Stabilis Solutions, Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, before we begin today's call, I would 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 beliefs and expectations as of today, November 12, 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 those 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 undue reliance on any forward-looking statement. I would now like to welcome you all to the Stabilis Solutions Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Jim Reddinger, President and CEO of Stabilis Solutions. Please go ahead, sir.

Thanks a lot, and good morning, everybody. Again, this is Jim Reddinger, the President and CEO of Stabilis Solutions. And with me on the call is Andy Puhala, our Senior Vice President and CFO. Thanks for joining us this morning on our third quarter 2020 earnings conference call. I wanted to start the call by addressing our recent name change. As announced last month, we have changed the company's name to Stabilis Solutions to better reflect our mission and the value we provide to our customers. Stabilis Solutions provides clean, low-cost, new energy solutions, including liquefied natural gas, compressed natural gas, and hydrogen to customers across a wide variety of end markets, including power generation, industrial applications, agriculture, mining, marine, and process heat, just to name a few. Our solutions allow our customers to transition to new fueling and power solutions that reduce their harmful environmental emissions as well as their fuel costs. In many cases, these solutions provide energy to customers who have few, if any, other alternatives. Natural gas and hydrogen will be critical fuel partners for renewable energy sources as the world transitions to more sustainable and less carbon-intensive sources of energy. For example, right now, LNG provides reliable and cost-effective power generation alongside solar and wind power around the world. Stabilis Solutions is a leader in this energy transition. Secondly, the name change helps us avoid any misconception that Stabilis is or is associated with upstream energy companies or the associated challenges around them. Despite persistent weakness in commodity prices, Stabilis' revenues grew by 80% in the third quarter, and the company returned to producing positive EBITDA. This activity was driven by our customers across a diverse set of end markets, transitioning their energy consumption away from polluting fuel oils to cleaner natural gas fuel solutions. For example, during the third quarter, Stabilis supported nearly 100 megawatts of cumulative power generation with natural gas. Stabilis provided these customers and with other customers the ability to transition to cleaner, lower-cost energy solutions. Later in the call, I'll discuss some of the new project wins and opportunities we see that give us optimism about the future and validate our strategy. But before I turn the call over to Andy to discuss our financial results, I'd like to take a moment to thank and congratulate our Stabilis team for their determination and resilience over the past nine months. As we reported on our last earnings call, Stabilis was not immune to the shutdown in economic activity that happened in the second quarter associated with the COVID pandemic. Throughout all of it, our team remained tough and determined, made sacrifices for the nation, and responded heroically to our incredible increase in business activity. It's a tremendous team, and I'm proud to work alongside them. Great work, everyone, and thank you very much. Now I'll turn the call over to Andy to discuss our financial results.

Thanks, Jim. As Jim mentioned, in the third quarter, revenue jumped 80% sequentially to $9 million from $5 million in the second quarter. LNG segment revenues were $7.7 million compared to $4 million in the quarter ended June 30, an increase of 90%. LNG gallons delivered increased 80% to 8.3 million gallons, and utilization of our George West liquefaction facility increased to 48% from a multiyear low of 33% in the second quarter. We saw a recovery with many of our legacy customers, and our revenue was further aided by LNG provided to a large remote power project in Mexico as well as to remote power installations in hurricane-impacted areas of Louisiana. Our Power Delivery segment reported revenues of $1.4 million, up 39% sequentially from the $1 million reported in the second quarter. Although down from Q2, our Chinese joint venture reported another strong quarter with net equity income of $0.6 million. As Jim mentioned, adjusted EBITDA for the quarter returned to positive territory and was $0.4 million, a $1.2 million improvement from the second quarter. The net loss for the quarter shrank to $2.1 million, an improvement of $1.3 million from Q2. Moving to the year-over-year results. Due to the COVID crisis, current period revenues of $9 million were down 14% from the $10.5 million reported in Q3 of 2019. LNG segment revenues were $7.7 million, down 16% from the $9.1 million in Q3 of last year. As mentioned previously, the utilization of our George West plant was 48% in Q3, down from 82% in the year-ago quarter. However, LNG gallons from third-party liquefiers increased by 22% year-on-year due to the geographic mix of our current customers. The Power Delivery segment revenues of $1.4 million were consistent with Q3 of 2019, although the 2019 numbers only included the period from July 27 through September 30 due to the timing of our reverse merger with American Electric Technologies. On a full quarter basis, Power Delivery revenues declined by approximately 40%, primarily as a result of the COVID crisis and a significant devaluation of the Brazilian real versus the U.S. dollar. Net equity income from our Chinese joint venture, as previously mentioned, was $0.6 million versus $0.1 million reported in the two months post-merger in the prior year. Adjusted EBITDA of $0.4 million in the quarter was consistent with the year-ago quarter, and the net loss shrank to $2.1 million from a loss of $3.4 million in the year-ago quarter. We finished Q3 with $3.4 million in cash and continue to believe that we have adequate cash and access to sources of liquidity to effectively fund the company's growth. I'll now turn the call back to Jim for some additional remarks. Jim?

Thanks, Andy. To summarize the call, we're extremely pleased with the recovery in the Q3 earnings from the COVID-related lows we experienced earlier in the second quarter. We're adding staff, particularly customer-facing field service staff, and are making targeted CapEx investments to expand our capabilities to meet the growth opportunities that we see in front of us. Our Mexican business activity is accelerating, and we expect strong growth from that market in the next 6 to 12 months. In the third quarter of 2020, we provided 2.4 million gallons of LNG to a remote power customer in Northwestern Mexico, as an example of some of the opportunity we'd see in the market. We believe this is the largest ever distributed natural gas project in Mexico, and we also believe there are many more projects like it to come in our pipeline. Outside of Mexico, we achieved one of our major goals for the year by securing our first marine bunkering support contract for LNG marine bunkering, and we have already begun to provide technical services to this customer. We believe this strategic contract demonstrates our capabilities in the marine space and will allow us to support additional marine bunkering customers going forward. We're also exploring fueling opportunities with hydrogen, a cryogenic fuel that shares many similar properties with LNG and provides zero carbon emissions. As many of you on the call know, there is increasing focus on this particular fuel. In addition, our sales pipeline continues to be strong. The new contracts we've talked about and the opportunities we see in the pipeline, we believe, will significantly broaden our customer base. Our long-term strategy remains unchanged. We want to become the preeminent provider of clean energy solutions that support the ongoing global energy transition by providing superior value and service to our customers. We believe that small-scale natural gas and hydrogen, along with the associated power generation they provide, are rapidly becoming an increasingly important piece of North America's energy solution. Finally, I want to invite everyone to take a look at our new website under the address www.stabilis-solutions.com. There's a dash between Stabilis and solutions; as we change the name, we launched that to provide easier access to information about the company. And with that, thanks for everyone for being on, and we'll open the call to questions. Moderator, please go ahead and start that process.

And we will take our first question from the line of Craig Shere with Tuohy Brothers.

A couple of questions. One, you mentioned hydrogen; I know it's way down the road. But have you had any discussions with Chart or any technical investigations into the ability to convert small-scale liquefaction to hydrogen, if you have a ready cash source?

Yes. I mean, as you know, Craig, the technology to produce and distribute hydrogen is very, very similar to that used to produce and distribute liquefied methane gas. Our company, in its history, has experience with multiple hydrogen projects, ranging from the science project variety where you're developing new technologies and new equipment and processes to more practical applications. So we've been around hydrogen as a company for some time. As the market stirs around the topic, we've begun to get active with customers who are working on hydrogen as a fuel source, and we're working with all of our partners and equipment suppliers to explore how we either adapt our existing equipment or add new equipment to make sure that we can handle that fuel.

Do you have any estimate for what it might cost to convert an LNG train to hydrogen?

I don't have one for you right now.

Okay. And on this bunkering thing, anything you could share about both the margin opportunity and future growth expectations?

Yes. I mean, our strategy, Craig, is to be in the bunkering value chain, doing a lot of things that we do best in bringing fuel over that last mile delivery to customers and handling a lot of the technical and operational aspects of that. So right now, we're working with a number of companies and a number of ports that are either undergoing testing or trial runs of their LNG marine bunkering processes or working with their partners and customers to convert into it. So right now, I'd say it's more of a business development stage than a long-term contracting stage where the margins in the growth would be more measurable. But from our perspective, we're in the chain and we're conducting the operations, and we'll use that to leverage into longer-term projects once these initial test phase operations are complete.

And we will move next with Bill Dezellem with Tieton Capital.

A group of questions. First of all, I'd like to talk about the remote power contract in Mexico. Would you talk to us about the sales cycle when that contract or business came online? And if it has any finite duration or if it's expected to be an evergreen-type contract?

Sure. We are proud that we were able to respond to an inquiry and have equipment deployed in the field in under two weeks. This was a last-minute request from an organization that recognized the need for extra power generation for some of their peaking operations. We stepped in to provide LNG fuel for this project, which is in a region that will continue to require this support. We are currently working on extending the contract for additional periods.

Jim, did we hear you say the sales cycle was two weeks, like 14 days?

It was a power need that the consumer didn't recognize until late in the process, and we were able to respond very quickly for them.

And so would you be able to discuss what the power is being used for? And how the customer missed that extra use? And to what degree they're able to longer-term have a different source of supply versus wanting to continue down the LNG path?

Yes. I think it's part of the general idea that pipelines often struggle to meet the capacity demands of their customers, especially during peak seasons like winter heating or summer cooling. Different seasonal requirements create challenges, and we deal with them as they arise. In this case, we encountered an opportunity with a very short sales cycle, but we believe it will persist over time. We are now prepared to take advantage of that with some firsthand experience and customer relationships to expand our participation in that program over the next few years.

And we will take our next question from Judson Tuohy with Tuohy Brothers.

I think Craig got most of my questions, but just one more piece on the Mexican business accelerating. Can you sort of talk about the breadth and depth of customers that are driving that and maybe the mix?

Yes. I mean, we're not to be too broad here, but we're seeing it really from a lot of sectors in Mexico. The number one sector we're seeing it from is the operation sector. This could be projects as small as a few megawatts to 30, 40, 50 megawatts, and it can be for customers that have longer-term needs and customers that have shorter-term needs. We're very focused on the power generation side down there. We're seeing a good amount of activity from remote locations, particularly mines and other industrial activities that, for various reasons, are a bit off the grid. Those are sites that are using it for power generation and some process heat along that theme.

Terrific. And then just one more on the hydrogen side; exciting, who are you guys talking to about that? In terms of driving the Monterrey story, what are you hearing in terms of customers that are driving that in terms of timeline? Is it still pretty early stage? Or are you sensing kind of an inflection point in terms of interest?

Yes. I mean, I know that the people that you guys follow and talk to have a whole range of ways they're participating in that segment from technology development to manufacturing and to service. We're really on the solutions or the service side, where customers executing projects will help them with the development and then be on the ground for execution. My sense of the market is, it's obviously got a tremendous amount of interest given the emissions profile. It's got some development to do in terms of getting the cost profile of the production of hydrogen to a place that's more economic. We're participating with customers who are in pilot phases. There are a few pilot programs that are getting ready to kick off, and what we're trying to do, similar to our LNG marine bunkering activity, is to really get boots on the ground and experience with these customers so that we can use that experience to help grow the market around us and bring that to other customers. It's early stages, and we're focused on the execution part of it as opposed to the technology or manufacturing equipment side of it.

We will move next with Warren Ross with BBVA.

Just wondering, is there anything you can share with us about your outlook regarding volume for the rest of this year or into next year, whether it's volume and spreads on the LNG side?

Yes. I think Warren will be better equipped to do that in a few months. As you know, the roller coaster from March to May to July to now November has been pretty significant. We're really happy with the business's intents and purposes back to where we would have expected it to be or where it was last year, roughly. We're just getting back to the point where I think we've got enough visibility to start forecasting. But I would say we were expecting significant growth coming into 2020 before this situation slowed the economy down, and we don't have any reason to believe that, that's changed now that people are getting back to work and starting to use fuel again.

And we have a follow-up from Bill Dezellem with Tieton Capital.

Relative to Mexico, would you please provide an update on the permitting process down there? And what you're experiencing?

Yes. Most of the relevant government agencies have been opened up for a bit now. As you would expect, they've got some backlog to deal with, but they're doing a great job of moving through that. We think that's back to being current with applications that are coming in probably sometime this quarter. So it's back on track.

So the timeline we would expect under normal circumstances; if we're at the starting line now, when are you anticipating that you should have permitting approval, or what do you need to have success with the permit?

I think we're back to where we started at the beginning of the year before the shutdown, which is roughly a six-month process.

Great. And then a couple of additional questions. Can you talk about the temporary hurricane or power projects tied to the hurricane? And then secondarily, on the oilfield completion activity, what are you seeing in terms of opportunity there? I ask the question in the spirit that we've heard some indication that completion activity may be picking up without drilling activity as some of the DUCs are completed. Are you sensing that LNG-powered spreads will come back faster than diesel-powered spreads?

Yes. I think one of the things we've figured out over the last six months is we probably need to get out of the business of projecting what's going to happen in the oilfield. But I think you're right; from what we're seeing, there is better activity coming on, although it seems to be in fits and starts. We have ongoing discussions with the turbine-powered frac operators and service companies as well as the energy companies that are thinking about using them. We're seeing that activity out there. I know we've had this couple of quarters, and we're prepared from a staffing and equipment standpoint to execute as soon as those opportunities arise. We're hoping, as you alluded to, that's going to be coming up soon.

And hurricane?

Yes. The business on the hurricane side; as you know, the Gulf Coast and particularly the western part of Louisiana had a rough hurricane season this year. There were a lot of down power lines and substations that needed to be repaired. We’ve been involved with several power providers over time. In this case, we've been hooked into seven or eight separate locations down there that are producing anywhere from low single digits to 10, 20 megawatts of power to support cities, manufacturing facilities, etc. These projects have been ongoing since approximately September, and we anticipate having as much as six plus more months of work on that as they look to repair the infrastructure there. These are complex, high-service projects for us, but they also provide nice volumes and margins, making it good business for us over the last several months.

Great. And then finally, did we hear you say that business is essentially back now? I'm thinking now in the middle of November to where it was a year ago. If that's the case, that would indicate that business has continued to accelerate in October and November. Just wanting to see if we heard all those pieces correct.

Yes, Bill, I was approximating. Andy went through the exact numbers, but we're back in the ballpark of where we were last year at this time. I think the mix is a little different between plants and production and distribution. But we're back in that same ballpark. We've talked about having some nice performance in the third quarter that we reported, and I'd say that momentum has continued since the end of the third quarter.

It seems that there are no additional questions at this moment.

Great. Well, thanks, everyone, for joining the call, and we look forward to talking again next quarter.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.