CLNE: Sell; Q315 Update

CLNE reported its third quarter earnings on November 5.  Including a $2.4 million gain related to the previous sale of a biomethane plant, CLNE reported a positive adjusted EBITDA of $3.1 million.  This was the first quarter that CLNE reported a positive adjusted EBITDA - a major milestone for sure.  Revenue for the quarter reached $92.3 million, which was less than the $103.4 million value reported in the year-ago third quarter.  The decrease in revenue was attributed to decreased pricing for fuel and lower station construction proceeds.

CLNE delivered 80.6 million gallons of fuel, which was 17% more gallons than the year-ago quarter.  The overall fuel growth was driven by 29% growth in refuse, 13% growth in trucking, and 186% (from 3.5 million gallons to 10 million gallons) growth in industrial.  While the gallons delivered increased impressively, the gross margin per gallon delivered decreased by 2 cents, or 7%, from the year ago quarter.  The growth in industrial gallons, and the growth in Redeem gallons from 13 million to 36 million, are two bright spots in CLNE's revenue picture.

On the expense side, CLNE reduced capital expenditures by $35 million and SG&A expenses by 20% relative to the year-ago quarter.  Due to these reductions and other factors, CLNE generated
-$1.01 million of operating cash flow over the first three quarters.  Not impressed?  This is an improvement of $55 million compared to the same point last year.  I'm being slightly facetious, negative operating cash flow is unhealthy for a company regardless of how much it has improved.

CLNE continues to putter along.  However, it has reached a critical point in terms of its debt.  CLNE has $150 million of debt due by August of 2016.  With a negative cash flow, it is not likely that CLNE will be able to generate enough cash to pay this debt off without dipping into its current cash or using other options.  CLNE management stated the following during the recent conference call:

"We remain focused on our 2016 convertible notes which are due at the end of August next year.  We are in regular communication with note holders and we expect to repay these notes with a combination of cash and stock ahead of the maturity date."

Let's analyze this situation.  CLNE has $166 million in cash and short-term investments on its balance sheet.  Let's assume that CLNE needs to keep $50 million of cash on its balance sheet for working capital (cash needed to run the company while it waits to receive cash it is owed).  In that case, CLNE can use $116 million of its cash (for discussion purposes, assume cash includes short-term investments as well) and can issue $44 million in new stock to pay the $150 million debt.  The $44 million of new shares would be issued in exchange for cash, which would dilute the current shareholders (If you own 1 share out of 10 available, you own 10%.  If the company issues 5 new shares, then your new ownership stake is 1/15 of the company, or 6.7%).

CLNE has a current market capitalization (number of total shares x current stock price) of $346 million.  If CLNE issues $44 million in new shares, each shareholder will be diluted by 11%.  This is the better-case scenario.  The worst-case scenario is that CLNE would use 100% equity (stock) to repay the debt.  In this case, current shareholders would be diluted by 30%.  In summary, current shareholders are likely looking at a range of 11% to 30% dilution before August of next year at CLNE's current share price.

Okay, so one big dilution, and then in the clear going forward?  Nope.  CLNE also has $250 million debt due in October 2018 and $50 million per year due from 2018 to 2020.  When considering these debts, CLNE either has to make drastic improvements to its operating cash flow, issue more debt, or issue more equity.

To reiterate, CLNE continues to putter along.  However, a drastic acceleration in revenue growth is going to be required to turn this company into an investable stock.  As such, Common Cents is looking to sell its shares of CLNE.

While CLNE can fall even further from where it is now, there is likely a lower bound at some point due to the potential for CLNE to be acquired.  The business rationale is still intact for CLNE, as the long-term desire for cheaper, cleaner energy still exists.  In fact, companies are increasingly interested in their global footprints to the point that they may pay more to obtain an eco-friendly image to clients and the public.  CLNE is simply in a race against time to repay its debt.

Common Cents will look to sell its shares on a rebound in oil prices.  CLNE has been highly correlated with oil prices over the recent history, and any increase in oil prices will provide a much more attractive exit point than current levels.

Common Cents Take: CLNE is in a race against time to repay its debt.  It does not, and likely will not, generate enough cash to repay its debt without using current cash reserves, additional debt, or new stock.  Therefore, Common Cents will look to sell its shares of CLNE when/if oil prices rebound.