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Clean Energy Fuels Corp (CLNE), Westport Innovations Inc. (USA) (WPRT): When a Good Quarter Isn’t Really Good, But It Doesn’t Matter Anyway

As we emerge from earnings season, I’ve taken some time to review a few of my favorite companies and come to terms with where things stand. That’s led me to take a hard look at the part of my portfolio that’s dedicated to the expansion of natural gas as a transportation fuel. There are a handful of companies that are early in the game:

Clean Energy Fuels Corp (NASDAQ:CLNE)

Don’t let the numbers fool you: It wasn’t really a good quarter

Clean Energy Fuels Corp (NASDAQ:CLNE) announced earnings on May 8, and while both the top- and bottom-line numbers looked good on the surface, a little digging paints a less-than-rosy picture:

  • A sequential decline in fuel delivered QoQ
  • Without a VETC tax credit of $26.2 million (part of federal stimulus passed in December), it would have both lost money, versus a non-GAAP profit
  • The same VETC tax credit prevented revenues from declining sequentially

Advantageous tax structures are nice. But when it’s only changes in tax structure that take what would have been a bad quarter, and make the numbers look good, we should dig a little deeper. And taking the next step and really understanding what’s happening now is why Clean Energy Fuels Corp (NASDAQ:CLNE)’s poor quarter-made good by a tax credit really shouldn’t matter to long-term investors. Let me explain- actually, I’ll let CEO Andrew Littlefair explain. His paraphrased comments from the earnings call on May 8, in regards to the expansion efforts and progress of America’s Natural Gas Highway with Pilot/Flying J:

“We got ahead of the engine build to change the discussion with the shippers. We had to. It’s in anticipation of the shipments at the end of this year and in 2014. We gotta work on that now. Ten are open, a like amount in the next couple of months. The number open keeps expanding because of fleet customers asking for it. Anticipating another 350 trucks coming on line soon, said that will allow us to open 4 more stations.”

In essence, he’s telling us that the company has positioned itself as the first mover, working closely with both the shippers and the manufacturers, to build a refueling infrastructure for over-the-road trucking fleets. As he said, they had to do it, or there would be no demand for natural gas-powered trucks, and no demand for fuel. It was a zero-sum game until Clean Energy Fuels Corp (NASDAQ:CLNE) changed the conversation. More from Littlefair on the call:

“We know exactly how many (class-8 NG) trucks are on the road, how many are ordered. We work very close with manufacturers and the shippers both- we have to
Over the road truckers will want the 400hp, which launches later this year. They will need the power. Most of the engine orders so far are CNG.

Clean Energy knows more than you think, and why the “chicken or egg” question has been answered

The two statements above are critical for investors to understand. Large shippers use their scale to negotiate fuel pricing, which means that companies like Clean Energy Fuels Corp (NASDAQ:CLNE) are having conversations that will lead to an agreement on fuel prices, volumes, when and where that fuel needs to be. This will allow the company to open stations almost exactly when the demand is there, meaning that cash flow going forward should grow faster than CapEx- which is actually lower by $25 million this year.

The second statement is in reference to the Cummins Inc. (NYSE:CMI)/Westport Innovations Inc. (USA) (NASDAQ:WPRT) ISX12 G engine, and a caution that it will be closer to the end of the year before we have any indication as to how quickly (or slowly) adoption to LNG is happening for long-haul truckers. Westport Innovations Inc. (USA) (NASDAQ:WPRT), much like Clean Energy Fuels Corp (NASDAQ:CLNE), is heavily leveraged into a future where natural gas is the fuel of choice for truckers. Coming off a poor quarter where revenues declined by 20% to start a year that the company is promising 30% growth, isn’t very comforting. With that said, management reiterated the outlook for the rest of the year, as the rollout of the ISX12 G engine ramps up over the summer. I’ve got more to say about Westport here.

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