CLEAN ENERGY FUELS CORP CLNE
February 11, 2020 - 12:18pm EST by
Bill
2020 2021
Price: 2.30 EPS 0.08 0.11
Shares Out. (in M): 204 P/E 29 21
Market Cap (in $M): 469 P/FCF 7 8.5
Net Debt (in $M): -115 EBIT 80 90
TEV ($): 354 TEV/EBIT 4.4 3.7

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Description

 
Thesis: CLNE is a compelling buy, with short-term upside potential of 100%+, and longer-term upside of much more. CLNE represents a very rare opportunity to own a high-growth, under-the-radar stock, at a deep discount valuation, and in a high growth industry. CLNE is significantly under-valued on every metric, and has several near-term catalysts that should propel the stock higher. The company operates within a segment of the Alternative Energy Industry which is at the initial stages of a significant positive growth inflection, driven by the compelling economic and environmental benefits of using natural gas (NG) as a fuel for fleet transportation vehicles. The benefits of NG have recently dramatically increased with the introduction of Renewable Natural Gas (RNG), which has near-zero emissions, and currently comprises about 30% of CLNE’s revenues, growing at a 30% rate. You could also feel good about owning CLNE, because it is a socially responsible investment, whose business reduces a tremendous amount of CO2, SOX, NOX, and particulates from our atmosphere. In 2018 alone, the company reduced the equivalent of over 665k tons of greenhouse gas emissions, which is the equivalent of removing 141k cars off the road.
 
Valuation:
 
CLNE is trading at about 1x tangible book value (TBV), 0.5x asset replacement value, and at an EV/EBITDA of 4.4 my FY20 estimates. My short-term target price for the stock is about $4.70 per share, which equals an EV/EBITDA, FCF yield, and replacement value of 11x, 7%, and 1x my FY20 estimates, resulting in 106% return potential. There is significant upside above this target in the mid-to-long-term as I expect the company to achieve 10-15% annual volume growth over the next 5 years, driving annual EBITDA growth of 15-20%, and adjusted EPS growth of 20-25%, as margins expand, and the company deploys its excess cash. To note, EPS is not a good valuation method to look at for CLNE, because the company accelerates depreciation of their assets. D&A for the company is expected to be in the $50-$55 mil range, while maintenance capex is around $15 mil. To note, within my EV/EBITDA I give CLNE $80 mil in credit for the guaranteed cash proceeds from an incentive program that should be fully collected by FYE20, with $50 mil expected to be collected in 1Q20, as is discussed in more detail below. I have also included my adjusted EBITDA in the the valuation tab above, rather than "EBIT" as requested, because EBITDA is the best metric to use to analyze CLNE, due to the fact that the company accelerates deprciation of its assets as outlined further below. I have also listed my adjusted FCF estimates to adjust for timing issues.
 
Why Does This Opportunity Exist? This dramatic under-valuation for CLNE exists for several reasons; 1) It is an underfollowed and misunderstood company, because CLNE has recently undergone a dramatic transformation, and it is relatively complex story with no direct peers; 2) the company has dramatically restructured itself over the last few years, which is yet to be appreciated or understood by investors; 3) very recent regulatory changes will dramatically increase CLNE’s EBITDA, which is not yet fully reflected in it’s valuation; 4) the stock seems to have irrationally traded down with other energy stocks, as energy prices have declined, although this action makes no rational sense since the company’s EBITDA is not impacted by swings in commodity prices, because the company is only a distributor of NG for vehicles, whose margins are fixed regardless of the price of the commodity.
 
The Company:
 
CLNE is the leading distributor of natural gas as an alternative fuel for fleet vehicles in the US and Canada. The company is the largest owner and operator of natural gas refueling stations in the US for light, medium and heavy duty vehicles. CLNE owns/operates/supplies over 530 natural gas fueling stations throughout the US, and Canada. The company serves over 47,000 natural gas vehicles, within 1000 fleet customers. CLNE also designs, builds, operates and maintains NG fueling stations for public and private fleets, and provides other related services, and sells certain equipment used in compressed natural gas (CNG) and liquefied natural gas (LNG) stations. The company once had other assets, but has dramatically restructured its business over the last few years, through selling underperforming divisions and cutting costs. CLNE has reduced its net debt from $350 mil in 2015, to -$20 mil today, and soon to be -$100 mil (yes negative $100 mil) after the receipt of a recently approved tax credit. CLNE operates in a high grow area within the Alternative Energy sector, which I estimate will achieve long-term growth of 10-15% resulting, in significant EDITDA and EPS growth for the company.
 
The Industry:
 
The market for natural gas (NG) fleet vehicles has begun to accelerate dramatically, which should continue to inflect upward due to a variety of factors, driving CLNE’s growth. The market for NG sales for vehicles has traditionally been comprised of Transit Buses ($1.5 bil), Taxis ($2 bil), and refuse trucks ($2 bil), and mining trucks ($1.6 bil), which has been growing for CLNE at a roughly 6% pace over the last 5 years, and I project growth will continue at this rate in the coming years. There is a much larger market opportunity on the horizon, which is for the use of NG in Heavy-Duty Trucks (HDT), with an annual market potential of $35 bil of fuel sales. This market potential is about 300% larger than all the other markets combined. HDT adoption has been very slow until recently, when a number of factors have converged, which I expect to drive adoption. The economics and environmental benefits to for HDT operators to switch to NV vehicles is now compelling for the first time. Even if only a small portion of this market converts to NG, CLNE’s revenues and EBITDA could increase well over 100% within the next few years. CLNE has the capacity within its current refueling infra-structure to more than double its sales without adding any additional stations or capital, resulting in significant operating leverage. There are several reasons why the adoption of HDTs and other fleet vehicles will accelerate, including the following; 1) The commercial availability of Renewable Natural Gas (RNG), which has near zero emissions; 2) Lower cost for operating a NG fleet; 3) The introduction and marketing of Cummins new HDT engines, which have several benefits over diesel engines; 4) The increased availability of low cost finance options; 5) stricter environmental mandates; and 6) Increasing environmental awareness amongst all industry participants. This trend is evidenced by the fact that in 2019, UPS announced that it will invest over $450 mil in NG trucks and stations over the next 3 years and purchase 170 mil gallons equivalents (GEs) of RNG from CLNE over the next seven years, which is the largest RNG purchase commitment in history. UPS’s announcement was a watershed event for the industry, and I think it is only a matter of time until many more large fleet operators follow. CLNE has also announced significant new other HDT customers over the last several months. Some of the press release URLs are below.
 
https://pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=PressReleases&id=1570546455953-427
https://pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=PressReleases&id=1558453536437-113
http://investors.cleanenergyfuels.com/news-releases/news-release-details/clean-energy-delivers-143-million-gallons-redeemtm-renewable
 
 
 
 
 
 
http://investors.cleanenergyfuels.com/news-releases/news-release-details/clean-energy-zero-now-truck-orders-surpass-250-and-climbing
 
Most of us don’t think of natural gas (NG) vehicles as a sexy growth area, but rather believe electric vehicles must be the future. However, the simple truth is that NG fleet vehicles are currently the only option to dramatically lower greenhouse gas emissions and other contaminants from this segment of the transportation industry. Electric fleet vehicles will not be ready for operation in HDTs in commercial quantities for at least 5 years, they are significantly more expensive than NG vehicles, will take years of road tests before deployed, and would take too long to refuel due to the vast amount of power needed. Electric vehicles also generate significantly more contaminants than NG vehicles, because they use electricity from the grid, which is generated mostly by fossil fuels. I don’t see any meaningful penetration for EVs in most segments of fleet vehicles for at least 10-15 years. Even when/if EVs gain a significant portion of this market, NG vehicles should still have a place in this market, dramatically larger than their current size One of the primary factors driving adoption of NG fleet vehicles is the recent introduction of commercial quantities of Renewable Natural Gas (RNG, or biomethane as it is sometimes called) which is a game changer, because it is the lowest emission fuel in the market, and is significantly cheaper than diesel. RNG is derived from various waste sources including landfills, sewage, waste treatment facilities, and farms. Using RNG has the potential of near-zero or even negative net emissions of all containments depending on the method of production. The reason why this fuel generally results in near-zero emissions, is because it uses the methane that would have otherwise ended up in the atmosphere from our waste, to create a natural gas substitute which is used to power vehicles. The fuel used in this process offsets carbon based fuels derived from drilling, resulting in a net neutral impact on the environment. RNG production is expected to ramp up dramatically over the next few years, because we have only begun to tap a small fraction of our domestic capacity. RNG is cheaper than Diesel, and several large companies are investing heavily to bring capacity on line. It has been estimated that the US easily has the potential to produce at least 20x the current levels of RNG, from existing waste sources. Europe currently produces about 10x RNG than the US, despite the fact that the US has more waste sources. Any rational governmental, regulatory, or industry actor should recognize that full utilization of our nations RNG resources is a no-brainer zero-cost step to lower our greenhouse gas and other emissions. Though partnership with BP and others, CLNE distributes the only widely available RNG in the domestic market, which they have branded Redeem. The company has grown its RNG sales at an annual rate of 59% over the last 6 years, and now represents about 1/3 of the company’s total volumes, or 140 mil gallons in FY19. NG derived from traditional drilling sources, which comprises roughly 2/3rds of CLNE’s volumes, also results in significantly lower fuel costs and CO2 emissions versus diesel. Although the environmental benefits are not as dramatic using traditional NG for fleet vehicle’s, they are still substantial, and should drive growth in this segment of the market. NG derived from drilling, releases about 20% less CO2 emissions vs diesel, as well as a dramatic reduction in other contaminants such as SOX, NOX and particulates. Fleet vehicles are able to interchangeably use any combination of RNG and traditional NG, in order to manage their carbon and other emissions, which should become increasingly important as environmental regulations tighten, and transport executes view it in the best interest of their companies to lower emissions.
 
 
 
Regardless of where NG is derived, it is significantly cheaper than Diesel on a gallon equivalent (GE) basis, which should further drive growth. According to the Department of Energy, NG prices were 40%, or $0.88 cheaper than Diesel per GE. Thus, every long-haul NG truck that a fleet owner deploys, saves roughly 19k per year in fuel expenses, which is substantial. Over the lifetime of the truck, this is equals $150k in fuel savings, which is greater than the price of some trucks. These savings also don’t incorporate governmental incentives for purchasing NG vehicles, or NG as a fuel for vehicles, which could be substantial, and vary by state by state. There are NG Trucks available in the market today that exceed all environmental standards, have lower life-time costs vs diesel, and are road tested. Cummins Westport introduced several improved natural gas engines in 2018, including the 7N, L9N, and ISX. These engines are sold to several leading truck and bus OEM’s (including Freightliner, Kenworth, Mack Trucks and Peterbuilt) to build into their vehicles. These engines emit ultra-low amounts of NOX and SOX and particulates, and have the potential to release near-zero total emissions used in combination with RNG fuel.The infrastructure of NG fueling stations has increased to the point where there is an adequate supply of fueling stations for fleet vehicles to operate without interruption or refueling anxiety. According to NGV America “there are more than 1,600 CNG and 140 LNG fueling stations in the US”. CLNE has significant regulatory growth drivers that I expect to increase over time, because using RNG and NG for fleet vehicles is an easy way to painlessly reduce green-house gas and other emissions. According to Advanced Clean Tech News, “Heavy Duty Vehicles like trucks total just 7% of all vehicles on America’s roadways but they account for 50% of all smog-precursor emissions… and 20% of all transportation-related greenhouse gases.” I could write an entire book on the regulatory dynamics within the Alternative Fuels market, but neither of us has the time. In short, CLNE derives significant benefits from a variety of federal, state, and local government laws and regulations. These incentives are likely to increase over time due to the bipartisan desire for pollution reduction. I estimate CLNE will generate roughly $56 mil in FY20 EBITDA from the combination of all of these incentives, which I expect to increase significantly over time as the company increase its volumes, and new regulations and legislation are introduced. As an example of the current positive political sentiment, in December 2019, the Alternative Fuels Tax Credit (AFTC) was extended on a bipartisan basis within the year-end spending bill. The AFTC gives CLNE a guaranteed $0.50/gallon NG tax credit though 2020, which will result in a cash infusion to CLNE of roughly $80 mil. Another recent event that will likely provide regulatory incentive upside for CLNE, is a January 2020 court decision that is expected to increase the price of a regulatory credits, called Renewable Identification Number Credits (RIN), which CLNE receives for every gallon equivalent of NG sold under the federal Renewable Fuel Standard Program. CLNE currently generates approximately $19 mil of EBITDA from the sale of RINs. RIN prices have dropped roughly 50% over the last two years because the EPA was granting indiscriminant exemptions from the regulation to many refiners, resulting in a supply/demand imbalance. The recent court decision outlined in the URL below finds these exemptions to be illegal, and calls for them to be immediately removed, with a potential retroactive impact. The EPA has not yet made a statement, and is currently studying the court ruling. I expect the EPA to publicly accept the outcome shortly, but there is some small potential that they could appeal the ruling. RIN prices have already started moving up in the market, and have increased 10-20% since the court ruling. If this ruling is fully enacted it could have a dramatically positive impact on RIN prices, although the precise impact is impossible to predict at this time. CLNE will derive EBITDA of approximately $19 mil in FY19 RIN sales. If RIN prices move to historic highs, there could be at least $19 mil of EBITDA upside not included in my current estimates.
 
https://nfu.org/2020/01/27/tenth-circuit-court-strikes-down-epa-small-refinery-exemptions/
 
Partnerships:
 
CLNE has strong partnerships with mega-cap companies such as BP, and Total. CLNE is BP’s primary distribution partner for the sale of RNG and CNG, and has a multi-year supply arrangement with the company. In May 2018, Total SA and CLNE announced “that the two companies have entered into a broad strategic agreement to drive deployment of new natural gas heavy-duty trucks. Total has agreed to purchase up to 50.8 mil shares of CLNE for $83.4 mil, to become CLNE’s largest stockholder with 25% ownership... CLNE with support from Total will launch an innovative leasing program that is intended to place thousands of new natural gas heavy-duty trucks on the road and fueling at CLNE stations. This program will allow fleets to begin driving heavy-duty trucks with the cleanest engine in the world at no increased cost compared to the diesel alternative, while also guaranteeing a discounted natural gas fuel price to diesel. Total intends to provide up to $100 mil of credit support for the program.” This program called Zero Now, has been a success, with over 400 current trucks signed up to date, and hundreds more in late stages of evaluation.
 
Balance Sheet and Cash Flow:
 
CLNE should generate a sigificant amount of amount of FCF going forward, generating an estimated adjusted FCF yeild in FY20 of 12%, or $55 mil, which should grow over time. The company has reduced its net debt from $350 mil in 2015, to -$20 mil today, and soon to be -$100 mil (yes negative $100 mil) after the receipt of the proceeds from the recently extended Alternative Fuels Tax Credit, expected to be fully booked by FYE20. This will leave CLNE in the enviable position of being overcapitalized for the first time in the company’s history. I expect the company to use the proceeds for a combination of a meaningful share repurchase, and/or organic growth investments, and/or small bolt-on accretive acquisitions. Capital deployment is not in my estimates. I also expect the company to generate a significant amount of free cash flow beyond FY20, because CLNE’s infra-structure is fully built-out, and the company only expects to incur maintenance capx of $15 in the foreseeable future. The company has the current capacity to serve at least 100% increase in volumes without adding any growth capx. CLNE will also not be paying any taxes for a very long time, because the company had federal and state net operating loss carryforwards of $428 mil, and 297 mil as of FYE19.
 
Income Statement:
 
I expect CLNE to report operating results significantly above consensus when they report 4Q19 earnings in March, and give above consensus guidance for 2020, unless consensus moves up by that time. The street has yet to fully factor in the positive impact of the AFTC extension into consensus estimates, because the company has not yet given guidance regarding this number. I calculate that CLNE should report revenues and adjusted EPS of about $128 mil and $0.22, vs consensus of $99 mil and $0.16. For FY20, I expect the company to give guidance 5-10% above consensus estimates, for adjusted EBITDA of $80 mil. EBITDA and volumes are the most important metrics to watch for CLNE, since the company’s revenues fluctuate wildly based on natural gas prices, although CLNE’s margin is locked-in regardless of the price. Investors have often (and amazingly to me) mistakenly sold CLNE stock when the price of NG decreases (like present), although NG prices have no bearing on the CLNE’s gross profit.
 
 
I estimate that CLNE will generate FY19 and FY20 adjusted EBITDA of $93 and $80 mil. The reason why CLNE’s EBITDA drops during this period, is because the company is booking two years’ worth of AFTC proceeds in FY19 (for FY18 and FY19), due to timing issues associated with the passage of the extension. Normalizing for this effect would result in FY19 and FY20 EBITDA of $68 mil and $80 mil, or a growth rate of 18% driven by higher NG volumes sold and operating leverage. Beyond FY20, I expect the company to achieve 10-15% annual volume growth over the next 5 years, driving annual EBITDA growth of 15-20%, and adjusted EPS growth of 20-25%, as margins expand, and the company deploys its excess cash. I estimate CLNE has enough capacity within its current fueling system to generate an additional $160 mil in EBITDA before it has to invest in additional growth capx.
 
Catalysts:
 
There are several catalysts for CLNE including the following; 1) The potential the EPA could come out any day accepting the court ruling which eliminates refiner exemption from the Renewable Standards Program, leading to a vast increase in RIN prices, and higher EBITDA for CLNE. 2) My expectation of a beat and raise 4QEPS report sometime in March, unless estimates increase before then; 3) The announcement of capital deployment of CLNEs excess cash balance, which should be approaching $100 mil by FYE20; 4) Additional announcements of large fleet deployments of natural gas vehicles which is just a matter of time; 5) If the market begins to discount the potential of a Democratic candidate winning the presidential election, which would likely propel incentives much higher; 6) The potential for
the company to be acquired, or for activist investors to emerge; 7) The potential change of the company’s business structure to an MLP; and 8) The potential that investors begin to better understand the company, and revalue it as a high growth alternative energy stock.
 
Risks:
 
The primary risks for the company include the following; 1) The unstable nature of the legislative and regulatory bodies which govern the NG incentives programs, could lead to a reduction or increase in the proceeds CLNE derives from these programs. The mechanisms and laws that govern incentives programs are inherently unstable due to the political nature of these programs. However, I believe there is probably more upside than downside risk to these programs, due to increasing bipartisan concern over hazardous emissions and greenhouse gases. 2) The adoption of NG and/or RNG for use in Heavy Duty Trucks could be slower than I anticipate. 3) CLNE’s supply of RNG could be below market demand. CLNE claims to have significant and growing supplies of RNG from BP and other partners, but the companydoes not give details of these agreements, so I can’t verify their exact supply.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

See above.

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