Clean Energy Fuels: More Shadows Than Lights Bear A Hold Rating

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Clean Energy Fuels is the largest distributor of RNG in the U.S., supplying major companies like Amazon and UPS.The company is undertaking the construction of RNG production facilities through joint ...

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Moreover, through two Joint Ventures with BP (BP) and TotalEnergies SE (TTE), CLNE is undertaking the construction of several RNG production facilities, obtained mainly through livestock farm waste, to produce part of the volumes sold through its service stations. The RNG demand expected to grow in the coming years, also aided by the new 15l Cummins engine, should be positive factors for continued revenue growth and business diversification. Despite these rather interesting implications, the same cannot be said of financial results, which are weak and have led to a sharp devaluation of the stock from the highs reached in FY21. In FY24, management issued guidance predicting GAAP net losses between -$101m and -$111m, mainly related to the high operating costs of the Idaho Project. In my opinion, CLNE is subject to capital dilution risks related to the issued warrants in the long run, as well as other minor issues that I will analyze later in the article. For these reasons and considering the results achieved through the Discounted Cash Flow, I am currently assigning a Hold rating to the company, waiting to see an improvement in its financial performance. This could begin to be seen starting in FY25 with the full commissioning and production of the new RNG facilities. If interested in the world of renewable energy, on EuroEquity Research you'll find several analyses of companies operating in it. Business Overview The Clean Energy Fuels business is mainly divided into two segments: products revenue and services revenue. Products Revenue deals with the sale of RNG and conventional gas through its 600 proprietary service stations, mainly located in the United States, with a small market share in Canada. As of FY23, almost all fuel sold was obtained from third parties through supply contracts. Despite this, this share is expected to decline with the start of production from owned plants, some of which were already in operation within the year but still in the ramp-up phase. Going to further analyze the revenues, we see that 67.5% of revenues in FY23 come from the sale of RNG and conventional gas at its own stations, 13.3% from the sale of tax credits such as RIN (D3), LCFS and AFTC. Revenues are found to be quite volatile, although following an upward trend. This is mainly due to the reduction in revenues from the Fuel Sales segment due to Amazon warrant charges, following the fuel supply contract up to $500m signed in FY21 to which is linked a warrant for 20% of CLNE shares exercisable by FY31. In FY21, FY22 and FY23 this weighed $83.6m, $24.3m and $60.6m of non-cash stock-based on revenues. Services Revenue is related to Operation & Maintenance services provided for third parties, as well as the construction and sale of fuel stations acting as an Engineering, Procurement and Construction company. As of FY23 this segment is worth 19.2% of total revenues and appears to be the segment with the most stable results and the steadiest growth among those in which CLNE operates.   CLNE SEC Filings and Author's Analysis Key development on RNG production facilities From FY21 onward, it seems clear the management's plan to exponentially increase its production of RNG, which was almost nil until that year, to reduce its dependence on third-party supplies, as well as leading to a possible improvement in financial results. This development will also promote revenue growth due to tax credits, currently only partially acquired by CLNE, through agreements with its suppliers. To overcome these problems and, at the same time, without involving too significant an outlay of capital, Clean Energy Fuels has entered 2 JVs (Joint Ventures). The first one with TTE, one of CLNE's major shareholders, for the construction of a RNG production plant, completed in Q1 2023 with an estimated production of 1.1m GGEs (0.5% of RNG sold in FY23). The production site appears to be still in the ramp-up phase and for these reasons in FY23 it recorded a modest revenue of $1.4m against $4.95m loss. Between FY21 and FY23 $61.8m of capital was used to finance the project. The second JV with BP regards the construction of 5 RNG production facilities, including 1 completed in Q4 2023, for a total production of 11.1m GGEs, accounting for about 5% of RNG sales in FY23. In FY23 CLNE provided $220.3m investment in the JV, which should lead to higher revenues starting in FY24 and especially FY25. In FY23 the JV produced a net loss of $9.1m. As of December 2023, CLNE also has 3 proprietary projects under construction scheduled to be completed by mid-2025, producing 3.6m GGEs (1.5% of the RNG sold in FY23). TTE has the right of first opportunity to invest in these RNG projects, taking ownership of 50% of the projects. Upon completion of the following investments, Clean Energy Fuels is expected to secure production of less than 10% of the entire RNG capacity sold annually. In my view, this is a modest percentage to result in a significant positive impact on operating results. Finally, in April 2023, the company entered into a JV agreement with Tourmaline Oil Corp. (OTCPK:TRMLF) to build at least 20 CNG fueling stations in Canada, totaling about $CAD70m, of which CLNE will own 50%. The agreement will allow a further increase of its business in Canada, which, however, for the time being, remains limited compared to total sales. Latest economic and financial results In FY23, revenues increased 1.2% YoY, mainly due to growth in the services segment and due to increased station construction sales. The weak performance is mainly attributable to the products segment, whose revenues decreased by $3.2m, driven by a $36.3 million increase in non-cash stock-based sales incentive contra-revenue charges related to the Amazon Warrant. At the same time, high expenses due to the implementation of new projects increased interest expenses, and losses due to JVs weighed significantly on net income (-$99m), down by about $40m compared to FY22. This dynamic seems likely to persist in FY24, mainly due to the expected expenses to be incurred in reference to the Idaho Project which, in the words of management: Is estimated to be complete around the end of 2024, maybe beginning of 2025 that is responsible for over half of the earnings drag in 2024. Idaho project has certain operating expenses that are occurring as we separately build out the main project and those operating expenses are reflected in our 2024 guidance. Those are also heavier in the first half of 2024.   CLNE SEC Filings and Author's Analysis & Estimates Between FY25 and FY26, I expect an improvement in results due to the completion of a good portion of under-construction projects, following the ramp-up phase that implies an additional 6-9 months of low project contribution even following their completion. I expect EBIT margin to reach a positive level not before FY26 (2.2%). Capital and cash flow results, not accounting for the non-cash outflows related to Amazon Warrant charges, turn out to be better than economic ones. CLNE has always achieved positive OCFs between FY18 and FY23, with management expecting the same outcome also for FY24. They expect an OCF of about $60m, compared to about $160m for Capex, of which $60m invested in internal projects and maintenance and $100m invested in JVs. Cash management has enabled CLNE to keep debt under control, despite the multiple investments carried out in the last 2-3 years. Notably, reported net debt was equal to $95m as of Dec23, which is under control considering PP&E are worth over $400m, although up from Dec21 (-$147m). I have not highlighted any issues regarding short-term liquidity.   CLNE SEC Filings and Author's Analysis & Estimates Main opportunities In the course in my analysis, I identified 4 main opportunities for CLNE in the near future. Increased demand for RNG, both globally and in the US. IEA data highlight potential growth of 20% between FY23 and FY28. CLNE has a first-rate and well-diversified customer base. Major customers can include Amazon, UPS, and other known retailers. It also has ambitions to expand into the airport (but not aviation) media segment and the maritime sector in the coming years. 30% of revenues in FY23 came from government bodies, which could further promote revenue stability. The new 15 L diesel engine from Cummins could be revolutionary and lead to a substantial increase in the use of RNG for heavy-trucks, improving their efficiency and reliability. Management within the last conference call was very insistent on this innovation as potentially disruptive to the industry. We await more data to be able to confirm or not confirm this development. Increased revenues in Canada could be a first step toward internationalizing the business. Main risks I have also identified 5 main risks to consider for CLNE. Increased competitiveness in the industry, as already seen in Montauk article. More and more companies such as Waste Management (WM) , Republic Services (RSG), and some major Oil companies are steadily increasing their interest in this business, both in terms of production and distribution. Future regulatory changes regarding RNG could have a heavy impact on CLNE's results, particularly regarding tax credits. An example of this is the AFTC, which is scheduled to expire in December 2024 and accounts for about 5% of total revenues in FY23. CLNE has two warrants in place, one with Amazon (up to 20% of capital) and one with Stonepeak (up to 10% of capital). Both contracts could have dilutive effects on CLNE shares. Despite the significant investment campaign to increase its RNG production, under-construction and newly completed plants are worth less than 10% of the entire volume of RNG sold by the company in FY23. This figure can pose a great risk, as such a large dependence on RNG suppliers can lead to RNG shortages, as well as an increased risk of volatility in the price of raw materials purchased. Revenues are currently extremely volatile as they are dependent on the dynamics of gas prices, the value of tax credits, see Montauk analysis for more. In addition, Amazon's warrant represents an additional element of volatility with respect to quantifying the company's total revenues. Discounted Cash Flow I conducted a DCF analysis to assess Clean Energy Fuels’ intrinsic value, returning a valuation of €1.94 per share, approximately 20% below the current market value. Please appreciate that I have already included in my estimates the risks to which CLNE is subjected. The following assumptions were used to determine the fair value: Beta: 2.09 obtained from Investing.com MRP (5.7%) and Risk-Free rate (3.8%) were obtained by using 2023 Fernandez's data, weighted by the geographic breakdown of the company's revenues. A cost of equity of 7.77% was obtained. Cost of debt (6.36%) was obtained from the ratio of interest expenses to total debt as of December 2023. WACC = 7.36% g = 2% in line with the inflation target in the US.    Author's Analysis & Estimates Conclusion  Clean Energy Fuels is one of the leading RNG distribution companies in the United States, with a significant customer base and a well-established network in the territory. In the next 2-3 years, its business may be subject to multiple opportunities that will allow it to grow, further diversify the business, and improve its operating results. Nevertheless, the poor results reported in recent years, the large amount of investment made against a small increase in OCF, and the multiple risks reported within the analysis, as well as the DCF results, prevent me from assigning a buy rating. As I await new developments on the finalization of the RNG facilities and the evolution of operating costs, I therefore assign a Hold rating. I believe that within the renewables world there are more interesting companies, also characterized by a lower amount of risk.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422618973"}