That horrifying noise assaulting investors’ ears is the sound of Clean Energy Fuels Corp (NASDAQ:CLNE) braking and swerving in the middle of the highway.
TheStreetSweeper is convinced it’s time to get out of Clean’s path while we still can.
Enamored with clean energy, investors found it easy to buy into Clean on fourth quarter results showing a bump in revenue. At first we, too, were almost charmed by the provider of natural gas – compressed (CNG), renewable natural gas (RNG) and liquefied (LNG) – for long-haul trucks, buses, taxis, etc.
But when we broke out our toolbox, we discovered a wreck that will remain too banged up to make the long haul. Company executives have not gotten back to TheStreetSweeper for an interview.
But investors may find other viewpoints here, as we highlight the top risks poised to run down Clean Energy shareholders.
1. Look under the hood: financials
First, the bump in revenue to $132 million wasn’t really the outperformance many thought. Check page 16 of its federal filing and note where $28.4 million of revenue came from: “federal fuel tax credits” which “expired on December 31, 2014.” Plus, another $12 million came from another one-time gain – the sale of Clean’s interest in a Dallas biomethane plant.
Second, gross profit per gallon declined to $0.26. That’s 2 cents less than the quarter before and 5 cents less than the prior year.
Gross profit was expected to be $0.29, according to Piper Jaffray’s Alexander Potter and Winnie Dong – who called a $3.25 price target on Sunday, March 1, 2015. Clean had just closed at $6.01.
“We are growing increasingly skeptical that this key metric can/will eventually rise,” analysts wrote of the gross profit.
Third, Clean’s adjusted EBITDA was not positive. It was actually negative at -$3.2 million.
Clean actually had a loss of $0.01, while firms like Raymond James were looking for positive earnings of $0.05.
Today, UPS announced that it signed a deal to buy renewable natural gas or RNG from Clean from three stations, servicing about 400 trucks at about 1.5 million gallons. RNG uses landfill gas, something one big truck operator, Waste Management, has been using since 2011.
“UPS is already a Clean customer and this announcement is not strategic stuff for Clean,” a long-time analyst told TheStreetSweeper.
He said the deal will mean only about $1.5 million a year to Clean.
The bull case accounts for a relatively strong balance sheet and that Clean should be able to reach positive cash flow.
But we strongly believe Clean’s financials should have sent investors racing …. For the exits.
2. LNG bet goes up in smoke. Clean Energy has placed a bet that long-haul trucking would easily switch from diesel to liquefied natural gas. But that has not happened.
Truckers are particularly hardpressed to justify paying an additional ~$8,000 per vehicle for modified tanks and engines.
And, Volvo Trucks and Cummins Westport have recently put their LNG engine plans on hold.
But the troubles with the liquefied natural gas plan become even more evident when we look at companies working alongside Clean. For example, Chart Industries, Inc. (NASDAQ:GTLS), the liquefied natural gas or LNG storage tank maker for big trucks just turned in its first quarter financials, highlighted by missing estimates and falling net income.
According to Chart executives, liquefied natural gas prospects are declining:
“We do face deteriorating near-term business prospects in the D&S LNG business for applications based on diesel fuel replacement …”
The LNG storage tank maker has shut down its liquefied natural gas equipment plant:
“We also announced the shutdown of our D&S LNG equipment manufacturing facility in Owatonna, Minnesota …”
More on declining demand:
“Orders were down primarily due to lower LNG equipment demand for diesel replacement applications in light of the narrow spread between natural gas and diesel.”
Bluntly, prospects for diesel fuel replacement remain at death’s doorway:
“And also, the near term, and I’ll say through 2015, prospects for equipment to the heavy-duty diesel fuel replacement market, particularly for oil and gas production looked moribund.”
Here is Chart Industries’ stock chart:
(Source Yahoo Finance)
Clean Energy also works hand-in-glove with Westport Innovations Inc. (NASDAQ:WPRT). Clean Energy builds and operates a network of liquefied natural gas filling stations. Those stations have to have something to fill up; they service big LNG-powered trucks that run on engines sold by Westport. So Westport’s stock chart also gives us a view of the state of the business.
(Source: Yahoo Finance)
But still more depressing news for Clean Energy hits both its CNG and LNG business. Truck drivers and fleets aren’t turning to tractors fueled by natural gas at anything near the extent projected just two years ago.
“Fleets Braking Hard When it Comes to Natural Gas Truck Buys,” is the succinct headline in Trucking News online.
While Clean has had some wins, the future doesn’t look too inviting. Experts say a 5 percent penetration of natural gas heavy-duty trucks anticipated in 2015 is too optimistic.
The publication referred to a trade news report that “attributes the rapidly declining cost of diesel with making the return on investment for the adoption of natural gas less lucrative – and less attractive to trucking industry players.”
Here’s the 1-year price chart for diesel:
(Source: Mundi Index)
Here’s the 1-year price chart for natural gas:
(Source: Mundi Index)
Diesel is down around $1.90; at about $2.80, so is the appeal of natural gas.
3. Pricey bet, killer consequences. It took a mountain of debt to finance Clean Energy’s LNG bet, driving Clean’s total debt to over half a billion dollars. This will crush investors.
The company has racked up $570 million in debt and has many of its assets tied up in LNG. In fact, Clean is facing up to $200 million in debt just for two new LNG plants. And it’s burning through an average $40 million per quarter.
But Clean has only $215 million in cash and short-term investments.
So Clean appears to be on the verge of crushing investors. The company will likely need a capital raise that would dilute current investors’ shares. Either that or sell assets, stop all expansion plus cut expenses even more.
Noting that Clean has a $145 million convertible note to repay in August 2016, plus another $300 million convertible debt in 2018, Piper Jaffray analysts wrote that their model suggests Clean “will not have enough cash to pay off its convertible debt in 2016.”
4. Brake, swerve, overcorrect: Watch the competition. Clean Energy is trying to make up for LNG’s disappointment by becoming a generic natural gas distributor/reseller. Margins are already low for Clean Energy, bumped up last quarter by strict expense-cutting, but this lower margin segment is inhabited by fierce competitors unburdened by the kind of debt Clean Energy is hauling around. But even they seem to be having second thoughts about natural gas at this time.
Piper Jaffray analysts wrote that, though gas volume is growing well at 20-30 percent, it won’t do Clean Energy any good without higher margins.
See the chart below to find actual margins and Piper Jaffray’s estimated margins for 2015 and 2016.
(Sources: YCharts; Piper Jaffray)
Meanwhile, Clean Energy competitors have been busy but low oil prices have slowed efforts to build natural gas filling stations.
Shell, which had planned to build 200 LNG pumps on 100 stations across the nation, announced in March that it had opened two LNG lanes for trucks in Baytown, Texas and in Lafayette, La.
But Shell told Reuters that only 15 to 20 percent of LNG projects already approved by the Canadian government will materialize by 2025.
Also, Amp Trillium announced plans in 2012 to build a network of CNG filling stations across the nation. It took about two years before Amp Trillium opened the first of five CNG stations for Frito-Lay trucks.
Finally, Chinese-backed Blu LNG had planned a network of natural gas fueling stations for trucks along US highways. But now, Blu LNG has canned execs and slowed down the entire plan.
At the same time, Clean Energy must remember that installing LNG fueling stations can reach $4 million. CNG ranges from $10,000 to $1.8 million.
All considered, Clean Energy’s ~$200-million-worth of LNG plants is looking more and more expensive as the company feels it must continue building to honor commitments to their big fleet customers.
5. Top five remaining officers receive over $8 million compensation … for what?
For their part in running a business at a $90 million loss last year alone, total compensation of the remaining top five executives, excluding that of the suddenly departed CFO reached $8.1 million:
(Source: SEC filings)
Even normally optimistic analysts are expecting Clean Energy to continue running over investors and their hard-earned money:
(Source: Yahoo Finance)
Sadly, even in the best of times, when the price of diesel was significantly higher than natural gas from January to August 2009, Clean recorded a net loss approaching ~$31 million. Likewise, when diesel was up compared with natural gas from October 2011 to March 2012, Clean recorded a net loss here and here of ~$53 million.
But these are not the best of times for Clean Energy. And we believe oil prices, disinterest in LNG, the company’s financials, gross margins and massive debt spiral have turned Clean Energy Fuels into a wreck. TheStreetSweeper believes investors should brace for impact – shares could drop to somewhere in the $3 – $4 range.