Stabilis Solutions, Inc.

Welcome to the Stabilis Solutions fourth quarter and four-year 2023 results conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your 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 others can hear your questions clearly, we ask that you pick up your handset for best sound quality. 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, you please go ahead.

Good morning, and welcome to Stabilis Solutions' fourth quarter and full year 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 fourth quarter and full year 2023 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 certain 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, March 7, 2024. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. 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 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 remarks.

Thank you, Andy, and good morning to everyone joining us on the call. Let me start by thanking our employees for their many contributions during what amounted to a historic year for Stabilis. Our success was a collective effort that culminated in our first full year of profitability since becoming a public company. While our full year profitability was an important milestone for our entire team, we remain in the early stages of a multi-year value creation story. You see, not only are we building a profitable, clean fueling solutions platform of scale, we're at the forefront of emerging blue sky sectors characterized by significant opportunities for sustained asymmetric growth. And as we look across the competitive landscape here domestically, we believe we are the only company in the small-scale LNG universe that has built the infrastructure, operational and technical capabilities, and customer relationships capable of advancing an increasingly sophisticated growth platform that further enhances our unique value proposition and competitive moat. Looking back over the progress we made in 2023, there were several highlights worthy of note, including the following. Commercially, we continue to shift our business model from commodity spot sales toward longer duration, take or pay contractual revenue. We believe this approach ensures further optimization of our asset base and increases the visibility of cash flow generation, positioning us to opportunistically invest in the people, systems, and infrastructure required to support future growth. In our marine business, we made measurable strides where we completed a six-month LNG bunkering contract in Port Canaveral, Florida, and conducted multiple LNG bunkering operations for a large container carrier in the port of Long Beach, California. In December, we commenced our previously announced multi-year marine bunkering contract with Carnival Corporation in Galveston, Texas. 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. Our relationship with Carnival is an important use case that further solidifies our position as a premier provider of comprehensive and scalable marine LNG fueling solutions in the market. Revenue from our marine customers in 2023 represented roughly 14% of total revenue, and our outlook for 2024 has marine revenue increasing to roughly one-third of total 2024 revenue. Beyond Carnival, over the last two years, 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 fuel container ships, cruise ships, and offshore supply vessels. And our team's efforts during that period have been impressive, with marine revenue growing at a compounded annual growth rate of 122%. Looking ahead, our marine strategy will focus on expanding our capabilities directly to the waterfront of high-traffic ports across the U.S. In doing so, we will continue to optimize our portfolio of owned and third-party supply sources, infrastructure, and logistical assets to provide comprehensive and scaled solutions to current and future customers. Along those lines, operationally, we continue to enhance our logistical capabilities to become the only small-scale LNG bunker provider capable of delivering multiple modes of delivery to our bunkering customers, whether that be bunker barge to vessel, truck to bunker barge, or truck to vessel across all three U.S. coastal markets. This operational and geographical flexibility affords our current and prospective customers the ability to validate a variety of trade lanes throughout the U.S., knowing they will have a reliable fuel supply with Stabilis. Throughout the year, we're also the beneficiaries of strong activity across our other diverse end markets, primarily led by aerospace, electric utilities, mining, and oil and gas sectors. Within the aerospace sector, our high purity methane continues to become the preferred fuel for space rockets, resulting in sales volumes of LNG to aerospace customers of approximately 3.4 million gallons in 2023, or 7% of total volumes for the year. Entering 2024, we are seeing a significant increase in quoting activity that points to a positive demand inflection within both our marine and aerospace markets. Given these favorable underlying demand conditions, we expect that by mid-2024, our two own liquefaction plants will effectively be sold out for the remainder of the year and well into 2025. So this begs the question, now what? In answering that question, it's important to remind everyone that our proven ability to rapidly source LNG at scale from our extensive supply network to meet ongoing incremental growth in customer demand is while we proactively evaluate a variety of opportunities to expand our assets and operations. On that note, allow me to share a few comments on our capital allocation over the last year, and we are focused entering 2024. In 2023, we deployed more than $7.8 million toward growth-related investments in our marine capabilities by acquiring the critical components for a new LNG production train and associated storage and equipment for waterfront expansion. Even after this significant level of investment in our marine business, we ended the year with more than $11 million of cash and availability under our credit facilities to fund our ongoing operations and a net leverage ratio of 0.6 times 2023 adjusted EBITDA. Looking ahead, we intend to further optimize our existing asset base and supply chain while prioritizing scalable investments in incremental new capacity and infrastructure for capable of supporting demand inflection within our marine, aerospace, and other diverse end markets, both in the U.S. and abroad. To accomplish this, we are routinely evaluating a variety of prospective sources of capital with heavy emphasis and focus on those partners that know our industry, our company, and recognize the significant upside potential in our operating model. Importantly, our decision to proceed with new infrastructure investments will correspond directly with our demonstrated ability to secure long-term, rateable offtake agreements that de-risk our investment over a multi-year period. With that, I'll turn it over to Andy.

Thank you, Westy. Let's move to a discussion of our fourth quarter and full-year performance, together with an update on our balance sheet and liquidity exiting 2023. Our fourth quarter 2023 results reflect 18% sequential revenue growth and the first quarter of profitability since Q1 of 2023. During the fourth quarter, our George West plant returned to full production rates, and that, combined with several new projects, resulted in a strong sequential performance. During the second and third quarters of 2023, operations at our George West facility were impacted by a series of investments we made to enhance our ability to utilize a wider range of feed gas stock. With this project work reaching completion in the third quarter, our George West facility operated at 95% of capacity during the fourth quarter and continues to operate at a similar level into the first quarter of 2024. We generated $1.3 million of cash from operations in the fourth quarter and $6.7 million for the full year. This strong cash generation helped us fund $10.3 million of total capital investment through the year while maintaining our strong liquidity position. At December 31, 2023, Stabilis had total cash and equivalents of $5.4 million, together with $5.6 million of availability under our credit facilities. Total debt outstanding as of December 31 was $9.4 million, resulting in a ratio of net debt to trailing 12-month adjusted EBITDA of 0.6 times. Given the recent activity in some of our higher growth target end markets, we are actively considering potential avenues for capacity growth. Our current liquidity position and balance sheet provides us with the optionality to pursue select organic investment as we meet an inflection point in demand for our solutions. As we look out over the coming years, the exponential growth opportunity for our business may warrant further capital investment beyond what our current balance sheet can support. For such investment, we are actively evaluating multiple pathways for financing, but our top priority in doing so continues to be protecting and maximizing shareholder value. That concludes our prepared remarks. Operator, please open the line for questions.

The floor is now open for questions. 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 up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question comes from Martin Malloy with Johnson Rice. Please go ahead. Good morning. Congratulations on the strong fourth quarter and all the progress that you made in 23. The first question, you know, just want to follow up on some of the topics that you touched on in your prior remarks on growth and potential multi-year contracts out there. Could you maybe help us with what kind of milestones we should look for that you would need to have before you pulled the trigger on expanding liquefaction capacity on the contractual side, whether it be marine bunkering or aerospace. And then on the aerospace side, I guess, what's the term out there that people are looking for in terms of LNG supply from a contract standpoint?

Yeah, thanks. Good morning, Marty. I think the way to think about this, these two buckets, one the marine and the other aerospace, I'll start obviously with the marine in that I think we've been pretty clear that as we think about capital deployment, we're not averse to putting money to work speculatively. We did that in the third quarter when we bought some of that first train and the associated equipment for almost $8 million of expenditure in marine. So we're comfortable with that. But I think for us to really deploy scalable dollars, we're going to want to have some more commercial meat on the bone and making sure that we've got a comfort level with term and rateability for some of these marine contracts. We're in a variety of discussions across multiple ship owners and operators. And if you just look at that tidal wave of demand, in 2023 and now into 2024, we've got over 500 ships as an addressable market, and that's up twofold from just two years ago and 15 times from six years ago. So this market has got a massive, massive demand, and so we're being thoughtful in these discussions. And so we'd like to have some more certainty, rateability before we start announcing the expenditure. And so look for that, but we're not afraid to also do some on spec as we demonstrated in Q3 of last year. I think on the space side, those contracts vary. I think that as we think about those contracts, they can be not dissimilar to marine. They can be anywhere from, you know, six months to two years to five years. And certainly we're working diligently to have those as rateable and long-term as the economics and operations make sense. So that's really... really how you should think about the airspace side of it.

Okay. And then for my follow-up question, just wanted to ask about operations at George West. I know you made some investments in 23 to kind of pre-treat some of the inlet gas. And it looks like from the fourth quarter results that things are, the utilization's doing very well and everything. But could you just maybe talk about how those investments are playing out in the utilization? Sure.

Sure. Yeah. So I think if you go back and look at kind of mid-year last year, we're in kind of the 40s and 50% utilization. That was some of the disruption that happened. We spent not a lot of money, but around a million dollars to go ahead and rectify that. And we want to be thoughtful in our approach. And I'm proud to say that as well in our rearview mirror. It doesn't mean that we're not, you know, other things won't happen. We don't foresee anything that have or will happen. And so I think the way to think about that is very high, kind of mid-90 utilization right now. That will ebb and flow based upon predetermined downtime for maintenance and the like. But that plant has in fourth quarter and continues through certainly the first part of 2024, operates in that mid to high 90% range. It's firing on all cylinders, and we're really excited about that.

That's great. I'll turn it back. Thank you very much. Thanks, Marty. Thank you. Our next question comes from Barry Haynes with Sage Asset Management. Please go ahead.

Thanks very much for taking my questions. First of all, I wanted to clarify, the money spent on growth capital, was that all marine bartering equipment, or was some of that long lead time on that? One of the time items for the new train that you've talked about in the past.

Yeah, so it's a little of both. It was another 100,000-gallon, the critical components to another 100,000-gallon train. That's, you know, in a small-scale world, it's modular. And so we could theoretically put it anywhere. Right now we have sight lines on moving it to the water for marine bunkering. It doesn't have to, but right now that's the intention. but also part of that $7.8 million was marine bunkering associated equipment with some pumping skids and some other hard items that further facilitate the bunkering of ships. And so you could look at it as all marine bunkering or maybe that train, if an opportunity comes up, since it's a very modular system, we could move it elsewhere for airspace or the like. Does that answer your question?

Yeah, so following up – what would be the timing of the new train coming on?

Yeah, the timing is going to be predicated upon kind of the earlier question that we talked about with Marty Malloy. And that's really just the cadence of contracts. As you think about really two big drivers for this company, the aerospace industry, as well as the marine industry, those are kind of nascent blue sky markets and sectors. And so they're in their infant stages of growing. So Understandably, those sales cycles take just a little bit longer to build out within a new market. And so we've had considerable success along the marine front and space front, frankly, with the work we've done in Florida, as well as California and, you know, now the Gulf of Mexico. We think that pace of play in marine picks up. We think the pace of play in space picks up. Trying to put definitions around that, if that's in the next two months or six months or nine months, it's hard to say. But if you just look at the – you know, in marine, the total number of ships, that's 500 ships now. Three years ago, it was 200 ships. And five years ago, it was 31 ships. And so we think that just the inertia in play now is going to inure to our benefit. But it's hard to put an actual timeline on that. But we're aggressively and peddling rapidly in 2024 with a lot of discussions around those topics.

Right. And then – so once you have contract coverage and you make the decision to go forward – how long would it take to, you know, build and, you know, finish up that train? Just, you know, how many months are we talking about roughly?

Yeah, once we have the contracts on and we disclose that, it's anywhere between 12 to 18 months. It just depends on the critical components. For that first train, it would probably take us, I don't know, 14, 15 months from the time you say go. If we were starting and had to order new components, it might take 18 to 24 months. But the beauty of it is, unlike the world scale, this can be a very quick shot in the arm. Also, I think another way to think about this is we've got a critical vendor that's also a large shareholder of our company, and that's Chart Industries. They're a logical provider of a lot of our products. are capex. And so I think, you know, we would like to get and think that we've got some favored nation relationships there as well over anybody else. And so it could be, as I mentioned, 15, 16, 18, 24 months. It all depends on the scale and location.

Great. Thanks. That's so helpful. And then just one or two others on different topics. You talked about the movement to contract from spot. Can you give us a rough feel for what that ratio was, contract to spot, 23 versus 22? And then if you have any sense for this year. Thanks.

Sure. So I think that when you think about our assets, 2022 was predominantly, if not holistically, spot. 2023, the vast majority of that was spot or short-term, think six months or shorter type contracts. I think as we go into 2024 and into 2025, think kind of 18-month to four-year type contracts.

And that would be for like what percent of your volumes in 2040 do you think would be under a contract like that versus continued spot business?

Yeah, so the variability is around our assets versus third party. Third party is a variable, but I'll just speak kind of with our own balance sheet assets and our own plans. I would say that our goal is to have 100% of our assets under some sort of term rateable contracts, whether that's you know, one- to four-year-type contracts, versus in 2022, 100 percent of that revenue was all spot, and the vast majority of it in 2023 was all spot. So, what we're doing is we're pivoting from a spot, inconsistent, unpredictable market, and we're pivoting to consistent, better visibility, better backlog, better planning, better planning because we've got better visibility and sightlines on cash flow, and also better margins.

Great. And then, on volumes this year, How much production volume, how many gallons do you think you missed out on because of the issues with George West? So theoretically, you'd get those volumes back this year.

Yeah, Barry, you know, publicly we've discussed it in terms of EBITDA, and we think that the EBITDA impact of that was about $3.2 million, which, you know, crossed both Q2 and Q3. So that's how we're kind of thinking about it.

Got it. And then last question, is there anything happening with the export license that you guys got? Just a little update on whether that's kind of sitting in the shelf or whether there's some plans to utilize that. Thanks.

There are absolutely plans to utilize that. And the good news is it's a 28-year license. The bad news is there's some short-term deliverables that we need to be thoughtful around. I also think it's hard to contemplate the export right now, just given where natural gas prices are in Europe and Asia. But we don't think that's a long-term systemic. And we think that this is a very exciting tool for us to use. in quick fashion should those markets turn quickly. And so we are constantly in discussions with offtake internationally that can flip the switch pretty quickly. But it's a really interesting tool, and we intend to leverage and utilize that not only for demand and power generation and the like industrially in Europe, but also we think that there are opportunities for us to put that on vessels and utilizing U.S. gas, exporting that to European markets and bunkering ships there as well. So it's got a lot of utilization and utility for us.

Great. Thanks so much for that. All the info, and congrats on a great quarter. Thank you. Great. Thank you.

Thank you. Our next question comes from Bill DeZellum with Titan Capital. Please go ahead.

Thank you. In your opening remarks, you referenced the Long Beach Marine Bunkering Project. Would you please detail the circumstances of that for us?

Well, that's a relationship that we are providing engineering, project management, and pumping services to a third party who is then fueling a vessel that's been going on for a couple of years. We also did that for another container ship, a separate container ship company, very similar construct, where we were providing engineering and management services and service personnel to pump LNG into a container ship on behalf of a third party.

And that third party is the shipping company itself, or is there a contractor between the two of you?

yeah so specific to long beach there's a contractor between us that that their responsibility was to source the gas and provide that to the container ship and we were providing the pumping services project management logistics supply chain of picking up their gas and delivering it to their customer That's that construct. I wouldn't look at that as being the business model across all the markets we're expanding to, but in that specific instance, that was the construct.

And, Wesley, tell us about the expertise that you bring to the equation that, in that case, the gas provider themselves was not able to do or why they were not able to do that.

Yeah, I mean, a lot of people really kind of stick to their knitting, and I think we've positioned ourselves as a turnkey provider of starting with the molecule, and it could be our own molecule or we can source that for somebody or somebody else can source it on their own. We're fairly agnostic. But we have the technical expertise, the rolling stock in many instances. We have the engineering, the commercial capability. We've got really kind of the entire infrastructure to provide this, the permitting, the licenses, really all some of that qualitative stuff as well and some of the administrative stuff. We've got a full capability of investment that we've made operationally and with our people and systems to deliver a turnkey solution from production all the way to last mile delivery, whether it's in our industrial business, aerospace business, or marine business. No one else really has that. No one else has that capability, nor they've invested in that capability, nor they've demonstrated the desire to invest in that capability.

Great. Thank you. And in the opening remarks, you also referenced having both plants essentially sold out. And you mentioned a timeframe, and I missed what that timeframe was. Would you please repeat that?

Yeah, so, excuse me, based upon the kind of lens we're looking through, we think that it stands to reason that by midpoint this year and well into 2025, our plants will be effectively sold out, Bill.

And today, the 95% capacity at George West, do you consider that sold out, or do you still see more, you're really wanting to get up to 100% or more?

I want to get up to 100% or more, and I think I'm optimistic that we're going to get there.

Okay, great. Thank you. And so when you take both accounts or both plants and put them together, what would the current utilization be running at, say, in the fourth quarter?

Yeah, if you take George West at kind of the mid to high 90s and Andy Port Allen was kind of in the mid 80s, you know, it's probably the low, low on just kind of weighted average. It's probably the low to low mid 90%.

Great. That's helpful. And Port Allen, does it have much volatility in its utilization? We just don't talk about it much. Or is it similar to George West that it has its level and it's kind of holding there now?

The latter. It's got very low volatility, and we've got a very strong counterparty customer that absorbs the vast majority of that production.

Great. Thank you, and congratulations on a good quarter.

Thanks, Bill.

Thank you. As a reminder, to ask a question, please press star 1. We'll take our next question from Spencer Lehman. Please go ahead.

Oh, good morning. Just a couple quick questions. You know, the current administration in Washington seems to be pretty antagonistic toward fossil fuels, and specifically LNG now. With the foreign exports, how do you see that impacting you domestically and maybe in the future? Are you worried about that?

I'm not overly concerned about it because if you think about it just in general, low natural gas prices – really are our friend. And if you think about the competitive landscape, certainly there may be other operating companies out there, but the real competition for me are oil prices for diesel or propane or, you know, other kind of maybe types of natural gas. And so we don't think it has a dramatic impact, not the least of which we've already got our permitting and licenses for export, so we're already grandfathered in. It might actually work to our benefit to the extent that others aren't successful, but also that's really a world scale phenomenon. And when you think world scale, you're thinking a million and a half to two million gallons of production a day. And so, chineers and tellurians and all these new kind of greenfield projects that are coming on for export, that's going to, I think, more dramatically impact them than really in the small-scale world where we participate, which is, you know, filling rocket ships for space exploration or marine bunkering for large ocean vessels and cruise ships.

Okay, that sounds good. And the second question on hydrogen. There's been a lot of talk lately, and it's starting to heat up, and I guess they're looking for some kind of guaranteed supply if a big usher comes in. Are you guys still pretty excited about the future of hydrogen?

I think we're excited about a variety of things. I don't know, since I joined the company, and I know that there was some thoughts around hydrogen that predates me, I don't know that I'm as bullish on it. I'm not overly bearish, but I think that there are other transitional fuels that are scalable, clean, and readily available and secure and cost-effective. The thing about hydrogen, if it's not green, it's not green. If it's going to be blue or gray, then you're better off utilizing a resource such as clean natural gas. I think the scalability and practicability around green hydrogen is pretty far in the future. So I'm not against hydrogen or methanol or ammonia or any of it. And we'll be thoughtful around not just LNG but other fuels as marriage fuels and our product solutions offerings. But I think hydrogen is one that's a little bit harder for me to get my head around at this point in time, kind of given the visibility that I see.

Gotcha. Okay. But you're ready to go with it if something, you know, breaks out? Yeah.

I think it's absolutely something we would consider to the extent that there's scalability in green hydrogen. And that or methanol or RNG and other kind of alternative clean fuels are, you know, LNG is not an end state for us. It's a beginning. And so all those other fuels would be fair game. But there's got to be, I think, they've got to be clean, they've got to be green, and they've got to add incremental value not only on the ESG side, but also on the scalability as well as cost side.

Okay, got it. Well, Gray, you guys are doing a great job, and good luck.

Thank you so much. Thank you. This concludes the Q&A portion of today's call. I would now like to turn the floor over to Mr. Ballard for his closing remarks.

Thank you, Operator, as well as all of those of you that joined us and for your time and interest in our company. If you have any further questions, please contact our IR team, and we look forward to seeing you on the road. Take care.

Thank you. This concludes today's Stabilis Solutions fourth quarter and full year 2023 results conference call. Please disconnect your line at this time and have a wonderful day.