The Plunge Continues For Clean Energy Fuels

seekingalpha06-21

Shares of Clean Energy Fuels continue to fall after a mixed 2023 fiscal year and in spite of recent bottom line strength.2024 is looking like it will be a mixed year, though EBITDA should rise year-...

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(NASDAQ:CLNE). At that time, shares of the company were down about 49% from their 52-week high. This was because of weak financial performance and concerns over the demand for its services worsening. Operationally speaking, I found the company to be a very interesting firm. But because of those same issues, primarily on the fundamental side, I could not rate it any higher than a 'hold'. Unfortunately, even that was overly optimistic. Since the publication of that article, shares have pulled back another 32%. That's far worse than the 16.2% increase seen by the S&P 500 over the same window of time. The data provided by management since then has shown reasons for investors to be optimistic. But when you look at the data, both on an absolute basis and relative to similar firms, and you look at the uncertainty of what the future holds, it's difficult to turn bullish just yet. If the stock continues to decline or if, by this time next year, the company has delivered on its promises, I think that it will finally be time to take a bullish stance on the business. But until then, keeping the firm rated a 'hold' appears logical. Assessing changes From a purely fundamental perspective, things have changed when it comes to Clean Energy Fuels. Some of those things have been for the better. But others have been for the worse. To start with, we should probably touch on the financial performance achieved for 2023 relative to 2022. During the year, the company generated $425.2 million worth of revenue. That was up about 1.9% from the $420.2 million reported one year earlier. Even though total volume-related product revenue fell, dropping from $350.7 million to $343.5 million, that was largely because of a reduction in both RIN Credits and LCFS Credits. Author - SEC EDGAR Data Actual fuel sales for the company expanded from $281.1 million to $287 million. This can really be chalked up to a growth in fuel volumes. For instance, RNG volumes for the company expanded from 198.2 million gasoline gallon equivalents (known as GGEs) to 225.7 million GGEs. This more than offset the drop in conventional natural gas volumes from 69.6 million GGEs to 62.5 million GGEs. The company also benefited from a rise in station construction sales from $22.3 million to $26.4 million, while volume-related O&M (operate and maintain) sales grew from $45.9 million to $52.7 million. As great as this was to see, the firm's bottom line took a hit. The company's net loss nearly doubled from $58.7 million to $99.5 million. A big part of this problem was a surge in net interest expense from $2.9 million to $11.8 million. However, the company also saw losses on equity method investments skyrocket from $4.8 million to $12.5 million, while the company's product cost of sales expanded from 75% of product revenue to 83.8%. Other profitability metrics, unfortunately, followed a very similar path. Operating cash flow fell from $66.7 million down to $43.8 million. If we adjust for changes in working capital, we get a decline from $57.5 million to $52.5 million. And lastly, EBITDA for the company fell from $49.1 million to $43.6 million. Author - SEC EDGAR Data When it comes to the 2024 fiscal year, we only have data covering the first quarter. That data is most certainly interesting. On the downside, the company suffered a decline in sales from $132.2 million to $103.7 million. The biggest contributor to this, by far, was a plunge in fuel sales from $106.9 million to $68.2 million. This came about even as fuel volumes involving RNG expanded from 53.4 million GGEs to 58 million GGEs, and as conventional natural gas volumes grew from 15.4 million GGEs to 17 million GGEs. The primary driver of the decline in revenue involved a drop in prices, a droplet management attributed to falling natural gas prices. According to the EIA (Energy Information Administration), natural gas prices averaged around $2.13 per Mcf in the first quarter of 2024. That's down from the $2.65 per Mcf reported at the same time in 2023. Clean Energy Fuels As disappointing as this is to see, there was some good news. And this is that the bottom line for the company actually got better. The firm's net loss went from $38.7 million last year to $18.4 million this year. This was in spite of the fact that net interest expense expanded from $1.6 million to $4.2 million, while losses from equity method investments jumped by approximately $3.5 million. The company did benefit from a decline in selling, general, and administrative costs from $29.6 million to $26.2 million. However, the real driver of improvement involved a reduction in product cost of sales from 90.5% of product revenue to only 74.3%. This is the double-edged sword that the company has to contend with. You see, even as prices drop, causing revenue to fall, that drop can also improve the company's bottom line because of the spread between the price that the company pays for its base resources and the price at which it sells those same resources. Other profitability metrics followed a very similar trajectory. Operating cash flow went from negative $19 million to positive $2.6 million. If we adjust for changes in working capital, we get an improvement from negative $2.8 million to positive $13.3 million. And lastly, EBITDA expanded from negative $4 million to positive $12.8 million. For the 2024 fiscal year in its entirety, management does expect a net loss of between $101 million and $111 million. That is worse than the $99.5 million net loss reported for 2023. However, EBITDA is expected to be between $62 million and $72 million. That's comfortably above the $43.6 million reported for last year. Stripping out certain cost items, we get an operating cash flow of about $39 million. My best guess for adjusted operating cash flow would be about $46.7 million in that case. Author - SEC EDGAR Data With these figures, you can see how shares of the company are priced in the chart above. For a firm that continues to generate rather significant and growing net losses, these kinds of multiples do not yet put us in bargain territory. But on a forward basis, things are starting to look a bit more attractive when it comes to the EV-to-EBITDA multiple. In the table below, I then compared the company to five similar firms. On a price-to-operating cash flow basis, I found that three of the five firms ended up being cheaper than it. This number increases to four of the five when using the EV-to-EBITDA approach.   Company Price/Operating Cash Flow EV/EBITDA   Clean Energy Fuels Corporation 10.7 13.3   REX American Resources Corporation (REX) 5.7 5.4    OPAL Fuels Inc. (OPAL)  2.4 1.8   World Kinect Corporation (WKC) 6.5 6.8    Vertex Energy, Inc. (VTNR)  19.2 21.9    Montauk Renewables, Inc. (MNTK)  11.0 11.7   Click to enlarge I do think it would also be helpful to understand that, even though the firm has its problems, management remains committed to growing operations in the long run. They've been very active in this regard. As an example, on May 14, Clean Energy Fuels partnered up with the largest dairy digester developer in the country, Maas Energy Works, to create a joint venture in order to build nine RNG production facilities at dairy farms spread across seven different states. These projects are expected to be completed sometime in 2026. And they are estimated to be able to produce up to 4 million gallons of RNG annually. Of course, such a bold initiative will require some money. According to management, Clean Energy Fuels will be spending about $130 million in order to build these facilities. There have been some other developments as well. Near the very end of May, management announced the signing of a new fueling agreement to provide RNG to 39 ready mix and cement bulk trucks owned and operated by Cemex. This agreement will see Clean Energy Fuels provide Cemex with around 300,000 gallons of RNG each year. In addition to this, Clean Energy Fuels has also commissioned a private fueling station that will be exclusively used by Cemex's fleet. In early June, Clean Energy Fuels announced that it was increasing its RNG fueling footprint in Southern California through the opening of two new stations, one in San Bernardino and the other in Perris. On June 11, management announced that they've decided to move forward with the construction of a third production train at the company's LNG plant in Boron, California in a move that will ultimately increase that plant's volume capacity by around 50%. That should take total daily production up from 270,000 gallons to approximately 405,000 gallons. Takeaway Based on my own review of Clean Energy Fuels, I cannot deny that the company is an interesting firm that is making solid long-term investment decisions. I fully believe that, down the road, it will go on to create some attractive value for its investors. However, I think it is a bit premature to get excited. The good news is that the company continues to make investments in growth initiatives and profit and cash flow figures in the most recent quarter were promising. On the other hand, 2023 was a bit rough from a profit and cash flow perspective, while profitability this year is expected to be worse than it was last year. Given these mixed results, we need to see the company trade cheaper, both on an absolute basis and relative to similar firms, before we can afford to be all that optimistic.  Editor's Note: This article covers one or more microcap stocks. 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