CLNE - Clean Energy Fuels: A Total Mixed Bag

2023-10-25 12:18:44 ET

Summary

• Clean Energy Fuels Corp aims to produce renewable natural gas (RNG) from cow byproducts to transform the global transportation industry.
• The company has received large investments from TotalEnergies and BP, allowing it to build a network of fuel stations and RNG production sites.
• Clean Energy Fuels Corp faces a big opportunity with Cummins' new generation of engines, as well as partnerships with companies like Amazon, UPS, and Waste Management.
• Meanwhile, the company has been losing money for a long time, and it will have to show at least a path to profitability for investors to remain invested.
• Management doesn't seem to have profitability as the first priority and stock dilution is concerning as well.

Clean Energy Fuels Corp (CLNE) comes with an interesting premise (and promise) to produce renewable clean energy from byproduct of cows in shape of RNG (renewable natural gas) in order to transform the global transportation industry. The management's promises sound good and inspiring but this company also has a history of overpromising and underdelivering and it remains a mixed bag until it can deliver at least some tangible results.

In recent years the company was able to show some growth in its production and delivery numbers as well as revenues but none of that converted into profits and investors grew increasingly frustrated with lack of profits. Even though the stock is up 41% in the last 3 years, it's been in a downtrend during most of this time after an initial rally of more than 500%.

The company received large investments totaling $800 million from TotalEnergies ( TTE ) and BP ( BP ) which made the former the largest shareholder in CLNE. The company seems to have put this money into work by building a network of 580 fuel stations, a large distribution network and RNG production sites. These investments made the company a global leader in RNG fuel market for transportation. The company was able to increase its annual sales from 13 million GGEs (gasoline gallon equivalents) to 198 million GGEs between 2013 and 2023. The company currently sells about half of RNG used for transportation fuel in the US. These seem like good developments and the company has been making progress in reaching its long term goals but these have also been very costly for the company as it has posted some large losses.

The company's biggest selling point is its positive impact on the environment rather than making a profit and this also appears to be its first priority. I respect the company's decision to emphasize its environmental impact over profits but at the same time I'd like to see some profits as an investor before putting my money into it. In the below chart you will see the environmental impact of different types of fuels in shape of carbon emission and as you can see, the company's two products seem to have the lowest carbon emission as compared to alternatives. Notice that RNG produced from manure actually has a negative carbon emission because it eliminates methane from the environment that normally would have been harmful so its net impact is actually positive.

Meanwhile the company is facing a pretty big opportunity. Early next year one of the biggest truck engine producers in the world Cummins ( CMI ) is launching its new generation of 15L engine platforms that will be used by new generation semi trucks. The platform includes hydrogen, diesel and biogas options. There are already some big customers lining up for the RNG version of these engines including Knight Transportation ( KNX ) which is one of the largest trucking companies in the country. The company already tested Cummins' new generation X15N natural gas engine using RNG fuels from CLNE and reportedly has been happy with the results. In addition, several other companies such as Amazon ( AMZN ), UPS ( UPS ) and Waste Management ( WM ) are already using CLNE's natural gas in their fleets and shown interest in next generation RNG trucks. These companies all have ambitious goals to reduce their carbon prints significantly in the next 20-30 years. As a matter of fact, CLNE has a number of fuel stations that are specifically dedicated to Amazon trucks and the company wants to build more of those in partnership with Amazon.

If the demand increases in a significant way, the company's current network of 590 fuel stations will not be sufficient and it will need to build more stations along with more production plants. Up until recently the company was getting virtually all of its cow byproducts from third party dairy producers but it also made some investments and took steps to have its own production sites which may help margins in the long term but will require a lot of initial investment.

In the long term the company sees itself supporting transportation industry in multiple shapes and forms. Currently it's mainly producing RNG which it distributes to its customers from fuel stations but in the future there is potential for using the RNG to create other forms of energy such as electric generation. This would allow the company to provide energy for different types of vehicles even though it would be indirectly involved in those alternative energy types such as electricity. Currently many regions produce their electricity from carbon sources such as oil or coal which would defeat the purpose of using electric vehicles in order to reduce our dependence on carbon sources. RNG could at least replace some of this and help reduce our carbon foot print in the long run. Again, the company will have to do this in a profitable way.

Even though the company hasn't shown us much in way of profits, it's been able to generate positive cashflow from its operations which is a good start and at least encouraging. The company's total free cash flow is still negative and still needs work though.

Analysts are typically bullish on this stock because there is belief that once the company's aggressive investment period comes to conclusion, big profits will follow. Currently the company is spending a lot of money on building production, fuel stations, distribution networks and other infrastructure but this should all become scalable once the company reaches a certain size according to bullish analysts. This reminds me of how Tesla ( TSLA ) was building a large network of charging stations and service centers a few years ago which ate into the company's cash flows but once those are built, they will contribute to the company's bottom line for years to come so CLNE might be also facing a similar situation but it's too early to tell.

Another problem faced by this company's investors is dilution. In the last 10 years the company's diluted share count rose by almost 140% which is pretty large. The company seems to spend a lot on its stock-based compensation which totaled more than $45 million in the last 3 years. The company will have to be more careful with dilution if it doesn't want to frustrate its patient investors any further.

RNG prices are typically determined by diesel prices but it's not exactly 1:1. RNG tends to be significantly cheaper than diesel on average but the general idea is that as one rises so does the other. Historically diesel prices had long periods of being range-bound but generally trended higher and higher in the long run. CLNE's profitability will also depend on RNG prices which are going to be directly correlated with diesel prices so this is one thing investors might want to pay attention to.

Sooner or later the company will have to show some profits, or at least a path to profitability and take its dilution under control. Currently the company's management seems to put profitability as a lower priority which may be good for the environment but not necessarily for investors who want to see a return on their investment. Currently the company shows -10% for return on equity and -9% for return on investment capital which don't look good for investors.

In the last 15 years the company spent more than $1 billion of capital on its initiatives and some investors don't believe it's making progress fast enough. The company has been ramping up its capital expenditures even more in the last few years and the next couple years will be very crucial for the company to show investors if it can reach profitability anytime soon.

Until the management can show "the money" or at least a path to profitability, this stock will remain as a story stock or a speculation. It's fine to have a speculative position in CLNE but it should be probably limited to 1% or less of your portfolio and it should be no more than an amount you feel comfortable losing it came down to that.

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