If you've invested in or followed natural gas fuel provider Clean Energy Fuels (NASDAQ:CLNE) for the past couple of years, you're aware that the stock is still well off its all-time high of around $22 from a couple of years ago. If you've followed my analysis of the company, you probably also know that I have a relatively positive outlook, and that I've met with both CEO Andrew Littlefair, and board member and largest shareholder T. Boone Pickens.
If you go here, you'll be able to find a number of videos posted, from a nearly two-hour interview I conducted with Littlefair back in April. If you go here, you'll see that I'm not always in agreement with what these guys think, going so far as to call Pickens' ideas "dangerous." The reality is, I've followed Clean Energy Fuels -- and the larger natural gas-for-transportation segment -- for a couple of years now, and I think I know the company and industry about as well as anyone not working in it directly can.
I also keep an open mind about my portfolio. After all, only about 60% of the stocks that I own have been long-term winners, so I've been "wrong" at least 40% of the time. As much as I like being right, I'm more concerned with finding the right answer. So when I see a short attack launched against a company I own shares of -- as happened over the weekend in a Seeking Alpha article over Clean Energy Fuels -- I take it as an opportunity to find out whether my thesis is broken.
Is the short thesis right in this case? Is Clean Energy Fuels a flawed business model, doomed to failure? Let's take a look.
Regionality of fuel costs and miles traveled matters
The short thesis points out that Clean Energy Fuels' average CNG prices are much higher than the competition, but it ignores a very important point. Clean Energy Fuels operates by far the largest number of stations, and a lot of them are located in high-cost areas like Southern California, which means that its average price over all of its stations will certainly skew higher than, say, those at Love's, the private truck-stop operator that has 11 stations total, all located in Texas and Oklahoma -- home to the lowest natural gas prices in the country. In these areas, Clean Energy Fuels' prices are more in line with those of its competitors.
When it comes to LNG, the author raises a valid point about fuel economy for natural gas versus diesel. However, in an attempt to use this to undermine the Morgan Stanley research report's findings, the short thesis ignores a couple of very important details.
Morgan Stanley uses a cost of $2.93 per DGE, 75,000 annual miles to calculate the cost savings of LNG versus diesel, and an average fuel economy of 5 miles per gallon, for both diesel and natural gas trucks. This resulted in a cost savings of $17,699 annually for the natural gas truck, meaning the premium cost of the truck of around $40,000 would be paid back in 2.3 years.
The short-seller went to more extremes on the diesel/natural gas fuel efficiency scales, stating that the actual fuel savings for LNG trucks would be closer to $4,000 annually, versus $17,699. The reality? Both ignore some very key points.
- Fuel efficiency is a result of load weight and route as well as fuel and engine.
- Many early natural gas converts are reporting fuel economy in excess of 6 MPG equivalent.
- AmpCNG is claiming 5.8-6 MPGe.
- Dillon Transport is claiming 6 MPGe.
- Love's is claiming 7.2 MPGe.
It's also worth pointing out that much of the thesis around LNG for trucking is long-haul routes, which often consume more than 20,000 gallons of fuel and travel more than 100,000 miles a year. A good example is UPS's recent addition of 10 trucks that will refuel at a Clean Energy Fuels station in Jacksonville, Florida. These 10 trucks will consume some 246,000 DGE per year, nearly double the amount used in those earlier calculations. Raven Transportation's fleet of 36 trucks, implemented last October, averages 27,700 DGE annually per truck.
I wouldn't take someone with a clear agenda -- pushing Clean Energy Fuels' share price down before short options expire -- at face value over this very important point. Westport Innovations says the average ISX12 G-configured truck will have a fuel economy loss of around 12% versus a similar diesel engine, and the HPDI 2.0 engines, such as the Volvo D13 LNG coming out in 2015, are expected to have similar fuel economy to diesel.
Truck-friendly versus 18-wheeler-friendly
In Clean Energy Fuels' most recent earnings call, Littlefair stated that the company has 96 "truck-friendly" stations already open today. If you're going to invest in something dealing with transportation, it's pretty important to understand what "heavy duty" means, and what it doesn't.
Class 8 trucks are more than just 18-wheelers. Here's an example of what class 8 trucks can look like:
Every station listed as "truck friendly" can accommodate these kinds of vehicles -- perfect targets for CNG applications. It appears that the short thesis ignores this key segment of the trucking market. CNG is cheaper than LNG, and these are exactly the kinds of vehicles many fleet operators will be targeting with CNG. And which company is the largest supplier of CNG? Clean Energy Fuels.
Investing in market growth versus "buying business"
The short thesis points at a $14.5 million impairment charge taken when the company's investment in Vehicle Production Group essentially ran out of capital and ceased production of its CNG-powered wheelchair van, almost making it sound like the failed federal government investment in Solyndra. The reality is, many large companies invest in start-ups in an effort to seed new technologies and, in Clean Energy Fuels' case, to seed the market with natural gas vehicles.
Two issues with the thesis:
- First, this wasn't a recent impairment -- It actually happened in 2012, not last quarter, so to claim that this is a recent misstep is misleading and false. It also disregards that this was based on investments made over a period of several years to help kick-start development of natural gas vehicles.
- Second, a single impairment ignores the other investments that Clean Energy Fuels has made into the space, including selling BAF to Westport Innovations last year (after first buying it for $8.3 million and paying off its debt) for $25 million in Westport stock.
The point? If you're going to use one example, you'd better be able to back it up with the context of historical results. The findings of the short thesis fail on this count.
Clean Energy Fuels' debt: the truth about convertible notes
I'll be the first to say that the company does have a significant amount of debt, but it's not as precipitous as the short thesis claims. Clean Energy Fuels isn't on a "ruinous path of self-destruction," nor is the $75 million-to-$85 million capex for 2014 speculative. The company's management has heavily stressed that further capital spending will be based on customer demand, not speculative expansion.
As to the approximately $300 million in convertible notes, the author's short thesis is based on the expiration of these large notes at the end of 2014 and 2016, and this is just plain untrue. The CHK notes don't begin coming due until 2018, 2019, and 2020, and 9.1 million shares' worth -- the vast majority of convertible shares -- are held by T. Boone Pickens and Leonard Green Partners. There are some convertible notes due in August 2016, for some 350,000 shares. That's equivalent to three-tenths of 1% of shares outstanding. I think Clean Energy can handle that one.
Also worth noting: While the company's cash position has fallen from $240 million a year ago to $154 million per the latest 10Q, restricted cash and short-term investments have increased about $30 million. In short, Clean Energy Fuels' actual liquidity position is over $330 million -- or more than all of the debt that's not tied to convertible notes.
Big fat caveat
The company is still spending more cash than it generates, but it's far from a house of cards. Here are a couple of metrics that demonstrate the business' cash generation capabilities:
Note the trend toward positive operating cash flow and EBITDA over the past year, as investment in station buildouts slows and fuel deliveries continue to increase. Flawed business model? More like a positive trend.
Foolish bottom line
Look, Clean Energy Fuels is far from a sure thing, but the short thesis ignores very real and consistent growth in the business. The company reported a 22% increase in LNG deliveries and 24% growth in comparable CNG deliveries last quarter. Simply put, if the company's business model is failing, why are fuel sales growing? And frankly, it's also pretty hard to ignore the timing of the article -- the day after the stock did this, when Morgan Stanley initiated coverage:
Based on my analysis, the bear thesis published over the weekend is worse than wrong: It's full of misstatements and inaccuracies. However, that doesn't mean investing in Clean Energy Fuels is a sure bet. Take time to build out your position, as you would with any stock. It's a long game, Fools, and it's still in the early innings.