Clean Energy Fuels (CLNE) is a bet on the growth of natural gas infrastructure story in the US, as the company is building 150 LNG stations (American Natural Gas Highway (ANGH)) across America to provide a complete NG solution for heavy duty fleet customers. Beside the ANGH project, Clean Energy Fuels is also involved in the manufacture of Natural Gas equipment, operating CNG/LNG stations and producing LNG. The company has powerful backers in the form of General Electric (GE) and Chesapeake Energy (CHK). GE has given a loan of $200m to CLNE to build 2 LNG plants using GE's micro-LNG technology. The company has become vertically integrated providing both the fuel as well as the infrastructure for getting that fuel to its customers. The company is progressing in building the ANGH which remains the principal driver of growth for the company. Despite low natural gas prices in the US, the natural gas infrastructure growth has been quite slow due to the absence of a widespread network of fueling stations and lack of NG engine vehicles. However, Westport Innovations (WPRT) is coming out with new improved NG engines in collaboration with Cummins (CMI). New Ford (F) and Volvo trucks are going to be introduced in 2013, which will help fuel the growth of NG vehicles in the country. I remain positive about CLNE in the long term though in the short term, the company faces issues from cash burn and losses during the ANGH rollout.
New CLNE Catalysts
1. New Partnerships - WPRT and CLNE are in a symbiotic relationship as the success of one company depends on the success of the other. These companies have now formed a new partnership to bundle the new Westport LNG Tank System with a long-term fuel contract from Clean Energy. The Westport Tank System is optimized to work with Cummins-Westport ISL engines and should be available by September 2013. CLNE has also signed an agreement with Mansfield Energy to provide a joint solution to customers for building a CNG fuel station. Besides these two new agreements, CLNE also has long term partnerships with a number of fleet customers such as Fedex, Frito-Lay, Saddle Creek, Covanta and Pilot Flying J etc. CLNE has built most of its LNG stations near the fleet stops of its big customers.
Companies like UPS (UPS) have already made strong commitments and announced plans to purchase 700 additional LNG trucks over the next year and a half. Many medium sized carriers have made the decision to place orders, putting them in a stronger position to gain market share. This was evident in the recent Request for Proposal for RFP by Procter & Gamble (PG). The giant packaged goods company, for the first time, included a natural gas requirement for the fleets that transport P&G products.
2. More fleet customers are switching to LNG - Big fleet customers like UPS are slowly coming around to see the advantages of their huge fleets running on natural gas. Not only does it lead to huge cost savings but also improves the image of the company (by being greener). The company is preparing to shift fuel usage of most of its 18 wheel trucks from gasoline to NG. There are almost 3 million trucks in US which consume about 15% of US's daily consumption of 20 million barrels of oil per day. If even a fraction of this fleet converts to NG, then the rewards of holding CLNE stock will be quite large.
3. Cash remains sufficient and Chesepeake support - It is difficult for small companies to make large capital investments as these investments take time to generate cash flows. However, CLNE has strong backers with T. Boone Pickens sitting on its board and Chesepeake ready to invest more money in June. CLNE has got more than $130 million of cash and expects almost $50 million in cash to be generated from VTECs in 2013. The company will be able to continue investing in LNG stations which should provide big returns from 2014 onwards.
Matthew Blair - Macquarie Group
Okay, thanks. And then Rick can you walk us through how you're thinking about funding for this year? It looks like you've cut CapEx by about $25 million. Can you give us a status also on the IMW payment and also the $50 million that's going to be due from Chesapeake in mid-year? Thanks.
Richard R. Wheeler
Sure. We made the IMW payment in January, so we won't have another one until next year, for this year. The Chesapeake money, in theory, it's slated to be coming here in the middle of June and we have no reason to believe it won't show…
4. Robust Results - CLNE continues to show robust growth with its revenues growing by 26% in the most recent quarter to $93 million. Gross margin came at almost ~45% which was a big jump from the last year. However, investors must remember that the big jump in revenues and margin came due to the ~$26 million in VETC revenues. The gross margin per gallon at 28c remained flat from last year.
Clean Energy Risks
- Competition is growing - A number of new competitors have entered the LNG fueling stations business in the last year or so. I don't think this is a big risk as the penetration of LNG stations in the US is very low. Competitor entry at this stage will help all players in the industry as fleet customers will buy more NG vehicles, if more LNG stations are established in the US. There were more than 150,000 gasoline fuel stations in the US compared to less than 2000 fuel stations providing CNG and LNG. The ENN Group plans to build 50 stations initially and may construct up to 500 more stations in the U.S. Other companies such as Shell (RDS.A) and Conoco Philips (COP) are also planning to build NG fueling infrastructure in the U.S.
- Capital Intensive Business - Clean Energy Fuels has to run most of its LNG stations at a low utilization because there are not enough LNG vehicles in the market to use them. The company will only be able to build the rest of the 80 stations if it can find enough customers for the first 70 stations. The UPS decision to buy 700 NG trucks will enable CLNE to open more LNG stations. CLNE has to tightly manage liquidity during the transition period.
- Rising NG Prices - CLNE claims to have a $1.50/gallon advantage over gasoline currently. However, that price advantage may not remain in the future if NG prices go up. NG prices have already gone up from $2/tcf to $4/tcf now. The US is also building huge LNG export terminals to export the gas to energy starved countries like India and Japan. The number of rigs for NG drilling has declined dramatically as oil and gas companies are shifting the rigs for oil drilling.
Clean Energy Fuels is neither cheap nor expensive, with a P/S of 3.4x and P/B of 2.1x at its current stock market price of ~$13. The company is trading at roughly half of its peak price of $25 reached last year. The company has grown rapidly with a CAGR of ~36% over the last three years. The debt equity ratio at 0.6x is not too high. The company has been making losses in the last 5 years as it invests heavily in NG infrastructure.
Clean Energy Fuels is a company with a lot of potential in an industry which will see strong growth in the coming decade. The company has a leading position in the natural gas infrastructure in the US, being a leader in both CNG and LNG. It also has strong financial backing from strong companies like GE and Chesapeake. The company has also managed to tie up with leading fleet customers as well as top NG companies like Mansfield Energy and Westport Innovations. However, the capital intensive nature of the NG infra business makes this company a tough buy for investors. The last time I had written about Clean Energy Fuels, I had advocated that investors should wait for a better buying opportunity as the company is still some time away from generating decent profits. The stock price remains stuck at ~$13, despite the general market advancing by more than 10% in the intervening period. Clean Energy Fuel's potential is huge, given that not even 1% of the US truck fleet is running on Natural Gas. Given NG's lower cost and better environment characteristics, it is only a matter of time before a large portion of the US truck fleet goes the NG way. New NG engines made by WPRT should also help convince investors in making NG investments. Like last time, I would not advise investors to buy CLNE aggressively as it is still halfway through the capex cycle for ANGH. WPRT would be a better buy right now, given its technology focus and faster growth.