Source: Clean Energy Fuels.
Stock in natural gas vehicle refueling company Clean Energy Fuels (CLNE -2.18%) has been getting killed since July, largely by a seemingly constant barrage of bad news for the industry. However, we got a sneak peek of some positive results for the company's actual business a few days ago, when Clean Energy announced that it delivered more than 50 million gallon-equivalents of compressed natural gas, or CNG, last quarter -- a record amount and a 36% increase from a year ago.
What can we expect when full earnings are announced on Thursday? Here are the three things that I'm paying closest attention to.
1. Gallons delivered growth in all categories
Natural gas remains much cheaper than diesel. Henry Hub Natural Gas Spot Price data by YCharts.
While CNG is the largest part of the company's business, it also sells liquefied natural gas, or LNG, and "RNG," which is renewable biomethane, sold under the "Redeem" brand, that can be purchased as CNG or LNG. In the first quarter, the company's deliveries of LNG and RNG also grew strongly, and the company needs to continue expanding sales in all three categories.
Why? Redeem very likely carries a higher premium as it is entirely produced from landfill emissions, so demand will be largely based on the environmental benefits rather than the price advantage versus diesel.
As to LNG, Clean Energy's "America's Natural Gas Highway," or ANGH, a network of fueling stations built primarily to service the heavy trucking industry, is LNG-focused, though many locations can also serve CNG. Liquefied natural gas growth remains central to the company's long-term success.
Any way you slice it, the company needs to report fuel delivery growth in all segments, not just CNG.
2. Expansion plans
Earlier this year, CEO Andrew Littlefair announced that the company was cutting its capital expenditure plans by around 40% this year, from $135 million to $85 million or less. On the surface, cutting back on growth looks like bad news. There's more to the story, though.
Over the past couple years, Clean Energy has built almost 100 ANGH stations, but had opened only 27 as of last quarter, leaving another 70-plus to begin operating as demand grows. Furthermore, as Littlefair reaffirmed on the last earnings call, the company intends to build 70 more new stations in 2014, with the majority coming in the second half of the year.
In short, it looks like management has taken a more conservative approach to expansion. Considering that the company is still cash flow negative, we want to see that continue.
3. Cash burn
Clean Energy Fuels has spent a lot of money over the past few years to build out its station network -- largely the ANGH -- in anticipation of more trucking companies adopting natural gas engines to replace diesel. But the trucking industry is historically very slow to change, and a number of product delays have pushed the industry about a year behind where it was expected to be in the adoption curve.
For Clean Energy -- which leveraged its business with more than $600 million in debt to build out the refueling infrastructure ahead of product availability -- management must take its foot off the gas of speculative buildouts, and instead focus on profitable growth.
The company had $276 million in cash and short-term investments (mostly bonds) at the end of last quarter, but has seen negative $149 million in free cash flow over the past 12 months. Over the same period, the company spent $108 million on capital projects, so that's roughly $41 million of cash burn not related to expansion:
CLNE Free Cash Flow (TTM) data by YCharts.
Cutting capex will help, but the company must grow fuel sales as well.
Iterative improvements, not big changes
Part of the challenge when investing in a company that is spending heavily to grow, and is not profitable, is finding trends that indicate whether the company is moving in the right direction. It's just as important to understand what news out there is directly related to a company's prospects, and what news isn't necessarily material.
In the case of Clean Energy Fuels, almost none of the "bad news" stories are likely to be material, as demonstrated by the strong growth in CNG deliveries reported this week. However, that's just part of the story. I'll look for improvements in all three areas noted above this week when we get the full earnings release. Check back here for more analysis on Thursday.
