Earnings Call Transcript - SLNG Q3 2023

Operator, Operator

Welcome to the Stabilis Solutions Third Quarter 2023 Earnings Conference Call. Please be advised that today's call is being recorded. I would now like to turn the call over to Andy Puhala, Chief Financial Officer. Mr. Puhala, please go ahead.

Andrew Puhala, CFO

Good morning and welcome to Stabilis Solutions' Third Quarter 2023 Results Conference Call. I'm 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 third 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, November 9, 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'll hand the call over to Westy Ballard for his prepared remarks.

Westervelt Ballard, CEO

Great. Thanks, Andy. And good morning to everyone joining us on the call. Today, I'm going to begin with a high-level overview of our third quarter financial performance, followed by an update on the exciting strategic progress we've made to further position Stabilis as a leading small-scale LNG fueling solutions company in North America. Our third quarter results were in line with our expectations. We delivered sequential revenue growth of 19% driven by a combination of higher sales volumes, strong demand from the equipment and labor portions of our business and higher-pass-through natural gas feedstock commodity prices. Following roughly five months of reduced production at our George West liquefaction facility in Texas due to changes in feed gas composition, the facility returned to normal production levels at the end of August. The return to these production levels was a result of our corrective actions taken, and we expect these levels to continue moving forward. On balance, the George West gas composition changes adversely impacted our second and third quarter adjusted EBITDA by $1.2 million and $1.3 million, respectively. With that overview, I'll now shift to a discussion of how our teams are working to execute our corporate strategy and specifically the significant progress we're making within the LNG marine bunkering market. In October, we announced a multiyear marine bunkering contract with Carnival Corporation. Carnival is a pioneering global cruise line committed to the decarbonization of their fleet through the adoption of LNG and alternative fuels and the first cruise line to introduce LNG-powered cruise ships in North America. Under the terms of the contract, in addition to LNG supply, Stabilis will provide project management and permitting, field personnel, waterside infrastructure and logistics services to the Carnival Jubilee over the 2-year contract, with an option to extend the contract for up to an additional two years at the request of Carnival. Our supply of LNG will be firm and ratable; and will initially be provided from our own liquefaction facility in Texas; and delivered to the Clean Jacksonville, an LNG barge owned by Seaside LNG. We estimate the contract will utilize between 50% to 60% of our George West liquefiers' existing 100,000 gallon per day production over the life of the contract. Our relationship with Carnival is an important step in further solidifying our position as a premier provider of comprehensive and scalable supply chain and marine LNG fueling solutions and one committed to building a leading marine bunkering platform not only along the Gulf Coast but also at strategic ports across the country. Since entering the LNG bunkering market two short years ago, we have engaged in full project development, management, engineering, support personnel, supply and operational services for the successful delivery of more than 2,000 loads of LNG to container ships, cruise ships and offshore supply vessels along three U.S. coasts. The Carnival contract will significantly increase our LNG marine bunkering business in the Gulf of Mexico and exponentially increases our volumes compared to historical levels. In addition to the Carnival award, we are engaged in front-end commercial, engineering and operational discussions with numerous vessel operators as they continue to evaluate their LNG fueling supply chain needs for their future LNG fuel vessels coming into service within their existing trade lanes and from potentially new ones. In further support of this, during the quarter, we completed the purchase of key components for an additional 100,000 gallon per day LNG train; and continue to evaluate a variety of waterfront locations for its deployment. This purchase represents the initial foundational footprint for future location and could rapidly scale thereafter given the modular expansion characteristics of small-scale LNG. This purchase, by no means, is an end state but instead the beginning of what we feel will be considerable investment in further expanding and optimizing our supply chain capabilities within our portfolio of owned and third-party assets across the U.S. As we actively evaluate expansionary options, it is important to remind everyone of our ability to rapidly source LNG at scale from a variety of third-party suppliers as well as from our George West, Texas liquefaction plant. Given our plant's advantaged proximity in the Gulf of Mexico, we can utilize it to bridge LNG bunkering demand for Gulf of Mexico vessels until we have expanded our footprint. With this asset, not only do we leverage an unmatched capability in the market, but in doing so, a portion of our plant sales mix shifts from predominantly spot offtake customers to customers at similar or higher margins; and for secure, ratable and termed contracts. As part of our growth strategy, we also continue to evaluate strategic partnerships with key ports and industry participants equipped to help support our rapid growth. We are also evaluating potential organic and inorganic expansionary opportunities that complement our strategic focus on clean fuels, new products, services and capabilities. While we are the 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 much positioned as a long-term growth story and a highly asymmetrical opportunity to invest in a rapidly growing company. Before I hand the call over to Andy, I would encourage you to review our new investor presentation which we recently added to the IR section of our corporate website at stabilis-solutions.com. This presentation walks you through our markets and the significant opportunities for profitable growth that we see ahead of us. Andy, I'll turn it over to you.

Andrew Puhala, CFO

Thank you, Westy. I'd like to add a little color to the reported results, particularly as it relates to our balance sheet, liquidity and future capital needs. Stabilis continues to consistently generate positive cash flows from operations and generated $1.5 million of cash from operations in the third quarter and $5.4 million in the first nine months of 2023, which allows us to continue to organically fund our core operations while pursuing these significant strategic opportunities that Westy has discussed. Noteworthy is that, even when our George West facility was operating at limited capacity due to our feed gas composition issues, we were still able to manage the business to positive operating cash flows. Consistent positive cash flow from our industrial business will continue to be one of our key operational priorities as we scale the business. At September 30, Stabilis had total cash and equivalents of $4.9 million, together with $3.7 million of availability under our credit facilities. Total debt outstanding as of September 30 was $10.6 million, resulting in a ratio of net debt-to-trailing 12-month adjusted EBITDA of 0.7x. We have ample liquidity to fund our current operations, and we continue to maintain a conservative capital structure. Additionally, the company has accelerated its capital investments in 2023 as we prepare for several exciting growth opportunities such as the recently announced Carnival bunkering contract. During the quarter, the company incurred $3.8 million of CapEx, bringing the year-to-date total to $9 million compared to only $1.7 million in the first nine months of 2022. The increase is indicative of our growing conviction about the marine bunkering business. Included in the Q3 CapEx was the final payment for the major components of our second 100,000 gallon per day liquefaction train to support demand within our marine business. We're in contact with a variety of capital providers as we evaluate our financing options. We intend to be thoughtful in protecting shareholder value as we finance these expansionary projects. That concludes our prepared remarks. Operator, please open the line for the Q&A session.

Operator, Operator

Our first question will come from Martin Malloy with Johnson Rice.

Martin Malloy, Analyst

Good morning and congratulations on making progress here on the marine bunkering side. I just wanted to ask about the opportunity here going forward on the marine bunkering side. It looks like, from your presentation that you've posted and then some of the projections for Carnival bringing on additional LNG-powered vessels, that there's a lot of opportunity out here. Can you maybe talk about how you see the timing of these opportunities developing?

Westervelt Ballard, CEO

Yes. From a macro perspective, there is a significant increase in the number of LNG-fueled vessels expected to be commissioned toward the end of next year. As we approach that timeframe, we are seeing procurement teams actively working to establish their trade routes into the United States market, with a focus on utilizing LNG fuel. As these ships come online, we anticipate a rise in demand throughout the middle to the end of next year. However, we are currently facing a bottleneck. The United States offers affordable, secure, and reliable natural gas, and we believe there is a surge in demand coming. It is crucial for us to improve the infrastructure that connects supply and demand, which will take some time. We have already begun making progress, including the recent acquisition of another train, and we plan to invest more capital in 2024, particularly along the Gulf Coast and at key ports on the East and West Coasts. While I can't specify a timeline, I want to assure you that the 100,000-gallon facility we acquired is just the starting point for us.

Martin Malloy, Analyst

Okay, great. And just for a follow-up, could you maybe talk about the timing for the additional 100,000 gallons per day, the construction cycle? And I guess it would be somewhat dependent on where you decide to place it in terms of how long the construction might take with what infrastructure might be in place already.

Westervelt Ballard, CEO

Yes, it's hard to say because there are an innumerable number of variables, but I think that it stands to reason that's a 12- to 24-month completion based upon, to your point, the geographical location. But I'd like to think that, under 24 months, we'll have that facility up and running, producing LNG in waterfront or close there for bunkering vessels.

Operator, Operator

Our next question comes from Jeff Grampp with Alliance Global Partners.

Jeffrey Grampp, Analyst

Good morning, guys. I'm curious. Westy, you mentioned in the prepared remarks that this Carnival deal will take, I think you said, 50% to 60% of George West's capacity. I'm just trying to contextualize that a bit more, so wondering what utilization of George West has been in recent history and how you guys think about kind of fulfilling the base business given this influx of demand you have.

Westervelt Ballard, CEO

We don't typically discuss the utilization of that plant. However, I can say that historically, our customer structure has been more focused on spot market transactions. This means that utilization can vary significantly, being higher on some days, weeks, or months, and lower at other times, often influenced by the time of year. The main objective is to take this valuable asset, which is strategically located and has strong capabilities, and shift from relying on the spot market to securing more consistent, long-term contracts. This transition will lead to much higher and more predictable utilization of the plant. The key is to enhance our operational capabilities, infrastructure, and supply chain, and to expand that infrastructure and supply chain across ports in the U.S. to take advantage of the bunkering opportunities. We're looking at a shift to higher margins that are also consistent and predictable, aiming to replicate this approach on the water as well.

Jeffrey Grampp, Analyst

Great, okay. Thank you. And curious if you can talk about the vetting process you went through with Carnival to earn this business. I imagine it wasn't easy but maybe wanted to get a better sense for the rigor there; and also, how you guys think about this maybe being a beachfront, no pun intended, for additional opportunities. Does this provide validation, you think, for other potential partners? Or is everyone kind of independent and needs to do their own process to come to terms with you guys?

Westervelt Ballard, CEO

Well, I'll talk about that really in two buckets. Carnival is a delight. They are a world-class organization, incredibly professional. And as I mentioned in my remarks, they really are a pioneer. And I think that the way they think about things is very in line with the way that we think about things. And so we are delighted to have them as a relationship and honored to have been chosen and selected as somebody who's going to bring a massive supply chain bunkering capability to their needs. So we're delighted. I'll say, if the number of inbounds that our commercial team and me even personally received as a result of this announcement and, frankly, leading up to that is any indication of this as a validating moment for us, then so be it. Because certainly our phones have been much more active, but I think it's important to note that, yes, our phones have been active as a result of this announcement, but if you think back to, call it, about a year ago: We really started in earnest this aggressive and proactive campaign of talking about expansionary, waterfront, full supply chain capabilities for bunkering across America. And the volume of discussions have grown exponentially, so while this is a great validation, I don't know that it was a necessary validation because those discussions have already been in the works. And we're very optimistic that there's more to come not only in the Gulf of Mexico but across a variety of ports in America.

Operator, Operator

We'll take our next question from Barry Haimes with Sage Asset Management.

Barry Haimes, Analyst

Thank you, guys. I had a couple of different questions. I'll just go one at a time. First, could you give us an update on the space business? You didn't talk about it or mentioned it in the press release, so we'd just love to get the update there.

Westervelt Ballard, CEO

We are very enthusiastic about the space business. Since 2018, we have been actively involved in fueling rocket ships, which aligns well with our two sectors at Stabilis: the industrial business and our marine bunkering business. The marine segment falls under the industrial category, and it’s particularly exciting because most propellant companies are increasingly shifting toward LNG as a fuel source. We believe this trend indicates a positive outlook ahead. Currently, the market can be a bit unpredictable, but as LNG or methane becomes less available in some areas, we anticipate a transition to a more stable and reliable contract structure, akin to marine contracts. Overall, we are very pleased with this business and expect it to continue thriving. I look forward to providing more specific updates in future calls as we gain better predictability and visibility on it, but we remain very optimistic about its potential.

Barry Haimes, Analyst

Right. So, I get that it's lumpy, but just to even add a little, if you did nine months this year compared to nine months last year, how do you feel for the growth or the size on the space business?

Westervelt Ballard, CEO

I would say that over the past nine months, and if you look back even two years, that part of the business has ranged from 2% to 10%, or around 5%, so you could say it's typically between 2% and 10% of our business in any given year. While I understand that's not an exact figure, it currently represents between 2% and 10% of our total revenue. I believe it makes sense that we should see an increase in this percentage going forward as these contracts become more predictable and sustainable.

Barry Haimes, Analyst

Okay, great. The second question is on a different topic. New Fortress mentioned yesterday on their call that they are looking to sell an asset in Miami, a liquefier that produces 100,000 gallons a day. Considering the volume of cruise business in and out of Miami, that seems like a suitable asset for you. Are you aware of it, and have you considered whether it would be a good fit?

Westervelt Ballard, CEO

Absolutely. We're very aware, obviously, of the asset. It's a similar asset to the other two that we have. And so I'd say it's safe to say that we're acutely aware of what's happening at New Fortress and some of their aspirations, but I'll say this: We don't want to buy an asset just for the sake of buying one. We want to make sure that it's got a core strategic, impactful, scalable implication on behalf of our shareholders and our constituents moving forward. And so yes, we're aware of it. Yes, we think openly about a variety of things, but they've got to be strategic and they've got to be meaningful for us to act upon.

Barry Haimes, Analyst

Got it. And then my last question, if I could throw in one last one: the feed gas issue at George West. Could you talk a little bit more about what the issue was, what the fix is? And is this something that could reoccur from time to time? Or was the fix sufficient that you put the issue behind you? Thanks.

Westervelt Ballard, CEO

Good question. When considering natural gas, it's composed of various elements like nitrogen, heavy hydrocarbons, and other pollutants. Building liquefaction plants involves pretreatment capabilities to address these components. Each molecule and carbon atom behaves differently, particularly with varying freezing points, and some are difficult to detect in monitoring. We aimed to implement a comprehensive technology in our facility to manage a range of potential pollutants in the feedstock. We believe we've achieved this, as our current utilization rate is quite high. While the feed gas composition can change in Texas and across the U.S., we are confident in our world-class technology that we've invested in to enhance our capabilities and mitigate issues. We are very excited about the outcomes and feel optimistic that this challenge is behind us. Stay tuned for further updates.

Operator, Operator

This concludes the question-and-answer portion of today's call. I would now like to turn the floor over to Mr. Ballard for his closing comments.

Westervelt Ballard, CEO

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

Operator, Operator

Thank you. This concludes today's Stabilis Solutions Third Quarter 2023 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.