Stabilis Solutions, Inc. (SLNG) Earnings Call Transcript & Summary

Ladies and gentlemen, before we begin today's call, 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, March 11, 2021. 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 statement. I'd now like to welcome you all to the Stabilis Solutions Q4 and Full Year 2020 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the floor over to Jim Reddinger, President and CEO of Stabilis Solutions. Please go ahead, sir.

Thanks, Holly. Good morning, everyone. Thanks for joining us on the call. Also with me is Andy Puhala, our Senior Vice President and Chief Financial Officer. We want to welcome everyone to our fourth quarter 2020 and full year 2020 earnings conference call. 2020 was a transformative year here at Stabilis. After reporting our highest ever quarterly revenue of $13.8 million in the first quarter, our business was significantly impacted by the pandemic-driven economic shutdown during the second and third quarters. However, I'm proud to report that in the fourth quarter, we returned to a positive year-over-year trajectory, and we expect this momentum to continue into 2021. In the fourth quarter, we produced our highest-ever fourth quarter revenue of $13.7 million, which was also our second highest quarterly revenue total ever. And we produced fourth quarter adjusted EBITDA of $2.3 million. Our strong first and fourth quarters last year as well as the cost-cutting and efficiency measures we implemented throughout the year allowed us to generate positive operating cash flows and produce adjusted EBITDA of $3.5 million for the year of 2020. Stabilis has not only made it through the pandemic successfully, but we have also returned to a strong growth trajectory. And just when we thought we had weathered the COVID storm, a real winter storm came along and ravaged the Gulf Coast region last month. As I'm sure you're all aware, extreme winter weather along the Gulf Coast of the U.S. resulted in widespread failures of the electrical grid and of the gas pipeline network. I'm proud to say that throughout this crisis, our Stabilis team members responded admirably, and we provided millions of gallons of LNG and the associated equipment and services to 10 locations in multiple states. And those locations supported heating and power generation for more than 100,000 households. We are able to do this because our LNG solutions could be mobilized quickly and safely to provide clean and reliable energy solutions when existing infrastructure cannot perform as required. This event provides a perfect example of the versatility and resiliency of small-scale LNG solutions, and we believe that it could create significant growth opportunities for our business going forward. LNG's ability to provide clean, reliable and dense energy solutions to customers who aren't on a gas pipeline or who need to supplement a gas pipeline are very valuable. Imagine if a power generation facility in the Gulf Coast would have had 1 to 2 days of backup gas supply in the form of LNG available to them during the recent storm. Many of the power outages, gas pipeline outages and the related problems that occurred could have been avoided. Stabilis intends to focus on bringing these LNG insurance policies to customers throughout the Gulf Coast in the weeks and months to come. Later in the call, I'll review some of the recent contract wins we've had and discuss our broader project pipeline. But before I do that, I'll turn the call over to Andy, our CFO, to review some financial results. First, I'd like to thank and congratulate our Stabilis Solutions team for their determination and resilience over the past 12 months. Our team members have remained dedicated throughout the whole year, which was very difficult, and they responded heroically during the recent extreme weather events. It's a tremendous team, and I'm very proud to work alongside them. Great work to everyone, and thank you. Now I'll turn it over to Andy.

Thanks, Jim. As Jim mentioned, we saw a broad increase in overall customer activity following the economic slowdown earlier in the year. We successfully maintained and grew existing customers while adding several significant new customers, driving fourth quarter revenue to grow to $13.7 million, a 52% increase compared to the third quarter of 2020 and a 10% increase compared to the fourth quarter of 2019. For the 12 months ended December 31, total revenue was $41.6 million compared to $47.1 million during 2019. For the fourth quarter, LNG segment revenues totaled $12.1 million, up 57% to the third quarter of 2020 and 16 -- and up 16% compared to the fourth quarter of 2019. We delivered 10.4 million gallons of LNG to customers during the quarter, and utilization of our George West Texas liquefier averaged 62% compared to 48% in the third quarter and 63% during the prior year period. For the year, LNG segment revenues totaled $36.3 million as compared to $43.7 million during 2019. LNG gallons delivered decreased by 17%, and utilization of the George West plant decreased to 55% compared to 70% in 2019. The decline in year-over-year revenue in LNG volumes was due to the pandemic-driven economic shutdown, which heavily impacted the company during the second and third quarters of 2020, but was offset by record revenues during the first and fourth quarters of the year. Adjusted EBITDA for the fourth quarter was $2.3 million or 17% of revenue, in line with the fourth quarter of 2019. Net loss for the quarter narrowed to $0.1 million, $0.01 per basic and diluted share, compared to a net loss of $0.6 million or $0.03 per basic and diluted share during the fourth quarter of 2019. Adjusted EBITDA for the 12 months ended December 31, 2020 was $3.5 million, 8% of total revenue, compared to $6.6 million or 14% of total revenue during 2019, again, related to essentially losing the second and third quarter's profit this year to the pandemic. We closed the year with $1.8 million in cash. And we believe we have adequate cash and access to liquidity to fund the company's operations and growth. I'll now turn the call back to Jim for some additional remarks.

Thanks, Andy. We're pleased with our rapid recovery from the negative impact of the economic shutdown. And today, we're hiring new staff and continue to make targeted investments in equipment and systems to expand our capabilities to meet the growth opportunities we can see in front of us. In terms of new contracts, we recently signed 3 long-term contracts for LNG sales that, in aggregate, represent approximately 40% of our capacity at our Texas LNG plant for the next 2 years. These customers are in the mining and paving industries. They provide a further diversification of our customer base, and they provide higher utilization at our plant. These contracts should significantly increase plant utilization maybe to as much as 100% in 2021 and beyond and thereby improving profitability. We expect to have several other similar LNG sales contracts completed in the coming months, which, if successful, would put us in an even better position to optimize our plant and equipment throughput. I would also note that Stabilis has the ability to continue to grow despite high utilization at our own LNG production plant. Stabilis can buy as much as 1.5 million gallons of LNG per day from over 25 different third-party supply sources across America -- across North America. This gives us the ability to grow sales and service customers in most geographic markets. In addition to our robust sales pipeline, we have a new project pipeline that represents almost $200 million of new revenue opportunities over the next 24 to 48 months. This project pipeline includes several marine bunkering projects as well as other projects that involve long-term contracts for supply of LNG to the electrical power customers. And some of these projects will require the construction of new LNG production facilities, the purchase and operation of transportation and storage assets as well as the purchase and operation of power generation assets for our customers. A significant portion of this opportunity is in Mexico, where activity continues to accelerate. In the third quarter of 2020, we provided approximately 2.4 million gallons of LNG to a new remote power customer in Northwestern Mexico in what we believe was the largest-ever distributed natural gas project in Mexican history. We're also providing LNG to one of the largest mining companies in Mexico for mine haul truck power generation. And as we've discussed on past calls, we believe the opportunities to provide LNG and related service in Mexico is large and growing rapidly. We also continue to explore fueling opportunities with hydrogen, a fuel that shares many properties with natural gas but provide 0 carbon emissions. We anticipate that our first hydrogen fuel project, a marine bunkering program for a passenger ferry, will begin operations in the first half of 2021. We also expect to engage on several other hydrogen test and commercial projects in 2021, including using hydrogen methane blends in generators and in pipelines. Our long-term strategy remains unchanged. We seek to become the preeminent provider of enlightened energy solutions that support the ongoing global energy transition by providing superior value and services to our customers. We believe that small-scale natural gas and hydrogen, along with the associated power generation they use, are rapidly becoming an increasingly part -- increasingly important piece of North America's energy solution. Once again, I want to thank and complement the Stabilis team for their amazing execution over the past 12 months, and thanks to everyone who joined us for our earnings call this morning. Your ongoing support of Stabilis is appreciated. Now I'd like to open up the call for questions. So Holly, please open the line when you're ready.

[Operator Instructions] Your first question for today is coming from Craig Shere. Please announce your affiliation.

Congratulations. Craig with Tuohy Brothers.

Hey, Craig. Thank you.

So could you dig a little deeper into the financial impacts for Stabilis from the February winter storms? Could this first quarter we're in now be another record? And are you getting any initial early feedback on commercial opportunities that would ensure generators against future such supply interruptions?

Sure. The storm was a little bit of a twofold impact. A lot of our industrial customers were not able to continue operating during the storm because of the lack of supply of electricity and gas. So several of them shut down. On the flip side, we were able to accelerate and expand our LNG supply to residential and essential service customers to allow them to keep their power and heat running. And so it was a bit of a mixed bag. But I think with that, those counteracting demands during the storm and after the storm, we've been able to run at very significant -- significantly high utilization rates at our plant across the system. I think overall, right now, we haven't completed a study of the impact, Craig, but I think I'd say that worst case, it was a push with a lot of new opportunities coming out of it. Like you mentioned, there's a big examination of the Texas pipeline and electricity grid ongoing. And as we've noted in past calls, in other parts of the country, we provide a lot of LNG to pipelines and utilities that need supplemental supply for emergency and search situations. And we're expecting to see the same type of resiliency begin to be built into the Texas and Gulf Coast systems going forward. We have begun to explore opportunities with customers like that, but don't have any news to report on outcomes yet. It's only been a few weeks.

I got you. And you commented that even at 100% utilization on your owned existing operating liquefaction, you have ample supply sources to continue your commercial efforts. Can you discuss the kind of dovetailing potentially of third-party supply and new small-scale LNG deployment? If you get enough critical mass in certain areas, can third-party supply simply tee up a new plant in 12 to 18 months?

Yes. I mean, we've always used -- we've been -- we've got about 40% of our current supply of LNG across the country coming from third-party sources. So we've used it extensively over time. And one of our strategies, particularly as you look at some of the things we're doing in Mexico, is to use third-party supply to seed markets and to build markets into which we can then build our own liquefaction or supply sources into those markets. So that's been a strategy we've used over time and one we'll continue to use. Obviously, we're not seeking to build supply on top of other third-party sources where it's available, but it does allow us to move into new markets across North America, the U.S. and Mexico as we need to. So similar strategy with what we've pursued in the past, and we'll continue to do that now. I would note a couple of other things, too. One is we measure our capacity utilization at our plant in Texas based on the nameplate capacity, which is about 100,000 gallons. Our team is usually able to squeeze 10,000 or 20,000 gallons more out of that. So there is additional supply, we believe, going to be available there as well. And of course, we'll continue to explore opportunities to expand that plant when and where it makes sense.

And lastly, since you brought it up, in Mexico, any prospects for FIDs in the next quarter or 2 of new liquefaction?

We don't have anything formal to report now, but I can say that in post-COVID world, a lot of project development has gotten back on track and been able to move forward. There was, as you'd expect, pretty much a total shutdown of activity last year in the second and third quarters even on these projects, but it really picked back up again in the fourth quarter. So nothing to announce now, but I can tell you that a lot of the work that's going to be required by our customers to move forward on these projects is moving forward quickly now.

Your next question is coming from Bill Dezellem. Please announce your affiliation.

Tieton Capital Management. And I wanted to start relative to the greater than 50% growth that you had versus the Q3. Was that essentially due to several singles and doubles or just small pieces of business? Or were there some really big -- either big wins of new customers or big rebound of existing customers that had really disappeared when COVID hit?

Yes, Bill. It was all of the above, really. We had a number of our existing customers, particularly those in the industrial and the energy sectors, really come back to life in the end of the third and the fourth quarters. And that ranged from power generation and process heat applications in the industrial sector and just the same activities in the energy sector. And so when energy prices recovered and the market turned back on, our existing customers really came up strongly. And I'd say throughout that period and really throughout the year in 2020, our pipeline and utility customers continue to move along at a pretty steady pace. They used the downtime to do a lot of repairs and maintenance. So they held steady. And on the industrial and energy side, we really saw a rebound in activity in the third and fourth quarter. In addition to that, we did have 2 new pretty significant customers come on board. One was the consumer of the LNG that we talked about in Northwestern Mexico for a power generation project that we believe was one of the largest ever completed in Mexican history for distributed LNG. And the second was a very large power generation project in the U.S. along the Gulf Coast that was serving and continues to serve a community that had some damage to their electrical grid. So it's a little bit of both. Our existing customers came back, and then we did have some new activity from customers that we had been developing for some time.

Great. And then relative to George West utilization, you said that it was 63% in the fourth quarter. What was the level exiting the fourth quarter? And I'm asking the question in the spirit that I'm presuming that the utilization ramped as the quarter progressed. So I'm wondering where you exited? And then how does that 63% utilization compare to where we're at today also?

We haven't -- I don't think we've given the monthly utilizations, Bill, but I'd say your assumption that utilization was accelerating through the quarter is correct. And then we haven't yet announced anything in the first quarter. We'll do that here over the next 1.5 months or so. But we do continue to see a growth in activity in the fourth -- in the first quarter.

And I assume that comment is just kind of neutralizing for the Arctic blast that the first quarter was on an upward trajectory from the fourth quarter.

Yes, the Arctic blast was unique. And during that particular week, we were -- we did have lower revenues. Because of the force majeures on the gas pipelines and because of the spike in electricity prices, our plant was down for a week as were all plants in Texas during that week. On the flip side, after the plant -- I'm sorry, the plant was able to turn back on, we were able to bring plant utilization well above -- or at or above 100%. And so we think that the spike in activity after the storm is, like I said to Craig earlier, is, worst-case, going to be a push, I think, with the lost revenue and opportunities we have during the storm.

Your next question is coming from Barry Haimes. Please announce your affiliation.

Sage Asset Management. First question is if I look at the variable margin in the fourth quarter on an adjusted EBITDA basis, it looks like it's about 42% if I look at the change in EBITDA versus the change in the sales. Is that representative of what we should expect as volumes ramp-up in the future? Or was there something different in the fourth quarter? That's the first question. A couple.

Andy, do you want to take a swipe at that?

Yes, I'd be happy to, Barry. So there's a couple of things going on in the fourth quarter that impacted the EBITDA. One was we had a very strong quarter from our Chinese joint venture. So that contributed to that strong EBITDA performance. So that's something that -- we don't give guidance on that joint venture, but that was stronger than normal for that joint venture. So that would be something to potentially normalize going forward.

Okay. So just on a -- if we just were to say on incremental volume going through your plant in Texas with some normal contribution margin, is there a normal range we should think in terms of?

If you look historically, EBITDA margins for us have been kind of mid-teens, lower to mid-teens. And we think that as we grow the business, we have the opportunity to grow that into the high teens in the near term.

Okay, great.

I'd add to that, Barry, that if you look at our utilization in the fourth quarter, which was in the 60-ish percent area, as that moves up, you'll have significantly more fall-through from the plant. So plant margins, to your question, should increase as volumes increase.

Okay. And then wanted to make sure I understood correctly. The 3 new contracts that you alluded to, you talked about would utilize 40% of your capacity. So if I heard that right, that would take you pretty much to full utilization. Did I hear that right? And then when do those contracts start? Just to get a rough feel of when we'll see the revenues.

Sure. It's not quite full utilization because some of them -- some of those volumes were already built into the 60% that we talk about in the fourth quarter. All those contracts are starting currently. So we've got some -- we still have some room in the system. We are working on a few other contracts that should take us up higher. And what we generally do is when we get to that full utilization level at our plant in Texas, there are several other facilities in the market that we can buy from. And so we'll start to dry down from those facilities so we can continue to service all those customers but keep the high utilization at the plant as well.

Right. And then you alluded to the fact that perhaps at some point, you could expand that plant. Any preliminary thoughts on what the capital costs would be for how much increase in capacity if you were to pursue something like that? And how long it might take to do that project?

Sure. I mean, the original facility we built there in South Texas was about $45 million for 100,000 gallons. When we built that facility, you obviously put in your gas pipeline connections, your electrical connections, you do your civil work and a whole host of other things that should make the second train that you had incrementally less expensive. I don't have a price for you right now on that, but we do think there's some pretty significant capital efficiencies in adding the second production train on there.

Okay. Would it be a similar size in terms of gallons if you did it? Or it would be different, second train?

We haven't made any decisions on that. Most likely, it would be a similar size to the next. The next step-up in the standard plant design that we use is 250,000 gallons a day. So that's probably more expansion than we do initially, but we're waiting to see. We would do this in response to customer demand. And so we'd put a larger one in if we could. But right now, I'd say it's probably -- the next step is probably another 100,000-gallon train.

Got it. Okay. And then last question. In terms of getting a NASDAQ listing, what do you -- where does this stand? What do you need to do to be able to get to that listing?

So we've talked about the NASDAQ listing extensively last year and told people on the call that we were going to continue to pursue that. And we're still in that situation where we continue to pursue it. It's a factor of -- there's a number of factors for the NASDAQ listing. I haven't looked at them today, but I think in general, we've been in the zone of being eligible for NASDAQ relisting based on the quantitative standards over the past month or 2. And so as we said before, when we're in the range for quantitative standards, we're going to go pursue the listing again. So we haven't made any formal announcement about it. But based on what we said last year, we'll continue to try to make that happen as soon as we can.

There are no further questions in queue.

Great. Well, thanks, everyone, and we look forward to speaking to you next quarter.

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.