Excelerate Energy, Inc. (EE) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Excelerate Energy 3Q 2022 Earnings Call. My name is Drew, and I'll be coordinating your call today. [Operator Instructions] I would now like to turn the call over to Craig Hicks, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Yesterday afternoon, we released our third quarter earnings press release along with the presentation that our President and Chief Executive Officer, Steven Kobos; and our Chief Financial Officer, Dana Armstrong, will speak to this morning. I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Our actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update or revise them. Also during the call, we'll discuss several non-GAAP financial measures. We provided a reconciliation to the most directly comparable GAAP financial measures at the back of the presentation. And with that, it is my pleasure to pass the call over to Steven Kobos.

Hi there. Thanks, Craig, and thank you all for joining us this morning. Excelerate delivered another strong quarter of financial results as we continue to advance our growth strategy and make good progress on our commercial opportunities. Against the backdrop of the most significant energy market disruption since the 1970s, we have seen the true value of Excelerate's flexible business model, which enables us to adapt our asset portfolio to deliver optimal solutions that scale with our customers' needs. During the quarter, we demonstrated once again our ability to navigate successfully the complexity of today's global LNG market. We are expanding our reach in both new and existing markets by pursuing attractive growth opportunities and deploying our flexible LNG infrastructure. In our short time as a public company, we've rebalanced our commercial portfolio to address increasing LNG demand and energy security concerns in Europe. Our fleet flexibility has also allowed us to capture economic upside from elevated FSRU charter rates while we continue to position our gas sales business for growth and increased profitability over the long term. On this morning's call, I'll focus my remarks on our third-quarter financial results, the current state of the global LNG market, and progress on our commercial opportunities. Dana will then walk through the details of our quarterly performance and our 2022 financial outlook before we open the call to your questions. With that, now let's turn to our results and highlights for the quarter.  Our financial performance during the third quarter was strong. We delivered $39 million of adjusted net income and $86 million of adjusted EBITDA. Our bottom line results during the quarter were driven primarily by another solid contribution from our regasification business and our gas sales business in Brazil. On the commercial front, the deployment of the FSRU exemplary to Finland remains on track, and our charter hire for the vessel commenced on October 1. We also signed a 5-year time charter contract with Germany for the FSRU Excelsior. The Finland and Germany opportunities are great examples of how we've been able to redeploy seamlessly our assets to maximize our revenue. This ability to transition from on-hire to technical stop to back on-hire again in this manner is unprecedented in our industry. I'll also highlight that on October 3, we executed our shipbuilding contract with Hyundai Heavy Industries for HHI for our new state-of-the-art FSRU, which will be delivered in June 2026. Next, as we approach the end of our first year selling gas downstream in Brazil, we are pleased that our gas sales business is proving to be as valuable as planned. We look forward to continuing to sell regasified LNG in Brazil in the future. We are finalizing an agreement with Petrobras to extend our gas sales operations there through the end of 2023, and we are awaiting final approvals.  On August 31, the FSRU exemplar completed its seasonal regasification charter at the Bahia Blanca gas port in Argentina. During this period, the exemplar regasified 12 LNG cargoes and provided energy security to Argentina during the Southern Hemisphere winter season. And this week, on November 8, the Excelerate Board of Directors declared our second quarterly dividend as a public company. Now I'd like to share with you some perspectives on the current state of the global LNG market. Since our last earnings call in August, we have continued to see robust demand for flexible LNG infrastructure around the world as countries seek energy security and independence. In Europe, countries are bracing for winter, and while they have succeeded in filling natural gas storage capacity to over 90%, the supply outlook for the 2023, 2024 heating season remains a concern. The September shutdown of and subsequent damage to the Nord Stream 1 and 2 pipelines cut off critical natural gas supplies to Europe and further intensified supply pressures. In real-time, we've watched the situation that could have been solved politically involved into one that now must be fixed with the deployment of new infrastructure.  The ongoing curtailment of Russian flows, combined with increased natural gas storage injections heading into the winter season, has led to increased LNG imports to Europe. The resulting increasing competition between OECD and non-OECD countries for finite LNG supply has exacerbated an already tight market. While Dutch TTF gas pricing has come down since the peak, it is expected to remain at elevated levels relative to history. This means that any additional supply disruptions were colder than expected weather could cause significant short-term spikes. The combination of European onshore storage levels being near capacity increased LNG imports, and mild fall weather have resulted in a buildup of latent LNG vessels around Europe. LNG tankers off the coast of Europe are awaiting opportunities to offload cargoes at fully utilized regasification facilities. This highlights the need for FSRUs and regasification infrastructure. The increased demand for FSRUs and LNG in Europe is also influencing energy policy globally. Some countries, particularly those in Southeast Asia have chosen to reduce LNG consumption in the near term as a direct result of elevated pricing in the spot market. However, because LNG remains an important part of their future energy mix, they are continuing to seek long-term affordable LNG supply to meet their energy needs. We are confident that these countries, with the support and backing from international organizations, will be able to achieve this objective.  And while affordability and security of supply remain at the forefront in Europe, Decarbonization remains a priority now more than ever. It is clear that natural gas will continue to play an important role in the energy transition, serving as a complementary backstop to balance the intermittency of renewable energy. We believe that FSRUs are the most important asset class to support Europe's efforts to achieve energy security and transition to renewable energy sources without the risk of having stranded infrastructure over the long term. Now I'd like to take a moment to provide you with some important commercial updates. As I mentioned on our last call, we reached an agreement with the government of Finland for the simpler to provide up to 5 billion cubic meters per year of regasified LNG capacity through a new regasification turn in Southern Finland. This flexible LNG terminal will bolster the energy security of Finland while also serving more broadly the needs of the Baltic Sea region, although the exemplar is currently undergoing customer-requested winterization upgrades during this technical stop in Spain or charter hire with Gasgrid Finland commenced on October 1. Gastric Finland, by the way, has done an exceptional job developing the eternal facility, and the exemplar should begin regasification operations at the Port of Inc, Finland in December 2022. We are also moving forward with our plans to sell regasified LNG downstream of the terminal. We've established a gas marketing entity in Finland, opened a new office near Helsinki, and our commercial team is actively pursuing near-term gas sale opportunities.  Next, we have our agreement with Germany. We've executed a definitive agreement with the German government to charter the FSRU Excelsior for 5 years. This is our second FSRU deployment to Europe since the invasion of Ukraine by Russia, and it demonstrates the ability of our business and our fleet to pivot quickly to capture new commercial opportunities. Excelsior will complete its charter in Israel at the end of this year and will go directly to the scheduled dry dock. Under the terms of the agreement with the German government, Excelsior will commence its charter hire in the first quarter of 2023. The vessel is expected to provide regasification services at Germany's planned LNG import terminal, which is being developed at the port of Williams [indiscernible] by Tree Energy Solutions, EON, and Bahia Blanca. Now let's turn to Southern Europe. We believe that there is a tremendous opportunity to sell regasified LNG to customers in Southern Europe downstream of our planned Flora terminal. Last quarter, we expanded the scope of our Albania project to include potential gas sales to countries linked to Europe's Southern gas corridor, including Italy, Greece, Bulgaria, and Turkey. Since then, the energy conflict between Europe and Russia has worsened.  The damage to the Nord Stream pipeline has made the Southern Corridor as an entree point for LNG deliveries even more critical for Europe. And our planned floor termite is even more valuable since it will add incremental capacity and alternative supply in the event of further disruptions. In recent weeks, we've engaged with third parties for the engineering design for the 300-megawatt power plant and the LNG terminal in Flora. While we are advancing the Flora LNG terminal towards FID, we are also evaluating other downstream opportunities that would allow us to connect to existing natural gas pipelines in the region. We're excited about our prospects, and we'll provide more detail on these opportunities as they progress. Now let's turn to Bangladesh. LNG remains critical to the country's economy. Our 2 FSRU terminals currently deliver approximately 20% of Bangladesh's natural gas supply. The government shares our view that long-term LNG supply will be a central part of its energy mix moving forward and the country is advancing plans to sign new long-term LNG supply agreements to guarantee more affordable and predictable LNG pricing. As discussed last quarter, rapid economic growth in Southwest Bangladesh is expected to drive increased energy demand in the region and a greater need for regasified LNG as a fuel source. We have recently completed our negotiations with PetroBangla for an LNG sale and purchase agreement, or SPA, and are now awaiting formal approvals. We've also continued to advance the development of our planned Para LNG terminal. We are currently negotiating term sheets for Para with PetroBangla ahead of signing the definitive agreements, and we are in conversations with potential strategic partners for all phases of the project.  Turning to our last update on the commercial front. In October, we executed a shipbuilding contract with HHI for a new-built FSRU, which will be delivered in June 26. This decision to expand our fleet reflects the confidence we have in our long-term trajectory and the opportunity set ahead of Excelerate. The new FSRU will have a storage capacity of 170,000 cubic meters of LNG and a maximum regasification capacity of 1 billion standard cubic feet per day. The state-of-the-art FSRU will be equipped with HHI's proprietary LNG regasification system, dual fuel engines, best-in-class containment system and boil-off gas management, and other innovative technologies, which will drive improved performance and efficiency while lowering emissions. On delivery, this new build FSR view will enhance the capabilities of our existing fleet and support the execution of our integrated growth projects. With that, I'll now turn the call over to Dana.

Thanks, Steven, and good morning, everyone. Overall, we're pleased to have delivered another quarter of great financial results. For the third quarter, we reported an adjusted net income of $39 million, an increase of $18 million or almost double our second-quarter adjusted net income, a debt to EBITDA was $86 million, up $11 million or up about 15% versus last quarter. The sequential quarterly increase was driven by lower out-of-fuel costs, lower repair and maintenance expenses, and higher margins from our Bahia Blanca seasonal charter in Argentina. This was partially offset by higher SG&A due to an increase in consulting, marketing, and business development-related costs. In comparison to the third quarter of last year, our adjusted EBITDA was up $21 million, an increase of about 32%. Our adjusted EBITDA was up about $21 million, an increase of about 32%. The year-over-year increase was driven mostly by our gas sales in Brazil, partially offset by an increase in SG&A related to our transition to a public company structure. Our track record of delivering strong financial performance on a consistent basis is a result of the high-quality agreements we negotiate with our customers. We're proud to say that with the recently announced Finland and Germany Turners, we've enhanced the quality of our portfolio even further. Now let's turn to liquidity and balance sheet.  For the 9 months ended September 30, Excelerate had $346 million of cash and cash equivalents on hand. As of the end of the third quarter, we had letters of credit issued of $40 million and no outstanding borrowings under our $350 million revolving credit facility. Our gross leverage ratio was 2.5x at the end of the quarter compared to 2.7x at the end of last quarter. On a net debt basis, our leverage ratio was 1.2x. We continue to maintain a strong balance sheet and a healthy liquidity position. The combination of our cash on hand and our available borrowing capacity provides us with sufficient flexibility to fund our ongoing operations, dividend payments, and CapEx needs in the near term. Our CapEx spend for 2022 has been lower than previous expectations, primarily due to the sequencing of the Finland and Germany opportunities, both of which required minimal CapEx ahead of other projects in our pipeline. As Steven mentioned earlier, our Board of Directors approved our second quarterly dividend as a public company. The dividend payment, which is equal to $0.25 per share or $0.10 on an annualized basis, will be paid on December 14, 2020, holding a record as of November 22, 2020.  Based on our results to date, we are increasing our financial guidance for 2020. The decision to increase our guidance was driven primarily by our solid performance in the third quarter, in combination with lower anticipated business development costs and slightly higher Finland margins in the fourth quarter as compared to our previous guidance range. For the full year 2022, we now expect adjusted EBITDA to range between $264 million and $274 million, and adjusted EBITDA is expected to range between $300 million and $310 million. As we look ahead, we're confident in our commercial momentum, and we believe the opportunities we're advancing will create a solid foundation for 2023. We expect to provide 2023 guidance in the first quarter of next year. With that, we'll now open up the call for Q&A.

[Operator Instructions] Our first question today comes from Michael Blum from Wells Fargo.

I wanted to just ask first about the quarter. I guess my question is, how sustainable are these lower costs going forward? And if you could talk specifically to what drove the higher margins at Bahia Blanca.

Thanks, Michael. This is Steven, and good to hear from you. Thanks for joining us this morning. We are really excited about how we're operating that fleet. We're excited about the work that our operations team does and how focused they are on efficiencies day in, and day out. There's no doubt about it. We do manage this fleet ourselves. We don't rely on a third party, and we think that it's making a difference. But Dana, do you want to dive into some of the...

Yes. No problem. Michael, the biggest drivers of the sequential quarter-over-quarter improvement was a couple of things. The repair and maintenance was lower this quarter compared to the second quarter. We do expect that to go up a bit in the fourth quarter, so that's included in our guidance, obviously. But we do see some lumpiness in our repair maintenance expense for our vessels. And it really just depends on what specific projects we have going on, on a quarter-to-quarter basis. As far as your question about the higher margins at the Bahia Blanca, that was really just the result of the timing. So we had 2 full months of the Bahia Blanca in the second -- sorry, in the third quarter. And I think we had 1.5 months in the second quarter. So that drove the margin increase on the Bahia Blanca. That answers your question?

Yes, it does. Just had one other question to ask for now. So as you continue to sign these contracts in Europe, does this delay or reduce your ability to complete deals in some of these developing countries that you've been working on? How do you sort of balance those 2 different markets?

Michael, and I appreciate you've always had a focus on Asia, and I like that. Our strategy is both ends, but the reality is we have focused extensively on Europe. I mentioned on the call we've formed a gas marketing subsidiary in Finland, we're doing all kinds of things across Europe. At the same time, I just got back last week from a trip to Bangladesh. We are eying this as a both-end strategy. Europe is an immediate need and an immediate opportunity. So we have been sequencing it on a priority basis because they are priority opportunities. But again, we are still advancing longer term. And frankly, as the other projects in our pipeline, I think that sequencing this year has worked to our benefit because many of the emerging markets are seeing that by the time you can come forward with these projects, they expect a more harmonized global LNG market. So I think it's actually the strategy we embarked upon that has been beneficial for our shareholders now and in the longer term.

[Operator Instructions] Our next question today comes from Craig Shere from Tuohy Brothers.

Congratulations on the good quarter. So I guess I'm trying to understand on Michael's question about the ongoing run rate for some costs. It sounded like in Dana's opening comments that development costs, project development, investment costs are sustainably down versus some of the maintenance quarterly lumpiness. Is that correct?

Yes. Our business development costs are lower than our expectations. So they're pretty flattish quarter-over-quarter, but we didn't extend to the level of what we had anticipated, and that's just a result of some of these projects pushing out as we're prioritizing Finland and Germany. Some of our spend for Para and Albania has pushed out a bit.

Got you. So to a degree, we defer some of these emerging market opportunities that Steven was referring to out a couple of years. The work that you're doing in Europe doesn't have the same development expense. So we should have some comparable improvement versus what we thought maybe 2 or 3 quarters ago heading into 23 perhaps.

Craig, and by the way, it's good to hear you on one of our calls, and thanks for joining. I appreciate it. Always glad to have HO Brothers around. I don't want to act like it's any big shift that we're talking about. The reality is, as we've discussed many times, you're continuing to see pricing on long-term LNG. You've seen some indications just recently that it doesn't look like it's been affected by the war in any meaningful manner, and without getting too much into the leads now, you're seeing IMF and others assisting some of these entities in APAC and elsewhere reentering in fact, the short-term LNG spot market, and we would see some of that in 2023. So I don't want to suggest that we're looking at a long-term shift in those APAC markets. I think Dana used the phrase sequencing, and that's what we really think about. This is sequencing. If there is any sort of shift. It's just in terms of how we can advance on all fronts, but our focus has very definitely been for the past few months to get bodies on the ground in Europe to form gas marketing entities in Europe and do that sort of thing. So it might have some adjustment in '23 spend, but I don't want to suggest that there's any loss of support or enthusiasm for APAC. Absolutely not.

Great. And just a little mate, I apologize, and maybe I got it wrong. But did I see correctly that the year-to-date 9-month cash flow reported investment in PP&E was lower than in the first half?

I don't think so. It was 60 -- sorry, I don't have the numbers in front of me right now, but no, it wasn't lower.

Maybe we can take it off-line. Just trying to understand...

We had -- Yes, sorry. So what -- yes, the second quarter included the $25 million for the Excelsior purchase. So that would have been the difference there. That was reported as PP&E. We've off 2 vessels. We bought the cell in the excellence with our proceeds. The excellence was reported as financing because that was a lease, but the Excelsior was a PP&E. So that was the driver here. So yes, that makes sense.

There are no further questions at this time. So I'll hand you back over to Steven Kobos for closing remarks.

Well, thank you again to everyone who joined us on today's call. I hope that you can see we are pleased with the progress we've made to date. We look forward to providing you with additional updates in the coming months. Until then, if you have any questions, please feel free to reach out to Craig Hicks, our VP of Investor Relations. And with that, thank you very much.

That concludes today's Excelerate Energy 3 Quarter 2022 Earnings Call. You may now disconnect your lines.