Stabilis Solutions, Inc.

Good morning, ladies and gentlemen, and welcome to Stabilist Solutions' third quarter 2022 earnings conference call. Joining us today are Wesley Ballard, President and CEO, and Andy Pujala, 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 Stabilist 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 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 cleaner 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. In turning to the quarter, we delivered solid third-quarter results as revenue remained strong across a variety of industries. And what I'll lump together and call our industrial group, think industries other than aerospace, utilities, mining, and the oil and gas sector for 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 the 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 bands across America. Our platform has tremendous optionality to remain a meaningful participant in its growth. Whether expanding our existing liquefaction infrastructure, investing in new greenfield infrastructure, across the U.S. Our considerable operating leverage and technical capabilities allow us to do so quickly and with modest increases in overhead.

Needless to say, we really like this portion of our business and its growth prospects in multiple industries and geographies.

I'm also really 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've spent considerable time organically developing these markets, and our efforts are beginning to pay off as during the quarter, aerospace and manufacturing combined for a healthy 23% of total revenue. And 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 modular short lead times to market, resulting in exciting growth in 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 and a volume 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 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 the manner 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 the last mile to export vessels, and highly sophisticated operational and technical team to ensure suitability, license permits, and execution. I'm excited about 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 complimentary blend with our core LNG fuels and, in other instances, as potential standalone solutions. Some end markets are expected to be early-year adopters than others, and rest assured, we will be thoughtful of prospective markets and applications along with a careful understanding of external factors that may assist in our efforts. like the recent US climate legislation. While I'm incredibly enthusiastic about our growth prospects, I'm also pleased by 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 groups operation, which will further solidify our We're 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 nitrogas 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 levels 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 that 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 quarter 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 costs were $2.8 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. 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.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please take off your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.

And our first question comes from Martin Malloy from Johnson & Rice.

Congratulations on the strong quarter, particularly the strong operating cash flow. generation during the quarter. It's great to see. My first question is just on the, what are 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, it's 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, Marty. Good morning, by the way. 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 And in doing so, I've got to put some more commercial meat on the bone. And we have made great progress in the third quarter as evidenced by 3% of our combined revenue and some of those growth drivers. And I think as we can with varying degrees of tenor, that will further inspire us to start putting money into the ground, not only in expansion of our George West and Port Allen facilities, but also You know, we have aspirations more broadly geographically in a variety of coasts, and so Greenfield as well.

So I think, you know, we're there now, but I think a couple more of those types of – – be an impetus for us to start putting capital to work.

Great. And the next question, I just wanted to ask about – you mentioned marine bunkering deposit. What are you seeing on the – is that a – I don't know if you can provide what kind of industry that that customer is involved with to put that deposit down and maybe kind of 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 east and west coasts. And so when you think about really the world of marine bunkering as it means to us, there's kind of three applications. The first is those container ships. The second are cruise lines, and third are kind of those I'll call row-row, or the roll-on, roll-off car carriers. A much stickier revenue base, much more predictability and consistency in their bunkering activities, much more interested in in the U.S. And so this happened to be a client of ours that was obviously a contributing factor to the third quarter revenue weighting that agreed to prepay, which allowed us to have a little bit of working capital to make sure that this project was funded properly.

And so that obviously contributed to our cash balance. Great.

Thank you. Congratulations on the quarter. I'll turn it back.

Thanks, Marty. Okay. Our next questioner comes from Liam Burke from V. Riley.

Thank you. Good morning. Morning. There are multiple projects here that look like you've got very, 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, you know, when you look at kind of the three, I'll call it our three buckets, we've got an industrial group, We've got our aerospace and we've got our marine kind of growth strategies. And each one of those present themselves in a very different manner. And so, you know, the addressable market in that kind of industrial group is probably a billion or two in the U.S. If you think along the aerospace and you think along the marine lines, that's kind of a $15, $16 billion addressable market globally. And so when we think about prioritization, we think about where we can most rapidly generate returns on invested capital. And so we'll look through a lot of different lenses. A lens will be pricing. We'll look about speed to market, how quickly we can build out infrastructure to support those endeavors. We'll look at tenor of contracts. Are these, you know, short-term? Are they mid-term? Are they long-term contracts? And what do they actually do with that? But all of this is kind of underpinned by ultimately generating a palatable return on capital. And so it's hard for me to kind of pinpoint what project is going to move to the front of the line, but to the extent that we can rapidly deploy capital, generate incremental margins that are sufficient and make sense, ultimately resulting in returns on capital. That's how we'll think about that. I think the last thing is sustainability. We obviously, the longer the better for us. Because it obviously gives us a little bit of backlog and a little bit of certainty and consistency in earnings versus kind of these shorter tenured contracts, which we like and can be very financially impactful. But, you know, they're tradeoffs, right?

Sure. No, I was looking for specific projects. I was looking for what you were looking for in a project, and 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?

Yeah, let me talk about that because everybody's got their own theories about what's going to prevail as we think about this energy addition. Some call it transition. I'll call it addition. And so when we think about fuels, we think about, first of all, those companion fuels. What fuels are most compatible with LNG? And I think it's important to note that we're not doing this in a vacuum. This is really coming from inbounds from our commercial relationships, inquiring about you know, RNG and other biofuels and hydrogen and methanol and ammonia and our ability to aggregate that with LNG. And so we're spending a lot of time counting those four or five different areas in hydrogen and ammonia and methanol and RNG and other biofuels and how that could be complementary. But also, are there other areas for us to expand our offerings, maybe not as a complement to partnership or as a kind of a standalone opportunities, and we're evaluating that. So I think those four or five are kind of the key early suspects that we're entertaining.

Great.

Thank you.

Yep.

We now hear from Bill DeZellum from Teton Capital.

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

So in

And in Port Allen, it was a little bit lower. It was kind of in the 70%, 71% range. And we had some unexpected mechanical challenges at our Port Allen facility that had been rectified. And so that brought that 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 100,000. Great.

Thank you. And relative to the fracking, electric frack, and frack sand opportunity, what are you seeing in that market today? And 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 oil field now.

Yeah, and so we're really participating in two areas in that market. One is obviously in South Texas, and the other is up in what's called the Mid-Con or Rockies. Still very strong. It's actually incredibly strong, not only from a volumetric basis in gallons, but also we've got really, really strong margins in that business. We've had to really work hard. to get those margins back in line to offset some of those inflationary headwinds. That business still was strong 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've got a heavier weighting in that market, then I start to get nervous. And then I'm also going to probably have to have some dedicated CapEx because I'll have to expand to other regions, which is not something that I'm overly inspired to do. So I like our positioning of having the ability to deliver some of our George West molecules in that South Texas market, but also source third-party molecules in other regions where I don't have liquefaction infrastructure. Now, caveat that by saying if there are opportunities in that market where I don't need to put balance sheet assets in play and I can just effectively just through my commercial efforts source LNG from third parties without any balance sheet involvement, then we'll take a hard look at that too.

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

Yeah, I'd like to actually. And so we looked at this kind of in the spring and put our heads together and thought, There's a lot of different commonality in a liquefaction capability that is certainly in the U.S., but we thought, is there a way to also take care of kind of the short-term energy dilemma in Europe, but also longer-winded challenges that we think they're going to have, and could we utilize our own resources, capabilities, and technical expertise to do so? And we thought, yeah, why not? And so we spent a lot of time and energy over a pretty long-winded period of time working with the Department of Energy to get licensed to have an exportation capability, which we were granted as we announced in September.

But understand that you don't just kind of do that.

Emphasize enough the challenges and barriers to entry to do that, because not only do you need to have a commercial capability to source the molecules, you've got to have your own liquefaction capabilities to also have LNG to export. But then you've got to also then from there have the supply chain and logistics wherewithal to take it all the way to the flange, that last mile of the flange of the ship. But it's one thing to do that. You've then got to have, I think, a very robust technical and permitting and licensing capability to get permits, licensing with Coast Guard, fire marshals, waterway feasibility studies. I mean, there's an amount of time, energy, and cost that goes into this. And we've, over the years, just by virtue of our platform, kind of already had that in place. And so, we thought this was going to be a pretty elegant way for us to leverage what we already had to export this stuff. And so, we were authorized to export just shy of 52 billion cubic feet a year, which we're working very, very hard with a variety of prospective clients who have reached out to us as a result of our announcement. And so nothing to report right now, but stay tuned.

When do you anticipate first shipments?

It's hard to say. And you've got some volatility, obviously, in the European gas. But I think a lot of the inbounds we have are thinking more long term. And so they're not necessarily thinking about this winter or some sort of late cold snap in Europe. I think they're looking at what are the challenges that European gas markets are going to face over the kind of the long haul. And so I'd like to think kind of first quarter or first half of the year, we'll have considerable meat on the bone, if you will, commercially and talk to the market and express to you all. And say is there's been a pretty voracious appetite of inbounds of people inquiring about partnering with us to to offtake our gas over to Europe.

And those inbound calls would be coming from European and market customers, is that correct, or some other intermediaries?

Both. In-market customers as well as intermediaries. You've got some that have some excess capacity and ship capacity, and rather than having vessels tied up in Rotterdam or somewhere in a European port, They're entertaining the notion of bringing it over to us. And you're talking kind of, this isn't world scale. This is anywhere between five and call it 20,000 cubic meter type vessels. But there's quite a bit of interest in market offtake, but also intermediaries. So I'd say both.

Great. Thank you for the time and taking all the questions.

Yeah, thanks so much.

Our next questioner is Barry Hines with SAGE.

Thanks so much. Thanks, Circuit Quarter. And a couple 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, you know, how much of your production is, in effect, committed to customers versus unencumbered, and how might that change, you know, over the next year or two? And then 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 that seasonally tends to be a little bit stronger. I presume capacity utilization on the liquefiers should be a little bit better, given the mechanical problem that you had, and just any other moving parts in the fourth quarter we should be thinking about. Thanks.

Yeah, no, thank you. I'll tackle this kind of as sequentially as I can, but on the IRA, there's kind of two buckets that we think about. One is when you think about the 45V, which is that clean hydrogen production tax credit. That's not going to be relevant to us today, but as I mentioned earlier, We're going to continue to expand our capabilities to have kind of a broader alternative clean fuel offering, either as a companion or standalone, and certainly hydrogen is one of those. And so I think the 45V is one area that we'll certainly think about, and the other is the 45Z, which is the clean fuel production, which is basically a dollar per gallon times some sort of emission factor. But when you think of the large S of this, $360 to $370 billion, legislation, we think there's certainly a lot of opportunity. We also think when you think of some of the narrative around some of our Texas politicians in Congress and the Senate, we think there's also interesting initiatives that they've narrated around. So I think those two, 45V and 45Z are areas that we'll start to look closely at and how we could potentially have those be meaningful for us. I think as it relates to the DOE, I'm sorry, remind me on the DOE about

Yeah, on the export license, the question was, could you sell some of your own volumes? So, in effect, how much of that would be unencumbered and available for export versus committed to customers, and how might that change over the next year or two?

Yeah, so the answer is a lot of our volumes, and that certainly is part of the calculation. Not only current volumes, but if we got some longer-winded offtake agreements, then we'd certainly expand our pre-existing infrastructure. I'll tell you that one of the challenges we've had and one of the things that I want to change is a lot of our customer relationships in our two facilities have not been long-term contracts. They've been effectively spot. Now, there is some consistency around that, and we're also organizationally trying to change that to get kind of longer-term off-take agreements with our Port Allen and our George West facilities. But so to the extent that somebody wanted to wanted to take a longer-winded contract and export internationally, we could do that pretty easily with our pre-existing facilities, given the nature of those contracts, how they're more spot. And then, as I've mentioned to repeat myself, we can also very quickly deploy capital in a modular fashion to expand those facilities in George West in a little over a year. So there's a lot of levers we can pull with our own molecules, with our own to export internationally aside from, you know, those third party. And then lastly, fourth quarter, one of the things I love about the fourth quarter is, you're right, it is traditionally a pretty good quarter for us. We get some peak shaving activity in a couple of markets. But what's important also to note is it's just our business in general. And when you kind of compare the two buckets, the world scale guys, they're sending millions of metric tons annually in kind of 30-year contracts and large capital investments. to market, whereas we have a lot of different revenue streams that we can utilize to generate capability and revenue, not only in the fourth quarter, but throughout the year. And so think about this industrial group that's servicing the oil and gas and peak shaving and mining and ag and food industries, to name a few, but also other levers in marine bunkering, which have very different dynamics than that industrial group of ours. dynamic in marine and industrial. And when I mean different dynamic, I mean not only the commercial approach, but technology, the equipment, our field technicians, some want it revaporized, some don't, some want it in a liquid form, some don't. So there are a lot of different for a pretty solid fourth quarter as well. And hopefully, you know, the same as we project out into 2023, we don't give guidance, but but we're kind of in that process of thinking about what's beyond 2022. So I don't know if that answers your question.

Yeah, that was great. If I could just do one quick follow-up on bunkering. Sure. Could you maybe talk about how many bunkering customers you had in the quarter, and then, you know, based on your conversations, how that might change in the next, let's say, two quarters?

Yeah, I mean, I think as we move forward, We've had, I don't know, a handful of customers in the quarter, but I firmly expect that to increase considerably because you've got really four touch points with a customer. You've got certainly the shipping lines themselves. You've got the large IOCs who have large trading desks themselves. You've got the large trading houses of the world who are moving molecules and uh, on a daily basis. And you've also got the ship brokers. And so you've got really four customers out there who are. And the financial arbitrage and the U S bunkering versus, uh, internationally is, is staggering. Moreover, if you look at kind of just kind of raw data and, and the markets in which we're looking at and bunkering call it that, you know, container ship, uh, cruise line slash, uh, you know, car carrier. There are about 90 or 91 of those vessels ending 2021. In the next three years, there's going to be about six times that number of vessels. And I'm not – and in Asian shipyards. And so we are growing that business rapidly as evidenced by the percentage of revenue contribution in the quarter from bunkering. And we think that that should be exponential. It's not going to be linear. There'll be some bumpiness, but it's certainly heading and trending absolutely in the right direction.

Great. Thanks so much. Appreciate it.

Yep.

Sir, there appears 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 what I'll say, many exciting initiatives throughout the course.

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.