No Fundamental Improvements At Clean Energy Fuels

May.14.14 | About: Clean Energy (CLNE)

Summary

Clean Energy continues to grow volumes with no improvement on the bottom line due to low fuel margins.

The market was pleased with engine comments from Westport Innovations that aren't overly bullish for the sector.

The company must grow gallons delivered substantially in order to reach break even on adjusted EBITDA.

The recently released first quarter report from Clean Energy Fuels (NASDAQ:CLNE) has the stock soaring back above $10, yet no fundamental improvements were noted in the release. Some of the excitement in the stock bled over from Westport Innovations' (NASDAQ:WPRT) comments that weren't necessarily that positive.

Clean Energy Fuels continues to bleed red while supporting the rollout of a national infrastructure to support the transition to using natural gas for transportation in North America. While the company had an innovative concept and a promising future, it continues to head down the path of large losses and mounting interest expenses, placing it further on the bleeding edge. The transition to natural gas has taken longer than expected and now Clean Energy faces increased demand for natural gas heading into 2015 that could reduce the competitive pricing advantage of the fuel.

In a previous article, Clean Energy was presented as a potential flop for the year and the recent results don't change that prediction despite the top line numbers including 43% revenue growth.

First Quarter Results

If anything, the quarterly results highlight the margin issue with the business. The company saw solid gains in volumes delivered and revenue, yet the bottom line numbers continued getting worse. The company provided the following highlights:

  • Gallons delivered grew to 59.3 million during the first quarter of 2014, compared to 49.9 million gallons during the prior year period.
  • Revenues grew 43% to reach $95.8 million, compared to $66.8 million in the first quarter of 2013 when excluding VETC.
  • Adjusted EBITDA dropped to a loss of $6.8 million.

The biggest issue is that the company generated larger losses from the surge in revenues. In the last four quarters, the company has lost 0.07, 0.16, 0.25 and now 0.30. The sequential progression is not encouraging and analysts forecast several more years of losses.

Reduced Margin

If anything, the first quarter should back the understanding that using CNG and LNG for transportation is an exciting new growth concept, yet it unfortunately brings with it the low margins of the diesel fuel it hopes to replace.

During the first quarter, Clean Energy saw margins per gallon drop to only $0.27 following extremely severe weather that caused natural gas prices to surge. The margin was down $0.04 from the prior quarter and typically averages around $0.30 per gallon.

Possibly the most concerning part of the earnings call was the statement by the CEO that it would take roughly 23 million more gallons at the current margin of $0.30 per gallon to just reach break even on adjusted EBITDA. Worth noting is that this doesn't cover interest expenses that have now nearly doubled on a quarterly basis to reach $9.5 million.

The previous article on Clean Energy turning into a flop showcased an earnings trend that has only become worse since the article was published in early March. According to the latest data below, the yearly earnings for 2014 and 2015 have both declined by an average of nearly $0.35.

Click to enlarge

* Data provided by Yahoo! Finance.

Cummins - Westport Engine

Naturally the new Cummins (NYSE:CMI) - Westport 12 liter engine will help on the America's Natural Gas Highway network, but Clean Energy was clear on the earnings call that it operates over 400 fueling stations whether public or private. Of those stations, around 96 can accommodate heavy-duty trucks and 26 are counted as part of the highway network. All traffic helps, but adding traffic to these existing stations is just as crucial as opening up more stations along the highway.

For the first quarter ended March 31 the CWI joint venture revenue increased by 79% to $80.1 million on 2,480 units, compared with $44.7 million on 1,313 units in the same period last year.

The CEO of Westport didn't exactly provide a ringing endorsement of the new 12 liter engine in their earnings call:

David Demers - Chief Executive Officer

Hi Rob ... I think that it doesn't take a lot of arithmetic to look at CWI's sales performance this quarter we are quite happy that the demand is high, big part of that demand is the growth in the 12 liter. 12 liter demand is right on track for what we said. We said last year trucking sales were about 1.7% of the market, around 3% to 5% is our expectation for this year. We aren't subscribers to the somewhat crazy numbers we have been hearing from some people. But we think 3% is on kind of the same scale with last year we have been looking say 6,000 engines between the 9 liter in trucking and the 12 liter some 6 to 10, it's kind of the path we have been suggesting is realistic given the pace of infrastructure, the pace of adoption in fleets, the demand that we are seeing. So we think that's quite credible and products are doing quite well.

The news probably beats some of the dire predictions that the market won't ever materialize, but the current ramp continues to be too slow for a company like Clean Energy that built out a network in 2013. The original goal was much closer to the 5% total that equated to 10,000 engines in 2014, but Westport is now guiding more toward 3% or 6,000 engines.

Conclusion

Ultimately, the fancy and revolutionary thoughts of a modern fueling concept should be ignored by investors. Clean Energy Fuels at its core is a retail fueling station concept with low margins where increasing comparable sales drive higher operating margins. Based on the financials, the company appears to be mostly growing based on adding new locations at high costs and not adding materially to existing locations. With low margins, the company must drive high volumes at existing locations in order to reach a profit and that doesn't appear a reality in the near term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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