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Response (Counter) To Clean Energy (CLNE) Seeking Alpha Article

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By Johnny Bevers

In the Seeking Alpha article titled “Clean Energy Fuels: A Flawed Business Model And Morgan Stanley’s Folly,” the author raises some legitimate concerns over Clean Energy, but failed to address some “core” aspects of the business that must be understood.   While most have read Clean Energy’s latest quarterly report, the reader ought to key in on some very key elements of the quarterly report as well as the press release.

Summary Of This Counter Argument

  • Volumes are up 24% from same quarter in 2013
  • Revenue is up 43% from same quarter in 2013
  • Cummins Westport is selling natural gas engines and will increase natural gas demand
  • EBITDA is adjusted without VETC and very close to “break-even”
  • RNG adds a competitive advantage
  • The author of the Seeking Alpha article is “short” CLNE

Volume

First, Clean Energy’s volume was up over 9 million gallons from the same period last year.  This fact represents 24% growth from last year, which tells me that Clean Energy has signed the right contracts, formed the right business relationships, and delivered the natural gas required by their customers, on time and at good operating margins.  The growth is HUGE folks.  There’s not much competition in this space and Clean Energy is dominating the niche markets to service customers with large bus fleets, waste operators, and at airports; not to mention, they’re now going after the rail and marine industries.  These are long term contracts that aren’t going away anytime soon, and if you don’t think their customers are going to continue buying more and more natural gas vehicles, well you’re just wrong, because they are.  Why?  Because the United States is flush with natural gas; most states are incentivizing these type investments with tax credits, and fleet owners are being pressured to lower carbon emissions, which natural gas does by reducing them by well over 20%.

The Cummins Westport Effect

Second, the Cummins Westport engine will change the game…  New natural gas vehicles are rolling off the assembly line in droves.  Expected production of the Cummins Westport engine will be in the 6,000 to 10,000 in 2014.  Many of these vehicles will fill their vehicles at stations owned by Clean Energy.  They will unwrap the previously moth balled stations and meet the demand of long distance carriers.  Rest assured, this will happen and will continue to grow volume at these and all other locations across the United States.

The Peruvian Joint Venture

Third, the author doesn’t discuss Clean Energy’s removal of the Peruvian joint venture which was dissolved.  Revenue declined as Clean Energy moved out of the deal and volume was taken out of the number.  Volume was much higher if you included the joint venture deal in the numbers.  They didn’t include them because they were trying to show the market an apples to apples comparison, which I think they did.  Still, even after removing this volume, they still reported really good volume increase as stated above and are firmly entrenched in the American markets.

The Impact Of VETC Revenue

The author of the Seeking Alpha article really didn’t discuss the impact of VETC revenue which was realized in 2013, but stopped by Congress in 2014.  This meant that Clean Energy couldn’t capitalize on those credits in 2014, which they did during the same quarterly period in 2013.  This credit was valued at $26.2M in the comparable quarter last year.  While they’ve lost the tax credit, volume has just about offset the loss, and they look really good moving into the next quarter.

EBITDA – A Look At the Numbers

After excluding the cash flows from Peru and losing their VETC revenue, Clean Energy reported a loss of $6.8M on revenue of $95.3M.  After excluding the VETC revenue of $26.2M, Q1 2014 revenue was actually up by 43%!  Moving forward, Clean Energy will begin to see an impressive economy of scale begin to form as their investments begin to actually show return.  As more and more natural gas vehicles come to market, they will re-open their fueling points to meet that demand.  Since Clean Energy’s operating loss is only $6.8M, I believe they will be very close to break-even in Q2-2014, and profitable in Q3-2014.

The Effect Of RNG On The Business

Renewable natural gas (RNG), also known as “Redeem,” could add some margin to Clean Energy’s business model.  I see these locations as having high margin potential even though they’re only getting a small fraction of what they really need to operate the overall company.  Still, redeem can be procured at a cheap price which could add some advantage for the company.

The Author Is In A “Short” Position On the Company

This author is obviously trying to drive the share price of Clean Energy down.  He has shorted the company and wants to see the share price go down as low as possible.  All I can say is that when you see volume increases and improved revenue, like we’ve seen with Clean Energy, on top of several analyst upgrades, it’s probably time to buy.

My Disclosure:

I am long CLNE and intend to take an increased position in the company at any time after June 1, 2014.

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