Stabilis Solutions, Inc. Q3 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to Stabilis Solutions Third Quarter 2022 Earnings Conference Call. Joining us today are Westy Ballard, President and CEO; and Andy Puhala, Chief Financial Officer. 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 beliefs and expectations as of today, November 3, 2022. 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 statements. Please also note that the company 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 the company's earnings press release. Today's call is being recorded. At this time, I'd like to turn the call over to Westy Ballard, President and CEO of Stabilis Solutions. Please go ahead, sir.

Thanks, Mike, and good morning, everyone. After a strong first half of the year, we continue to build significant momentum here, and it appears that people are starting to take notice. Our third quarter really begins to highlight the success of our strategic initiatives and several catalysts persist, like the increasing difficulties of expanding greenfield natural gas pipeline infrastructure in the U.S., the European energy crisis, and the rapid shift of new industries transitioning to clean fuels. Given our ability to leverage our commercial, technical, and operational capabilities, we think our strategy puts us in a fantastic position to address these challenges now and beyond. As I've said in the past, we are not trying to reinvent the wheel here. But instead, we are leveraging our proven and durable business model and competencies to address significant demand from existing and new frontier growth opportunities in a world eager for cleaner, safer, secure, and reliable fuels. Turning to the quarter, we delivered solid third quarter results, as revenue remained strong across a variety of industries. When I lump together what I'll call our industrial group, industries other than aerospace, utilities, mining, and the oil and gas sectors were healthy contributors. In the U.S., more than half of the natural gas pipeline infrastructure has aged considerably as it was built prior to 1970, and with this aging infrastructure and a limited sanctioning of greenfield pipeline expansion, we believe even more industries will continue to face challenges in having access to natural gas. This aging of existing infrastructure and lack of incremental pipeline capacity are a few of the key drivers of our growing demand across America. Our platform has tremendous optionality to remain a meaningful participant in its growth. Whether expanding our existing liquefaction infrastructure or investing in new greenfield infrastructure points across the U.S., our considerable operating leverage and technical capabilities allow us to do so quickly and with modest increases in overhead. We really like this portion of our business and its growth prospects across various industries and geographies. I'm also excited about our progress in important growth markets like aerospace and marine bunkering. These markets are estimated to combine for more than $15 billion in addressable opportunity globally, and they are expanding rapidly. Over the past year, we spent considerable time organically developing these markets and our efforts are beginning to pay off, as during the quarter, aerospace and marine bunkering combined for a healthy 23% of total revenue. To put that in context, they combined for 5% of total revenue in all of 2021. Throughout the rest of the year, as we enter 2023, we will look to build on the momentum that we've created. New projects are in active discussions, and we are actively evaluating a variety of infrastructure investments across several U.S. regions to expand our reach and capabilities. One great attribute of the small-scale market is how we can deploy capital in modular phases with short lead times to market, resulting in exciting growth and return on invested capital. During the quarter, we also announced that the U.S. Department of Energy granted us a 28-year license to export domestically produced LNG, equivalent to roughly 52 billion cubic feet of natural gas annually across the globe. The DOE's approval not only provides us with the ability to assist in the world's energy needs but is yet another tool for us to facilitate the world's addition of cleaner energy sources over the long term as well. Exportation of LNG, in which we are approved, has significant barriers to entry and requires considerable capabilities. We feel we are advantaged to do this given our unmatched ability to aggregate our own and third-party LNG supply, our robust asset base to bring it to the last mile to export vessels, and our highly sophisticated operational and technical team to ensure suitability, licensing, permits, and execution. I'm excited about the prospects here and the direction they are heading, so please stay tuned. I've often said that while our current core competency, LNG, is our starting point, not our end state, over time, we expect to leverage our platform to introduce additional clean fuel sources to our customers. We anticipate them as a complementary blend with our core LNG fuels and, in other instances, as potential standalone solutions. Some end markets are expected to be earlier adopters, and rest assured, we will be thoughtful regarding prospective markets and applications along with a careful understanding of external factors that may assist in our efforts like the recent U.S. climate legislation. While I'm incredibly enthusiastic about our growth prospects, I'm also pleased with the profitability in the quarter, resulting in solid adjusted EBITDA and positive net income from continuing operations. Much of this is through our relentless efforts to optimize our core industrial group's operation, which will further solidify our position. We are having a very good year, and given the growth demand for clean energy sources, we feel our market position as a leading provider of virtual natural gas pipelines through the last mile across the U.S. Our expansionary efforts in new and exciting sectors, our ability to export LNG abroad, and our growing efforts to introduce additional clean fuels to our customer base all afford us numerous levers in order to drive tremendous franchise value. Now let me hand it over to Andy.

Thank you, Westy, and good morning, everyone. For the quarter, we reported record revenues of $25.8 million, an increase of 12% sequentially and 45% above the same quarter last year. Net income from continuing operations was $1 million in the quarter compared to a $2.1 million loss in the second quarter and a loss of $4.6 million in the third quarter of last year. These results are particularly notable, as the third quarter is traditionally not our strongest quarter, associated with winter peaking, and it generally provides our strongest results in Q4 and Q1. The year-over-year improvements are the result of both more gallons of LNG delivered and higher rental and service revenues related to the expansion of our marine bunkering and aerospace businesses that Westy mentioned in his remarks. Additionally, we are seeing the results of our pricing and cost reduction initiatives that we have been discussing over the past few quarters. Net loss, including the results from the discontinued operations, was $0.8 million compared to a loss of $2.2 million in the second quarter and a loss of $4.6 million in the same quarter last year. Adjusted EBITDA, a non-GAAP measure, was $2.3 million in the quarter, a 59% increase compared to the second quarter and a 65% increase compared to the third quarter of last year. Operating income was $0.8 million, aided by a new marine bunkering customer deposit in the quarter. We ended the quarter with a historically strong liquidity position of over $12 million, including $11.1 million of cash and $1 million of remaining availability on our advancing line of credit with Ameristate Bank. Along those lines, we are also in discussions with prospective lenders to establish a more conventional credit facility, which will add additional liquidity as we continue to expand our business. One final thing to note is the divestiture of our Brazilian business that we closed earlier this week. The business provides electrical systems and services, primarily to the Brazilian oil and gas market with a history of delivering high-quality products and services. We looked hard at the attributes, and after careful review, we determined that this business was no longer a strategic fit with our vision moving forward. It is not a big financial impact on our company, and as a result of the decision to exit, the results of our Brazilian operations have been shown as a single line item under discontinued operations, net of tax, in our third quarter and year-to-date results and comparative periods in our press release. While we don't give formal earnings guidance, the outlook for the remainder of 2022 is positive. With that, that concludes our prepared remarks, and I'll turn the call back to Mike to open the line for questions. Thank you.

The first question comes from Martin Malloy from Johnson & Rice.

Congratulations on the strong quarter, and particularly the strong operating cash flow generation during the quarter. It's great to see. My first question was just on the milestones we should look for in terms of undertaking a project or projects to expand the LNG liquefaction capacity. Obviously, the demand—the picture that you painted is very strong. You've got the export licenses in hand. International LNG prices are elevated. What should we look for in terms of progress towards expanding liquefaction capacity?

Thanks, Martin. I think a couple of things. First of all, we are at a pretty high level of capacity with our two liquefaction plants today. So that certainly is one consideration. But I think the other, and I've been pretty vocal about this, is I want to continue to de-risk this as much as I can. In doing so, I've got to put some more commercial meat on the bone. We have made great progress in the third quarter, as evidenced by our revenue from some of those growth drivers. I think as we continue to work with varying degrees of tenure, that will further inspire us to start putting money into the ground not only in the expansion of our George West and Port Allen facilities but also in aspirations more broadly geographically in a variety of costs. So I think we're there now, but a couple more of those types of commitments would be an appetite for us to start putting capital to work.

Great. And the next question, I just wanted to ask about—you mentioned that marine bunkering deposits. Can you provide what kind of industry that customer is involved with to put that deposit down? And maybe talk about what you're seeing on the marine bunkering side and opportunities there?

Well, obviously, we're incredibly bullish on the marine bunkering business as a whole; and again, not just along the Gulf Coast, but on both the East and West Coasts. When you think about the world of marine bunkering, there are three applications. The first is container ships; the second are cruise lines; and third are the roll-on roll-off car carriers, which provide a much stickier revenue base, with much more predictability and consistency in their bunkering activities, much more interested in utilizing LNG in the U.S. So, this happened to be a client of ours who was obviously a contributing factor to the third quarter revenue weighting that had agreed to prepay, which allowed us to have a bit of working capital to ensure that this project was funded properly. And so that's obviously contributed to our cash balance.

Great. Congratulations on the quarter. I'll turn it back.

Our next question comes from Liam Burke from B. Riley.

There are multiple projects there that look like you've got very nice opportunities. How are you prioritizing the projects? Is it speed to market? Is it the competitive environment? Or how are you looking at the prioritization?

Well, certainly, when you look at our three buckets—we've got the industrial group, our aerospace, and our marine growth strategies. Each one presents itself in a very different manner. The addressable market in the industrial group is probably $1 billion or $2 billion in the U.S. If you think along aerospace and marine lines, that’s about a $15 billion to $16 billion addressable market globally. When we think about prioritization, we think about where we can most rapidly generate returns on invested capital. We will look through a lot of different lenses: pricing, speed to market, how quickly we can build out infrastructure to support those endeavors. We'll evaluate the tenor of contracts—whether they are short-term or mid-term—and what are the implications with that. All of this is underpinned by ultimately generating a palatable return on capital. While it's hard for me to pinpoint what project will move to the front of the line, to the extent that we can rapidly deploy capital and generate incremental margins that are sufficient, that’s how we will think about it. The last thing is sustainability. The longer the contract, the better for us.

Sure. No, that's perfect, thank you. The other question I had is what alternative fuels over and above LNG do you see having the most promise longer term?

Yes. Let me talk about that because everybody has their own theories about what’s going to prevail as we think about this energy addition—or some call it transition, I call it addition. When we think about fuels, we think first about those companion fuels, which fuels are most compatible with LNG. It's important to note that we're not doing this in a vacuum. We are responding to inquiries from our commercial relationships about RNG, other biofuels, hydrogen, methanol, and ammonia, and our ability to aggregate that with LNG. We are spending a lot of time in those four or five different areas. Hydrogen, ammonia, methanol, RNG, and other biofuels are the key early suspects that we're entertaining.

We now hear from Bill Dezellem from Tieton Capital.

First of all, what was the utilization of the two plants in the quarter?

In Port Allen, it was a little bit lower, in the 70% to 71% range. We had some unexpected mechanical challenges at our Port Allen facility that have been rectified. That brought utilization down in the quarter.

And Westy, your line cut out when you gave the George West number. What was that?

It was 87% utilization in the quarter.

And was that based off of 100,000 gallons or based off of where you have historically been able to run it up?

Off of 100,000.

Great. Thank you. Relative to the kind of the fracking, electric frac, and frac sand opportunity. What are you seeing in that market today? I know you have less of an emphasis than maybe the company has had in the past, but it seems like there's a pickup in the oilfield now.

Yes. We’re really participating in two areas in that market: one is obviously in South Texas, and the other is up in the Mid-Con or Rockies. It's incredibly strong, both from a volumetric basis in gallons and our margins in that business. We've had to work hard to bring those margins back in line to offset some inflationary headwinds in that business. It performed strongly in the first half of the year and was also strong in the third quarter.

And do you see that building from here? Or has it reached what you think is a nice steady rate?

I like where we are, and I say that because if I had a heavier weighting in that market, then I’d start to get nervous. I’d also probably have to have some dedicated CapEx because expanding to other regions is not something I’m overly inspired to do. I like our positioning of having the ability to deliver some of our George West molecules in the South Texas market, but also source third-party molecules in other regions where I don't have liquefaction infrastructure. Caveat that by saying if there are opportunities in that market where I don’t need to put balance sheet assets in play, and can effectively source LNG from third parties without any balance sheet involvement, then we'll take a hard look at that too.

Great. And then can you talk in some detail about the new export license opportunity?

Yes, I’d like to. We looked at this in the spring and thought about the commonality and liquefaction capability that is certainly in the U.S. We thought, is there a way to take advantage of the short-term energy dilemma in Europe, but also the longer challenges we think they will have. Could we utilize our resources, capabilities, and technical expertise to do so? We thought, yes, why not? We spent a lot of time working with the Department of Energy to get licensed for exportation, which we announced in September. Understand that you don’t just do that easily; there are challenges and barriers to entry to do it. You need a commercial capability to source the molecules, liquefaction capabilities, and supply chain logistics to take it to the last mile of the export vessel. Additionally, a robust technical and permitting capability is required to obtain permits and licenses with Coast Guard, Fire Marshals, and conduct waterway feasibility studies. There’s a considerable amount of time, energy, and cost that goes into this. We have, over the years, had that in place already, making this an elegant way for us to leverage what we have to export. We were authorized to export just shy of 52 billion cubic feet a year, and we are working hard with various prospective clients who reached out in response to our announcement. Nothing to report right now, but stay tuned.

When do you anticipate first shipments?

It's hard to say, and you've got volatility in the European gas market, but many inbounds are thinking more long-term. They are not exclusively focused on this winter or a late cold snap in Europe. I hope by the first quarter or first half of the year, we will have considerable opportunities, as I can say there has been a voracious appetite for inquiries about partnering with us to offtake our gas for Europe.

And those inbound calls would be coming from European end market customers, is that correct? Or other intermediaries?

Both. We are getting inquiries from end market customers as well as intermediaries. Some have excess capacity and ship capacity. Rather than having vessels tied up in Rotterdam or elsewhere in a European port, they are exploring the notion of bringing it over to us. This isn't world scale; we're talking between 5,000 and around 20,000 cubic meter type vessels. There's significant interest in end-market offtake, as well as from intermediaries. I'd say both.

Our next question is from Barry Haimes with Sage.

I had a couple of questions. One is the Inflation Reduction Act. As you've looked at it, I wonder if you could talk a little bit about where that could possibly impact you, if at all? Second, one follow-up question on your discussion we just had on export license. Where do you see the ability to export your own LNG, which is to say, how much of your production is in effect committed to customers versus unencumbered and how might that change over the next year or two? Finally, I wonder if you could just talk a little bit about the fourth quarter in terms of how we ought to think about it. I think you mentioned it seasonally tends to be a little bit stronger. I presume capacity utilization on liquefiers should be a little bit better given the mechanical problems you had. Just any other moving parts in the fourth quarter we should consider?

Yes. Thank you. I'll tackle this sequentially. On the IRA, we think about it in two buckets. First, regarding the 45V, which is the clean hydrogen production tax credit, that won't be relevant to us today. But as I mentioned, we will expand our capabilities to have a broader alternative clean fuel offering, either as a companion or stand-alone. Hydrogen is one of those areas. The second is the 45Z, which is the clean fuel production credit of $1 per gallon based on some emission factor. With the vast legislation, we think there's a lot of opportunity. Additionally, there is interesting initiatives from our Texas politicians in Congress and the Senate that we've noticed. Those two areas, 45V and 45Z, are the ones we'll start looking closely at for potential meaningful impact. On the export license, a lot of our volumes are part of the calculation—not only current volumes but longer-term offtake agreements. We can expand our pre-existing infrastructure as necessary. Many of our customer relationships at our two facilities haven’t been long-term contracts; they have been spot. However, we are organizationally trying to establish these longer-term agreements with our Port Allen and George West facilities. To the extent someone wanted to take a longer contract and export internationally, we could do that pretty easily. Regarding the fourth quarter, it's traditionally a strong quarter for us due to peak shaving activity in certain markets. Our business in general has various revenue streams that allow us to generate revenue consistently throughout the year. Our industrial group services the oil and gas market, mining, and agriculture, while other levers like marine bunkering have different dynamics. Overall, we expect a strong fourth quarter and a solid projection into 2023. While we don’t give guidance specifically, we are in the process of thinking beyond 2022.

That was great. If I could just do one quick follow-up on bunkering. Could you talk about how many bunkering customers you had in the quarter? How based on your conversations, how that might change in the next two quarters?

As we move forward, we’ve had a handful of customers in the quarter. However, I expect that to increase considerably. You have shipping lines themselves, large IOCs, large trading houses, and ship brokers as key customer touchpoints. The financial arbitrage between U.S. bunkering versus international is staggering. In terms of raw numbers, there were about 90 or 91 vessels at the end of 2021 that will grow sixfold in the next three years. We are growing our business rapidly, which is reflected in the revenue contribution from bunkering in the quarter. While there will be some bumps, the trend is certainly going in the right direction.

Sir, there appear to be no further questions in the queue. Do you have any closing comments you would like to finish with?

No. Thanks, everybody, for participating in our call today. We look forward to updating you on the progress and many exciting initiatives throughout the quarter. We'll talk soon.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.