If you were looking for solid evidence that the natural gas revolution is moving full steam ahead, the news from Clean Energy Fuels (Nasdaq: CLNE ) may at least make you pause for a moment. If we're really going to begin fueling medium- and heavy-duty trucks with natural gas and eventually making the fuel a viable alternative to gasoline, wasn't the stage set for a blowout in the fourth quarter? Natural gas is cheap, oil is expensive, and the political will is in Clean Energy Fuels' corner. But the company experienced some growing pains at the end of 2011.
During the fourth quarter, the company only saw revenue rise 3.6% to $86.2 million, although growth was a bit stronger than that due to an oversize volumetric excise tax credit, or VETC, received in 2010. Worse yet, the company's loss ballooned to $20.9 million, or $0.29 per share, from a net income of $13.8 million last year.
What bothered me most was the product gross margin falling from 19.7% a year ago to 14.2% in the fourth quarter of 2011, after adjusting for the VETC. Management said that there were some operational issues that led to this lower margin, but I'll be watching this in the future.
On the plus side, volumes were up to 40 million gasoline gallon equivalents from 31.7 million gallons a year ago. This momentum should accelerate as fleet operators switch to natural gas.
Westport (Nasdaq: WPRT ) , Cummins (NYSE: CMI ) , Volvo, and Ford (NYSE: F ) were all highlighted as manufacturers making natural gas engines that are becoming more competitive with standard truck engines. According to management, the momentum is building for these manufacturers and truck operators as incremental costs fall and sales improve. Westport is the most leveraged of these manufacturers to the natural gas market, but I expect natural gas to become a major growth opportunity and marketing pitch for Cummins, Volvo, and Ford in the future.
It's only one quarter
To be fair, Clean Energy Fuels' growth strategy is just getting off the ground and the company has yet to truly roll out its Natural Gas Highway. It also has $238 million in cash to fund expansion and a partnership with Chesapeake Energy (NYSE: CHK ) to expand its fueling infrastructure. So the long-term prospects look good. My questions are more short-term in nature.
How long will it take to grow revenue to a critical mass so that these fueling stations actually pay off? How fast will the medium- and heavy-duty trucking market make the transition to natural gas fuel? Will the government keep subsidizing natural gas fuel? When will margins begin to increase?
Based on the numbers I saw today, I am going to end my profitable outperform CAPScall on Clean Energy Fuels for the time being. I don't like the declining margins and would like to see the company prove it can build out a natural gas fueling infrastructure before I jump back on the bandwagon.
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