Shares of Clean Energy Fuels Corp. (CLNE -3.20%), a supplier of natural gas for transportation, fell as much as 21.8% in early trading on Wednesday, before recovering as the day progressed. As of 12:39 p.m. EDT, shares were down 10.5% on heavy trading.
The big drop follows the release of the company's second-quarter results, and management's call with investors. The company reported revenue of $70.5 million, down 13% from last year, and a non-GAAP loss of $0.07 per share.
Wednesday's big drop was almost certainly a product of overly high expectations, following the announcement in May that energy giant Total was taking a 25% stake in the company. Total also agreed to provide $100 million for a program to accelerate sales of heavy-duty trucks using natural gas.
It's likely that Clean Energy's revenue decline was a surprise for many investors, who expected quick results following the Total deal. At the same time, the company reported only a 1.1% increase in natural gas sales, further disappointing investors who may have been looking for a bigger increase coming out of the Total investment.
With the bad (at least in Mr. Market's view), there is a lot of good in Clean Energy's earnings release. Adjusted for 1.5 million gallon-equivalents in one-off liquid natural gas sales in last year's quarter, and renewable natural gas (RNG) volumes that it no longer recognizes following the sale of its renewable natural gas production business to BP in 2017, volumes were up 4% in the quarter. Sales of Redeem, its brand name for RNG, increased 22% in the quarter and are on track to increase 25% this year.
Cash flows have also improved, while operating costs continue to fall. Sales, general, and administrative expenses fell 15% from last year, and are on track to fall more in the second half of the year. On the earnings call, CEO Andrew Littlefair pointed out that both operating cash flow and free cash flow improved in the second quarter, and that adjusted EBITDA more than doubled to $7.4 million.
Clean Energy Fuels ended the quarter with $42 million more in cash and investments than debt, giving it by far the strongest balance sheet it's had in years. Factor in expectations that it will be cash-flow positive this year, and Littlefair described the company as "back on the offensive."
The market's reaction on Wednesday was heavily weighted to short-term expectations that were probably unrealistic. The company only recently rolled out the marketing plan that Total is supporting, and the purchase cycle for the heavy-duty vehicles that Clean Energy provides fuel for take months to complete. So any expectations that it would result in fast growth were bound to lead to disappointment. This isn't the kind of industry that turns on a dime.
There are positive catalysts coming. The ports of Long Beach and Los Angeles (the two busiest in the U.S.) are implementing new rules to drive down emissions, and natural gas trucks will be a big part of this. The Total-backed leasing program -- which makes natural gas trucks the same price as a diesel equivalent, and the fuel much cheaper -- is now being offered to customers. These new programs, along with increased supply of RNG and expanded interest across the U.S., should lead to growth in the quarters to come. It just won't happen overnight.
But with Clean Energy's strong balance sheet, falling expenses, and a business that's now built to generate positive operating cash flows, investors should be able to rest a little easier while the growth catalysts develop.