Clean Energy Fuels (CLNE 4.60%) was absolutely clobbered in 2014. The stock finished the year down 61% as investors grew impatient with the company's continued losses, the slow adoption of natural gas engines by heavy-duty fleets, and the direction of oil prices. Yet, while the stock chart makes it appear as though the sky was falling, Clean Energy Fuels managed to grow revenue on higher volumes of its natural gas fuels, slash operating expenses, and forge new partnerships and joint ventures that could provide important revenue streams in 2015.
Will the company's progress and momentum be enough to rejuvenate investor confidence, or are shareholders in for another volatile year? Let's evaluate the good, the bad, and the ugly realities for the current investing environment.
The good: Revenue growth, cash discipline, and new deals
There's plenty for Clean Energy Fuels shareholders to look forward to in 2015. The Natural Gas Fuel and Infrastructure Tax Credit, which provided the company with $45.4 million in revenue in 2013 before expiring, was reinstated in mid-December for 2014. The law is expected to deliver $24 million to $28 million in revenue in the fourth quarter. While it will not be active in 2015 (it could be retroactively reinstated again), the U.S. Environmental Protection Agency now recognizes renewable natural gas, or RNG, as an advanced biofuel that will come with the highest subsidies per gallon. Good news: Clean Energy Fuels produces and markets a respectable amount of RNG under its Redeem brand.
How the company's RNG, called Redeem, is manufactured. Image source: Clean Energy Fuels.
That will certainly boost growth, and growth is doing quite well lately. Total revenue through the first nine months of 2014 rose 11% from the year-ago period to $296.8 million. Although losses swelled 160% on the heels of expansion, management is driven to lower overhead. Selling, general, and administrative expenses fell $5.3 million in the third quarter alone, while capital expenditures are expected to fall from $145 million in 2013 to $85 million when full-year 2014 results are announced -- and further still in 2015.
Significantly reduced capital expenditures are the result of years of expansion and building out a national distribution and refueling network, which management believes can adequately meet demand for the time-being. However, those sunk costs could begin translating into even bigger growth moving forward, especially considering important collaboration and distribution deals that will create significant and steady demand in the months ahead.
Two major deals were announced in September and October. First, Clean Energy Fuels announced a joint venture with longtime partner Mansfield Oil Company to open private fueling stations across the nation for bulk fuel haulers, which typically consume diesel fuel. The JV will have access to hundreds of Mansfield Oil's customers and, according to fellow Fool Jason Hall, the entire bulk fuel hauling market represents a 3 billion gallon per year opportunity.
Second, Clean Energy Fuels acquired a controlling stake in NG Advantage, which provides "virtual pipelines" to entities such as hospitals and paper mills that do not have access to the nation's natural gas infrastructure. Large tractor trailers are retrofitted to store natural gas, parked on site, and refueled regularly to meet a customer's energy needs. It's a bit different from what investors might have originally envisioned for Clean Energy Fuels going forward, but a 16-million gallon per year station in Vermont will instantly become the company's largest.
When coupled with sizable distribution deals to Dillon Transport (nearly 2.5 million gallons of compressed natural gas, or CNG, each year) and Fred Meyer (nearly 1 million gallons of liquefied natural gas, or LNG, each year), it's not difficult to see that sales volumes should continue to grow in 2015.
The bad: Slower than expected rollout of heavy-duty engines
Fewer engines for heavy-duty needs means fewer fleets, which translates into dampened growth for Clean Energy Fuels. As CEO Andrew Littefair noted on the last conference call, there is growth and there is momentum. He then quoted Joel Feucht, Caterpillar's General Manager of Natural Gas engines, stating, "[The market] is not going nearly as fast as the hype people expected, but it is probably going faster than most people appreciate."
Cummins and Westport Innovations continue to sell their 400-horsepower ISX12 G engine, but it's also the only one available to truck manufacturers -- and that may not change anytime soon. Volvo recently decided to halt development of its own natural gas engine, which will put a damper on market development. Then again, Clean Energy Fuels continues to grow with or without multiple engine options.
The ISX12G is the only natural gas fuel engine on the market for heavy-duty applications. Image source: Cummins.
The ugly: BIG expansion stalled?
At the end of 2012, Clean Energy Fuels entered into a $200 million credit agreement with the financial arm of General Electric. The goal was to build two 90-million gallon per year LNG manufacturing facilities that could eventually be expanded to annual capacities of 365 million gallons each -- expediting the company's ability to serve the 25 billion gallon per year heavy-duty trucking market. To put that in perspective, the company delivered 68.8 million gallons of fuels in the third quarter. These potential behemoths are known as the "GE Plants" in the company's SEC filings.
Unfortunately, the original agreement called for the GE Plants to be built in 2014 or the credit agreement would terminate at the end of the year. Slower than expected transitioning from diesel to natural gas fuels forced Clean Energy Fuels to ask for an extension to the end of 2016, but General Electric has yet to make a decision at the time of the third quarter conference call. That doesn't necessarily mean the companies won't extend the financing arrangement, although investors could be in for some humbling news in the next conference call. After all, 730 million gallons of potential future annual production is no drop in the bucket.
Can the company bounce back in 2015?
I feel it's likely that shares of Clean Energy Fuels get back onto their feet in 2015. Any announcement to cancel the GE Plants would set the company's future growth plans back a bit, but it makes sense to postpone the project until the heavy-duty market picks up. Besides, there will be additional megagrowth projects on the table if the natural gas fuel and vehicle markets continue to expand. And that looks likely.
Volumes continue to grow at a healthy clip, while there's no shortage of new distribution deals and strategic acquisitions to be made. A reduction in capital expenditures will help make positive cash flow more attainable and stem losses from operations before they swell out of control. Additionally, the urge to suggest that the company will suffer from falling oil prices could easily be proven incorrect during the next earnings release.
The truth is, not much has changed for Clean Energy Fuels except its falling market cap, which makes me believe current share prices present an interesting long-term opportunity for investors.
