Top line advances
Clean Energy Fuels (CLNE) continued to make solid top line advances in the first quarter of 2013. Year on year gallons of gasoline equivalents rose 14% from 43.7 million to 49.9 million. Revenues were also up 26% year on year from $93 million to $73.6 million. Before getting too excited, the 26% YOY increase in revenue requires a closer look.
Volumetric Excise Tax Credit
Revenues for the first quarter would have been lower than the same period a year previous, if it weren't for the inclusion of $26.2 million of VETC credits. This was not an example of aggressive accounting on Clean Energy's part. The American Taxpayer Relief Act signed into law on January 2, 2013, extends VETC through the end of 2013 and was made retroactive to January 1, 2012. $20.8 million of the credits added to Q1 2013 revenues were for credits earned during 2012, but not made recognizable until the act was signed.
A lesser company might not have mentioned the VETC credits and allowed the market to assume that revenues were soaring, unless they examined the company's SEC filings. Clean Energy's CFO RIchard Wheeler was quick to mention the credits during the latest earnings call. Wheeler even explained that Q1 2013 revenue from building stations fell $12.2 million year on year.
Promising fuel sales growth
Clean Energy's self described revenue sources are "selling CNG and LNG, providing operations and maintenance ("O&M") services to our vehicle fleet customers, designing and constructing fueling stations and selling or leasing those stations to our customers, selling RNG, selling converted natural gas vehicles, providing design and engineering services for natural gas engine systems, selling non-lubricated natural gas fueling compressors and related equipment and maintenance services, providing financing for our customers' natural gas vehicle purchases and selling tradable credits, including LCFS Credits and RIN Credits."
I think that most will agree that the majority of growth going forward will be driven by sales of both CNG, RNG, and LNG. This is why I'm not too concerned with the year on year first quarter drop in total sales due to a decline in station building. This is also why the first thing I look at after the company reports quarterly results are fuel sales margins. Investors can rest easy for a few more months, all is well in this department.
The company has hinted at a squeezing of margins as it competes for larger contracts to municipalities and refuse management companies. Clean Energy is also facing competition from Royal Dutch Shell, (RDS.A) which is building out a network of LNG fueling stations at TravelCenters of America (TA) locations in the United States. During the latest earnings call TravelCenters CEO Thomas O'Brien discussed an agreement with Shell to construct a network of fueling lanes at up to 100 of his company's travel centers over the next few years.
China's privately held ENN Group is also building out a network of LNG fuelling stations throughout the US. The Chinese giant has partnered with a tiny company from Utah, CH4 Energy, to create Transfuels LLC which operates as Blu LNG. The partnership has already opened its first LNG filling stations and has enough planned to keep Clean Energy on its toes.
An attempt to quantify potential gross profits
Clean Energy doesn't break down gross profits for its fuel sales segment, but it did provide the necessary information. The effective cost to Clean Energy per gallon for both periods below remained unchanged at $0.55, and the effective price per gallon charged to customers fell just $0.01 per gallon.
Total Gallons Delivered
Cost Per Gallon
Price Per Gallon Charged
Gross Margin on Fuel Sales
Gross Profit from fuel sales
Percent Gain (Loss)
According to Clean Energy's SEC filings the company feels that heavy duty trucks in the US consume 20,000 gallons or more per year. There are over 8 million heavy duty trucks registered in the US market. If the dream of every long haul trucker in the US running LNG comes true, the market could be worth approximately $160 billion per year. If Clean Energy can maintain a 50% share of the LNG market and maintain about a 30% margin on fuel sales, the gross profit potential is about $24 billion per year. If you annualize Q1 2013 gross profit from fuel sales that's an astronomical gain of 42949%. There are some enormous 'ifs' in this scenario, but it highlights the exciting potential for Clean Energy, and its competitors.
Introducing the ISX12 G
Clean Energy is on its feet cheering for the 12 liter engine developed by the joint venture of Cummins (CMI) and Westport Innovations (WPRT). You can see a walkaround video of the engine here. The first engines have already been put into use by Owens Corning's (OC) logistics partner, Modern Transportation. The glass fiber manufacturer has one of the largest supply chain infrastructures in the US, and is pressuring its logistics partners to convert from diesel to natural gas.
Although Cummins and other diverse heavy machinery companies are presently suffering, I believe there is some opportunity here. Unlike Clean Energy and Westport Innovations which have yet to prove themselves, Cummins is profitable now despite a general downturn for the industry. If you want to latch on to a possible natural gas boom in the US trucking industry, I feel that Cummins will provide significant upside for a long term investor with relatively little risk. Clean Energy's margins are still relatively healthy, but growing competition from the likes of Shell and Blu warrant should be monitored closely.
Proceed with caution
As mentioned earlier, the profit potential for Clean Energy Fuels is enormous, and feasibly right around the corner. More importantly, Clean Energy has demonstrated that it can maintain healthy margins in its fuel sales segment despite growing competition. Before getting too excited it's important to remember the LNG market in the US is still in its infancy, and weighing the effects of growing competition on Clean Energy's future profitability is guesswork at best. At this stage, a long position on Clean Energy is a highly speculative gamble, not an investment.