Stabilis Solutions, Inc. Q2 FY2020 Earnings Call

Greetings, and welcome to the Stabilis Energy Second Quarter 2020 Earnings Conference Call. Please note that today's conference is being recorded. Before we begin today's call, I'd like to remind everyone that today's conference call will contain forward-looking statements within the meanings of the Private Securities Reform Act of 1995 and other securities laws. These forward-looking statements are based on the company's beliefs and expectations as of today, August 6, 2020. Forward-looking statements are subject to the risks and uncertainties that may cause actual results to differ materially from those projected. The company undertakes no obligation to release updates or revisions to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause these differences is contained in the company's filings with the SEC and the press release announcing the company's results. Investors are cautioned not to place any undue reliance on any forward-looking statement. At this time, I'd like to turn the call over to Mr. Jim Reddinger, President and CEO of Stabilis Energy. Please go ahead.

Thanks, Donna, and good morning, everybody. This is Jim Reddinger, President and CEO of Stabilis. And with me is Andy Puhala, our Senior Vice President and Chief Financial Officer. I would like to welcome you to our second quarter 2020 earnings conference call. It goes without saying that the second quarter 2020 was a challenging quarter for many companies, including Stabilis. We saw both volumes of LNG sold and revenues fall over 60% from the first quarter, which, as a reminder, the first quarter was a record quarter for us. These Q2 results were not unexpected as we discussed the challenges we were beginning to see on our last earnings call. We responded to this decrease in business activity quickly and aggressively by reducing costs, including headcount reductions, salary and other compensation reductions, the capital expenditure freeze and discretionary expense reductions, including travel and consulting costs. However, most importantly, we pivoted our sales team to focus on new market opportunities that provide sales and growth opportunities despite the broader market downturn. We think these efforts have paid off, and we're putting and are putting us in a position to successfully manage through the downturn. In fact, it appears that our activity levels bottomed out in May and are now improving month-over-month. Later, I'll discuss some of the new project wins and opportunities we see that give us reason for optimism about the recovery and validate the growth strategy we've been discussing in our last several calls. But first, I'll turn the call over to Andy for some comments on the financial results.

Thanks, Jim. For the second quarter, Stabilis reported revenues of $5 million, a decrease of 64% versus the $13.8 million reported in Q1. LNG segment revenues were $4 million compared to $12.5 million in the quarter ended March 31, 2020. The sequential decrease is primarily due to a 62% decrease in LNG gallons delivered due to the impact of the COVID-19 crisis, the related shutdowns and the resulting decrease in industrial activity, particularly with our oil and gas-related customers. Normal seasonal factors also contributed to the first quarter, as the first quarter is typically our strongest quarter due to winter peaking activities. George West facility utilization fell to 31%, down from 74% in Q1. Our Power Delivery segment reported revenue of $1 million, down 25% sequentially. Net equity income from our BOMAY joint venture was $0.9 million compared to a net loss of $0.2 million in the previous quarter. Our China joint venture provided a bright spot in the quarter as the JV resumed operations after the shutdown that impacted its results earlier this year. As a result, adjusted EBITDA for the quarter was a negative $800,000, down from the positive $1.5 million in the first quarter. There were no adjustments to EBITDA in the current quarter. Net loss for the quarter increased to $3.5 million compared to a net loss of $1.1 million in the preceding quarter. Moving to the year-over-year results. Revenues contracted by 55% in the second quarter compared to Q2 of 2019. LNG segment revenues decreased by $7.1 million year-over-year due to the crisis. Lower natural gas prices accounted for approximately $300,000 of the reduction. As mentioned previously, the utilization of our George West plant was 31% in Q2, down from 76% in the year-ago quarter. The Power Delivery segment was not included in our prior year quarter as our merger transaction closed subsequent to Q2 of last year. Adjusted EBITDA, as I mentioned, was a loss of $0.8 million in the quarter compared to positive EBITDA of $1.7 million in the year-ago quarter. Net loss increased to $3.5 million from $1 million in the year-ago quarter. We finished the quarter with $7.1 million in cash on hand, which was aided by net dividends received of $1.8 million from our BOMAY joint venture and also benefited from a reduction in net working capital during the quarter. We believe we have adequate cash and access to sources of liquidity to manage through the current cycle. I'll now turn the call back to Jim for some additional remarks.

Thanks, Andy. As I mentioned earlier, although the COVID-19 crisis had a significant impact on our business in the second quarter, we’re seeing some encouraging signs for the future. We have signed contracts with several new Mexican customers since our last call, including a greenhouse and a remote power customer that are both currently taking deliveries of LNG. In addition, we have several new contracts with Mexican customers in the final stages of negotiation that include several mining customers that have the potential to utilize significant volumes of LNG on a long-term basis. In the U.S., we achieved one of our goals for 2020 by securing our first marine bunkering contract that will begin providing technical services revenue immediately and have significant activity beginning in January of 2021. We also signed a multiyear renewal with a major customer for winter peaking services in the Northeast beginning in Q4 of this year. And as indicated in our last call, we signed a contract with a major customer in the aerospace industry that we expect to provide strong LNG volumes later this year and into the future. And we have several opportunities that we're actively pursuing with similar customers. We also recently completed a short-term pipeline interruption contract for a new customer in Texas. Our sales pipeline is strong and growing, and these new contracts and opportunities will significantly broaden our customer base and reduce our reliance on some of our traditional oil and gas-related customers going forward. We're excited about these new opportunities. And although the pace at which we're able to recover to previous revenue levels remains uncertain, we're excited about the future and confident that we'll be able to continue to successfully manage through the crisis as the world goes back to work. Finally, as I mentioned last quarter, our long-term strategy remains unchanged. We seek to become the preeminent small-scale LNG provider in North America by providing superior value and service to our customers. We believe that small-scale LNG will continue to become an increasingly important and growing piece of North America's energy solution. In the short term, we're focused on increasing and diversifying sales, controlling costs and maintaining liquidity. With that, I'll turn the call over to Donna for questions.

Our first question today is from Bill Dezellem of Tieton Capital.

A couple of questions to start with here. When was the last time that George West was operating at 31% utilization?

Good question, Bill. I will have to go back and confirm it for you, but it's probably about 18 to 24 months.

And what was the absolute bottom, low point, and if we measure it on a weekly basis, if that's a reasonable way to do it for George West utilization? And where are you running at today?

Andy, do you have those numbers in front of you?

Yes. As of July, we were operating at approximately 40%. The lowest utilization was around 22% in May.

Great. And then relative to the oil and gas market, I recognize there's not a lot of fracking taking place, but are you finding that there is a preference for e-frac for those instances where fracking is taking place? Or could you talk about that dynamic?

Well, I can talk about it before the shutdown started, the COVID shutdown started, there was a significant momentum towards using e-frac applications throughout multiple basins in the U.S. I don't know that we can really draw any conclusions about during the crisis, given most, if not all, the activity we were seeing going on shut down for a period of time. But there certainly has been significant momentum for the e-fracs moving forward for a variety of economic and environmental issues as well.

Yes. And I guess where I was going with the question, Jim, was now that the rig count has stabilized-ish, are you sensing that the momentum that e-frac had may return, meaning that in the cases where there is a frac job that’s going to take place, that the operator would rather that be done with an e-frac fleet rather than a traditional? Or is it simply too early to know?

I have no reason to think the momentum that the e-frac saw before the shutdown is going to change. So I do think it will continue going forward. Again, it's a better cost alternative in some cases. And it's a better emissions profile in a lot of cases, both environmental emissions, noise, et cetera. So we have no reason to think that change, Bill. Given a lot of the oilfield activity, feels like it's getting ready to gear up in Q3 and Q4, and we are preparing to do that with a few customers. But I don't really have anything more specific than the trends we already saw for you on the e-frac side, which were positive.

We will move back to Bill with Tieton Capital.

I won't follow the 2 question rule anymore. Could you talk about the business in general from March to now, particularly regarding trends, behaviors, and activities? It seems like utilization hit a low in May. What about interactions with prospects? Are there any trends or characteristics you can share based on what you've observed since things started to decline in March?

Well, I think what I'd say, Bill, is downturns are never positive for anyone. But as we've been through a few of these with this business now, in all cases, we've been able to continue pretty significant customer interactions during those downturns, but probably most importantly, we've been able to use them to find new customers and new segments. A lot of the downturns we've been through, including this one, have had significant negative impact on the oilfield sector as we've all witnessed. This one has had an impact on some of the larger industrial sector activity as well. But as I talked about in my comments, one of the things that I'm happy about as we come out of this or worked through it, is we've got a lot more exposure now and some growth with some of the customers we've seen in Mexico. We've got some significant new activity in the aerospace sector and some encouraging new activity now in the marine sector. So we're really seeing the opportunity during this downturn to focus on those new markets, which I think coming out of it as oilfield activity rebounds will just put us on stronger footing for having a larger and more diversified base of business. So from that perspective, it's consistent with other downturns where we've really been able to use it as an impetus to pivot and grow in the new places.

Did you sense at all a lack of interest early on? And I'm thinking March and April, maybe into May, of customers to even have discussions with you as they were trying to figure out their own work-from-home situation? Or did the ongoing conversations pretty much continue throughout the whole lockdown?

I was impressed that most people seamlessly transitioned to working from home. We maintained regular conversations with our customers, and I think that even picked up in early April when the lockdown began. Employees everywhere were quite aware of the need to stay engaged. While order activity may not have increased, discussions with customers were definitely very active. I’ve been pleasantly surprised that we were able to keep that momentum going. Of course, some sectors, like the oilfield, faced their own challenges, but we haven’t really lost contact with anyone.

That's great. And then let's talk about a few of your wins that you referenced in the press release. First of all, the U.S. aerospace customer. Would you talk just to why they need LNG and what it is that they're doing that they weren't able or aren't able to do in, what I'd call, a more traditional sense?

Yes, I'd say that at some point we would like to discuss it further. We are bound by strict confidentiality agreements with these specific customers. However, I can share that there are some intriguing new applications where LNG is being utilized as a fuel for certain activities in the aerospace sector.

All right. The marine bunkering, did we hear you say that significant volumes will begin in January? Or is that when some of the engineering revenues will become meaningful?

We're starting the engineering work now, which involves a lot of engineering, safety, process, procedure, and operational tasks. We expect to begin substantial bunkering events either late in the fourth quarter of this year or in the first quarter of 2021. One of our goals was to secure at least one marine bunkering contract in 2020, so we are pleased to have accomplished this. We will be involved in the development of this project with a major Trans-Pacific shipper on the West Coast, and we are excited about it. They are eager to begin their testing and pilot programs. Therefore, starting next year, we anticipate more significant bunkering activity.

And Jim, given this win, does it accelerate or raise the interest with any other customers? Or is there not a spillover benefit?

Well, we hope it will. I mean there's obviously financial benefits to this. But for us, the biggest win for the future is the expertise we're going to be able to develop in the processes and procedures, the safety procedures and the efficient setup of equipment and operations to bunker large volumes of fuel into marine vessels. So our goal was, both from a revenue perspective to get into marine, but probably more importantly, from an experience perspective, so we can start to grow along with the sector as more and more bunkering activity starts happening.

And is it your sense that there is a fair amount of additional bunkering activity, marine bunkering, under discussion?

Yes. Everything we observe indicates significant changes. Many vessels, including container ships and car carriers in both the Atlantic and Pacific, are either being converted or entering service as LNG-ready, largely due to the global IMO 2020 standards for shippers. We're witnessing this momentum really increase.

And cruise ships, do they fit in that category also?

Yes. There's a number of cruise ships that you can read about in the news that are being converted along Florida's East Coast from Fort Lauderdale, Miami, up to some of the more northern ports there. But cruise ships have been one of the leaders. They get a lot of benefit from the, I guess, the social responsibility and marketing aspect of being cleaner. And they also just get a lot of benefit from the customer experience where you don't have black smoke and soot and all those things happening on the boats.

And it makes complete sense. And are you finding that the cruise ships, because they're not operating now, that they have put these plans on hold as they try to cut their own CapEx? Or is this one of those unique situations where they're moving forward in spite of that?

I don't have the schedule in front of me, but I know many of them or most of them have already made this capital commitment. So I think that, to use the pun intentionally, that ship has already sailed. They've already made those commitments. So that's going to happen.

Great. And may I continue with more questions? Or would you prefer I stepped out?

Operator, is there anyone else in the queue? Or should we keep going with Bill?

You can keep going with Bill.

Great. So let's shift, if we could, to the remote power generation contract in Mexico. Would you please discuss what it is that, that customer is doing? I think I have a bit of an image in my mind, but I don't want to mischaracterize it as I think about it. Would you please talk about it? And then the size also, please.

Yes. Our largest customer in Mexico is utilizing LNG to power generators that are enhancing the power grid. This is being done to help with summer cooling and air conditioning, as well as to provide general support to the grid. We transport LNG from the U.S., cross the border, deliver it to the power generation site, store it there, and then convert it back to gas for the generators. Currently, they are consuming between 3 to 5 truckloads of LNG each day.

And is that a new win? Or do you have a new win in addition to your largest customer?

So it is the largest customer right now, and it is a new win. We've also secured a greenhouse that's using LNG for heating purposes, and that's approximately half a load to a load today. Additionally, we have two other mining contracts that have been verbally awarded and are currently under contract discussions, which could combine to about 4 to 5 truckloads a day. All these together represent significant new volumes into Mexico.

And that's very helpful. The two mining customers, the four to five loads, are those combined or would that be...

That would be combined. That would be combined. They're each approximately 2 to 3 loads a day.

Well, that's fantastic. And for each of those, what's the time frame before the verbal commitment that you have now that would practically turn into volumes being shipped?

Within the next 8 weeks is my anticipation, 4 to 8 weeks.

You believe you could be shipping product at the rate of 2 to 3 loads a day in the next couple of months?

Yes. We've started the technical setup. There's some equipment that needs to arrive at the customers' sites for some of this to happen. But yes, we do believe that it's imminent.

Okay. So these are in addition to then some of the mines that are being proposed and would actually take time for the mining company to prepare the site to actually do the mining. These are actual mines that are working right now.

Yes, they're working now, and they've got power generation, process heat, other needs that they're already running on other fuels that they'd be converting to LNG.

Congratulations on nearing the completion of that effort. I noticed in the Houston Chronicle that you received approval to transport LNG into Mexico by rail. How significant is this, especially considering the recent successes you mentioned?

Yes. Just to clarify, it wasn't specifically Stabilis, but U.S. authorities approved LNG transportation by rail in general. We believe this is a significant development. Clearly, having another mode of transportation can enhance our ability to move LNG efficiently. Some things need to happen first, including capital investment in railcars and in rail-loading and receiving terminals for LNG to make this feasible. However, we anticipate that will occur. We see this as a very positive development, but it will take some time to become a practical alternative.

Great. Okay. That's appreciated. And then would you talk to us about your permitting and site preparation, et cetera, for your plant or plants in Mexico?

Yes. We're still in the queue for that in Mexico. Given some of the shutdowns the government enacted and is still enacting there, that process continues to be a bit stalled. We're working with the agencies and are waiting for them to get back online. I don't have any specific guidance on that right now other than to say it's been delayed due to COVID shutdowns.

And so Jim, would it be fair for us to be thinking about you trucking volumes into Mexico and to supply these wins and in some cases, your margins will be lower just because the trucking distance will be a little bit further than what you would otherwise want, and that will continue until you have these plants up and running? Or do you think that you'll just keep trucking product down and the new plants when they are up and running will be serving all new customers that we aren't even talking about yet today?

Our growth strategy has generally focused on utilizing our distribution capabilities and sales expertise to develop new markets before establishing plants in those areas. We aim to create sufficient volumes in specific regions of Mexico to support a plant. In certain situations, where we have established customer bases, it will make sense to implement a plant in that region. However, due to various factors such as gas and power availability, we may continue to source from third-party suppliers. I cannot provide project-specific margins or details. While the new sales have not been priced to be profitably standalone due to longer shipping distances, establishing plants in these areas would likely lower our transportation costs and enhance margins.

Great. And so finally, if we think about what you've been describing, even if the oilfield does not come back as it appears as though it may in Q3 and Q4, that bottom in May probably holds and volumes continue to grow from this point forward because of the new wins that you have in place, both in the U.S. and in Mexico?

Yes. Assuming no changes in the market, which I cannot predict, we believe we are currently on track for that.

Operator, are we all set with questions?

No. I appreciate everybody being on. And we look forward to having improving results next time we talk next quarter. Thanks much.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.