Tag Archives: utilities

Clean Energy Fuels – Time To Go Long

Summary CLNE is set for another disappointing year as weak natural gas prices have curtailed the company’s growth despite an increase in its volumes, but investors should not lose hope. CLNE achieved positive EBITDA last quarter on the back of its cost-reduction efforts, which is commendable if we consider the challenging end-market situation. The registered number of medium and heavy duty vehicles running on natural gas in the U.S. is expected to increase from 0.25% in 2012 to approximately 3.8% in 2023. As CLNE’s end-market grows, it will see an increase in its addressable market that will lead to growth in gallons delivered and help it post better financial results going forward. Natural gas refueling company Clean Energy Fuels (NASDAQ: CLNE ) had started the year with a lot of hope and was trading at 52-week highs at the beginning of May. But, the second half of 2015 ensured that Clean Energy is set to post another disappointing year as it has lost half its value in the past six months. The weakness in the company’s stock price can be attributed a declining financial performance due to weak natural gas pricing. For instance, in the third quarter, Clean Energy’s revenue was down 11% from last year, while it also posted a loss due to a decline in the value of gallons delivered. But, in my opinion, investors should not ignore the improvements in Clean Energy’s performance as the company seems to be on track for long-term gains. In this article, I’m going to take a look at the various reasons why Clean Energy can come out of its slump. Cost reductions indicate that Clean Energy is moving in right direction Though Clean Energy posted a loss last quarter, the company was able to reduce the quantum of its loss. Clean Energy’s loss was down 21% sequentially and 15% year-over-year in the previous quarter. The decline in its loss can be attributed to Clean Energy’s cost reduction efforts and volume growth. For instance, the company has reduced its SG&A expenses by over 20% in the past five quarters and increased its volumes by more than 24%. These are commendable numbers, especially considering that weak oil prices have created an adverse impact on natural gas vehicle conversions. In fact, Clean Energy improved its volume by 17% to 80.6 million gasoline gallon equivalents in the third quarter. What’s more important is that Clean Energy, for the first time, reported positive EBITDA of $3.1 million last quarter despite the low pricing environment. This represents an improvement of $5.7 million over the second quarter of 2015 and an improvement of $8.7 million over the first quarter of 2015. In fact, for the first nine months of 2015, Clean Energy has improved its EBITDA by a whopping 62%. The following table clearly indicates the improvement in Clean Energy’s EBITDA performance. Source: Press Release Hence, as far as operational improvements are concerned, Clean Energy Fuels is moving in the right direction by reducing costs, which is why it has been able to improve its EBITDA remarkably. But, apart from cost reductions, there is another positive about Clean Energy Fuels, in the form of a booming end-market opportunity, which investors should not ignore Growing end-market opportunity strengthens the bull case Looking ahead, Clean Energy Fuels will benefit from a growing number of natural gas vehicles in the U.S. According to a report published by the Fuels Institute, natural gas vehicles are expected to grow substantially in the coming five years, particularly in the medium and heavy duty market. It is expected that the NGV share of registered M/HD vehicles will grow from 0.25% in 2012 to approximately 3.8% in 2023. The following chart shows the expected increase in natural gas vehicles on U.S. roads going forward in both base and aggressive cases: Source The report states that the majority of vehicles using CNG systems will be found in the class 8 category of heavy duty vehicles. This is because these vehicles will benefit from lower fuel costs, combined with significantly higher fuel consumption annually, which will provide returns on vehicle investment quickly. In fact, Clean Energy has already penned a number of agreements with fleet operators, which is an indicator of the fact that the company is already gaining traction for its business. For instance, last quarter, Clean Energy expanded its relationship with Raven Transport. Raven Transport deployed an additional 40 LNG trucks last quarter, and these trucks will refuel at Clean Energy’s stations on interstate corridors throughout the southeast. All in all, Raven now operates 223 LNG trucks in its fleet. Likewise, Clean Energy is also expected to benefit from its relationship with Saddle Creek Logistics, which recently announced that it will be adding 50 CNG trucks to its existing fleet of 200. These new contracts indicate that Clean Energy will see an increase in its natural gas volumes going forward, and as the overall market expands, the company will see better opportunities to expand its volumes. Conclusion Despite the downturn in the end market, Clean Energy has managed to improve its EBITDA performance this year. At the same time, its volumes have also increased, indicating that the demand for natural gas vehicles is still there despite low diesel prices. In the long run, as the number of NGVs on the roads increases, Clean Energy Fuels will see an increase in its addressable market and will be able to improve its financial performance. So, in my opinion, investors should go long Clean Energy Fuels and take advantage of the drop in its stock price for long-term gains.

NorthWestern Corporation – A Year After The Near $1 Billion Transaction

Summary Cash flow generation outpaced dilution from the acquisition. The debt level is acceptable. The stock isn’t cheap, but you are paying a fair price in exchange for stability. NorthWestern Corporation (NYSE: NWE ) is a utility company that operates in Montana, South Dakota, and Nebraska. The company is both a generator and a distributor of electricity and a distributor of natural gas. In November 2014, the company completed a significant transaction, buying up hydroelectric generating facilities for $904 million. The idea is that this will decrease the company’s overall risk profile, since this transaction would decrease the company’s reliance on purchasing agreements. This is similar to how Questar Corporation sources natural gas from its own subsidiary instead of just being a typical distributor. Thus far, investors have been indifferent, as the stock hasn’t gone anywhere in a year. Is there anything wrong? To complete the transaction, the company issued 7.77 million shares at $51.50/share and $450 million of debt at 4.2%. The debt seems cheap, but the share issuance increased total share count by 20%, so there was significant dilution. However, this doesn’t seem to be a problem, as the company has significantly increased its cash flow generation. Year to date, the company generated $304 million of operating cash flow versus $205 million from last year. This represents an increase of 48%, well above the dilution. If we ignore the working capital changes, the improvement is more subdued (+15% from $207 million to $238 million), but is still impressive nevertheless. From an earnings perspective, the company seems to have gotten into a bit of trouble in Q3, as EPS dropped 33% from $0.77 to $0.51. As we’ve discussed earlier, the company was quite healthy from a cash flow perspective, so what caused this discrepancy? The answer lies in the income tax expense. In Q3 2014, the company benefited from the release of some unrecognized tax benefit. This was not repeated in 2015. For that reason I think the company’s performance is better judged by its earnings before tax, which mirrored the cash flow growth, rising from $12 million to $30 million. Looking at the balance sheet, I don’t see any reason for investors to worry either. Although there is $2 billion of debt, there is no major redemption until 2019, when $250 million would be due. Considering the company’s high cash flow, I believe that the company should not have any problem paying it off or rolling it over. From a coverage perspective, the company currently has an EBIT/interest expense ratio of 2.8x in 2015. For companies in other industries, I would be very cautious, but since the company is in the utility industry, investors do not have to worry about wild swings that could jeopardize the company’s current capitalization. From a valuation perspective, the company’s P/E ratio has steadily climbed to 18x given the multi-year long bull market. While the stock is no longer cheap on an absolute basis, I believe if you are looking safety, NorthWestern Corporation will still fit the bill. In other words, you are paying a fair price in exchange for the company’s stability. Keep in mind that the stability I’m referring to is the company’s ability to generate a profit, not revenue. Due to swings in the commodity market, revenue will not experience steady growth, but as a utility company, the company should continue to generate steady profits. (See below) Takeaway The company has continued to deliver good results in 2015. I believe that the relative muted response from the market can be attributed to the overall pessimism in 2015. As we head towards year-end, it has become apparent that a multi-year long bull market is finally coming to an end. As we step into a more uncertain future, I believe that defensive investors should be very confident about holding on to a company like NorthWestern Corporation.

Riding The Petchem Boom With A Utility

Summary Entergy Corp. is a utility operating in the heart of America’s petrochemical boom. Entergy plans to steadily grow both earnings and dividends through 2018 at least. Shares are undervalued and I believe Entergy is a buy. The ‘shale boom’ just might be turning into the ‘shale bust’ as we speak, but the petrochemical boom is alive, well and durable. That’s because natural gas and natural gas liquids, inputs for the petrochemical industry, are now cheaper in America than anywhere else. This gives the U.S. a major advantage over other countries. The American petrochemical industry is really focused on the eastern Texas-Louisiana Gulf Coast. Not surprisingly, petrochemical plants and LNG export facilities are springing up all over the area. This boom is driven by demand, not supply, and so lower gas prices only help this growth trend. Investing in end-use chemical producers or LNG exporters is one way to participate in this trend, but utilities are also a low-risk way to be involved in this. Entergy Corporation (NYSE: ETR ) is the perfect company for this, in my opinion. Entergy generates power in New England from a handful of nuclear power plants, but the bulk of Entergy’s business is in generation and transmission of power in Mississippi, Arkansas, eastern Texas, and Louisiana. Louisiana is the largest piece of Entergy’s business, and, importantly, Entergy supplies much of the petrochemical industry along the Gulf Coast. Best of all, Entergy now yields over 5%, and has recently begun increasing its dividend as a result of the economic growth in its service areas. Solid growth and reliable income Some of Entergy’s industrial customers use as much power as a small city, and currently there are several plants being built along the Gulf Coast. This includes Cameron LNG in Louisiana, a Sasol cracker/chemical complex, two methanol plants under construction in Texas and Louisiana, and one steel mill under construction in Arkansas. (click to enlarge) Courtesy of Entergy Corp Investor Relations. The key ingredient to the industrial boom in this region is cheap, reliable energy. Louisiana and Arkansas have no renewable energy mandate. Texas does have one, but it’s not very big. Therefore, it’s no surprise that there’s three states have among the lowest electricity costs in the country. Low electricity prices entice these big industrial customers into this region and, as we will see, this in turn brings more residents and more efficient power distribution. It’s a virtuous cycle not often seen in the U.S. anymore. What does that mean for us? Well, it means 2% load growth for residentials and 4% growth for industrials, each year, through 2018 at least. (click to enlarge) Courtesy of Entergy Corp Investor Relations. Currently Entergy’s dividend is 57% of earnings, on a per-share basis. Over the last twelve months, Entergy has generated only $509 in free cash flow, but has paid $617 million in dividends. That, however, is because Entergy is building up its generation capacity with several power plants. Once the first new plant is up, St. Charles power station, Entergy will have much more financial flexibility. I fully expect Entergy to continue raising its dividend by low single digits through 2018, and perhaps even more in the following years. Valuation and conclusion (click to enlarge) Courtesy of Entergy Corp Investor Relations Is Entergy a good value right now? I believe it is. According to FAST Graphs, Entergy trades at 11.3 times earnings, which is quite a bit lower than the stock’s ten-year average valuation of 13.4 times earnings. That’s a 15.6% discount to its full-cycle average valuation, and there’s no reason Entergy shouldn’t achieve at least that average valuation. When you add a 5.1% dividend onto that, there’s a lot to like about this utility. Here’s what you’ll get with Entergy: A steady-growth utility in an economically strong area. As a utility, the barriers to entry in this industry are very high, which puts a lot of safety into this name. For these reasons, I believe Entergy is a buy right here.