Stabilis Solutions, Inc.

Welcome to the Stabilis Solutions third quarter 2023 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. So that others can hear your questions clearly, we ask that you pick your handset up for best sound quality. Please be advised that today's call is being recorded. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Andy Pujala, Chief Financial Officer. Mr. Pujala, please go ahead.

Good morning and welcome to Stabilis Solutions' third quarter 2023 results conference call. I'm Andy Pujala, 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.

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 multi-year 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 two-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 on a firm and rateable basis and will initially be provided from our own liquefaction facility in Texas and delivered to the clean Jacksonville and 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 energy 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-fueled vessels coming into service within their existing trade lanes and for 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 a future location and could rapidly scale thereafter, given the module expansion characteristics of small-scale LNG. This purchase by no means is an instate, 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 advantage proximity in the Gulf of Mexico, we can utilize it to bridge LNG bunkering demand for Gulf of Mexico vessels until such time that we've 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, rateable, and term 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 on our corporate website at www.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.

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 30th, 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 30th was $10.6 million, resulting in a ratio of net debt to trailing 12-month adjusted EBITDA of 0.7 times. 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 and 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.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick your handset up when posting your question to provide optimal sound quality. Thank you. Our first question will come from Martin Malloy with Johnson Rice.

Good morning and congratulations on making progress here on the marine bunkering side. Just wanted to ask about the opportunity here going forward on the marine bunkering side. It looks like from your presentation that you posted and then some of the projections for Carnival bringing on additional LMG-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?

Yeah, so if you take it really on a macro level and you look at just the kind of some of the inflection points, you've got a really large inventory of LNG-fueled vessels that really start to become commissioned the latter part of next year. And so leading up to that, you've got an enormous wave of procurement teams that are trying to better establish their trade lanes into the United States market, knowing that they want to bunker LNG fuel, given its characteristics in the United States. And so as those ships start to come online, I suspect that you'll see more and more demand increase throughout the middle to end of next year. Now, the problem you have here is you've got a bit of a logjam. You see you've got inexpensive, secure, reliable natural gas in the United States. You've got what we think is a tidal wave of demand. And so it's incumbent upon us to unlock that infrastructure conduit between the supply and demand, which takes a little time. But we've already taken steps in that direction, Marty. As you know, we finalized the purchase of yet another train. But I think it stands to reason through 2024, we will start putting even more capital to work across certainly the Gulf Coast, but also in other key ports on the East and West Coast. I don't have a real good feel for the time, but rest assured, that 100,000-gallon plant that we acquired, it's not an end state for us. It's really merely a beginning.

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. Okay.

Yeah, 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 like to think that under 24 months, we'll have that facility up and running producing LNG waterfront or close there for bunkery vessels.

Great. I'll turn it back. Thank you for taking my questions. Yep.

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

Good morning, guys. Good morning. Wes, 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, you know, kind of fulfilling the base business given this influx of demand you have.

We don't really talk about kind of utilization of that plant. I will tell you this, that the construct of customer historically has been much more spot. And so utilization could really be all over the place. Higher some days, weeks, and months and lower others. Some of it's, you know, time of year. dependent. And so the real key here is to take that asset, which is a great asset, a strategic asset, especially given its capabilities and its geographic location and proximity to the water, to take that and really graduate away from that spot market to that of more rateable term contracts, which then drives, you know, very, very high utilization and consistent predictable utilization from that plant. But I think the real story is leveraging our operational capabilities within that plant and infrastructure and supply chain and expanding that infrastructure and supply chain across ports across America to capitalize on really the bunkering opportunity. So it's a shift at similar or higher margins, but also rateable, predictable in that plant, but also hope to replicate that on the water as well.

Great. Okay. Thank you. And I'm 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 you 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.

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 for 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 dig 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.

Great. Sounds good. Thanks for the time, guys. Yep. Thanks.

Once again, if you do have a question, you may press star 1 on your telephone keypad at this time. We'll take our next question from Barry Haynes with Sage Asset Management.

Thank you, guys. Had a couple 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 mention it in the press release, so we'd just love to get the update there.

Love the space business. Been involved in fueling rocket ships since 2018. So it really fits in. You know, when we got the two buckets at Stabilis, we've got that industrial business. And then, obviously, we've got our marine bunkering business. It really falls in that industrial business. That business is... is exciting because the vast majority of those propellant companies are really migrating more and more to LNG as a fuel source. And so we think that there are blue skies ahead. The challenge now is it's still a bit lumpy. But we think that as LNG or methane becomes more scarce in some of these markets, that that paradigm changes to a bit more predictable and rateable contract construct, similar to these marine-type contracts. But we love it. It's a great business for us. It will continue to be a great business for us, we think. And I hope that in future calls I've got the ability to talk more specifically around it as there's better predictability and visibility on it. But it's something that we are very excited about.

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

I'd say that from kind of nine months, if you go back even two years, you know, that business has been anywhere from, 2% to 10% to 5%. So it's anywhere between 2% to 10% of our business on any given year. I know that doesn't give you an exact, but it's currently between 2% and 10% of our total revenue. And I think that it stands to reason that we ought to have more than that moving forward as these contracts get more predictable and more sustainable.

Okay, great. The second question is a different topic. New Fortress happened to mention yesterday on their call that they were looking to divest an asset in Miami, a liquefier that produces 100,000 gallons a day. Is that something, you know, given the amount of Christmas that's going on in and out of Miami, that would seem like a natural asset for you? Is that something that you're aware of and have looked at and might fit, or not?

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, I think, act upon them.

Got it. And then my last question, if I could throw in one last one. The sea 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 recur from time to time, or was the fix sufficient that you put the issue behind you? Thanks.

Yeah, so good question. I'd say on macro, when you're looking at just natural gas in general, it contains a lot of different elements, obviously, whether it's nitrogen or heavy hydrocarbons, other pollutants, acid. There's a variety of things that make up the composition of natural gas. And so when you build these liquefaction plants, you have pretreatment capabilities, and you try and – weigh the probabilities of certain molecules that are entering the system. But at the end of the day, when you've got a lot of different molecules and carbon atoms entering your system, they all have different freezing points. And some of these are at parts per million that are very, very hard to pick up on some sort of monitoring system. And so what you want to do is you – and what we did is we took a step back and said, what is a more comprehensive technology that we can put into our facility – that puts its arm around a wide array of possible pollutants and other matter that comes into that feedstock. We think we've done that, as evidenced by if you look at kind of historical utilization, which we don't disclose, but we're running at a very high utilization rate right now. Now, feed gas composition changes in Texas and across the U.S., and so it doesn't mean that this has entirely mitigated it, but we think we've got world-class technology that we've spent some money on to enhance that capability, to ensure that we have done everything we can to mitigate this, and we are unbelievably excited about the results and optimistic that this certainly is behind us. And so stay tuned.

Great. Thanks so much for the update. Appreciate it.

Yep.

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.

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

Thank you. This concludes today's Tableau Solutions Third Quarter 2023 Earnings Conference Call. Please disconnect your line at this time