Clean Energy Fuels: Managing Expansion In A Challenging Market Environment

seekingalpha11-20 15:33

Clean Energy Fuels is aggressively expanding its RNG production and distribution but faces financial stability risks due to high capital investments and potential equity raises.The company's ambitious...

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Tom Merton Clean Energy Fuels (NASDAQ:CLNE) is one of the largest distributors of RNG in the US, leveraging a network of 583 fueling stations, 24 of which are in Canada as of September 2024. Additionally, the company produces approximately 2.8 million GGEs of RNG through two JVs with TotalEnergies and BP, targeting an output of between 4 and 6 million GGEs by the end of FY25. The company's business plan is highly aggressive, focusing on stronger vertical integration to improve margins in line with increased RNG production. However, these investments require a significant amount of capital, implying higher debt, rising interest expenses and, in my opinion, the risk of equity raises. Operating in a business as competitive as fuel distribution, the company has inherently low margins and has not yet achieved break-even. Although the growth plan could represent an excellent opportunity for expansion, I believe it also constitutes one of the biggest risks, as an overly aggressive strategy may compromise financial stability. Finally, uncertainty remains about future regulations adopted by the Trump administration regarding renewable fuels. Supported by the results of the DCF analysis, indicating a 15% market price overvaluation, I assign Clean Energy Fuels a “hold” rating. Business Overview CLNE generates most of its revenue from the sale of RNG and CNG across 583 fueling stations in the US and Canada, while also engaging in contract station construction and providing O&M services. It sells environmental credits (D3 RINs, LCFS, and AFTC) earned through the sale and production of RNG. In FY21, the company established two JVs with BP and TotalEnergies to develop dairy ADG RNG production facilities, with a production of 2.8 million GGEs as of September 2024, expected to be between 4 and 6 million GGEs by December 2025. CLNE SEC Filings and Author's AnalysisThe Fuel Sales segment business accounted for 61.87% of CLNE's revenue in the first 9m of FY24, down 13.85% YoY. The company is increasing the number of operating stations, including through partnerships such as those signed with Amazon or Canadian company Tourmaline, consequently increasing RNG output sold, which rose from 40 million to 60 million GGEs per quarter between Q2 FY22 and Q3 FY24. The launch of the new Cummings X15N engine could be a major driver for RNG demand, as it is currently one of the most cost-efficient green alternatives for heavy-truck transportation. This solution is increasingly adopted by companies such as WM, Saia e UPS which view RNG as a viable alternative to the pollution of diesel and the high infrastructure costs of electric vehicles. By selling RNG and related production through JVs, the company earns environmental credits, which are becoming one of the major components of revenue, with a 17.38% share in the first 9m of FY24, up 35.97% YoY. This is driven by both the increase in sales volumes and the favorable price dynamics of D3 RINs. The ramp-up of RNG facilities recognized in the JVs will lead to further growth in revenue from D3 RIN credit sales. The successful execution of the Inflation Reduction Act would be a significant advantage for CLNE, allowing the company to benefit from the PTC, thereby increasing its production and sales margins. Nevertheless, the settlement of the Trump administration could pose a challenge for the entire industry, although this is not my base case scenario at the moment, given the connection between the renewable fuels participants and Republican interests. Finally, CLNE generated 5.53% of its revenue from the Station Construction Services segment in the first 9m of FY24, growing 7.95% YoY, while the O&M Services segment accounted for 13.89% of revenue, up 7.58% YoY. The latter generates recurring revenue streams and is characterized by steady growth. JVs Are A Double-Edged Sword RNG production offers a promising path for growth, as it allows CLNE to sell the RNG produced at its service stations, steadily lowering the cost of sales through vertical integration of the supply chain. At the same time, it would generate more environmental credits. Nevertheless, in my view, this business plan has two major critical issues: CLNE invested $242 million (more than 1/3 of its market cap) in JVs equity between FY21 and FY23. Additionally, it has entered a partnership with Maas Energy Works, which plans up to a $132 million investment in a JV dedicated to RNG production facilities, making a $29.6 million investment in October 2024. Combining this with $257 million in CAPEX between FY21 and Q3 FY24 results in an investment stream of over $500 million in less than 4 years. Although this strategy may boost growth and margins in the long run, in the short run it implies a deterioration of financial stability, with net debt rising to $120 million as of September 2024 and the possibility of new equity raises to finance the remaining growth plan, only partially financed by positive OCF. Moreover, at the moment, JVs are a cost. In the first 9m of FY24 the JV with BP reported a loss of $8.5 million, while that with Total Energies a loss of $1.5 million, totalling a total cost of $10 million. As more and more plants are ramped up, JV margins should improve, becoming a positive component for the company's margins, necessary to justify such a high level of investment. The second critical issue is related to the Trump administration, which is openly against the Inflation Reduction Act. While Trump is unlikely to dismantle the entire law, he may introduce legislative changes to favor certain sectors over others. I believe it is likely that RNG production will not be particularly disadvantaged, as it shares many common interests with the oil & gas giants, who have long been supported by the Republican Party. These developments create high regulatory uncertainty, leading to a slowdown in the company's investments in the short term, as evidenced by CAPEX of $53 million in the first 9m of FY24, significantly lower than the $194 million in FY23, which included $73 million in JV investments. Financial Summary CLNE SEC Filings and Author's EstimatesClean Energy Fuels reported $306.5 million in revenue in the first 9m of FY24, down 3.7% YoY, due to the Fuel Sales segment, despite strong performance in all other segments. Gross profit margin sharply improved to 49.21%, up from 19.18% in FY23. Net income margin of -17.26% in the first 9m of FY24 is only a slight improvement from -23.4% in FY23, driven by an increase in interest expense, projected at $31.2 million in FY24, compared to $17.54 million in FY23. For FY24, management expects a loss between $81 million and $91 million, including $63 million in Amazon warrant charges, which represent a non-cash outflow. For FY25, uncertainty remains regarding whether incentives such as the AFTC will be in place, as well as developments related to the PTC. However, increased sales volumes at the fueling stations and growth in the O&M services segment are expected to be the main contributors to overall revenue growth. CLNE SEC Filings and Author's AnalysisCLNE generated $42.7 million of OCF in the first 9m of FY24, financing only a small share of the company's ambitious growth plan, leading to negative FCF funded through higher debt (Stonepeak Credit Agreement). Net debt increased to $120 million as of September 2024, covered by about $600 million from PP&E and JV investments. The cash on hand of $245 million appears sufficient in the short term to finance CLNE's operational needs; however, the large amount of capital required to finance the business plan may necessitate equity raise, along with further debt borrowing. Other Risks The Amazon and Stonepeak warrants, if exercised, could have a capital dilutive effect. Currently, CLNE's market price does not seem to justify their exercise. The market in which CLNE operates is extremely competitive, including both traditional oil and gas distributors and integrated companies such as OPAL Fuels (OPAL), Archea Energy, and Montauk Renewables (MNTK). Changes in current regulations and incentives, such as those under the Inflation Reduction Act, could negatively impact both the company's financial performance and the implementation of planned investments. The company's long-term growth trend depends mainly on the adoption of gas engines and RNG demand in heavy trucks. Discounted Cash Flow To attribute a valuation to Clean Energy Fuels, I performed a three-stage DCF. I made an estimate of the expected values of revenue, EBIT margin, CAPEX and depreciation for FY24, FY25, FY26. I made a projection of these values for the period between FY27 and FY33, finally calculating the terminal value. This analysis returned a target price of $2.23 per share, which is about 15% lower than CLNE current market price. To determine this value, I made the following assumptions: Beta was obtained using the unlevered beta of \"Oil/Gas (Integrated)\" industry reported by Professor Aswath Damodaran, subsequently calculating levered beta based on CLNE D/E ratio. A value of 0.71 was derived. The growth rate of 2% is in line with the inflation target in the US, the main market where CLNE operates. Risk-free rate of 4.30%, based on US 10-year treasury yield. Equity risk premium of 4.6% was obtained from US ERP provided by Aswath Damodaran. Cost of equity of 7.56% derived from a CAPM model. Cost of debt of 8.52% was obtained by dividing CLNE’s annual interest expense by total debt. WACC of 7.42%. Author's Analysis and EstimatesTake-Away Clean Energy Fuels is a company with ambitious management, executing a significant investment program aimed at meeting the growing demand for RNG in the US and Canada. Although these developments will lead to a notable increase in efficiency through the vertical integration of RNG production and the rise in RNG sales, I believe that margins will remain tight due to the highly competitive nature of the industry.  Moreover, regulatory uncertainty due to the inauguration of the Trump administration disincentivizes new investment in the sector and could lead to a reduction in incentives and environmental credits. The balance sheet appears strong, despite an increase in debt, but may require stock issuance to finance the planned investments. Consistent with the result of the DCF analysis, which indicates a 15% overvaluation of Clean Energy Fuels market price, I assign a “hold” rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"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":"4.29.2","shortVersion":"4.29.2","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/2484416594"}