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:
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.
The key takeaway is that Clean Energy Fuels Corp (NASDAQ:CLNE) chose to build out a refueling network (at considerable cost and risk) to change the conversation, and support the engine makers and shippers both. All the cards, so to speak, are now on the table; natural gas is a viable choice for shippers today.
More to the story
Besides Clean Energy, Royal Dutch Shell plc (ADR) (NYSE:RDS.A)-B), -A) is also making a serious move into LNG for truckers, working with TravelCenters of America LLC (NYSE:TA) to add LNG fueling lanes at up to 100 existing TA and Petro locations. While seeing a behemoth like Royal Dutch Shell plc (ADR) (NYSE:RDS.A) jump in the mix could be enough to spook some investors, it’s important to remember that competition from the “big boys” also serves as validation of the market opportunity. Additionally, Shell’s stability, sheer size, and 5% dividend offers a nice anchor with much less downside risk, compared to the much more speculative Westport and Clean Energy Fuels. Simply put, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is a low-downside, low-upside way to add natural gas to your portfolio.
TravelCenters of America LLC (NYSE:TA) seems to have the most to lose. If truckers adopt LNG more quickly than it and Shell can build out those first 100 stations, it could face serious material impact to its business. While Clean Energy and Pilot/Flying J only have about a dozen stations open today, there are another 70 complete that could be operational within weeks, or even days, as needed. TravelCenters offers little in the way of upside, and while revenues have grown substantially over the past three years, much of that has been driven by the rising cost of fuel versus true organic growth. And with the major benefit of CNG being its lower cost versus diesel, growth in adoption could actually see TravelCenters of America LLC (NYSE:TA)’ revenues decline.
Foolish bottom line
It’s still early in the game. None of these companies have seen any real material return on the natural gas business for over-the-road trucking. But by the end of the year, the rate of adoption could be happening in a very real way, and that’s why I own Westport Innovations Inc. (USA) (NASDAQ:WPRT) and Clean Energy Fuels.
Here’s some perspective on the opportunity: If 3% of the trucking business adopts natural gas over the next year or two, and Clean Energy (with the lion’s share of refueling stations) is able to capture half of that business, it will grow by 50%. The market opportunity is massive. Westport Innovations Inc. (USA) (NASDAQ:WPRT)’s opportunity reaches all over the globe, and its growth could be just as exponential as Clean Energy’s.
Me? I’ve put my money where my mouth is. What about you? Share your thoughts in the comments below.
The article When a Good Quarter Isn’t Really Good, But It Doesn’t Matter Anyway originally appeared on Fool.com is written by Jason Hall.
Jason Hall owns shares of Westport Innovations and Clean Energy Fuels. The Motley Fool recommends Clean Energy Fuels and Westport Innovations. The Motley Fool owns shares of Westport Innovations. Jason is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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