CLNE is in the middle of the emerging trend toward the use of natural gas in transportation. When oil prices started to take off in the 1970s and Washington's interference with the natural gas market was gradually reduced so that market forces could determine how much natural gas was actually economically recoverable, a price gap between the two fuels started to emerge. There was once a benchmark 10 to 1 ratio between a barrel of West Texas Crude and an MCF of natural gas at the Henry Hub. In recent years, that ratio has moved up well over 20 to 1 and sometimes as high as 30 or 40 to 1. The result has been that natural gas has replaced petroleum in those markets where substitution is relatively easy - powerplants, industrial boiler use, commercial space heating and residential space heating. In the United States, at least, petroleum has become a kind of transportation specialty fuel retreating into the market in which its density and ease of handling provide powerful competitive advantages.
The combination of high oil prices and lower natural gas prices brought on by the fracking boom has led to various efforts to breach petroleum's transportation moat. There are various ways of using natural gas as a transportation fuel; for this article, compressed natural gas (CNG) and liquefied natural gas (LNG) are most relevant (although the conversion of natural gas into methanol is also an option). CNG is simply natural gas pressurized into a tank carried on a vehicle. Because of the relatively low energy density of CNG and the time it takes to pressurize a tank, CNG works best for urban fleet vehicles with limited range. It is rapidly taking hold in the garbage truck, delivery truck, bus and airport vehicle markets. When my wife and I visited China in 2008, virtually all the taxicabs seemed to operate on CNG.
LNG is a different story. Natural gas is cooled to a very, very low temperature at which it becomes a liquid. LNG has greater energy density than CNG and the tank filling process appears to move more rapidly. LNG is, thus, more suitable for long distance trucking. Of course, the liquefying process requires expensive equipment and consumes energy. In addition, storage and transportation require special equipment. So, while a CNG filling station can be hooked up to the ubiquitous natural gas distribution system in the United States, LNG filling stations (and the LNG plants necessary to supply them) require a greater capital outlay.
In terms of adoption, the CNG business has taken off and CLNE is the biggest player. However, it is a competitive business with private companies and sometimes local gas distribution companies entering bidding contests. Urban fleets have been and will continue to move to CNG; the largest waste haulers have committed to buy more CNG vehicles and it has become clear that natural gas will grab a big part of this market. LNG has been slower to develop because of the chicken-egg problem of the need for a national network of filling stations before long haul truckers will adopt LNG and the need for lots of customers to justify the construction of such a network.
CLNE's core business appears to be LNG and the construction of the Natural Gas Highway. However, investors should be aware that it is very active in the CNG market. It appears to have several different businesses in addition to the LNG business - 1. the production of pipeline quality gas from landfills (Clean Energy Renewable Fuels), 2. the conversion of vehicles to operate on CNG (BAF), 3. the sale and installation of compressors for CNG stations (IMW), 4. the construction of fueling systems and stations (NorthStar), 5. the finance of natural gas vehicle fleets (Clean Energy Finance), and 6. the sale of CNG to contract and other customers. These are important businesses. The landfill business stands to generate roughly $10 million a year on one landfill once it is at capacity and it has at least two more on the way. IMW grossed $64.5 million in 2012 and BAF did $24.3 million. As described below, the CNG sales business is actually considerably bigger than the LNG sales business on a volumetric basis.
My initial article projected a potential sales level of 2 billion gallons of diesel equivalent (GDE) in 2017 and noted that it would take an annual doubling of sales to reach that level. CLNE's latest annual report indicates that LNG sales went from 47.1 million GDE in 2011 to 55.5 million GDE in 2012, and this is, of course, well short of a doubling. Readers should be aware that CNG sales are higher at 130.5 GDE in 2012 up from 101.8 GDE in 2011. The problem is that the company is still losing money and is still "burning" capital at a pretty fast rate, building expensive LNG filling stations to encourage the adoption of the technology. So why is it, other than my optimistic nature, that I suggest that the company may be near the point of "inflection?"
Reviewing the transcript of the latest conference call, I think that several considerations point in that direction. CLNE's revenue increased from $293 million in 2011 to $334 million in 2012. Certainly, the enactment of the tax credit earlier this year retroactive to 1/1/2012, which puts an immediate $21 million in the company's coffers and promises additional benefits through this year is another positive factor. If that money had landed in 2012 where it was earned the company's adjusted EBITDA would actually have been positive. I am also encouraged by the validation of the LNG thesis due to the entry of Royal Dutch Shell into the business in Canada and the commitment of the Chinese company, ENN, to enter the business in the United States. This is of course a classic "double-edged sword" - new entrants mean competition but they also increase the confidence of carriers in adopting LNG and the big issue here is adoption of the technology. Another factor is some important breakthroughs in the technology discussed in this article. I am not an engineer but I find the analysis in the article persuasive and it suggests that large scale adoption of the LNG technology by trucking companies may be on the not too distant horizon. In addition, CLNE's CNG business appears to be poised to benefit from greater filling station utilization as more and more gasoline and diesel powered fleet vehicles are replaced each year with CNG vehicles.
Like many companies with new technologies, CLNE is engaged in a kind of race against the clock - hoping to achieve positive cash flow before running out of capital and having to dilute investors. However, the company is not really strapped for cash. It has $117 million cash on its balance sheet. Its accounts receivable exceed accounts payable by $20 million (probably due to the financing business). There is the $21 million tax credit discussed above. Chesapeake Energy (NYSE:CHK) has committed to buy a $50 million note this summer. CLNE recently sold a Peruvian subsidiary for $6 million. The conference call indicates confidence on this score well into 2014 so we are not quite at the "do or die" point. We may see some positive signs in the numbers in the next few quarters. If more "green shoots" continue to pop up, there may be attractive opportunities for joint ventures or even the sale of one of the other lines of businesses in order to bridge the gap. Of course, the optimistic scenario is that positive cash flow from the business does the job and, when that happens, the point of inflection described above may be upon us.
I have a high level of confidence that 5 years from now natural gas will play a much, much greater role as a transportation fuel than it is playing now and I think that it is overwhelmingly likely that CLNE will be playing a pivotal role in the transition. I am still long CLNE but I will be watching the numbers very carefully over the next 3 or 4 quarters.