural gas fueling stations is exactly the problem that CLNE seeks to address. CLNE has first focused on serving fleets of vehicles that operate in a limited geographic area and usually use one fueling center. These fleets include trucks, airports, taxis, refuse handling and public transit. At December 31, 2012, CLNE owned, operated or supplied 348 fueling stations serving 650 fleet customers with 30,600 vehicles operating in 32 states, British Columbia and Ontario Canada, and Peru. CLNE's more long-term strategy has been to build a national network of LNG truck fueling stations that it is calling America's Natural Gas Highway ("ANGH"). As of December 31, there were 70 ANGH stations open and serving customers. The company anticipates opening 50 to 70 additional stations in 2013 and having 200 to 250 total ANGH stations by the end of 2014. In discussing the development of the ANGH in the context of reporting fourth-quarter 2012 results, CLNE President and CEO Andrew Littlefair said, "The infrastructure excuse isn't that good anymore, sure there is more work to be done but regional trucking can now go coast to coast in a long regional corridors of natural gas."
CLNE is the leading company developing natural gas fueling options, but it is certainly not the only one. Royal Dutch Shell (RDS.A) has announced that it will invest more than $300 million to construct 200 LNG pumps at Travel Centers of America truck stops. General Electric (GE) and Chesapeake Energy (CHK) signed a collaborative agreement to open 250 CNG stations in the second half of 2013 (CNG - Compressed Natural Gas - will not serve long-haul truckers; CNG will support automobiles and light trucks).
A third issue with natural gas vehicles is that they are more expensive. This is partially because there's a premium paid based on the limited supply of engines, and partially because storage of natural gas under pressure and occupying a larger volume per unit energy is inherently more expensive than the storage of gasoline or diesel. Waste Management (WM) has reported that over the next five years, 80% of the trucks it buys will operate on natural gas - but that these trucks cost $30,000 more than diesel-powered trucks (the investment makes sense, however, because it estimates a $27,000 annual savings in fuel costs). The natural gas powered Honda Civic costs about $5,200 more than its gasoline powered brethren. General Motors' new dual fuel Silverado and Sierra will cost about $11,000 more than gasoline versions of the same vehicle. The Dodge Ram 2500 pickup truck, CNG version, starts at about $47,500.
Another issue related to natural gas vehicles is performance. Performance problems plagued early versions of the natural gas engines used by public transit and refuse haulers; these problems have apparently been solved with the newer Cummins Westport 8.9 liter engine. The new long haul 11.9 liter Cummins Westport engine has been road tested and is believed to have acceptable performance. Larger Cummins Westport and Volvo engines will be available in 2014. For automobiles, natural gas engines have not performed as well as gasoline engines. The only natural gas automobile available in 2012, the Honda Civic, was reviewed by Car and Driver as follows:
How Does It Drive?
Exactly like a Civic that has lost 30 hp. Zero to 60 takes 10.7 seconds, 1.7 seconds longer than the gas-powered Civic EX and 0.6 longer than the Civic hybrid (it also has 110 hp). Keeping pace with Michigan's 70-plus-mph highway traffic in the Civic CNG is an exercise in patience, advance planning, and luck. Pick a spot, floor the throttle, wait for the digital speed display to creep up, and hope that you judged that traffic gap correctly.
Finally, natural gas fuel storage, especially CNG, is more bulky than gasoline or diesel. Natural gas occupies more volume per unit of energy, so tanks must be larger and range may be reduced. Also, the necessity of maintaining the fuel under pressure adds to the bulk. CNG is generally used for automobiles and light trucks, while LNG is used for larger vehicles. For CNG, storage issues can be a real problem. Consider the aforementioned Car and Driver review of the CNG powered Honda Civic,
"...the car's supply of CNG is stored in a 3600-psi tank that sits behind the rear seats and cuts the trunk space in half, to six cubic feet. In energy equivalence, the Civic CNG holds about eight gasoline gallons' worth of fuel. Honda lists a conservative range estimate of 220 miles. Part of the reason for the conservative promise, it explains, is that different stations refill the CNG tank differently, and ambient temperatures can affect how much you are able to fill the tank."
For LNG powered vehicles, storage is less of an issue because LNG packs about six times more energy than CNG into the same volume and because the vehicles are larger so they have more space.
Weighing these issues, it is reasonable to assume that there will be a huge growth in LNG powered large trucks and vehicles, that CNG will become a predominant source of fuel for fleet vehicles operating within limited geographic areas (e.g., busses, taxis, trash haulers, and shuttle vehicles), and that CNG-powered automobiles will have limited appeal. Evidence to support this conclusion includes that Navistar (NAV) has predicted that, within a couple of years, one third of the trucks it sells will be powered by natural gas and BNSF, a subsidiary of Berkshire Hathaway (BRK.B), has recently announced that it is going to experiment with powering its trains with LNG.
How well-positioned is CLNE?
So, we've established that natural gas is likely to become an important vehicle fuel, especially for CNG-powered fleet vehicles and LNG-powered long haul trucking. And, probably not coincidentally, these are exactly the markets which CLNE is focused on. Now, let's look at CLNE specifically.
CLNE's core business has been supporting fleets that serve a limited geographic area, mostly with CNG fuel. CLNE's 2012 10-K report includes the following highlights about the fleet market:
- CLNE operates fueling stations serving taxis, vans and shuttles at the following airports: Albuquerque, Atlanta Hartsfield Jackson International, Austin Bergstrom International, Baltimore Washington International, Burbank, Cleveland Hopkins International, Dallas-Ft. Worth International, Denver International, George Bush International (Houston), Hartford, Las Vegas, Love Field (Dallas), Long Beach, LaGuardia (New York), Los Angeles International, New Orleans, Newark International, Oakland International, Ontario, Palm Springs, Philadelphia International, Phoenix Sky Harbor International, San Francisco International, Santa Ana/John Wayne, San Diego International, SeaTac International (Seattle), Tampa International, Tucson International and Will Rogers (Oklahoma City).
- CLNE serves "approximately 2,100 taxis in Southern California, the San Francisco Bay Area, Dallas, Houston, Las Vegas, New York City, Phoenix, Tucson and Seattle."
- CLNE estimates that 3,000 out of 8,000 total new refuse hauling trucks purchased in 2012 are powered by CNG. CLNE currently serves 101 hauling companies.
- Approximately 36% of municipal transit busses in the U.S. are powered by CNG or LNG. CLNE's "public transit customers include Boston Metropolitan Transit Development Agency, City of Elk Grove (California), City of Laredo Transit (Texas), City of Montebello (California), Dallas Area Rapid Transit, Foothill Transit (California), Long Beach Transit (California), Los Angeles Metropolitan Transit Authority, Orange County Transit Authority, Phoenix Transit, Tempe Transit, Regional Transit Commission of Nevada, Regional Transit Authority (Ohio), Santa Cruz Metropolitan, Santa Monica Big Blue Bus, Stark Area Regional Transit Authority (SARTA) of Ohio and Tulsa Transit (Oklahoma)."
Here is some of what Littlefair had to say about the CNG market in his fourth-quarter conference call:
Saddle Creek supplemented their natural gas fleet in Lakeland, Florida by deploying 60 additional CNG tractors and now they have a fleet of over 100 trucks. Premier Transportation ordered 60 new CNG trucks to supplement their fleet in Atlanta and the fleet fueled the Clean Energy's College Park CNG station next to Atlanta's Hartsfield Airport… In our refuse market, 455 new CNG refuse trucks were delivered to Clean Energy customers across the country. In the fourth quarter, an additional 567 trucks were ordered. For the full year of 2012, over 2000 new CNG trucks were delivered to Clean Energy's 101 refuse customers. In our airport, taxi and shuttle market, we now have 37 airport stations across the country and continue to see impressive fleet expansion throughout. Some noticeable highlights includes SuperShuttle's announcement that they will be expanding their CNG fleet with 100 additional shuttles which will fuel our California stations and the opening of our new CNG station in the Hertz Rent-A-Car's LAX property. We also opened a new station at Cleveland-Hopkins International Airport with our partner Parking Company of America. And I am pleased to report that the City of Chicago has added 63 new CNG taxis and para-transit vehicles growing their total to over 400 natural gas vehicles in service, an increase of nearly 40% since the beginning of 2012. We have several good deals that have just been signed in the last few days. We were just asked to take over two stations for New York Sanitation. We were awarded a new station for LA Metro. We extended our fuel agreement with Dallas Area Rapid Transit for the next two years and signed a 5-year extension with Orange County Transit for a new station with an upgrade which services 170 buses.
The future of CLNE features the addition of long-haul trucking to its fleet sales. The 10-K states that the following long-haul trucking concerns are piloting LNG vehicles: Con-way, FedEx, Frito-Lay, Ruan, Ryder, Schneider, Swift, UPS, Werner and YRC Worldwide. Here is some of what President and CEO Andrew Littlefair had to say about CLNE's prospects in serving the long-haul trucking market:
We're working closely with more than two dozen contract carriers and working with over a 100 national shippers on fueling and we'll specific doing locations up and ready when their trucks are deployed on the road… UPS has expanded their LNG fleet of 70 with 12 more tractors that will fuel Clean Energy's Phoenix station and plans to deploy a 100 plus LNG tractors in Texas for 2013. FedEx freight has been fueling LNG 11.9 liter Kenworth tractors out of our Dallas station since October running to close to a 1000 miles per day and they have been pleased with the performance and fueling operation… Heckmann Water Corp will be running trucks from Shreveport, Louisiana to our base down Texas, LNG station and returning to Shreveport to service oil and gas field operations. And I am pleased to highlight that just yesterday, YRC Freight, a subsidiary of YRC Worldwide announced they will purchase LNG trucks to operate in their Southern California network.
Our Chief Marketing Officer, Jim Harger presented at the Food Shippers of America Conference earlier this week in Phoenix. And a thousand people were in the audience, 700 contract areas and about 300 food producers. And they were asked for a show of hands who was not considering natural gas for the fleets and not a single hand went up.
The reasonable conclusion is that CLNE is well positioned to benefit from the growth of natural gas fleet vehicles and long-haul trucks.
Is CLNE Attractively Valued?
Recently, CLNE has been trading at about $13.00 per share reflecting a market capitalization of $1.14 billion. Is this an attractive valuation?
Stockholder's Equity was $543 million at December 31, 2012, meaning that the market cap is almost two times book value; this doesn't seem an excessive multiple for a company that hasn't yet turned a profit.
The balance sheet reflects the massive capital expenditures that CLNE has been making - $41 million in 2010, $67 million in 2011 and $193 million in 2012 - of the total assets of $975 million, $428 were real property, $285 million was current assets, and $175 million was goodwill and intangible assets. The $429 million of liabilities include $301 million of long-term debts. This looks like a solid, but heavily leveraged balance sheet; again, nothing surprising for a company that has been investing heavily to build a new business.
The following table highlights CLNE's quarterly operating revenues and expenses (all figures other than percentages are in millions of dollars):
|Other Oper. Expns.||$28.5||$24.5||$26.2||$35.4||$114.7||$46.5||$27.9||$33.9||$42.5||$150.8|
The income statement reveals a number of interesting things, including:
- Revenues from product sales increased at a fairly steady rate, only 13% ($294 million/$260 million) from 2011 to 2012. However, the sharp up-tick in the second half of 2012 after a slow first half caused a 21% increase from the second half of 2011 to the second half of 2012 ($170 million/$140 million).
- The gross margin increased by $4.3 million from $76.0 million in 2011 to $80.3 million in 2012.
- The increase in product Cost of Goods Sold in the second half of 2012 is a possible worrisome trend; there was no explanation for these increases in the 10-K or the quarterly conference call.
Another way to assess reasonableness of valuation is as a multiple of revenues; today's market capitalization represents a three times multiple on trailing twelve months sales.
What we see looking at CLNE's financials is a company that is growing, losing money and investing capital heavily. In order to invest in this, we must believe that future earnings will be generated by these investments. Is this a reasonable expectation?
We can find a reassurance in Royal Dutch Shell's announcement that it will invest more than $300 million to build 200 LNG pumps at Travel Centers of America truck stops. CLNE investors are taking a piece of a $1.14 billion investment in 348 stations that are already open and generated $300 million of revenue in 2012. The fact that an external organization is willing to make a comparably valued investment indicates that others expect the returns from such an investment are worth the risk. This also indicates that a large energy company might look at CLNE as an acquisition worth making.
But, we can also do some rough calculations of our own on how CLNE revenues are likely to grow... and what earnings are likely to be generated. There are three components that drive CLNE revenues:
- Fleet sales. We can assume that current product revenues is essentially fleet sale revenues. A reasonably conservative assumption would be that fleet sales will grow by 15% per year.
- Service sales. These increased by $8 million from 2011 to 2012, let's assume that they continue to increase by $8 million annually.
- ANGH sales. This is the main growth opportunity. There are over 80 million heavy duty trucks registered in the U.S. and each consumes the equivalent of more than 20,000 gallons of diesel fuel each year. The cost of the equivalent of 20,000 of diesel fuel in the form of LNG is more than $50,000. This means that one truck buying exclusively from CLNE translates to $50,000 of revenue; using a COGS of 80%, this one truck generates $10,000 to CLNE's gross margin.
Using the above assumptions and the "truck equivalents" show in the table below, as well as 2012 COGS ratios and increasing other operating expenses by $50 thousand in 2013, $65 thousand in 2014, $80 thousand in 2015 and $95 thousand in 2016, here is a reasonable, but conservative, forecast of future CLNE revenues and expenses:
|Other Oper. Exp.||$114.6||$150.8||$200.8||$265.8||$345.8||$440.8|
CLNE has invested heavily to build a business operating natural gas fueling stations. There are no examples of other companies that have already done this. However, the evidence seems very strong that the transition to natural gas powered heavy duty trucks will happen and CLNE is well-positioned to be a leading source of fuel for them. With a total of 80 million trucks in the U.S., CLNE serving just 100,000 of them by 2016 - less than 1% - could build CLNE annual revenues to over $5 billion and net income to $675.7 million ($7.71 per share). At a p/e of 15, a CLNE share could be worth more than $110. Put another way, if one quarter of the heavy-duty trucks in the U.S. convert to LNG over the next 10 years - a very real possibility - fueling them will be a $100 billion industry. As the current leader in LNG fueling, it is quite possible that CLNE will generate tens of billions of dollars in revenues and be worth many times its current $1.14 billion valuation.
Yet, there are probably two years of losses that will happen before it is clear this future will occur. Management is stressing that it is being careful about how many stations it opens and when it opens them, so I don't expect losses to be as large as I've projected them above.
My conclusion is that CLNE is reasonably valued at its current price. I am long because I think CLNE could easily be acquired at any time by a large energy company. Furthermore, I want to be locked in when the huge future potential of CLNE becomes evident. Investors should be prepared to wait as long as two years for this to happen.