CLNE - Clean Energy Fuels: More Of The Same

2023-05-12 12:10:22 ET

Summary

• Clean Energy Fuels Corp. reported another quarter of losses despite a big revenue boost.
• The renewable fuels company still produces weak margins, with cost savings passed onto customers.
• Clean Energy Fuels Corp. stock remains expensive at 20x adjusted EBITDA targets.

The whole world is looking for clean fuel alternatives, but Clean Energy Fuels Corp. ( CLNE ) still can't figure out how to profit off this scenario. The natural gas fuels company has long struggled to build the business into one that rewards shareholders due to low margins in a tough business. My investment thesis remains Bearish on the stock, still trading at a premium valuation due to the concept and not the reality of the weak business.

Revenue Boost, But...

Clean Energy reported Q1'23 revenues that surged to $132 million, but the quarterly financials weren't any better. The company reported sales grew by 58% and beat analyst estimates, but the business lost an increasing amount of money.

The renewable fuels company sold 68.8 million gallons of fuel, up from 58.3 million last Q1. As the chart below shows, Clean Energy has constantly grown the RNG fuel volumes with a target to hit 234 million gallons in 2023, but the conventional natural gas fuel volumes were down about 20% YoY.

The major problem in the business has always been the lack of gross margins produced from the fuel sales. Clean Energy always passes on the fuel savings to customers, leaving the company with no profits from a modern fuel concept aimed at lowering carbon emissions.

In Q1'23, fuel sales soared by nearly $50 million to reach $106.9 million. The problem is that the cost of fuel/product sales jumped $62 million in the quarter. The GAAP gross margin for products during Q1 was 0%.

Clean Energy has long targeted fuel margins per gallon only in the $0.50 range, so the company has to focus on volumes to produce profits. The original concept of a new energy play has always rolled into a volume play similar to a traditional gas station and those margins are always low with the profits made via the items sold at the convenience store attached to the gas pumps.

The end result was Clean Energy delivering higher fuel volumes at higher fuel prices, yet the business lost nearly $16 million in Q1'23. The company lost $11 million in the prior Q1.

Lots Of Promises

Clean Energy is working on a lot of projects in the dairy area that will deliver a substantial increase in RNG fuel sources. The forecast is for the projects under construction to deliver 105 million gallons of RNG produced from dairy by 2026.

In essence, the forecast is for the total RNG supply to nearly double from 2023 to 2026, with about half the growth coming from dairy supplies produced by Clean Energy. The problem is that the company still does a lot of work to save the environment, with limited plans to profit off the work.

The renewable fuels company ended the March quarter with a cash balance of $220 million and $153 million in debt. Clean Energy does have a net cash balance of $67 million, but the share count has soared over the years to 222 million shares, with a nearly 200% boost since 2016.

The stock has a market cap in the $1 billion range, with the company targeting an adjusted EBITDA of ~$50 million. Clean Energy has produced roughly flat EBITDA in the $50 million annual range for years now, and the depreciation cost and interest expenses basically wipe out all of the actual profits.

The stock trades at about 20x adjusted EBITDA, which is far too expensive for a risky, low-margin business. Investors still vastly overpay for the renewable fuels concept and not the fundamentals of the business.

Takeaway

The key investor takeaway is that Clean Energy Fuels Corp. should still be sold here. Until the business model adapts to collect the benefit of switching trucking firms to renewable fuel sources, Clean Energy Fuels Corp. stock just isn't attractive at these elevated prices.

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