Stabilis Solutions Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 6 speakers on the call.

Operator

Welcome to the Stabilis Solutions Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. So, others can hear your questions clearly, we ask that you pick up your handset for best sound quality. I would now like to turn the call over to Andy Puhalla, Chief Financial Officer. Mr.

Operator

Puhalla, please go ahead.

Speaker 1

Thank you, Ashley. Good morning, and welcome to Stabilis Solutions Second Quarter 2023 Results Conference Call. I am Andy Puhalla, Senior Vice President and CFO of Stabilis. And joining me today is our President and CEO, Westy Ballard. We issued a press release after the market closed yesterday, detailing our 2nd quarter operational and financial results.

Speaker 1

This release is publicly available in the Investor Relations section of our corporate website at stabilis solutions.com. Before we begin, I'd like to remind everyone that today's conference call will contain forward looking statements within the meaning of the Private Securities Reform Act of 1995 and other securities laws. These forward looking statements are based on the company's expectations and beliefs as of today, August 10, 2023. Forward looking statements are subject to risks and uncertainties that may cause The company undertakes no obligation to provide updates or revisions to to the forward looking statements made in today's call. Additional information concerning factors that could cause those differences Is contained in our filings with the SEC and in the press release announcing our results.

Speaker 1

Investors are cautioned not Please undue reliance on any forward looking statements. Further, please note that we may refer to certain non GAAP financial information on today's call. You can find reconciliations of the non GAAP financial measures disclosed to the most comparable GAAP measures in our earnings press

Speaker 2

Thank you, Andy, and good morning to everyone joining us on the call today. I'd like to begin with a high level overview of our recent performance And then I want to move to really exciting growth initiatives we're working on. Our second quarter results were in line with our expectations and were attributable to stability for the upcoming winter season and lower pass through natural gas feedstock commodity prices. These three components accounted for roughly 82% of Total sequential revenue decline. As you know and may be aware, we generally do not generate margin or incur spot market risk with respect to the price of feed gas and it is a cost passed directly on to our customers.

Speaker 2

During the Q2, we also experienced lower utilization at our Texas liquefaction plant due to changes in the composition of our suppliers' feed gas. The new source gas has a considerably different molecular composition, resulting in high levels of heavy hydrocarbons not experienced in prior years. These heavy hydrocarbons each have their own freezing point, So as their respective temperatures drop below those points, the heavy hydrocarbons freeze, clogging the flow of methane in the liquefaction process, which in turn disrupts LNG production until you eliminate the frozen hydrocarbons. Unfortunately, many LNG production plants in Texas During the quarter, we took action to eliminate these issues at our plant and we are confident the challenge will be fully remediated during the quarter. Strategically, our objectives remain the same, protect and optimize our core industrial business, while we accelerate Early stages given little prior regulatory requirements to use fuels other than widely dispersed marine fuel oil.

Speaker 2

So historically, Only a small number of LNG fueled vessels have been built and put into service. In 2020, the International Maritime Organization changed this, mandating that all vessels lower their sulfur emissions by 85%, requiring virtually every vessel operator in the world to decide on a cleaner approach and LNG fueled vessels have been the clear leader. Led by the abundance of inexpensive shale gas, the United States enjoys a Structural cost advantage over most countries, positioning our nation to become a leader in the fueling of LNG vessels. But given the historically low number of LNG fuel vessels in service, U. S.

Speaker 2

LNG bunkering infrastructure, including production, storage and bunker barging is in its infancy, meaning that it will take time and considerable capital to fully develop the demand. New vessel construction is an expensive process generally spanning several years. With the IMO's low sulfur mandates still being relatively new, We anticipate that the growth in LNG fueled vessels entering service will begin to positively inflect during 2024. At this time, we expect our addressable market will scale to more than 380 ships, up from less than 70 in 2021. In the meantime, vessel owners and operators continue to evaluate their future LNG fuel vessel supply chain needs and prospective new trade lanes and we continue to spend considerable time assisting them in their efforts.

Speaker 2

Over the last 12 months, we've made great progress in our marine strategy as evidenced by our total marine revenue increasing by more than $16,000,000 to 21% of total revenue versus 5% in the prior year period. While it's impressive, it's important to note that growing into a developing and nascent industry Can be very lumpy period over period and it's not always linear. And we are confident the overall truckery will continue to move higher, especially as a significant volume of new LNG fuel vessels enter the market. Stabilis is uniquely positioned to be the leader in marine bunkering by and our proven business model to expand and optimize our portfolio of owned and third party assets to drive long term growth and shareholder returns. And while we continue to develop this market, our financial footing remains on solid ground with sufficient cash and liquidity to fund our operations.

Speaker 2

During the Q2, we generated $3,800,000 of operating cash flow and ended the quarter with total cash and equivalents of $8,100,000 together with combined $4,000,000 of availability under our bank facilities. As a sole publicly traded small scale LNG growth platform in North America, There is nothing small about the small scale LNG growth opportunity. Our growth prospects are exciting and Stabilis is very well positioned as a long term growth story and highly asymmetrical opportunity to invest in a rapidly growing company with a proven and durable business model. With that, I'll turn it over to Andy.

Speaker 1

Thank you, Westy. For the 3 months ended June 30, 2023, Stabilis reported a net loss of $2,200,000 on total revenue of $12,900,000 versus a net loss of $2,200,000 on revenue of $23,200,000 in the Q2 of 2022 and net income of $1,100,000 on revenue of 20 $6,800,000 in the Q1 of 2023. Adjusted EBITDA was a loss of $100,000 in the 2nd quarter versus $1,400,000 in the Q2 of 2022 $3,500,000 in the Q1 of 2023. Year over year, the Q2 revenue change was largely due to significantly lower gas prices in current period compared to the year ago quarter. Our weighted average cost of gas was $2.60 per MMBtu during Q2 versus $7.05 during the same quarter last year.

Speaker 1

Lower commodity prices accounted for a reduction in revenue of about $4,000,000 As Westy mentioned, these are pass through revenue amounts that don't generate margin in our business. Additionally, revenue was lower by $1,400,000 due to the feed gas composition change at our George West plant. Sequentially, the revenue change is due to the lower pass through commodity prices, which resulted in a $3,900,000 reduction. Scheduled completion in Q1 of a large short term marine bunkering contract, the feed gas composition changes mentioned earlier and the normal seasonal and customer demand variations. As we bridge the adjusted EBITDA variance Between the Q2 2023 and the prior year period, there are several important items to highlight.

Speaker 1

First, the gas composition changes at our George West Facility reduced EBITDA by $1,200,000 during the quarter. The composition changes required us to reduce production and led to both rationing for some customers and the substitution of costlier third party LNG at certain customer accounts. This is a temporary challenge that began at the end of Q1, persisted throughout the Q2 and should conclude this August when capital investments we have made in gas pretreatment and scrubbing are brought online at our George West facility. Additionally, we invested in new commercial field technical and support staff and training to accommodate anticipated growth later in the year and into 2024. Sequentially, the drivers of the EBITDA changes are similar with the addition of the scheduled Q1 completion of the large bunkering contract mentioned earlier.

Speaker 1

On a trailing 12 month basis Through June 30, 2023, the company generated total revenue of $95,200,000 an increase of 16% versus the prior year period. For the same trailing 12 month period, non GAAP adjusted EBITDA increased 74 percent to $9,600,000 while free cash flow Our operating cash flow less total capital expenditures increased 92% to $5,400,000 Moving to cash and liquidity. In June, we We arranged a new $10,000,000 secured revolving credit facility with Cadence Bank subject to a borrowing base of eligible accounts receivable. There are currently no borrowings outstanding on the facility. We believe the closing of this credit Facility in this dynamic financial environment is a testament to our lender relationship and their underlying confidence in our business model.

Speaker 1

This facility along with our ability to generate strong operating cash flows from our core business will provide Stabilis with additional liquidity and greater operating flexibility to Leverage our unique portfolio of LNG and other clean emerging fueling solutions consistent with our stated strategic focus. As Westy mentioned, as of June 30, 2023, Stabilis had total cash and equivalents of $8,100,000 together with $4,000,000 of combined availability under our revolving credit facility and our advancing loan with AmeriState Bank. Total debt outstanding as of June 30, 2023 was $9,900,000 resulting in a ratio of net debt to Trailing 12 month adjusted EBITDA of 0.2 times. That completes our prepared remarks. Ashley, we're now ready for the question and answer portion of our

Operator

And our first question comes from Martin Malloy with Johnson Rice. Please go ahead.

Speaker 3

Good morning. Just in regards to profitability here second half of the year, given the significant decline from 1Q to 2Q, Could you maybe talk a little bit about what you're expecting 3Q and 4Q that we should be aware of And the magnitude of the George West facility is still having issues through August.

Speaker 1

Yes. Thanks, Marty, and good morning. This is Andy Prujala. Looking forward, we think that I'll start with the George West Question first. We think that we've got a solution for this problem.

Speaker 1

We're confident of that. And we're in the process of implementing that solution now. So you should expect George West production to go back up to kind of its historic levels. As I mentioned, that was about a 1 point $2,000,000 EBITDA drag in the 2nd quarter. So if you add that back, we're essentially breakeven before So that would it's about a $1,200,000 change there.

Speaker 1

Looking at the back half of the year, We're working on some contracts that could provide us some significant improvement in the back half of the year. As you know, we don't give guidance. So I really don't want to go into any more detail there. But there are some opportunities We're working on that are fairly we're very optimistic about.

Speaker 3

Thank you. And for my follow-up, I just wanted to ask maybe if you could go over potential milestones that we should be looking out for regarding Some of the growth platforms, whether it be marine bunkering or space and maybe timing of can we look for contracts That provides some support for the capital investments that you're making or announcements regarding operating of Marine Bunkering Facilities or investments in those. Just maybe milestones that we should be aware of

Speaker 4

that are potentially out there.

Speaker 2

Yes, I think Marty good morning, by the way. I think 2 logical milestones Leading indicators are going to be really what you just mentioned, one of which is going to be capital expenditure. As we mentioned, we've started to invest CapEx in the first half of the year. We've acquired the critical components to a for A train that would look very similar to our George West facility, whether that train doubles our capacity in South Texas or We elect to build that infrastructure somewhere else, logically, probably in South Texas, but we've acquired that. It was a unique asset and we got it we thought at a very, very attractive valuation.

Speaker 2

And so we have moved with purchasing that And we're very excited about that. I think secondly, I think the second part is also what you mentioned is contracts. We feel like We have had significant and very tangible relevant conversations with a variety of vessel owners, vessel operators, Brokerage houses, large trading houses, you name it, many of those are trying to establish their trade lanes. A lot of those vessels aren't coming online as we mentioned until next year, but they're trying to lay that foundational work with supply chain and infrastructure. We feel very confident that An award that's material is imminent, but you never know with these things.

Speaker 2

As we mentioned, as this business and trajectory starts to advance throughout the next few years, that trajectory and success rate will grow. And so we're excited about that. So I think the 2 leading indicators for you are as you see us investing in CapEx and OpEx because that's an indicator we're seeing green shoots. The other certainly would be an announcement that we have with respect to being awarded contract or several.

Speaker 3

Thank you very much. I'll turn it back. Yes.

Operator

Thank you. We will take our next question from Jeff Grampp with Alliance Global Partners. Please go ahead.

Speaker 5

Good morning, guys. Thanks for the time.

Speaker 1

Good morning.

Speaker 5

Sticking on the LNG filtering opportunity there, it's something It's starting to materialize here in a really interesting way in 2024 and beyond with the new ships being commissioned. Hoping to get an update there just in terms of How you guys see that playing out for the company, just big picture standpoint? And then from a contracting standpoint, Does that market operate differently than how most of the business has done today from a size and duration standpoint? Or How are you guys thinking about kind of pursuing that opportunity as it relates to the contractual aspects of it?

Speaker 2

Yes, both great questions. I think when you think about the first question, you got to really think about really what's that addressable market and the perspective we have on that. And so what we're really looking for is we're looking for as sticky a revenue base as possible. And so more specifically, think about those vessels that are making ratable And routine calls into port and they need fuel. So I think cruise ships, I think some of those car carriers, those car carriers coming out of Asia and Europe, They've got to deliver floor plan models to these auto dealers in the U.

Speaker 2

S. So they're making fairly predictable routine Ports of call, I think container ships, those are all 3 likely candidates Categorically speaking for us to be thinking about and then I think also we want to own our backyard. We've got infrastructure already in place And close to the Gulf of Mexico. That's not really as much a container ship or car carrier, but you do Cruise lines coming into the Port of Galveston, but also it's a large chemical and tanker market for us to be really excited about as well. So those 4 categories, if you kind of follow those ports, that's kind of where we were thinking about the infrastructure.

Speaker 2

Now I will caveat that With no port is the same. Each port in each jurisdiction, each state has its own kind of unique Permitting and regulatory environment, but rest assured, we've been doing this for a few years. And so we've got a pretty strong Technical and engineering and legal capability on our staff. We've got memorandums of understanding across Most of the Gulf of Mexico ports we've operated in California, we've operated on the East Coast. So we have a very strong appreciation about how to get licensed and approved in those markets.

Speaker 2

But those are the markets that makes sense to us that kind of ratable consistent sticky revenue base. I think when you think about size and contract, the tenure of those contracts really is varied. We said and announced that we did a 6 month contract that completed in the quarter. But also these contracts could be year, 2, 3, 4 years. There's no real specific model right now, Just given the nascent nature of the industry, but it stands to reason that if people are going to spend large numbers of capital investment for this Small infrastructure that's got heavy demand, many are going to want some guarantees in offtake.

Speaker 2

We're not different. We're going to have that similar perspective.

Speaker 1

But I will say one of

Speaker 2

the unique attributes of our business is we've got a mobile asset fleet. So we can go test trial certain markets on the East Coast or Along the Gulf Coast to help establish those trade lanes. I'd say also the revenue and margin opportunity Different as it relates to the difference between that and our industrial business is multiples larger. It's significant. On any given day, we're trucking 100,000 to 200,000 gallons to a customer location.

Speaker 2

Those rebunkering On any bunkering might be 500,000 to 1000000 gallons alone. So it's considerable multiples and considerably longer contract Tenors, the matter that's kind of more spot market we have in our core business. That was a lot to unpack. So I hope that helps.

Speaker 5

No, that's great. I appreciate the thoughts there. And then my follow-up is on the capital side of things. I think you guys mentioned it was like $5,000,000 in the quarter. It sounds like a lot of that was for the critical components for this new train that maybe sound a little opportunistic.

Speaker 5

I mean, correct me if I'm off Based there, but any kind of expectations for CapEx pace going forward? Is it more opportunistic as some of these contracts Potentially materialize or any kind of color you can provide about go forward capital plans would be great.

Speaker 2

Yes, I think it's a blend. This was certainly had some opportunistic undertone to it. But candidly, we know this asset, we know this configuration very well. The price was attractive, but we also have very strong belief that this is going to be rolling out into a market in a fairly short period of time. When you think small scale versus the world scale, those are 10, 12 year FID to liquid flowing, ours is anywhere between 9 to 15 months.

Speaker 2

So we can in a very modular fashion roll this out quickly. The beauty of this asset is, as I mentioned, we know. So it's got a lot of optionality for us. But to repeat myself, I think I have very strong conviction. We're We're going to build this train out very quickly.

Speaker 2

I think also as we think about CapEx moving forward, We've got the predominant amount of OpEx with great operating leverage. So CapEx will scale And we'll be thoughtful in that capital structure. And you're talking about numbers anywhere between 50 to 350 based upon opportunity. We want to have some commercial meat on the bone before we start out laying that kind of capital. And that's why we're pedaling So fast and hard to with these discussions with these vessel owner and operators to as they establish kind of their infrastructure needs.

Speaker 2

It's a bit of a chicken and the egg, but I think we're going to be thoughtful about how we capitalize it. But we're excited because there's an enormous Tsunami of demand that's on the way. And we think that given our footprint, our mobility, our experience, we'll be at the forefront. Also remember that Chart Industries owns 8% of our company and we have a wonderful relationship with Chart. They're arguably one of The Premier manufacturers have a lot of this equipment.

Speaker 2

So when you think of supply chain and that capital expenditure side, we've got a very tethered relationship And we think that our cost will be very competitive and our turnaround supply chains and critical item needs will be very, Very expeditious. And so that's kind of how we think about it.

Speaker 5

Great. I look forward to following along and best of luck. Yes, thanks.

Operator

We will take our next question from Barry Haynes with Citi Management. Please go ahead.

Speaker 4

Thanks so much for taking my questions. And I apologize if I missed something earlier. My line was going in and out. I had to re dial in. But I had a couple of questions.

Speaker 4

One is, I don't think I heard you guys talk about the space market. Could you give an update on how that did in the quarter and what the outlook is for the year? And then second question is, In terms of the export license, any plans to take advantage of that? Where does that stand? Thank you.

Speaker 4

Yes. No, thank you. Good morning. The space

Speaker 2

business is incredibly exciting from our perspective. We've been servicing that market since really 2018 And it's a relevant element of kind of the way we think about things. I'll say this, it's really got a similar complexion to our industrial business though, meaning it's a fairly lumpy business right now. It's a lot of fits and starts and stops. And so until there's more consistency in longer term contracts, it's a challenge to really think more strategically about, but Certainly, it's relevant.

Speaker 2

It's exciting. I think over the ensuing years, you'll have a much larger and broader audience of customer. Right now, there's kind of a one large consumer of our goods in our LNG. We think that changes. I don't think that changes today, But it does change as others come online and their rocket and programs come online as satellites continue to get more and more robust And launched in the space.

Speaker 2

And so it's a great business. We're excited about it. It's just going to be lumpy and choppy and it's very similar to kind of Our industrial business now. I think moving forward, the other question was in and around What was the other question, excuse me?

Speaker 4

The export license.

Speaker 2

The export, excuse me. That's also we are very bullish on that. We think The structural elements of supply and demand certainly in the European continent are real. It didn't really materialize last year because you saw a massive build of inventories. And then this winter, it was a fairly mild winter in Europe.

Speaker 2

We don't think that that mild nature of weather in Europe is sustainable. Ultimately, it's going to get chilly again in Eastern Europe And the drawdowns in those inventory levels will happen. It's hard to predict when. But we have spent a lot of time interacting With off take to take our molecules and third party molecules that we can source pretty seamlessly to fill that market. We'd like to get 2, 3 year kind of contracts on that.

Speaker 2

It's just I think you've got some gun shy off take right now given As I mentioned, the full tanks in Europe and really kind of the expectations or lack thereof of cold winter again. It's kind of a wait and see. But the punch line here is we are incredibly bullish on that aspect of our business. When and how it materializes is still developing.

Speaker 4

Got it. And then one last question. I didn't catch What was the equipment that you bought related to the new train? And if you talked about What was the cost of that and what the all in cost would be of this next train? Thanks.

Speaker 2

Yes. So the way to think about this, the train was a very Similar train that we have in our South Texas location. We understand the asset incredibly well, understand how to deploy that. We will Logically put that in our South Texas to expand that capacity, double the capacity. But also what's great and unique about it is it allows us and affords us the optionality to move that We're in a market for infrastructural needs as well.

Speaker 2

So that's exciting for us. When you think about the cost, It was a considerable portion of our cost, probably in excess of 70% of our CapEx for the first half of the year. But that and if you think kind of Along the lines of putting that say doubling our facility, that's probably a $40,000,000 to $45,000,000 kind of all in soup to nuts investment. And I think with pretty expedited returns on cash, cash on cash returns on capital.

Speaker 4

Right. And what's the projected timeline in terms of when that would start producing LNG?

Speaker 2

Yes. So the way to think about There's a little variability here because supply chain, but that's in between, call it, 9, 10 months to call it 15 months. I'd like to put a finer point on it. It's a little harder to do. But rest assured that when we start installing that train and kind of communicate that with you all.

Speaker 2

We'll have a much finer point on it, but that's kind of a good range to think about, 9 to 14, 15 months, somewhere in that vicinity.

Speaker 4

Great. Thanks very much. Good luck going forward.

Speaker 2

Yes. Thank you. Thanks.

Operator

All right. And this concludes the Q and A portion of today's call. I would now like to turn the floor over to Mr. Ballard for closing remarks.

Speaker 2

Thanks everybody for joining us this morning and we look forward to seeing you in the future and on the road. Take care.

Operator

Thank you. And this concludes today's Solutions Second Quarter 2023 Earnings Conference Call. Please disconnect your line at this time and have a wonderful day.

Powered by Quartr
Earnings Conference Call
Stabilis Solutions Q2 2023
00:00 / 00:00