A Low Risk Tesla Short Play: Buy Clean Energy Fuels
Summary
- Tesla boasts staggering losses and significant production issues, yet as a story stock with a cult-hero CEO it still enjoys sky-high valuation and expectations.
- Bears have a compelling case but shorting TSLA is still a risky trade, with short interest at all-time highs and a stock that likes to move on any news.
- Clean Energy's tiny little nat gas fueling business has been steadily improving for years and will be cash-flow positive this year, but investors have all but abandoned it.
- On the surface the two companies have nothing to do with each other, but Tesla's recent Semi PR stunt and fears of an electric Class-8 future have recently pummeled CLNE.
- TSLA production delays and potential capital raise in 2018 could potentially be a major catalyst for CLNE, making this unloved small-cap an unorthodox low-risk play for TSLA bears.
I'm being facetious, of course - you aren't really shorting Tesla (TSLA) by buying Clean Energy Fuels (NASDAQ:CLNE). But the two companies are linked via the Tesla Semi, a mythical beast whose demise would be part of broader problems, sending Tesla downward and would propel Clean Energy Fuels upward. This article is something of a thought exercise exploring the likelihood of this scenario, discussing the Semi itself, and touching on the bull case for CLNE - regardless of what might happen in the near term with Tesla.
A transformative year for Tesla
Tesla's story is nothing if not entertaining. And Elon Musk is truly a showman of the first water. I love the Tesla story, love the cars, and want the company to succeed. I have also previously been long the stock, exiting two years ago with a tidy profit and content to watch from the sidelines since then. Are we nearing the end-game, with battle lines now clearly drawn between Musk ("we'll be cash flow positive in Q3 with no need for a capital raise!") and detractors ("dude, you're high!")? Grab your popcorn folks, it is shaping up to be a transformative year for Tesla.
Musk of course has a long history of grand declarations on which the company fails to deliver (at least, on the initial timelines). Yet the cult of Elon has typically reacted to each delay with a boost in the stock price, anchoring on the forward-looking statements and seemingly attributing to him the power to will his glorious future into existence. And he has inarguably accomplished some amazing things. But...
Notorious examples of production misses and delays include the infamous May 2016 guidance that "100,000 to 200,000" Model 3s were going to be produced in the second half of 2017. Model 3 sales in that period totaled 1,770. The following year, Musk promised to deliver 1,600 Model 3s in Q3, but only delivered 220 of them. And in August Musk said, “We remain, we believe, on track to achieve a 5,000-unit week by the end of this year.”
Analysis of Model 3 production for the first quarter of 2018 reveals that despite the extraordinary, all-hands-round-the-clock measures to deliver "2000 Model 3s a week" in the final week, Tesla was unable to produce more than 650 Model 3s weekly with sustainable operations. That number is so laughably low in contrast with Musk's bold proclamations that any rational observer would conclude that mass production simply is not possible with its current operations. Elon himself has acknowledged that to even have a hope of hitting his promised 5000-unit per week production by the end of June, the Model 3 production line must now run 24/7, burning even more cash and adding further quality risk. It is still a pipe dream.
Tesla has burned through two-thirds of its cumulative paid-in-capital in operating losses and also has over $10 billion in debt. Moody’s last month downgraded Tesla's credit rating, noting that the company is burning through $2 billion of cash a year and will soon have to raise more. With ~$1.5 billion of debt coming due very soon and billions more in PP&E yet to be paid, even a $2 billion debt issue would not leave much to fund operations. Elon has recently said that the company would not need to raise more money in 2018. But he also said that in 2016 and 2017... and then Tesla raised $3 billion.
Adding insult to injury, the phase out of the $7,500 US Federal EV tax credit will soon begin for Tesla and will likely be gone by the end of next year. And EV competition is growing from all quarters, including new luxury entries due soon from Audi and Jaguar. With higher margin Model S sales already flagging, the long-term future looks murky at best to this observer, regardless of what capital moves Tesla might make this year.
Those are some quick highlights. For more on the bear case, Seeking Alpha contributors Montana Skeptic and Bill Cunningham are particularly recommended for their excellent critical analysis of Tesla.
Shifting gears to talk about CLNE
It may seem a jarring transition, but stay with me. We'll arrive at the Semi, but our journey must first take us from Fremont down south to Newport Beach.
I first came across Clean Energy Fuels Corp. recently while poking around the beaten-down energy sector for opportunities. Clean Energy bills itself as "The Pioneers and Experts in Natural Gas for Transportation." It is the only public company devoted to natural gas fueling. The company was started in the late nineties by T. Boone Pickens and current CEO Andrew Littlefair with 3 natural gas fueling stations, going public in 2007. Pickens remains the largest shareholder, currently owning 9% of outstanding shares. The premise for CLNE is that natural gas, being plentiful, cleaner and cheaper than diesel, will emerge as a strong alternative to diesel as a primary fuel for the trucking industry.
Clean Energy's principal business is supplying CNG (Compressed Natural Gas) LNG (Liquefied Natural Gas), and RNG (Renewable Natural Gas) to light, medium and heavy-duty vehicles and providing operation and maintenance services for vehicle fleet customer stations. RNG is derived from renewable sources such as capture of landfill methane and can be delivered as either CNG or LNG. The company developed the first commercial RNG fuel and is by far the largest supplier of RNG, delivering almost half of all RNG nationwide last year.
CLNE primarily serves commercial fleet operators in airports, refuse, public transit, industrial and institutional energy users, and government fleets, with heavy-duty trucking representing a huge potential market even given only modest adoption. As of December 31, 2017, CLNE serves approximately 1,000 fleet customers operating over 46,000 natural gas vehicles, and owns, operates and/or supplies over 530 natural gas fueling stations in 42 states and Canada.
A terrible investment
CLNE has been a terrible investment. I mean terrible. Clean Energy Fuels was once a high-flier, a growth stock that was poised to reap the benefits of a rapid conversion in the Class 8 trucking industry from diesel to natural gas. Natgas fuel technology innovator Westport (WPRT) was building natural gas engine systems that OEMs were putting into big trucks, and Clean Energy Fuels built America's Natural Gas Highway. Investors just needed to sit back and watch the money roll in.
That didn't happen. From its peak at over $22 in January of 2012, CLNE has lost more than 90% of its value. Ouch. One look at this chart and you'd think the company had flat-lined and is on life support, the end imminent:
Source: Clean Energy Fuels Corp 2017 10-K
The dismal stock performance can be attributed to a number of factors:
Hype Cycle: CLNE was swept up in the hype of alternative fuel stocks (solar, biofuel, etc.) while oil was hovering at $100 a barrel. Many high-fliers during this time have crashed and burned from lofty valuations that were never justified by underlying business performance.
The ANGH: A big bet on building "America's Natural Gas Highway" (ANGH) left Clean Energy Fuels with a huge debt load. There was no way the heavy-duty trucking industry would adopt natural gas trucks if there was no fueling infrastructure, so Clean Energy built the ANGH to provide that infrastructure by borrowing hundreds of millions of dollars and issuing millions of shares to finance construction of 150 LNG stations covering most major long-haul routes. But the anticipated shift to natgas for long-haul trucking has yet to take place, largely because of the next two factors.
The Oil Price Collapse: In 2012, natural gas fuel was $1.50-2.00 cheaper per gallon equivalent than diesel. In 2014, that differential had shrunk to $0.50-0.90 as diesel prices declined precipitously. This has impacted CLNE's margins but more importantly eliminated or reduced the economic incentive for truckers to switch fuels.
Reluctance to Change: The trucking industry is notoriously risk-averse. Truckers operate on razor-thin margins and adopting any new technology can represent a significant risk. Despite the significant economic benefit that a much-cheaper fuel can deliver over time (since fuel is the biggest operating cost for truckers), the higher up-front price for natgas trucks versus diesel combined with a conservative risk posture within the industry has led to an adoption rate much, much slower than forecast.
Yet Clean Energy's underlying business over this period has only gotten stronger. Debt has been reduced from over $600 million in 2013 to roughly $250 million today, with a cash balance that can easily cover upcoming maturities. The company has cut way back on CapEx and made strong strategic moves to increase cash and operating flexibility. And Clean Energy steadily delivers more and more fuel as industry penetration grows, quarter after quarter and year after year:
Source: Clean Energy Fuels annual financial statements
So...we have a $50 billion market cap maker of electric vehicles for consumers, and a $250 million market cap provider of fuel for commercial truck fleets. Two very different businesses. But now we come to the point on our route where Clean Energy Fuels and Tesla intersect: The Tesla Semi.
Time to get Semi serious
What will become of the Semi? That is the question that links Tesla to Clean Energy Fuels. The Semi is a sideshow that doesn't even enter into a discussion of the short thesis for Tesla bears. But the splashy unveiling of the Semi last year, along with related industry news, has had a significant impact on CLNE's share price. If Tesla never builds the beast, that would impact both TSLA and CLNE shareholders significantly.
After announcing the Semi in November, Tesla quickly racked up about 400 truck reservations from big haulers like Walmart (WMT), UPS and Anheuser-Busch (BUD). The threat of Tesla's entry into the heavy-duty trucking market had been putting downward pressure on Clean Energy's already moribund stock price since it was first teased last summer. Then after news of big Semi pre-order numbers began to sink in, suddenly in January CLNE's stock just dropped like a rock (falling 20% in 3 days) and has traded these levels ever since.
CLNE's stock performance year-to-date can't just be attributed to the Tesla Semi, of course. There was also the fact that Clean Energy took a $73.8-million charge in December relating to closing 42 underperforming stations. But that splashy launch also ushered in a tidal wave of press about other alternative fuel vehicles being targeted at the trucking industry, including by major truck manufacturers like Paccar (PCAR), Volvo (OTCPK:VOLVY), and Daimler (DDAIF). No doubt many investors concluded that electric is now the future of trucking, and CLNE is doomed. It smells like capitulation.
Semi-Tough
It is easy for major haulers to sign up for the Semi. It's great PR, and deposits are refundable. But here's the thing about the Tesla Semi: It might revolutionize the trucking industry. Or, it might never get built.
The company has published some truly impressive specifications for the new truck. Yet skepticism within the industry abounds that an electric truck could ever be feasible for long-haul trucking, given concerns over battery weight, cost, and performance (and the fact that Tesla's claims "break the laws of batteries"), along with the high estimated price tag. There are other concerns, most notably the lack of any fueling or servicing infrastructure. Tesla's myriad operational challenges, quality issues, and lack of expertise in trucking are also cause to remain skeptical.
Even if Tesla somehow produces a truck that delivers on its published specs, there remains the question of infrastructure. Tesla has promised to deliver a nationwide network of "Megachargers" capable of recharging the truck's battery in 30 minutes, but this remains a promise. And a critical mass of qualified mechanics to service the trucks will be, well... critical.
Tesla will also be up against the same intransigence in the trucking industry that has impacted Clean Energy. Early feedbacks from truckers point to some important issues and design questions. The company is also going to need hard data to prove that running the Semi will make economic sense, and that will take years, and millions of true on-road miles, to develop before there is likely to be meaningful adoption. As one industry spokesman put it, "I’ve spoken to a few [truckers] and most have laughed. Tesla has a lot to prove. Haulers are not risk-taking people and will need to be convinced."
Lastly, the mounting concerns about Tesla's operational and financial woes described earlier in this article lead me to suspect that the "might never get built" scenario is the most likely outcome. At the very least, Musk's target of delivery by 2019 seems unlikely given Tesla's manifest inability to meet any stated production timelines. At worst, bigger problems at the automaker may prevent it from ever delivering a Semi, because it won't have the money, plant, or personnel necessary to fund the program.
The road ahead looks good for CLNE
Whatever happens with the Tesla Semi, electric medium and heavy-duty vehicles are probably inevitable. But they likely won't be a viable option for several years. And the market for Class 8 trucks is so large that Clean Energy can still grow and thrive with just a small fraction of trucks converting to natural gas. There are approximately 3.2 million Class 8 trucks on the road in America, consuming 25 billion gallons of diesel annually. Just 1% of that total converting to natural gas could nearly double CLNE's fuel volumes.
And there are several Tailwinds for CLNE's business going forward.
New Natural Gas Engine: Most notable is the launch of the ISX12 N natural gas engine, built by a joint venture of Cummins, Inc. (CMI) and Westport, which began commercial delivery this quarter and is being offered in trucks by Kenworth, Peterbilt, and Freightliner. This engine boasts performance specs that match similar diesel engines, and produces near-zero NOx emissions. The combination of performance and environmental benefit is likely to spur greater adoption.
Legislative Catalysts: Local governments are taking the lead in driving green fuel standards, and there is now a big push by California to force the issue of clean(er) fuel adoption. The California Air Resources Board introduced Optional Low NOx emission standards that are 90% lower than current EPA standards (and certified that the Cummins-Westport engine meets these standards), and the California South Coast Air Quality Management District created a $21-million dollar program designed to accelerate the switch from diesel. Fleet owners seeking to replace diesel trucks may be eligible for up to $100,000 towards the purchase of a new natural gas truck. Most notably, the ports of Los Angeles and Long Beach last year passed the Clean Air Action Plan which calls for the introduction of near-zero engines and places a fee on diesel trucks beginning in 2020. Approximately 16,000 heavy-duty trucks move in and out of the ports every day, and will need to aggressively begin switching to natural gas engines or other alternatives. In a shrewd move following the plan's passage, Clean Energy partnered with the LA and Long Beach Harbor Trucking Association (HTA) to become the exclusive clean transportation fuel provider to HTA member companies.
Rising Diesel Prices: After a long period of soft diesel prices in the wake of the recent oil collapse, we're now seeing a breakout of diesel prices above $2.50 per gallon. If this holds or if diesel prices continue to rise (which appears likely), then the price advantage of NG over diesel should once again become more apparent across the industry. The cost differential of NG trucks has already come way down in recent years, so this combination of factors may convince more trucking companies that now is the time to make the switch.
Continued Business Growth: Another potential catalyst would be positive operating results from CLNE this year. Littlefair on the most recent conference call, "We remain on track to achieve positive operating cash flow in 2018 and we believe we’ll be close to $55 million to $60 million of adjusted EBITDA for the year. We are expecting to increase our volumes in the high single digits." This would be a major milestone for the company, an indication of a potentially very bright future, and an inflection point that could convince current skeptics. EBITDA is a more important measure than GAPP earnings right now because GAAP earnings will look misleadingly bad due to the high depreciation and amortization charges from the massive ANGH build-out. That capital has been spent and won't need to be spent again, and represents significant operating leverage as each station begins to deliver more GGE/year to a growing volume of NG trucks.
This combination of factors may bring investors back into this stock as the original, long-delayed thesis of a large-scale switch to natural gas for heavy-duty trucking finally begins to play out.
Back to that crazy Tesla short play
Tesla and Clean Energy are "linked" by the Tesla Semi. The prospect of the Semi has had a significant negative effect on CLNE's stock price. In fact, Clean Energy's CEO Littlefair went so far as to address this perception on the company's most recent earnings call:
Finally, I'd like to take a moment to address our stock price. It's been a rough time for our stock price and our shareholders. Our friends on Wall Street tell us there are 3 principal reasons, which I want to address. The first is the fervor around the perceived potential of mass adoption of heavy-duty electric trucks. Electric may work for passenger and light-duty vehicles; however, as the dust begins to settle on the hype around electric heavy-duty trucks, we are starting to see industry experts that are highly skeptical of the feasibility of the battery range and the weight, the cost of charging stations and the ability to scale commercially to meet the demands of heavy-duty truck market. Our natural gas offering meets the demanding duty cycle of heavy-duty trucking. It is green or greener than electric and is available today for significantly less.
If Tesla is forced to delay the Semi this year, there could be an immediate positive impact on Clean Energy's stock price.
So let's revisit our thought exercise, and break it down to a simple series of statements:
- The point of shorting a stock is to profit from a decline in the stock price.
- The short thesis for Tesla posits that Tesla's financial and operational problems will prevent it from meeting its Model 3 production goals, and that the company will need to raise capital this year.
- If that happens the TSLA stock price will likely decline significantly, and the Tesla Semi would probably be delayed.
- If it becomes apparent that the Semi will not be coming to market soon, the CLNE stock price is likely to rise.
- If instead Tesla achieves profitability this year as Musk has claimed it will, the record-high short interest could fuel a monster short squeeze. Thus there is significant risk in being directly short TSLA.
- Clean Energy will be cash-flow positive this year, and near-term catalysts and market dynamics point to eventual profitability and successful CLNE stock performance whether or not a Tesla Semi eventually becomes available for heavy-duty trucking.
- Put simply, CLNE is likely to rise quickly if the TSLA short thesis plays out, and likely to rise slowly if the TSLA short thesis breaks down.
- Thus CLNE is an effective low-risk alternative to a short position in TSLA.
As I said at the top, this article isn't intended to make a serious case that Short TSLA = Long CLNE. It's not. But as I've dug into Clean Energy recently in the wake of the Tesla Semi announcement, I've come to the conclusion that the company's recent stock action is wildly out of step with its business performance, that the likelihood of success is good, and that an investment at these levels is likely to produce a strong annualized return. On the other hand, I'm not entirely confident in Tesla's likelihood of success, and I think it is likely that 2018 could be ugly for the car maker. However, I'm not going to short Tesla directly as the potential risk is too great. Instead, I'm riding along with Clean Energy Fuels, where any news that adversely affects the Semi is likely to juice up some gains in CLNE.
No Megacharger required.
This article was written by
Analyst’s Disclosure: I am/we are long CLNE. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (72)
Traveled thru cental valley of california to see how CLNE was doing.
3 stations: Fresno,Tulare,Bakersfi... All along Highway 99 between Sacramento and LA
Tulare- closed
Fresno- no NG traffic
Backersfield- no traffic and RNG plant running but could not see anyone working.
Just an observation, but would it not be nice to see something happening
Maybe they should change there name to In-and Out.
Now there is a busy place 24/7
