Clearing The Confusion On Clean Energy Fuels

| About: Clean Energy (CLNE)

Summary

Clean Energy Fuels impressively maintains solid margins amid low fuel price environment.

Clean Energy Fuels paying down debt, decreasing interest payments.

Margins will expand from Q1.

After two quarters of profit, loss expected in Q2; consistent profitability in 2017 or 18.

Recent developments have made sooner the quarter at which Clean Energy Fuels (NASDAQ:CLNE) will become consistently profitable.

Over the last two quarters, CLNE was profitable and handily profitable. But this was in part due to gains from paying down debt at a cheap price and a "lumped" payment of government subsidies for their natural gas fuels.

Q2 will very likely see a loss of between 10 cents and 20 cents per quarter. But because Clean Energy has both paid down their long-term debt and did so by diluting their shares, the loss may be lower than previously expected from Q2 forward.

The debt pay-down may result in as much as a 3 cent cut in their loss in EPS per quarter, and likely more than 10 million in savings over a year.

Furthermore, CLNE just introduced their new modular, environmentally-friendly nat gas compressor. They will immediately start using this compressor at stations that they own or build. This will improve services at a lower cost. This will benefit the bottom line in two ways: lowering costs and also increasing sales and profits at their languishing compressor business.

The compressor business has been seeing some slow sales as they wait for sales to China to kick in. With the announcement of the new better, less costly compressor, those China sales may start to kick in. The Chinese may have been waiting for this new product to come out.

What was surprising about Q4 and Q1 was that CLNE was able to maintain solid gross margins on their nat gas fuel sales even as oil prices plummeted into the 20s.

With prices hitting around 50 in Q2, the quarter should see excellent margins. Of course, much of their sales are contracted, so the margins may not double from 25 to 50. But because of the increased diesel prices, I expect to see accelerated contract signings.

This seems to be borne out by the reports of many new nat gas stations opening nationwide in Q2, and through July.

Some investors are confused, thinking that higher nat gas prices help CLNE. The main factor is the difference in price between a gallon of diesel and a gallon-equivalent of nat gas fuel (either CNG or LNG).

Amazingly, CLNE reported that they maintained up to a dollar difference in these prices in Q4! And that the "payback period" for buying a nat gas heavy duty truck was about 18 months!

If one were to start a trucking company or a sanitation company or a bus company today, one would start it off using 100% natural gas fuels. No question about that.

However, CLNE is in the business of convincing companies to switch to natural gas, and that is why it has not taken off more than it has. Companies are waiting to see where diesel goes from here before they invest in nat gas trucks.

And that is where the benefits of low-emissions trucks come in. More shippers and ship-ees seek lower emissions in trucking because of new federal and California laws and because people are demanding cleaner means of transport and production. UPS, Ryder, Dillon, Waste Management, etc., are getting customers because they are looking cleaner and cleaner than the others.

Plus every business in the chain of production and patronage is benefiting from government subsidies; the government is doing little things -- a few million here and there -- on both the state and federal levels to try to slow climate change by shifting the emissions of the largest vehicular culprit -- trucking.

So, if you could save a dollar a gallon, pay off your new zero-smog truck (see Westport Fuel Systems, (NASDAQ:WPRT)) in a year and a half, and gain a reputation as a clean fuel shipper, would you?

Of course you would consider this; but it would be a hassle if you were already using diesel. Hence the slow pick up. But states like California are trying to accelerate the process with major subsidies.

And nat gas fuels have barely penetrated the state.

But that is where CLNE's renewable natural gas (NYSE:RNG) is starting to make huge strides. Because RNG is essentially natural gas captured from landfills and other places, it is actually removing greenhouse gases from the atmosphere. California recognizes this and the state will likely continue adapting RNG as fast as it can be produced.

Worried about electric trucks? No one has built a viable one, and Tesla is too busy buying up Musk projects to invest in one. Furthermore, electric trucks use electricity from the grid, and that means the dirtiest fuel of all, among others: coal.

So, the future looks bright for Clean Energy Fuels. Just a matter of which quarter they go profitable "for good." Most likely it will be in 2017 or 2018, but the closer the company gets there, the higher the stock price will likely climb.

Disclosure: I am/we are long CLNE, WPRT.

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.