Welcome to Stabilis Solutions Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for your questions following the presentation. I would now like to turn the call over to Andy Puhala, Chief Financial Officer. Mr. Puhala, please go ahead.

Thank you, Ashley. Good morning and welcome to Stabilis Solutions' second quarter 2023 results conference call. I am Andy Puhala, 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 second quarter operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at stabilis-solutions.com. Before we begin, I'd like to remind everyone that today's conference call will contain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 and other securities laws. These forward-looking statements are based on the company's expectations and beliefs as of today, August 10, 2023. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. The 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. 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 disclosed 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 will hand the call over to Westy Ballard for his prepared remarks.

Thank you, Andy, and good morning to everyone joining us on the call today. I'd like to begin with a high-level overview of our recent performance, and then I want to move to the really exciting growth initiatives we're working on. Our second quarter results were in line with our expectations and were attributable to the anticipated completion of a short-term marine bunkering contract, usual seasonal activity, much of which has been reawarded to Stabilis for the upcoming winter season, and lower pass-through natural gas feedstock commodity prices. These three components accounted for roughly 82% of total sequential revenue decline. As you know, we generally do not generate margin or incur spot market risk with respect to the price of feed gas, and it is a cost passed directly onto our customers. During the second quarter, we also experienced lower utilization at our Texas liquefaction plant due to changes in the composition of our supplier's feed gas. The new source gas has a considerably different molecular composition resulting in high levels of heavy hydrocarbons not experienced in prior years. These heavy hydrocarbons each have their own freezing point. So as their respective temperatures drop below those points, the heavy hydrocarbons freeze, clogging the flow of methane in the liquefaction process, which in turn disrupts LNG production until you eliminate the frozen hydrocarbons. Unfortunately, many LNG production plants in Texas are experiencing challenges with an increasing combination of nitrogen, heavy hydrocarbons, and other contaminants in their feed gas. During the quarter, we took action to eliminate these issues at our plant, and we are confident the challenge will be fully remediated during the quarter. Strategically, our objectives remain the same: protect and optimize our core industrial business while we accelerate growth into a massive and multi-year marine vessel bunkering and export demand cycle. Fueling the vessels with LNG is in its early stages, given little prior regulatory requirements to use fuels other than widely dispersed marine fuel oil. Historically, only a small number of LNG fueled vessels have been built and put into service. In 2020, the International Maritime Organization changed this, mandating that all vessels lower their sulfur emissions by 85%, requiring virtually every vessel operator in the world to decide on a cleaner approach. The LNG fueled vessels have been the clear leader. Led by the abundance of inexpensive shale gas, the United States enjoys a structural cost advantage over most countries, positioning our nation to become a leader in the fueling of LNG vessels. But given the historically low number of LNG-fueled vessels in service, U.S. LNG bunkering infrastructure, including production, storage, and bunker barging, is in its infancy, meaning that it will take time and considerable capital to fully develop the demand. New vessel construction is an expensive process, generally taking several years. With the IMO's low sulfur mandates still being relatively new, we anticipate that the growth in LNG fueled vessels entering service will begin to positively inflect during 2024. At this time, we expect our addressable market will scale to more than 380 ships, up from less than 70 in 2021. In the meantime, vessel owners and operators continue to evaluate their future LNG-fueled vessel supply chain needs and prospective new trade lanes, and we continue to spend considerable time assisting them in their efforts. Over the last 12 months, we’ve made great progress in our marine strategy as evidenced by our total marine revenue, increasing by more than $16 million to 21% of total revenue versus 5% in the prior year period. While it’s impressive, it’s important to note that growing into a developing and nascent industry can be very lumpy period-over-period, and it’s not always linear. We are confident the overall trajectory will continue to move higher, especially as a significant volume of new LNG-fueled vessels enter the market. Stabilis is uniquely positioned to be the leader in marine bunkering by leveraging our proven business model to expand and optimize our portfolio of owned and third-party assets to drive long-term growth and shareholder returns. While we continue to develop this market, our financial footing remains on solid ground with sufficient cash and liquidity to fund our operations. During the second quarter, we generated $3.8 million of operating cash flow and ended the quarter with total cash and equivalents of $8.1 million, along with a combined $4 million of availability under our bank facilities. As a sole publicly traded small-scale LNG growth platform in North America, there is nothing small about the small-scale LNG growth opportunity. Our growth prospects are exciting, and Stabilis is very well positioned as a long-term growth story and a highly asymmetrical opportunity to invest in a rapidly growing company with a proven and durable business model. With that, I’ll turn it over to Andy.

Thank you, Westy. For the three months ended June 30, 2023, Stabilis reported a net loss of $2.2 million on total revenue of $12.9 million compared to a net loss of $2.2 million on revenue of $23.2 million in the second quarter of 2022, and net income of $1.1 million on revenue of $26.8 million in the first quarter of 2023. Adjusted EBITDA was a loss of $0.1 million in the second quarter versus $1.4 million in the second quarter of 2022 and $3.5 million in the first quarter of 2023. Year-over-year, the Q2 revenue change was largely due to significantly lower gas prices in the current period compared to the year-ago quarter. Our weighted average cost of gas was $2.60 per MMBtu during Q2 versus $7.05 during the same quarter last year. Lower commodity prices accounted for a reduction in revenue of about $4 million. As Westy mentioned, these are pass-through revenue amounts that don’t generate margin in our business. Additionally, revenue was lower by $1.4 million due to the feed gas composition change at our George West plant. Sequentially, the revenue change is due to the lower pass-through commodity prices, which resulted in a $3.9 million reduction. The scheduled completion in Q1 of a large short-term marine bunkering contract, the feed gas composition changes mentioned earlier, and normal seasonal and customer demand variations. As we bridge the adjusted EBITDA variance between the second quarter 2023 and the prior year period, there are several important items to highlight. First, the gas composition changes at our George West facility reduced EBITDA by $1.2 million during the quarter. The composition changes required us to reduce production and led to both rationing for some customers and the substitution of costlier third-party LNG at certain customer accounts. This is a temporary challenge that began at the end of Q1, persisted throughout the second quarter, and should conclude this August when capital investments we have made in gas pre-treatment and scrubbing are brought online at our George West facility. Additionally, we invested in new commercial field technical and support staff and training to accommodate anticipated market growth later in the year and into 2024. Sequentially, the drivers of the EBITDA changes are similar with the addition of the scheduled Q1 completion of the large bunkering contract mentioned earlier. On a trailing 12-month basis through June 30, 2023, the company generated total revenue of $95.2 million, an increase of 16% versus the prior year period. For the same trailing 12-month period, non-GAAP adjusted EBITDA increased 74% to $9.6 million, while free cash flow or operating cash flow less total capital expenditures increased 92% to $5.4 million. Moving to cash and liquidity, in June, we successfully arranged a new $10 million secured revolving credit facility with Cadence Bank, subject to a borrowing base of eligible accounts receivable. There are currently no borrowings outstanding on the facility. We believe the closing of this credit facility in this dynamic financial environment is a testament to our lender relationship and their underlying confidence in our business model. This facility, along with our ability to generate strong operating cash flows from our core business, will provide Stabilis with additional liquidity and greater operating flexibility to further leverage our unique portfolio of LNG and other clean emerging fueling solutions consistent with our stated strategic focus. As Westy mentioned, as of June 30, 2023, Stabilis had total cash and equivalents of $8.1 million together with $4 million of combined availability under our revolving credit facility and our advancing loan with Ameristate Bank. Total debt outstanding as of June 30, 2023, was $9.9 million, resulting in a ratio of net debt to trailing 12 months adjusted EBITDA of 0.2x. That completes our prepared remarks. Ashley, we're now ready for the question-and-answer portion of our call.

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

Good morning. Just in regards to profitability here for the second half of the year, given the significant decline from Q1 to Q2. Could you maybe talk a little bit about what you're expecting in Q3 and Q4 that we should be aware of and the magnitude of the George West facility still having issues through August?

Yes. Thanks, Marty, and good morning. I'll start with the George West question first. We think that we've got a solution for this problem; we're confident of that, and we're in the process of implementing that solution now. So you should expect George West production to return to its historic levels. As I mentioned, that was about a $1.2 million EBITDA drag in the second quarter. If you add that back, we were essentially breakeven before that. So that would be about a $1.2 million change there. Looking at the back half of the year, we're working on some contracts that could provide us significant improvement in the back half of the year. As you know, we don't give guidance, so I really don't want to go into any more detail, but there are some opportunities that we're working on that we are very optimistic about.

Thank you. And for my follow-up, I just wanted to ask maybe if you could go over potential milestones that we should be looking out for regarding some of the growth platforms, whether it would be marine bunkering or space, and maybe timing of potential contracts that provide some support for the capital investments that you're making or announcements regarding the offering of marine bunkering facilities or investments in those. Just maybe milestones that we should be aware of that are potentially out there.

Yes, I think – Marty, good morning, by the way. I think two logical milestones, kind of leading indicators are going to be really what you just mentioned, one of which is capital expenditure. As we mentioned, we've started to invest CapEx in the first half of the year. We've acquired the critical components for a train that would look very similar to our George West facility, whether that train doubles our capacity in South Texas or we elect to build that infrastructure somewhere else, probably in South Texas, but we've acquired that. It was a unique asset, and we got it at a very attractive valuation. We're very excited about that. I think secondly, the second part is also what you mentioned is contracts. We feel like we have had significant and tangible relevant conversations with a variety of vessel owners, vessel operators, brokerage houses, and large trading houses, and many of those are trying to establish their trade lanes. A lot of those vessels aren't coming online, as we mentioned, until next year, but they're trying to lay that foundational work with supply chain and infrastructure. We feel very confident that an award that's material is eminent, but you never know with these things. As we mentioned, as this business and trajectory starts to advance throughout the next few years, that trajectory and success rate will grow. We're excited about that. So I think the two leading indicators for you are as you see us investing in CapEx and OpEx because that's an indicator we're seeing green shoots, and the other is certainly would be an announcement that we have regarding being awarded a contract or several.

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

Yes.

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

Good morning guys. Thanks for the time.

Good morning.

Good morning.

Sticking on the LNG bunkering opportunity there, it seems to be starting to materialize in a really interesting way in 2024 and beyond with the new ships being commissioned. Hoping to get an update there just in terms of how you guys see that playing out for the company from a big-picture standpoint. From a contracting standpoint, does that market operate differently than how most of the business is done today from a size and duration standpoint? Or how are you guys thinking about kind of pursuing that opportunity as it relates to the contractual aspects?

Yes, both great questions. I think when you think about the first question, you have to really consider the addressable market and the perspective we have on that. We are looking for as sticky a revenue base as possible. More specifically, think about those vessels that are making regularly scheduled calls into port and need fuel. So think cruise ships, car carriers, and container ships. Those are all likely candidates that we are considering. We want to own our backyard. We've got infrastructure already in place close to the Gulf of Mexico. That is not really as much a container ship or a car carrier, but you do have cruise lines coming in at the port of Galveston, alongside a large chemical and tanker market for us to be really excited about as well. Different ports have unique permitting and regulatory environments, but rest assured we've been doing this for a few years. We have a strong technical, engineering, and legal capability on our staff, along with memorandums of understanding across most of the Gulf of Mexico ports. We have operated in California and the East Coast, giving us a strong appreciation of how to get licensed and approved in those markets. The center of those contracts is varied. We said and announced that we did a six-month contract that was completed in the quarter, but these contracts could last a year, 2, 3, or 4 years. There is currently no specific model given the nascent nature of the industry. However, if people are going to spend large amounts of capital for small infrastructure with heavy demand, many are going to want some guarantees and offtake. We are no different. One unique aspect of our business is our mobile asset fleet, allowing us to test trial certain markets on the East Coast or Gulf Coast to establish trade lanes. Revenue and margin opportunities differ compared to our industrial business, which is significantly larger in this context. On any given day, we're transporting 100,000 to 200,000 gallons to a customer location, while marine bunkering could be anywhere from 500,000 to 1 million gallons. Longer contract tenors are expected, contrasting with the more spot market we have in our core business. That was a lot to unpack, so I hope that helps.

No, that’s great. I appreciate the thoughts there. My follow-up is on the capital side. I think you mentioned it was about $5 million in the quarter. A lot of that was for the critical components for this new train, which sounds a little opportunistic. Correct me if I’m off-base there. Any expectations for CapEx pacing going forward? Is it more opportunistic as some of these contracts potentially materialize or any kind of color you can provide about go forward capital plans?

Yes, I think it's a blend. This was certainly opportunistic. However, we know this asset and configuration very well, and the price was attractive. We strongly believe this will roll out into a market in a fairly short time. When you think small scale versus world scale, those are 10-12 year FID to liquid flowing, while ours is anywhere between 9 to 15 months. We can modularly roll this out quickly. The asset has optionality for us, and I have strong conviction we’ll build this train quickly. Regarding CapEx moving forward, we have a predominant amount of OpEx with great operating leverage. CapEx will scale, and we're being thoughtful about our capital structure, estimating costs ranging from $50 to $350 million based on opportunities. We aim to ensure some commercial value before we begin allocating significant capital on this. That's why we are actively engaging with vessel owners and operators as they establish their infrastructure needs. Ultimately, there's an enormous wave of demand approaching, and we believe that our footprint, mobility, and experience will position us at the forefront. Additionally, remember that Chart Industries owns 8% of our company and we maintain a strong relationship with them as they are one of the premier manufacturers of this equipment. On the supply chain and capital expenditure side, we believe our costs will be competitive and that our turnaround and supply chain needs will be expedient. This is how we envision it.

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

Yes, thanks.

We will take our next question from Barry Haimes with Sage Asset Management. Please go ahead.

Thanks so much for taking my questions and apologize if I missed something earlier. My line was going in and out; I had to redial in. But I had a couple of questions. One is I don’t think I heard you guys talk about the space market. Could you give an update on how that’s been in the quarter and what the outlook is for the year? And then second question is in terms of the export license, any plans to take advantage of that? Where does that stand? Thank you.

Yes, no, thank you. Good morning. The space business is incredibly exciting from our perspective. We’ve been servicing that market since early 2018, and it’s a relevant element of how we think about things. I’ll say this: it really has a similar complexion to our industrial business; it’s quite lumpy right now with many fits and starts. Until we have more consistency with longer-term contracts, it’s a challenge to think strategically about. However, it’s relevant and exciting. Over ensuing years, we expect to see a larger and broader audience of customers, but right now, there’s mainly one large consumer of our goods and LNG. We expect that to change as others come online, and their rocket programs launch more satellites. Now moving to the export license; we are very bullish on that. We believe the structural elements of supply and demand in the European continent are real. Last year, it didn’t materialize due to a massive build of inventories, and the winter was fairly mild in Europe. We don’t think that mild weather is sustainable. Eventually, it’s going to get chilly in Eastern Europe, leading to drawdowns in those inventory levels. It’s hard to predict exactly when this will happen, but we are engaging significantly with offtake to supply our molecules and third-party molecules to fill that market. We’d like to secure two or three-year contracts on this, though there is some hesitance from offtake due to full storage tanks in Europe and the expectations of another mild winter. So it’s a waiting game, but we are incredibly optimistic about this aspect of our business as it develops.

Got it. And then one last question. I didn’t catch what equipment you bought related to the new train, and if you discussed either the cost of that and the total costs associated with this next train? Thanks.

Yes, so the train was very similar to the one we have in our South Texas location. We understand the asset incredibly well and know how to deploy it. We plan to put that in South Texas to expand that capacity, potentially doubling it. This train also offers us the flexibility to position it elsewhere in the market for infrastructural needs. As for cost, it constituted a considerable portion of our spending, likely exceeding 70% of our CapEx for the first half of the year. Overall, the all-in cost for this expansion is around $40 to $45 million, expected to yield expedited returns on capital.

Right. And what’s the expected timeline for when it will start producing LNG?

Yes, the timeline for this project has a little variability due to the supply chain, but it's estimated to be anywhere between approximately 9 to 15 months. I'd like to provide a more precise date as we start installing that train and communicate further updates, but that's a general range for your consideration.

Great. Thanks very much. Good luck going forward.

Yes. Thank you. Thanks.

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

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

Thank you. And this concludes Stabilis Solutions' second quarter 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day.