Total investment a game-changer for clean energy fuels – clean energy fuels corp. (nasdaq clne) seeking alpha electricity history united states


On Thursday morning, Clean Energy Fuels Corp. ( CLNE) announced a strategic partnership with global energy company Total S.A. ( TOT). Total agreed to purchase up to 50.8M shares of CLNE’s common stock for $83.4M, making it the largest stockholder with a 25% ownership interest and giving the company two seats on CLNE’s board. The news drove Clean Energy‘s shares up over 12 percent on the day.

Patrick Pouyanné, Chairman and CEO of Total, noted, "Natural gas can become the fuel of choice. Total believes there is a strong development opportunity in the natural gas for transportation market in particular[ly] in the United States which benefits from unique giant low-cost gas resources. Total is looking forward to partnering with Clean Energy to accelerate the remarkable innovation capacities of this company."

As part of the deal, Total will provide $100 million to finance the incremental cost of natural gas trucks versus diesel. The program, set to begin in Q3 via existing truck leasing companies, would enable fleet owners to convert thousands of trucks to natural gas with no incremental financial cost or risk. The lease payment will be identical to that of a diesel truck and the lease will include a guaranteed price for natural gas fuel at Clean Energy fueling locations for at least $0.50 per DGE less than diesel. Depending on the operator’s location, access to Clean Energy’s Redeem RNG fuel would be "icing on the cake." Combining RNG with the near-zero emissions 12 Liter Natural Gas Engine from Cummins-Westport, the joint venture between Westport Fuel Systems, Inc. ( WPRT) and Cummins, Inc. ( CMI), heavy duty truck operators can run carbon negative while enjoying significant cost savings over diesel.

The combination of cost savings, environmental benefit, and now, zero cost differential for the operator provides an extremely compelling offer that should accelerate a new wave of adoption of Natural Gas fuel by the heavy-duty trucking industry.

On a conference call shortly after the announcement, Clean Energy CEO Andrew Littlefair gave analysts additional color on the nature of the partnership and the expected benefits for both companies. He noted that throughout the company’s long history, the up-front cost premium for a natural gas truck has always been the greatest barrier to adoption. The engine performance has been proven vs diesel; the lower fuel cost has always been there, even in the low-price diesel environment of the past few years, eventually providing return on that up-front investment; Low-NOx engines and Redeem RNG provide additional environmental (and PR) benefits for converting. But the higher up-front cost remains the big sticking point.

The company has long felt that a leasing program such as the one announced with Total would remove that barrier and drive industry adoption, but they haven’t had the balance sheet strength to do this on their own. Basically Clean Energy gets Total’s capital strength to accelerate growth along with the implicit endorsement of the company’s business model and future prospects by the 4th largest oil & gas major in the world. The industry (if not the market) is likely to sit up and take notice. There would be ancillary benefits for CLNE’s compressor JV in European markets where Total has a big footprint, but that wasn’t a material consideration and the company has no desire to expand their operations outside of North America.

The $100 million lease program will focus on heavy-duty truck fleets and operators where a truck typically consumes upwards of fifteen thousand gallon equivalents per year, and Littlefair estimates it would result in approximately 2,500 new natural gas long haul trucks fueling with Clean Energy Fuels Corp. In Q4 the company reported a margin per gallon of $0.26. By simple math the above equates to at least $10 million to CLNE’s bottom line.

That’s over and above the growth that will be driven by legislative changes such as new emissions requirements at the Ports of LA and Long Beach, by fleets that have been waiting for the new Cummins Westport engines to make the switch, by those taking advantage of various local government grant programs, and by large operators being spurred by fuel cost risk from rising oil prices. And of course the steady organic growth in the refuse and transportation segments should continue apace.

All this comes at a cost. The immediate outcry among retail investors after the announcement, particularly those who’ve felt burned by Littlefair in the past due to poor stock price performance and perceived poor management, was about dilution.

Potential dilution is indeed a fair complaint (the final impact isn’t known at the time of this writing). However it is instructive to look at this transaction as being analogous to a start-up that dilutes by bringing on Venture Capital backing. VC transactions offer these smaller companies growth capital, network scale, executive and/or operating expertise, or other material benefits. In short, in exchange for equity dilution the start-up receives the ability to grow much larger, much faster, than it otherwise could on its own. That growth acceleration factor is very much at play here, and in exchange for Total’s stake retail investors now own shares of a company that, I believe, has the potential to grow larger more quickly and thus drive improved annualized returns even with an expanded base of shares outstanding. Time, of course, will tell.

What is certain is that Total’s investment in Clean Energy Fuels is a resounding validation of both the business model and the potential market opportunity, and the partnership cannot help but accelerate a transition to natural gas for heavy-duty trucking in North America. Total’s stake also puts an effective floor under the share price. It’s possible that there has never been a better time to consider an investment in CLNE.