Stabilis Solutions Q4 2023 Earnings Call Transcript

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March 7, 2024

There are 6 speakers on the call.

Operator

Welcome to the Stabilis Solutions 4th Quarter and Full Year 2023 Results Conference Call. I would now like to turn the call over to Andy Puhalla, Chief Financial Officer. Mr. Puhalla, please go ahead.

Speaker 1

Good morning, and welcome to Stabilis Solutions' 4th quarter and full year 2023 results conference call. I'm 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 Q4 and full year 2023 operational and financial results. This release is publicly available in the Investor Relations section of our website at stabilis solutions.com.

Speaker 1

Before we begin, I'd like to remind everyone that today's call will contain certain 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, March 7, 2024. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Company undertakes no obligation to provide updates or revisions 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 to place 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 to the most comparable GAAP measures in our earnings press release. Today's call is being recorded and will be available for replay. With that, I'll hand the call over to Westy Ballard for his remarks.

Speaker 2

Thank you, Andy, and good morning to everyone joining us on the call. Let me start by thanking our employees for their many contributions during what amounted to a historic year for Stabilis. Our success was a collective effort that culminated in our 1st full year of profitability since becoming a public company. While our full year profitability was an important milestone for our entire team, we remain in the early stages of a multiyear value creation story. You see, not only are we building a profitable clean fueling solutions platform of scale, we're at the forefront of emerging blue sky sectors characterized by significant opportunities for sustained asymmetric growth.

Speaker 2

And as we look across the competitive landscape here domestically, we believe we are the only company in the small scale LNG universe that has built the infrastructure, operational and technical capabilities and customer relationships capable of advancing an increasingly sophisticated growth platform that further enhances our unique value proposition and competitive moat. Looking back over the progress we made in 2023, there were several highlights worthy of note, including the following. Commercially, we continue to shift our business model from commodity spot sales toward longer duration take or pay contractual revenue. We believe this approach ensures further optimization of our asset base and increases the visibility of cash flow generation, positioning us to opportunistically invest in the people, systems and infrastructure required to support future growth. In our marine business, we made measurable strides where we completed a 6 month LNG bunkering contract in Port Canaveral, Florida and conducted multiple LNG bunkering operations for a large container carrier in the Port of Long Beach, California.

Speaker 2

In December, we commenced our previously announced multi year marine bunkering contract with Carnival Corporation in Galveston, Texas. Carnival is a pioneering global cruise line committed to the decarbonization of their fleet through the adoption of LNG and alternative fuels and the 1st cruise line to introduce LNG powered cruise ships in North America. Our relationship with Carnival is an important use case that further solidifies our position as a premier provider of comprehensive and scalable marine LNG fueling solutions in the market. Revenue from our marine customers in 2023 represented roughly 14% of total revenue and our outlook for 2024 has marine revenue increasing to roughly 1 third of total 2024 revenue. Beyond Carnival, over the last 2 years, we've engaged in full project development, management, engineering, support personnel, supply and operational services to the successful delivery of more than 2,000 loads of LNG to fuel container ships, cruise ships and offshore supply vessels.

Speaker 2

And our team's efforts during that period have been impressive with marine revenue growing at a compounded annual growth rate of 122%. Looking ahead, our marine strategy will focus on expanding our capabilities directly to the waterfront of high traffic ports across the U. S. In doing so, we will continue to optimize our portfolio of owned and third party supply sources, infrastructure and logistical assets to provide comprehensive and scaled solutions to current and future customers. Along those lines, operationally, we continue to enhance our logistical capabilities to become the only small scale LNG bunker provider capable of delivering multiple modes of delivery to our bunkering customers, whether that be bunker barge to vessel, truck to bunker barge or truck to vessel across all 3 U.

Speaker 2

S. Coastal markets. This operational and geographical flexibility affords our current and prospective customers the ability to validate a variety of trade lanes throughout the U. S. Knowing they will have a reliable fuel supply with Stabilis.

Speaker 2

Throughout the year, we're also the beneficiaries of strong activity across our other diverse end markets, primarily led by aerospace, electric utilities, mining and oil and gas sectors. Within the aerospace sector, our high purity methane continues to become the or 7% of total volumes for the year. Entering 2024, we are seeing a significant increase in quoting activity that points to a positive demand inflection within both our marine and aerospace markets. Given these favorable underlying demand conditions, we expect that by mid-twenty 24, our 2 owned liquefaction plants will effectively be sold out for the remainder of the year and well into 2025. So this begs the question now what?

Speaker 2

In answering that question, it's important to remind everyone that our proven ability to rapidly source LNG at scale from our extensive supply network to meet ongoing incremental growth in customer demand, while we proactively evaluate a variety of opportunities to expand our assets and operations. On that note, allow me to share a few comments on our capital allocation over the last year and we are focused entering 2024. In 2023, we deployed more than $7,800,000 toward growth related investments in our marine capabilities by acquiring the critical components for new LNG production train and associated storage and equipment for waterfront expansion. Even after the significant level of investment in our marine business, we ended the year with more than $11,000,000 of cash and availability under our credit facilities to fund our ongoing operations and a net leverage ratio of 0.6 times 2023 adjusted EBITDA. Looking ahead, we intend to further optimize our existing asset base and supply chain, while prioritizing scalable investments and incremental new capacity and infrastructure capable of supporting demand inflection within our marine, aerospace and other diverse end markets, both in the U.

Speaker 2

S. And abroad. To accomplish this, we are routinely evaluating of sources of capital with heavy emphasis on focus and focus on those partners that know our industry, our company and recognize a significant upside potential in our operating model. Importantly, our decision to proceed with new infrastructure investments will correspond directly with our demonstrated ability to secure long term ratable off take agreements that de risk our investment for a multiyear period. With that, I'll turn it over to Andy.

Speaker 1

Thank you, Westy. Let's move to a discussion of our Q4 and full year performance together with an update on our balance sheet and liquidity exiting 2023. Our Q4 2023 results reflect 18% sequential revenue growth and the 1st quarter of profitability since Q1 of 2023. During the Q4, our George West plant returned to full production rates and that combined with several new projects resulted in a strong sequential performance. During the second and third quarters of 2023, operations at our George West facility were impacted by a series of investments we made to enhance our ability to utilize a wider range of feed guest stock.

Speaker 1

With this project work reaching completion in the 3rd quarter, our George West facility operated at 95% of capacity during the Q4 and continues to operate at a similar level into the Q1 of 2024. We generated $1,300,000 of cash from operations in the 4th quarter and $6,700,000 for the full year. This strong cash generation helped us fund $10,300,000 of total capital investment through the year, while maintaining our strong liquidity position. At December 31, 2023, Stabilis had total cash and equivalents of $5,400,000 together with 5,600,000 dollars of availability under our credit facilities. Total debt outstanding as of December 31 was $9,400,000 resulting in a ratio of net debt to trailing 12 month adjusted EBITDA of 0.6 times.

Speaker 1

Given the recent activity in some of our higher growth target end markets, we are actively considering potential avenues for capacity growth. Our current liquidity position and balance sheet provides us with the optionality to pursue select organic investment as we meet an inflection point in demand for our solutions. As we look out over the coming years, the exponential growth opportunity for our business may warrant further capital investment beyond what our current balance sheet can support. For such investment, we are actively evaluating multiple pathways for financing, but our top priority in doing so continues to be protecting and maximizing shareholder value. That concludes our prepared remarks.

Speaker 1

Operator, please open the line for questions.

Operator

Our first question comes from Martin Malloy with Johnson Rice. Please go ahead. Good morning. Congratulations on the strong 4th quarter and all the progress that you made in 'twenty three. The first question, just want to follow-up on some of the topics that you touched on in your prepared remarks on growth and potential multiyear contracts out there.

Operator

Could you maybe help us with what kind of milestones we should look for that you would need to have before you pull the trigger on expanding liquefaction capacity on the contractual side, whether it be marine bunkering or aerospace? And then on the aerospace side, I guess, what's the term out there that people are looking for in terms of LNG supply from a contract standpoint?

Speaker 2

Yes, thanks. Good morning, Marty. I think the way to think about this, these 2 buckets, 1, the Marine and the other Aerospace, I'll start obviously with the Marine in that we I think we've been pretty clear that as we think about capital deployment, we're not averse to putting money to work speculatively. We did that in the Q3 when we bought some of those first train and the associated equipment for almost $8,000,000 of expenditure in marine. So we're comfortable with that.

Speaker 2

But I think for us to really deploy scalable dollars, we're are going to want to have some more commercial meat on the bone and making sure that we've got a comfort level with term and ratability for some of these marine contracts. We're in a variety of discussions across multiple ship owners and operators. And if you'll just look at that tidal wave of demand in 2023 and now into 2024, we've got over 500 ships as an addressable market and that's up 2 fold from just 2 years ago and 15 times from 6 years ago. So this market has got a massive demand and so we're being thoughtful on these discussions. And so we'd like to have some more certainty, ratability before we start announcing the expenditure.

Speaker 2

And so look for that, but we're not afraid to also do some on spec as we demonstrated in Q3 of last year. I think on the space side, those contracts vary. I think that as we think about those contracts, they can be not dissimilar to marine, they can be anywhere from 6 months to 2 years to 5 years. And certainly, we're working diligently to have those as ratable and long term as the economics and operations make sense. So that's really how you should think about the aerospace side of it.

Operator

Okay. And then, so my follow-up question, just wanted to ask about operations at George West. I know you made some investments in 2023 to kind of pretreat some of the inlet gas. And it looks like from the Q4 results that things are the utilization is doing very well and everything. But can you just maybe talk about how those investments are playing out in the utilization?

Speaker 2

Sure. Yes. So I think if you go back and look at kind of mid year last year, we're in the kind of the 40% 50% utilization. That was some of the disruption that happened. We spent not a lot of money, but around $1,000,000 to go ahead and rectify that and we want to rectify that and we want to be thoughtful in our approach.

Speaker 2

And I'm proud to say that as well in our rearview mirror. It doesn't mean that we're not other things won't happen. We don't foresee anything that have or will happen. And so I think the way to think about that is very high, kind of mid-ninety utilization rate now. That a little ebb and flow based upon predetermined downtime for maintenance and the like.

Speaker 2

But that plant has in Q4 and continues through certainly the 1st part of 2024 operates in that mid to high 90% range. It's firing on all cylinders and we're really excited about that.

Operator

That's great. I'll turn it back. Thank you very much.

Speaker 2

Thanks, Marty.

Operator

Thank you. Our next question comes from Barry Haynes with Sage Asset Management. Please go ahead.

Speaker 3

Thanks very much for taking my questions. First of all, I wanted to clarify the money spent on growth capital, was that all marine bunkering equipment or was some of that long lead time items for the Nutrien that you've talked about in the

Speaker 2

past? Yes. So, it's a little of both. It was another 100,000 gallon, the critical components to another 100,000 gallon train. That's small scale world, it's modular.

Speaker 2

And so we could theoretically put it anywhere. Right now, we have state lines on moving to the water for marine bunkering, doesn't have to, but right now that's the intention. But also part of that $7,800,000 was marine bunkering associated equipment with some pumping skids and some other hard items that further facilitate the bunkering of ships. And so you could look at it as all marine bunkering or maybe that train if an opportunity comes up, since it's a very modular system, we can move it elsewhere for aerospace or the like. That answer your question?

Speaker 3

Yes. So following up, what would be the timing of the new train coming on?

Speaker 2

Yes, the timing is going to be predicated upon kind of the earlier question that we talked about with Marty Malloy. And that's really just the cadence of contracts. As you think about really 2 big drivers for this company, the aerospace industry as well as the marine industry, those are kind of nascent blue sky markets and sectors. And so they're in their infant stages of growing. So understandably, those sales cycles take just a little bit longer to build out within a new market.

Speaker 2

And so we've had considerable success along the marine front and space front frankly with the work we've done in Florida as well as California and now the Gulf of Mexico. We think that pace of play in marine picks up. We think the pace of play in space picks up. Trying to put definitions around that if that's in the next 2 months or 6 months or 9 months, it's hard to say. But if you just look at the in Marine, the total number of ships, that's 500 ships now, 3 years ago, it's 200 ships and 5 years ago, it's 31 ships.

Speaker 2

And so we think that just the inertia in play now is going to in order to our benefit, but it's hard to put an actual timeline on that. But we're aggressively and pedaling rapidly in 2024 with a lot of discussions around those topics.

Speaker 3

Right. And then so once you have contract coverage and you make the decision to go forward, how long would it take to build and finish up that train? Just how many months are we talking about roughly?

Speaker 2

Yes. Once we have the contracts on and we disclose that, it's anywhere between 12 to 18 months. It just depends on the critical components. For that first training, it would probably take us 14, 15 months from the time we say go. If we are starting and had to order new components, it might take 18 months to 24 months.

Speaker 2

But the beauty of it is, unlike the world scale, this can be a very quick shot in the arm. Also, I think another way to think about this is we've got a critical vendor that's also a large shareholder of our company and that's Chart Industries. They're a logical provider of a lot of our CapEx. And so I think we would like to get and think that we've got some favored nation relationships there as well over anybody else. And so it could be, as I mentioned, 15, 16, 18, 24 months.

Speaker 2

It all depends on the scale and location. Great.

Speaker 3

Thanks. That's so helpful. And then I just want to others on different topics. You talked about the movement to contract from spot. Can you give us a rough feel for what that ratio was contract to spot, 23 versus 22?

Speaker 3

And then if you have any sense for this year? Thanks.

Speaker 2

Sure. So I think that when you think about our assets, 2022 was predominantly, if not holistically, spot. 2023, the vast majority of that was spot or short term, think 6 months or shorter type contracts. I think as we go into 2024 and into 2025, think kind of 18 month to 4 year type contracts.

Speaker 3

And that would be for like what percent of the contract what percent of your volumes in 24 do you think would be under a contract like that versus continued spot business?

Speaker 2

Yes. So the variability is around our assets versus 3rd party. 3rd party is a variable, but so I'll just speak with our own balance sheet assets and our own plants. I would say that our goal is to have 100% of our assets under some sort of term ratable contracts, whether that's 1 to 4 year type contracts versus 2022, 100 percent of that revenue was all spot and the vast majority of it in 2023 was all spot. So what we're doing is we're pivoting from a spot inconsistent unpredictable market and we're pivoting to consistent better visibility, better backlog and better planning, better planning because we got better visibility and sidelines on cash flow and also better margins.

Speaker 3

Great. And then on volumes this year, how much production volume, how many gallons do you think you missed out on because of the issues at George West? So theoretically, you'd get those loans back this year.

Speaker 1

Yes. Barry, we've publicly we've discussed it in terms of EBITDA, and we think that the EBITDA impact of that was about $3,200,000 which crossed both Q2 and Q3. So that's how we're kind of thinking about it.

Speaker 3

Got it. And then last question, is there anything happening with the export license that you guys got? Just a little update on whether that's kind of sitting in the shelf or whether there's some plans to utilize that? Thanks.

Speaker 2

There are absolutely plans to utilize that. And the good news is it's a 28 year license. The bad news is there's some short term deliverables that we need to be thoughtful around. I also think it's hard to contemplate the export right now given where natural gas prices are in Europe and Asia. But we don't think that's a long term systemic and we think that this is a very exciting tool for us to use in quick fashion should those markets turn quickly.

Speaker 2

And so we are constantly in discussions with offtake internationally that can flip the switch pretty quickly. But it's a really interesting tool and we intend to leverage and utilize that not only for demand and power generation and the like industrially in Europe, but also we think that there are opportunities for us to put that on vessels and utilizing U. S. Gas exporting that to European markets and bunkering ships as well. So it's got a lot of utilization utility for us.

Speaker 3

Great. Thanks so much for all the info and congrats on a great quarter. Thank you. Great. Thank you.

Speaker 4

Thank you. Our next In your opening remarks, you referenced the Long Beach Marine Bunkering project. Would you please detail the circumstances of that for us?

Speaker 2

Well, that's a relationship that we are providing engineering, project management and pumping services to a third party who is then fueling a vessel that's been going on for a couple of years. We also did that for another container ship, a separate container ship company, very similar construct where we were providing engineering and management and service personnel to pump LNG into a container ship on behalf of a third party.

Speaker 4

And that third party is the shipping company itself or is there a contractor between the 2 of you?

Speaker 2

Yes. So specific to Long Beach, there's a contractor between us that their responsibility was to source the gas and provide that to the container ship. And we were providing the pumping services project management logistics supply chain of picking up their gas and delivering it to their customer. That's that construct. I wouldn't look at that as being the business model across all the markets we're expanding to.

Speaker 2

But in that specific instance, that was the construct.

Speaker 4

And, Wes, do you tell us about the expertise that you bring to the equation that in that case the gas provider themselves was not able to do or why they were not able to do that?

Speaker 2

Yes. I mean, a lot of people really kind of stick to their knitting. And I think we've positioned ourselves as a turnkey provider of starting with the molecule and it could be our own molecule or we can source that for somebody or somebody else can source it on their own. We're fairly agnostic. But we have the technical expertise, the rolling stock in many instances.

Speaker 2

We have the engineering, the commercial capability. We've got really kind of the entire infrastructure to provide this permitting, the licenses, really all some of that qualitative stuff as well and some of the administrative stuff. We've got a full capability of investment that we've made operationally and with our people and systems to deliver a turnkey solution from production all the way to last mile delivery, whether it's in our industrial business, aerospace business or marine business. No one else really has that. No one else has that capability nor they've invested in that capability nor they've demonstrated the desire to invest in that capability.

Speaker 4

Great. Thank you. And in the opening remarks, you also referenced having both plants essentially sold out. And you mentioned a timeframe and I missed what that timeframe was. Would you please repeat that?

Speaker 2

Yes. So, excuse me, based upon the Helen of Lindsey we're looking through, we think that it stands to reason that by midpoint this year and well into 2025, our plants will be effectively sold out, Bill.

Speaker 4

And today, the 95% capacity at George West, do you consider that sold out or do you still see more you're really wanting to get up to 100% or more?

Speaker 2

I want to get up to 100% or more and I think I'm optimistic that we're going to get there.

Speaker 4

Okay, great. Thank you. And so when you take both accounts or both plants and put them together, what would the current utilization be running at, say, in the Q4?

Speaker 2

Yes. If you take George West at kind of the mid to high 90s and Andy Port Allen was kind of in the mid-80s, it's probably the low on a just kind of weighted average. It's probably the low to low mid 90%.

Speaker 4

Great. That's helpful. And Port Allen, does it have much volatility in its utilization? We just don't talk about it much. Or is it similar to George West that it has its level and it's kind of holding there now?

Speaker 2

The latter. It's got very low volatility. And we've got a very strong counterparty customer that absorbs the vast majority of that production. Great.

Speaker 4

Thank you and congratulations on a good quarter.

Speaker 2

Thanks Bill.

Speaker 4

Thank you.

Operator

We'll take our next question from Spencer Lehman. Please go ahead.

Speaker 5

Good morning. Just a couple of quick questions. The current administration in Washington seems to be pretty antagonistic toward fossil fuels and specifically LNG now with the foreign exports. How do you see that impacting you domestically and maybe in the future? Are you worried about that?

Speaker 2

I'm not overly concerned about it because if you think about it just in general, low natural gas prices really are our friend. And if you think about the competitive landscape, certainly there may be other operating companies out there, but the real competition for me are oil prices for diesel or propane or other kind of maybe types of natural gas. And so we don't think it has a dramatic impact, not the least of which we've already got our permitting and licenses for export. So we're already grandfathered in. It might actually work to our benefit to the extent that others aren't successful.

Speaker 2

But also that's really a world scale phenomenon. And when you think world scale, you're thinking 1,500,000 to 2,000,000 of gallons of production a day. And so Cheniere's and Tellurian's and all these new kind of greenfield projects that are coming on for export, that's going to, I think, more dramatically impact them than really in the small scale world where we participate, which is filling rocket ships for space exploration or marine bunkering for large ocean vessels and cruise ships.

Speaker 5

Okay. That sounds good. And the second question on hydrogen. I've been a lot of talk lately and it's starting to heat up and guess they're looking for some kind of guaranteed supply if a big usher comes in. And are you still are you guys still pretty excited about the future of hydrogen?

Speaker 2

I think we're excited about a variety of things. I don't know since I joined the company and I know that there was some thoughts around hydrogen that predates me. I don't know that I'm as bullish on it. I'm not overly bearish, but I think that there are other transitional fuels that are scalable, clean and readily available and secure and cost effective. The thing about hydrogen, if it's not green, it's not green.

Speaker 2

And so if it's going to be blue or gray, then you're better off utilizing a resource such as clean natural gas. And so I think the scalability and practicability around green hydrogen is pretty far in the future. So I'm not against hydrogen or methanol or ammonia or any of it. And we'll be thoughtful around not just LNG, but other fuels as marriage fuels and our product solutions offerings. But I think hydrogen is one that's a little bit harder for me to get my head around at this point in time, kind of given the visibility that I see.

Speaker 5

Got you. Okay. But you're ready to go with it if some breaks out?

Speaker 2

I think it's absolutely something we would consider to the extent that there's scalability in green hydrogen And if that or methanol or RNG and other kind of alternative clean fuels are LNG is not an infotate for us, it's beginning. And so all those other fuels would be fair game, but there's got to be I think they got to be clean, they got to be green, and they've got to add incremental value not only on the ESG side, but also on the scalability as well as cost side.

Speaker 5

Okay, got it. Well, great. And you guys are doing a great job and good luck.

Speaker 2

Thank you so much.

Operator

Thank you. This concludes the Q and A portion of today's call. I would now like to turn the floor over to Mr. Ballard for his closing remarks.

Speaker 2

Thank you, operator, as well as all of those of you that joined us and for your time and interest in our company. If you have any further questions, please contact our IR team and we look forward to seeing you on the road. Take care.

Operator

Thank you. This concludes today's Stabilis Solutions 4th quarter and full year 2023 results conference call. Please disconnect your line at this time and have a wonderful day.

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