Stabilis Solutions, Inc. (NASDAQ:SLNG) Q2 2023 Earnings Call Transcript

Stabilis Solutions, Inc. (NASDAQ:SLNG) Q2 2023 Earnings Call Transcript August 10, 2023

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

Andy Puhala: Thank you, Ashley. Good morning and welcome to Stabilis Solutions second quarter 2023 results conference call. I am Andy Puhala, Senior Vice President and CFO of Stabilis, and joining me today is our President and CEO, Westy Ballard. We issued a press release after the market closed yesterday, detailing our second quarter operational and financial results. This release is publicly available in the Investor Relations sections of our corporate website at stabilis-solutions.com. Before we begin, I’d like to remind everyone that today’s conference call will contain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 and other securities laws. These forward-looking statements are based on the company’s expectations and beliefs as of today, August 10, 2023.

Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. The company undertakes no obligation to provide updates or revisions to the forward-looking statements made in today’s call. Additional information concerning factors that could cause those differences is contained in our filings with the SEC and in the press release announcing our results. Investors are cautioned not to place undue reliance on any forward-looking statements. Further, please note that we may refer to certain non-GAAP financial information on today’s call. You can find reconciliations of the non-GAAP financial measures disclosed to the most comparable GAAP measures in our earnings press release.

Today’s call is being recorded and will be available for replay. With that I will hand the call over to Westy Ballard for his prepared remarks.

Westy Ballard: Thank you, Andy, and good morning to everyone joining us on the call today. I’d like to begin with a high level overview of our recent performance, and then I want to move to the really exciting growth initiatives we’re working on. Our second quarter results were in line with our expectations and were attributable to the anticipated completion of a short-term marine bunkering contract, usual seasonal activity, much of which has been reawarded to Stabilis for the upcoming winter season and lower pass-through natural gas feedstock commodity prices. These three components accounted for roughly 82% of total sequential revenue decline. As you know and maybe aware, we generally do not generate margin or incur spot market risk with respect to the price of feed gas, and it is a cost passed directly onto our customers.

During the second quarter, we also experienced lower utilization at our Texas liquefaction plant due to changes in the composition of our supplier’s feed gas. The new source gas has a considerably different molecular composition resulting in high levels of heavy hydrocarbons, not experienced in prior years. These heavy hydrocarbons each have their own freezing point. So as their respective temperatures drop below those points, the heavy hydrocarbons freeze clogging the flow of methane in the liquefaction process which in turn disrupts LNG production until you eliminate the frozen hydrocarbons. Unfortunately, many LNG production plants in Texas are experiencing challenges with an increasing combination of nitrogen, heavy hydrocarbons and other contaminants in their feed gas.

During the quarter, we took action to eliminate these issues at our plant, and we are confident the challenge will be fully remediated during the quarter. Strategically, our objectives remain the same, protect and optimize our core industrial business while we accelerate growth into a massive and multi-year marine vessel bunkering and export demand cycle. Fueling the vessels with LNG is in its early stages, given little prior regulatory requirements to use fuels other than widely dispersed marine fuel oil. So historically, only a small number of LNG fueled vessels have been built and put into service. In 2020, the International Maritime Organization changed this, mandating that all vessels lower their sulfur emissions by 85%, requiring virtually every vessel operator in the world to decide on a cleaner approach and the LNG fueled vessels have been the clear leader.

Led by the abundance of inexpensive shale gas, the United States enjoys a structural cost advantage over most countries, positioning our nation to become a leader in the fueling of LNG vessels. But given the historically low number of LNG-fueled vessels in service, U.S. LNG bunkering infrastructure including production, storage and bunker barging is in its infancy, meaning that it will take time and considerable capital to fully develop the demand. New vessel construction is an expensive process, generally spending several years. With the IMO’s low sulfur mandates still being relatively new, we anticipate that the growth in LNG fueled vessels entering the service will begin to positively inflect during 2024. At this time, we expect our addressable market will scale to more than 380 ships, up from less than 70 in 2021.

In the meantime, vessel owners and operators continue to evaluate their future LNG-fueled vessel supply chain needs and prospective new trade lanes, and we continue to spend considerable time assisting them in their efforts. Over the last 12 months, we’ve made great progress in our marine strategy as evidenced by our total marine revenue, increasingly by more than $16 million to 21% of total revenue versus 5% in the prior year period. While it’s impressive, it’s important to note that growing into a developing and nascent industry can be very lumpy period-over-period, and it’s not always linear. And we are confident the overall trajectory will continue to move higher, especially as a significant volume of new LNG-fueled vessels enter the market.

Stabilis is uniquely positioned to be the leader in marine bunkering by leveraging our proven business model to expand and optimize our portfolio of owned and third-party assets to drive long-term growth and shareholder returns. And while we continue to develop this market, our financial footing remains on solid ground with sufficient cash and liquidity to fund our operations. During the second quarter, we generated $3.8 million of operating cash flow and ended the quarter with total cash and equivalents of $8.1 million, together with combined $4 million of availability under our bank facilities. As a sole publicly traded small scale LNG growth platform in North America, there is nothing small about the small scale LNG growth opportunity. Our growth prospects are exciting and Stabilis is very well positioned as a long-term growth story and highly asymmetrical opportunity to invest in a rapidly growing company with a proven and durable business model.

With that, I’ll turn it over to Andy.

Andy Puhala: Thank you, Westy. For the three months ended June 30, 2023, Stabilis reported a net loss of $2.2 million on total revenue of $12.9 million versus a net loss of $2.2 million on revenue of $23.2 million in the second quarter of 2022. And net income of $1.1 million on revenue of $26.8 million in the first quarter of 2023. Adjusted EBITDA was a loss of $0.1 million in the second quarter versus $1.4 million in the second quarter of 2022 and $3.5 million in the first quarter of 2023. Year-over-year, the Q2 revenue change was largely due to significantly lower gas prices in current period compared to the year-ago quarter. Our weighted average cost of gas was $2.60 per MMBtu during Q2 versus $7.05 during the same quarter last year.

Lower commodity prices accounted for a reduction in revenue of about $4 million. As Westy mentioned, these are pass through revenue amounts that don’t generate margin in our business. Additionally, revenue was lower by $1.4 million due to the feed gas composition change at our George West plant. Sequentially, the revenue change is due to the lower path through commodity prices, which resulted in a $3.9 million reduction. The scheduled completion in Q1 of a large short-term marine bunkering contract, the feed gas composition changes mentioned earlier and the normal seasonal and customer demand variations. As we bridge the adjusted EBITDA variance between the second quarter 2023 and the prior year period, there are several important items to highlight.

First, the gas composition changes at our George West facility reduced EBITDA by $1.2 million during the quarter. The composition changes required us to reduce production and led to both rationing for some customers and the substitution of costlier third-party LNG at certain customer accounts. This is a temporary challenge that began at the end of Q1 persisted throughout the second quarter and should conclude this August when capital investments we have made in gas pre-treatment and scrubbing are brought online at our George West facility. Additionally, we invested in new commercial field technical and support staff and training to accommodate anticipated market growth later in the year and into 2024. Sequentially, the drivers of the EBITDA changes are similar with the addition of the scheduled Q1 completion of the large bunkering contract mentioned earlier.

On a trailing 12-month basis through June 30, 2023, the company generated total revenue of $95.2 million, an increase of 16% versus the prior year period. For the same trailing 12-month period, non-GAAP adjusted EBITDA increased 74% to $9.6 million, while free cash flow or operating cash flow less total capital expenditures increased 92% [ph] to $5.4 million. Moving to cash and liquidity. In June, we successfully arranged a new $10 million secured revolving credit facility with Cadence Bank subject to a borrowing base of eligible accounts receivable. There are currently no borrowings outstanding on the facility. We believe the closing of this credit facility in this dynamic financial environment is a testament to our lender relationship and their underlying confidence in our business model.

This facility along with our ability to generate strong operating cash flows from our core business will provide Stabilis with additional liquidity and greater operating flexibility to further leverage our unique portfolio of LNG and other clean emerging fueling solutions consistent with our stated strategic focus. As Westy mentioned, as of June 30, 2023, Stabilis had total cash and equivalents of $8.1 million together with $4 million of combined availability under our revolving credit facility and our advancing loan with Ameristate bank. Total debt outstanding as of June 30, 2023 was $9.9 million resulting in a ratio of net debt to trailing 12 months adjusted EBITDA of 0.2x. That completes our prepared remarks. Ashley, we’re now ready for the question-and-answer portion of our call.

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Q&A Session

Operator: [Operator Instructions] Thank you. And our first question comes from Martin Malloy with Johnson Rice. Please go ahead.

Martin Malloy: Good morning. Just in regards to profitability here, second half of the year, given the significant decline from 1Q to 2Q. Could you maybe talk a little bit about what you’re expecting in 3Q and 4Q that we should be aware of and the magnitude of the George West facility still having issues through August?

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

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

Westy Ballard: Yes, I think – Marty, good morning, by the way. I think two logical milestones, kind of leading indicators are going to be really what you just mentioned, one of which is going to be capital expenditure. As we mentioned, we’ve started to invest CapEx in the first half of the year. We’ve acquired the critical components to a – for a train that would look very similar to our George West facility whether that train doubles our capacity in South Texas or we elect to build that infrastructure somewhere else logically probably in South Texas, but we’ve acquired that. It was a unique asset and we got it – we thought it a very, very attractive valuation. And so we have moved with purchasing that. And we’re very excited about that.

I think secondly, we – I think the second part is also what you mentioned is contracts. We feel like that we have had significant and very tangible relevant conversations with a variety of vessel owners, vessel operators, brokerage houses, large trading houses, you name it. Many of those are trying to establish their trade lanes. A lot of those vessels aren’t coming online, as we mentioned, till next year, but they’re trying to lay that foundational work with supply chain and infrastructure. We feel very confident that an award that’s material is eminent, but you never know with these things. As we mentioned, as this business and trajectory starts to advance throughout the next few years that trajectory and success rate will grow. And so, we’re excited about that.