Earth First Investments 6: Clean Energy Fuels
Clean energy fuels (NASDAQ: CLNE) is a major distributor of natural gases of several types, with a renewed focus on renewable natural gas (RNG). The company has a network of stations across the United States, the majority of which in partnership with Pilot Flying J (BRK.A) (BRK.B), and there are now over 500 locations. Additionally, RNG’s sales have grown more than 30% annually since the product line’s introduction in 2014. However, multiple issues have led the company to experience negative revenue and revenue growth over the past of the last 10 years. Investors were furious and the company offered some of the worst returns in the sustainable technology market.
Renewable gas is good for the earth
I’m sure you hear that enough, so I’m going to make this quick summary. By relying on an existing renewable asset, animal waste, the CLNE is able to develop a fuel that will not disappear over time and that will reduce emissions. One might wonder why the emissions are reduced, and this is mainly because the process captures methane, a much more potent greenhouse gas than CO2. Additionally, as grid-scale and vehicle-scale EV and H2 applications advance in feasibility, current combustion of green-sourced CNG, LNG, and RNG offers much better sustainability profiles than coal or fuel. fossil fuel gas. Should help growth and profits, right? No. However, there is a significant niche in manure-based RNG that CLNE can exploit in the long term.
Demand is not the problem
The demand for profitable renewable gas is huge. This is evidenced by dozens of tax policies around the world, B2B arrangements and contracts, and the wide variety of applications. As such, that’s not the issue and revenue should increase. The main problem is that companies such as CLNE are unable to market their products to an extent that is both profitable for the company and competitive with alternatives. It’s a bit of a dog-eating-dog world, as those in need of fuel sources outsource only cheap availability while expensive options face big losses.
To underscore the slow growth in supply, the CLNE has only increased RNG sales from 14 to ~194 million gasoline gallon equivalents (GGE), or 40% per year, since 2014. Meanwhile, electric vehicles have grown at a rate of 50% or more over the same period. period. In addition, the production and use of H2 is expected to increase by more than 40%. over the next five years as well as. Growth is inhibited due to the fact that only one source of fuel (animal waste) is needed. In addition, the limited growth of the dairy herd, whether due to demand for milk or beef production efficiencylimits RNG production prospects.
Increase in number of stations, decline in revenue
Clean Energy Fuels now distributes gas products to more than 550 stations in the United States and Canada. In addition, dozens more are planned for development or already under construction. I also mentioned earlier how RNG sales have grown over 30% per year since 2014. However, a major red flag is that total revenue has been declining over the past decade. Whether this is due to a drop in selling prices or an increase in supplier prices. 2022 could prove to be a critical year to see how the company can exploit a high demand and high price environment. While traditional fuel and feedstock suppliers are seeing higher profits and revenue growth, CLNE has yet to do so at an equivalent pace. Although the last quarter saw favorable growth year-on-year, so watch this trend.
Along with weak revenue growth, profits are non-existent. Gross margins fell from a 5-year average of 32.9% to 15.7%, while net profit margin fell from -9.9% to -36.4%. Not a good look as most other companies in the market show the opposite effect. Some comfort can be found in the fact that debt is not an issue, and the positive cash position of $150 million can sustain about 2 years of operations at 2021 expense levels. This is the only saving grace, especially since in-house RNG sales can prove more profitable than vendor-based RNGs, and are expected to go live in 2024.
Diversification VS Specification
The company began developing the GNR in-house due to a lack of supply. This creates significant risk due to the need to enter into contracts with farms. Additionally, spending on this segment has resulted in losses in recent years, with limited production information available in the future. Current company estimates suggest up to 105 million GGE by 2026, but this is only a quarter of the total estimated supply that year. Supply contracts and third-party purchases are slow and uncertain, but perhaps the company should focus on expanding supply partnerships. If CLNE wants to produce RNG now, why did it sell its upstream RNG assets to BP (BP) in 2017? This lack of focus will show symptoms such as further losses, reduced growth and weaker support valuation in the years to come.
Significant costs for advertising, developing partnerships and retaining the world’s dairy farmers will be a hidden cost that also hurts the investment thesis. As evidenced by the reduced expected supply growth and continued losses, these factors play a significant role in the company’s poor financial performance. Although the environmental benefits make me want to grow in this segment, I fear that the issues are too influential.
The above issues have left some wondering about the management’s capabilities. While SA’s comments are hardly a reason to question the results we are seeing, I find that the risks outweigh the benefits of investing in the company. Lack of leadership, whether it’s being distributors only or not, being the main negative catalyst. Maybe focusing on one at a time would have been a better option. Even Standard Oil didn’t start out as a marketer, refiner, explorer and driller all at once, but they show the potential of a market based on limited competition and competent management.
Thing is, competition with my peers and other energy sources keeps me from getting into RNG or alt markets as a whole. This is especially true if there is limited potential in place or a lack of clear goals for the future. To realize their full potential, the CLNE must: be realistic about the RNG market’s supply capabilities, understand how it can be cost-competitive with average market profitability, and create growth through profit reinvestment. Ultimately, I recommend taking a look at other opportunities in the market.
The only other potential for shareholder return in my eyes would be a merger and acquisition by a fossil fuel company trying to diversify (probably Total (TTE)) or sustained extreme gas prices (but the company needs to make a profit to enjoy). If you find this risk worth taking, please let me know your trading strategy. If you want exposure to manure-based RNG production, you might want to consider Dominion Energy (D) which has a partnership with Smithfield (OTCPK:WHGLY) or Sempra (SRE) which uses California dairy farms as a gas source.
Thanks for reading.