Clean Energy Fuels (NASDAQ:CLNE) just announced financial results for its first quarter, falling short of analyst projections for both earnings and revenue. The highlights:
- Revenue of $85.8 million, down 10% from year-ago quarter
- $31.1 million net loss, versus $28.6 million loss last year, and following a profitable fourth quarter
- Gallons of natural gas delivered up 27%
- Net cash and equivalents up $6 million from beginning of quarter
So... did Clean Energy Fuels have a good quarter, or a bad one? While declining revenue and continual losses -- in and of themselves -- aren't a good thing, these numbers alone rarely tell the whole story. Let's take a closer look at the results and see if we can put things in context.
Building something big
Profits and losses are important, but there is a distinction between a company that's investing large amounts of cash to build for growth and a mature business that's unable to turn a profit. While some investors might say it's a distinction without a difference, that's probably too narrow of a view when it comes to the kinds of investments in new infrastructure that Clean Energy has made over the past three years.
Management -- starting at the top with co-founder and CEO Andrew Littlefair -- has plainly said that they were probably a little in front of the market with their buildout of over-the-road public refueling stations. Called America's Natural Gas Highway, this bold, risky step has certainly changed the conversation between shippers -- companies that hire trucking fleets -- and the truckers they hire. Natural gas is now a viable alternative to diesel in many places where it wasn't an option even a year or two ago.
As things stand today, the company has built around 90 new public truck-friendly stations, but only 40 are open as of this writing. Littlefair thinks they can get another 15 to 20 open this year. This is, of course, on top of the 250-plus company-owned stations that can handle smaller vehicles like buses and garbage trucks, and the other 300 owned by its customers that the company maintains and runs.
As a comparison, the next largest competitor has about 70 or 80 total stations.
Digging into the numbers
One of the most important metrics to follow with Clean Energy Fuels is gallons of fuel delivered. That number increased 27% last quarter, 30% in the fourth quarter of 2014, and more than 22% in each of the three quarters prior. Here's the thing: Over that time frame, oil prices have fallen more than 50%, a strong indicator that there remains both a price advantage and pretty strong market momentum toward the cleaner, cheaper alternative to diesel and gasoline.
Yes -- total revenue was down about 10% from last year's first quarter, but this is where it's especially important to understand Clean Energy's business model. The company makes money in essentially three ways:
- Building (and maintaining) stations for customers
- Selling components for stations (under its IMW subsidiary)
- Selling natural gas
The company doesn't break out these segments in its earnings report, but management did offer some color on the earnings call.
The short version is this: IMW is facing headwinds as international demand softens in the current oil price market, and from weak foreign exchange. The station-building business is lumpy at best, and last year's Q1 had some pretty large stations in it. These two segments of the business will be weak and lumpy at times, and that's the case right now.
Why all the caveats? Because IMW and the station construction business exist to support the core business: selling natural gas at its stations and stations it runs for customers. And that business grew strongly in the quarter.
Even with natural gas prices down almost 40% since the beginning of 2014, Clean Energy's fuel revenues increased 15%.
What about making money?
There are a few positive signs to note about the company's slow march toward profitability. Littlefair reaffirmed on the earnings call that the company should be adjusted-EBITDA positive by year-end, meaning essentially that cash flow from operations will exceed costs. This doesn't include real cash costs like interest and taxes, or often noncash things like depreciation, so it should never be used as a substitute for GAAP accounting, but it can help get a more clear picture of how well the operation produces cash flows.
From an adjusted-EBITDA metric, Clean Energy reported a $5.6 million shortfall in the quarter, versus negative $6.8 million a year ago, good for an 18% reduction in operating losses. There are two drivers behind this improvement: First is cost reductions, with the company's SG&A expense down more than 10% (about $3.2 million) from last year. Second (and really important for profitability long term) is fuel margin, which increased to $0.28 per gallon, from $0.27 last year and $0.26 sequentially.
The company ended the quarter with $220 million in cash and short-term investments, about $5 million more than it started with. This was driven by better margins and lower costs, as well as the 2014 alternative fuel tax credits received in the quarter. In all, the company has only burned through about $28 million in cash over the past six months, compared to 140 million in the 12 months prior.
The biggest thing that adjusted EBITDA ignores is debt expense, which is approaching $10 million per quarter. The company is carrying around $570 million in long-term debt, with $145 million due in August 2016.
Over the past few quarters, management has spoken several times about its debt situation. The debt that comes due next year can be repaid through either cash or shares of the company's stock. Littlefair and CFO Robert Vreeland have both spoken about the company's position and made it clear that they are evaluating a number of options to repay the debt, including potentially some asset sales.
My best guess is that we will see some combination of multiple things, maybe selling off some noncore assets in the next year, as well as potentially some dilution to pay off this debt. The bottom line is that removing this debt would reduce interest expense by more than 25% -- about $10.8 million per year -- another big step toward profitability. If it comes at the cost of some dilution, worse things could happen.
The company is also spending a lot less on capital expenditures this year. It will spend about $38 million on new stations and station openings, compared to $87 million last year, and another $21 million on the NG Advantage business.
Let's be honest: If anyone had asked you in early 2014, "How will Clean Energy Fuels do over the next year if oil prices fall 50%?" not very many of us could have guessed that it would have reported five straight quarters of 20%-plus fuel delivery growth. Add in the fact that fuel sales have actually accelerated over the past two quarters, and that's hard to ignore. Furthermore, the company has cut SG&A expenses by 10%, and also managed to increase its fuel margins in the most competitive oil environment since the Great Recession.
Yes, some real challenges remain, but Clean Energy continues to grow its core business, cut costs, and reduce cash burn. All things considered, it's probably a much better quarter than Wall Street seems to think it is.