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Clean Energy Fuels Should Make It Through The Valley Of Death
Mar. 3, 2015 4:02 PM ET | 11 comments | About: Clean Energy Fuels Corp. (CLNE)
Disclosure: The author is long CLNE. (More...)
Summary
CLNE reported a strong fourth quarter helped by VETC renewal and the sale of a subsidiary.
Sales volumes of both CNG and LNG are growing with future growth assured due to the deployment of more gas powered trucks.
CNG has been burning cash but has a relatively strong balance sheet with $293 million in financial assets and should be able to reach the point of positive cash flow.
The only problem is $145 million of debt coming due in August 2016 by which time CLNE should be showing better cash flow.
Investors should monitor cash flow and the balance sheet quarterly but it looks like CLNE will emerge from its "cash burn" phase in relatively good shape.
Clean Energy Fuels (NASDAQ:CLNE) provides natural gas in the form of compressed natural gas (CNG) and liquefied natural gas (LNG) to the trucking industry. I have written about it before here and here and, unfortunately, my optimism has not been vindicated. Growth has been much slower than I expected and the result has been negative cash flow as the investment in more filling stations has not yet been supported by cash flow from sales. CLNE's stock price has taken a pasting, falling all the way to $3.99 before rebounding on a strong fourth quarter report. Fourth quarter numbers were helped by the sale of a subsidiary and legislation renewing the VETC tax credit for calendar 2014. CLNE closed Monday at $5.67. I still believe that - in the very long term - CLNE has a strong business model and that it will be viable. However, we must now confront the short and intermediate term issue presented by the "valley of death" (the time in which a growing business burns cash due to capital expenditures in excess of operational cash flow). Three things can happen - 1. the company can be forced into Chapter 11; 2. the company can be required to issue many more shares diluting current shareholders; and 3. the company can pull through without significant dilution and emerge with growing earnings per share.
Sales Growth - CLNE builds and operates filling stations targeted at the trucking industry. The CNG business is primarily a local urban fleet business with the biggest customers being refuse trucks, local bus fleets and airport vehicles. This business has experienced healthy growth but there is considerable competition. The LNG business is targeted at long distance trucks and requires a large scale network of filling stations (the "Natural Gas Highway") which tends to make it less subject to competition but also more capital intensive. The chart below provides CLNE's sales of CNG, LNG and RNG (renewable gas) in millions of gallons of diesel equivalent (DGE) or the past three years and the fourth quarter of 2014.
2012 2013 2014 4Q 2014
CNG 130.5 143.9 182.6 52
LNG 55.5 60.0 70.3 17.3
RNG 8.9 10.5 12.2 3.1
CNG sales have been moving up nicely and the fourth quarter suggests a current run rate of over 200 million DGE per year. LNG sales seem to be growing more slowly. CNG growth is likely to continue as fleet operators have ordered more trucks and the momentum will carry sales numbers higher. In this regard, the largest operators of refuse vehicles - Waste Management (NYSE:WM) and Republic Services (NYSE:RSG) - are ordering a high proportion of their new vehicles as natural gas powered trucks. Each quarter, more and more of these trucks come on line and add to natural gas sales growth. According to CLNE's most recent conference call, only one (out of a very large number) potential fleet purchaser of natural gas trucks has cancelled due to the recent decline in petroleum prices.
Cash Burn - CLNE has been burning cash at a healthy rate but has a relatively strong balance sheet. The chart below is based upon CLNE financial statements filed with the SEC. For each time period I have included the total value of financial assets (including restricted cash and notes), the total amount of debt, and net debt (debt minus financial assets) - all in millions of dollars. The negative number for net debt in 2012 means that CLNE had cash in excess of debt at that time.
12/31/12 12/31/13 3/31/14 6/30/14 9/30/14 12/31/14
Cash $347 $461 $403 $350 $333 $293
Debt $289 $620 $622 $625 $619 $571
Net Debt -$58 $159 $219 $275 $286 $278
The progression of net debt provides a rough metric for estimating the "burn rate" of cash utilization over time. The above table suggests that the burn rate has been declining as the system gets built out and sales increase. Indeed, in the fourth quarter of 2014, the burn rate went negative but this was due to extraordinary factors. In the fourth quarter of 2014, CLNE had an extraordinary item of some $40 million in cash receipts due to the sale of a subsidiary. This was likely offset to some extent by the expenditure of some cash for the purchase of another company whose financials are now consolidated making it difficult to tease out the precise impact on cash flow. Going forward, CLNE projects that it will reach zero EBITDA sometime in 2015. CLNE's interest expense in 2014 was some $44 million and CLNE is anticipating capital expenditures of $59 million in 2015 (down from $86 million in 2014). Assuming zero EBITDA for 2015 as a whole, cash burn should be roughly $103 million in 2015. This would be a lower number than the $119 million in 2014 (the $119 million would be higher but for the $40 million sale of a subsidiary) and much lower than the $217 million in 2013. As sales continue to trend higher, EBITDA should increase into positive territory in late 2015 and early 2016. This suggests that CLNE's $293 million in financial assets should get it through the "valley of death" (the time period in which capital expenditures vastly exceed operational cash flow).
Debt Issues - Reviewing CLNE's debt, the only problematic item seems to be the "SLG notes" (these are convertible notes priced to convert at a price of $15 a share) in the amount of $145 million which mature in August 2016. Paying off these notes after burning cash in 2015 may put a squeeze on CLNE unless operational cash flow improves sharply or another source of cash materializes. Assuming $103 million cash burn in 2015 and zero cash burn in early 2016 (a generous assumption given the interest expense), CLNE would have the ability to repay the loan from existing financial assets. More likely, CLNE will seek to either extend the loan (at least in part) or replace it with new financing. If EBITDA is positive and trending higher by that point, this should be possible. On the other hand, it is not impossible that some kind of dilutive event involving the issuance of more shares may be necessary. I think that the most likely result is that CLNE will refinance a significant part of the $145 million without substantial dilution but shareholders should examine each quarterly financial report carefully to watch the trend in cash flow, net debt and EBITDA.
Conclusion - I remain a shareholder although I have taken a hit (having bought in slightly below $20 a share). This was a "concept" stock for me. I determined that natural gas should replace petroleum in the transportation market and that CLNE was very well positioned to profit from the transition. I was not completely wrong. Natural gas sales in the vehicular market have increase sharply although the LNG part of the market has been somewhat sluggish. Like many other things - especially in the energy business - it has taken much more time than initially anticipated. When you are burning cash, time is your enemy and the race to positive operational cash flow may become a desperate one. I think that CLNE will win the race but it may be close. If CLNE wins the race, investors at the current price should prosper because, once operational cash flow is achieved, the momentum of sales growth should create solid earnings growth which should support a generous multiple. But the race has not yet been won and there is definite risk. On a risk/reward basis, I think CLNE is attractive as a somewhat speculative investment at the current price but it is not for the faint of heart.
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