Q3 2024 Stabilis Solutions Inc Earnings Call

this pronounced shift in the quality and consistency of our revenue mix.

and the enhanced gas processing capabilities we deployed last year to address feed gas consistency issues.

resulted in exceptional utilization of our two owned LNG production facilities and has contributed to a significant improvement in our margin realization consistent with our strategic focus on driving improved operating leverage.

And given our improved margins and operating leverage, we ended the third quarter with $15.6 million of available cash and liquidity and a net cash position on our balance sheet versus $8.6 million of total liquidity in the year-ago period.

Our improved financial foundation and strong liquidity profile have enabled continued investment of operating cash flows to grow the business.

Along our strategic focus of strengthening the durability of our business and liquidity profile, we established a second objective, which was to identify, prioritize, and pursue key growth initiatives that can drive long-term shareholder value.

that are reliable and cost-effective.

In evaluating growth opportunities, a key criterion was our ability to leverage our capabilities to expand into new markets that are at the forefront of considerable growth.

Not only is our scalable, cost-effective, execution-ready operating model a considerable competitive advantage for us,

But also, being an incumbent supplier in many markets positions us for further market share growth as neither large-scale energy production nor alternative fuel sources are feasible or economically viable for most of these customer applications.

While we are encouraged by the growth in these markets, they are in early stages of what we anticipate will become a significant increase in demand.

The anatomy of these types of projects consists of a wide array of variables across commercial, operational and financing fronts, so they take time, and we recognize that.

That notwithstanding, over the past 24 months we've made tremendous progress along this front as evidenced by our LNG bunkering operations in Port Canaveral, Florida and the Port of Long Beach, California.

and the award of a multi-year LNG bunkering contract to fuel Carnival Corporation's newest LNG-fueled cruise ship, the Carnival Jubilee, in Galveston, Texas, in the fourth quarter of 2023.

And during the third quarter, we realized a three-fold year-over-year increase in revenues within our marine and aerospace growth markets, which now comprise approximately 40% of total revenues compared to 11% in the third quarter of last year.

Within our marine business, Stabilus is the only provider of marine bunkering solutions with experience executing LNG bunkering operations using multiple modes of delivery on all three coasts.

Since identifying expansion in the marine market as a key growth strategy, we have spent an enormous amount of time and energy further developing our commercial relationships with the world's largest and most dynamic owners and operators of vessels.

Throughout these discussions, several consistent themes have arisen as to why we are a highly thought of leader to develop the modern marine bunkering infrastructure in the United States.

These themes include our extensive experience supported by our deep bench of regulatory, engineering, project management, and operational teams ready to execute.

We are a low-risk and execution-ready choice given our existing, redundant, and reliable supply chain and ability to deliver LNG volumes at scale. And as a NASDAQ-listed company, our customers value the transparency and stability we provide as a financial counterparty.

This is evidenced by the award of our LNG bunkering contract with Carnival Corporation. Our team has done an excellent job in the execution of the Carnival contract, and we are excited about leveraging our first mover advantage to further scale our LNG marine bunkering supply chain to the waterfront on the Texas Gulf Coast.

We are moving quickly along this front and feel that we are competitively advantaged when compared to concept company competitors as we have invested in design engineering and feasibility assessment

identified a proposed site.

purchased the major components of a 100,000 gallon per day liquefaction plant.

and we present a de-risked value proposition to prospective customers not only due to our experience...

but by virtue of our ability to leverage our existing operational South Texas and Louisiana liquefaction plants as backstop or supplemental supply points to ensure redundancy and continuity of supply.

Beyond the Texas Gulf Coast, we are actively evaluating opportunities to build upon our experience on the East and West Coast, as well as expanding outside of the U.S. to the Caribbean, Central America, and South America.

And turning to our commercial industrial markets, we see strong structural tailwinds driving incremental power demand.

Applications include data centers, the onshoring of manufacturing, and vehicle electrification, all of which are expected to increase U.S. power consumption by at least 55 gigawatts between now and 2030.

Of the 55 gigawatts, data centers are anticipated to consume around 40% or 22 gigawatts. So to put that into context, that's equivalent to roughly 23 billion incremental LNG gallons of demand per year.

or, said differently, nearly 650 additional Stabilis South Texas liquefaction plants.

This incremental power demand poses a litany of challenges for utilities to service this incremental demand. As the addition of new power generation capacity is highly regulated, it will require significant investment that may not be appropriated and will take considerable time to build.

Reliability, scalability, cleaner and more sustainable power supply are critical needs for data centers and the constraints are causing data center infrastructure providers and offtakers to proactively take control of their own power destinies.

This dynamic is creating considerable opportunities for new power generation solutions in the market to support this incremental load growth and put Stabilis in a wonderful position to address these needs.

So it is our intention to empower data centers to do just that, control their own power destinies. We want to bring energy to where they need it. To do so, we intend to deploy a suit of capabilities across several fronts.

to assist customers with planning, permitting, licensing, site design, natural gas pipeline sourcing, and access.

primarily in new build data centers where there is a time lag between data center power demand and when base load grid power is available at the data center site. We will also provide backup and peaking power generation at data center locations as well.

To support this, we provide ancillary and critical back-end services.

consisting of continuous methane emissions monitoring, renewable natural gas,

or RNG, and other alternative energy solutions sourcing supported by our highly trained operational and field service technicians to assist customers with mobilizing, commissioning, monitoring, and reliably operating on location.

We're extremely excited about the potential in this market, which is a natural extension of our considerable power generation resume where we have delivered over 12 million kilowatt hours of dependable natural gas fired power for critical must-run applications since our company's inception.

In closing, I want to leave you with this message.

With Stabilus, we've provided shareholders with a business that can capitalize on significant upside.

evident across our growing underserved clean fuel markets while de-risking the model through an increased mix of high-quality contractual revenue and a disciplined approach to capital allocation.

Simply put, we've effectively combined the remarkable growth potential of a successful startup without the risk profile of a startup.

It's an incredibly exciting time for our business and we're just getting started.

With that, I'll turn it over to Andy.

Thank you, Westy.

Andy: Let's move to a discussion of our third quarter performance, together with an update on our balance sheet and liquidity exiting the third quarter.

Andy: Third quarter net income was $1,000,000 or $0.05 per diluted share on revenues of $17.6 million.

Andy: Our revenues grew 15.1% compared to the prior year period, driven by strong LNG demand and improved utilization of our own liquefaction facilities.

The improved year-over-year utilization was a result of incremental demand from long-term customer agreements and the resolution of the feed gas composition issues which hindered our production at our South Texas LNG plant in the third quarter of last year.

Andy: Adjusted EBITDA of 2.6 million dollars was a record for the third quarter, increasing by 2.1 million dollars compared to the prior year period.

Andy: Adjusted EBITDA margin increased to 14.6 percent up from 3.5 percent in the third quarter of last year.

Andy: We generated $2.6 million of cash from operations in the third quarter, and this strong cash generation continued to build on our solid cash and liquidity position, which we intend to leverage as we invest in growth going forward.

Andy: As of September 30, 2024, Stabilis had total cash and equivalents of $12.4 million, together with $3.2 million of availability under our credit facilities.

Andy: Total debt outstanding as of September 30, 2024 was $9.8 million, resulting in a negative

Andy: in a ratio of net debt to trailing month adjusted EBITDA of negative 0.2 times.

Andy: Through the first three quarters we've invested 3.6 million dollars in capital expenditures on a cash basis with 1.3 million dollars incurred in the current quarter.

Andy: This amount is expected to rise in the fourth quarter as we complete several payments, including those for the expansion of storage capacity at our George West LNG production facility, which we highlighted last quarter.

Andy: For the full year 2024, we anticipate CapEx to total between $8 million and $10 million, subject to the timing of specific projects.

Andy: I'd like to emphasize that ongoing maintenance capex for the company remains relatively minimal.

Andy: On the growth side, an increase in CapEx will reflect positive progress on several of the key initiatives we've outlined in the call and will require additional financing.

Andy: To address this, we're routinely evaluating a variety of prospective sources of capital with heavy emphasis on those partners that know our industry, our company, and recognize the significant upside potential in our operating model.

Andy: That concludes our prepared remarks. Operator, please open the line for the Q&A session.

Speaker Change: Thank you. Ladies and gentlemen, the floor is now open for your questions. If you have a question or comment, please press star 1 on your telephone keypad.

Speaker Change: If at any point your question is answered, you may remove yourself from the queue by pressing star 2.

Speaker Change: Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality.

Speaker Change: In the interest of time, we also ask that you limit yourself to one question and one follow-up question. We will pause for just a moment to assemble a question queue.

Speaker Change: Our first question comes from Martin Malloy with Johnson Rice. Please go ahead.

Martin Malloy: Good morning. Congratulations on the strong quarter and the progress you're making on a number of fronts here.

Martin Malloy: The first question I wanted to ask about was on the Marine and the Gulf Coast Marine bunkering operation.

a project that you discussed in the press, please.

Speaker Change: Could you maybe talk about milestones we might be looking for here to...

Speaker Change: reach FID for this project and any permitting milestones we should be looking for. And then maybe you've purchased a lot of the key items and long lead time items, maybe time from FID to when it might be operational.

Yeah, good morning Marty. Thanks so much for the question.

of

Speaker Change: quite a bit of preliminary feed study analysis around our site location. We have...

Speaker Change: We've settled on a location that we think is highly actionable.

and frankly, um...

Speaker Change: We are poised and ready to go and think about capitalizing this. But in doing so, there are a couple of variables that fall into play. One of which, obviously, is the commercial side of the equation.

Speaker Change: and the other is the financing side. And so there's quite a bit of industrial logic to doing something like this on spec.

But as you can imagine, a company our size, that...

Speaker Change: that's quite a bite to take. We want to continue to firm that up, and so milestones...

in and around commercial activity.

Speaker Change: but it doesn't mean that we've got to have a fully booked backlog.

Speaker Change: I think that if we can continue to see green shoots, we'll be in the market raising capital with some speculative because of the backdrops there. So I think those milestones are going to be CapEx, the triggering of larger quantums of CapEx.

Speaker Change: and or announcement of commercial activity or broader commercial activity than the success we've already had with that carnival contract.

Speaker Change: I think when you talk about time well I think when you think about time sorry I think the time

It depends.

Speaker Change: But, as you know, we've got a really good relationship with the majority of our vendors, and so we think that we've got, maybe not favored nation, but highly thought of nation status with many of them. And so I think, when you think of timeline, that could be an 18 to 24 month from the time we say go to the time it gets rolled out.

Speaker Change: So, you know, it's a pretty quick and expeditious rollout, and that's one of the beauties of small-scale LNG, the modular aspects and the expedited ability.

Speaker Change: The ability for us to have a balance sheet that afforded us the opportunity to buy that first train. So that confluence of activity, I think, expedites this. But 18 to 24 months is probably a good rule of thumb.

Okay.

Speaker Change: And then for my second question, I wanted to ask about the data center opportunity. We've heard from other sources as well that they are serious about looking at LNG as a fuel supply for power generation, and they're focused on timelines.

Could you maybe...

Speaker Change: give us a sense of the pace of discussions that you're having and is it possible that you could get a, you know, offtake agreement from, or offtake agreement, I guess, from a credit worthy counterparty for, you know, a number of years that would...

that would give you the...

Speaker Change: justification to maybe expand liquefaction capacity even further, or would you be sourcing from third-party sources?

Speaker Change: Yeah, no, so thanks. The paradigm has changed, and as you alluded to, it's changed quickly. Really, over the last 18 to 20 months, you've seen a massive shift.

Speaker Change: and notoriety of this AI and data center and cloud computing infrastructure or the need for such infrastructure. And we think that, yes, there are opportunities for us really in several phases. The first of which is for us to have

Speaker Change: term contracts to bridge that gap between when the data center has been constructed and when the primary baseload grid can show up to their location. That can be 6, 9, 12, 18, 2, 3 year. It's hard to speculate, but there will be some term and readability to that.

Speaker Change: and then that then amorphs into providing backup through what historically has been diesel.

Speaker Change: generators, but really we think moving forward it's going to be natural gas and generation and turbine capability. And so our volume of discussions, even over the last 90 days, has grown considerably.

Speaker Change: We are in the process of trying to enter non-disclosure agreements with many prospective customers to better understand their footprint.

Speaker Change: and what their goals are and locations so we can better and more thoughtfully think about where we need to build our infrastructure service at.

Speaker Change: And so, to answer your question, we might have a first wave where we source from third parties or we source from our George West plant or we double or triple or expand our George West plant.

Speaker Change: But I think it is very likely or possible that we'll build additional infrastructure in and around the U.S.

Speaker Change: to adequately support a bit of a hub-and-spoke model where we'll have liquefaction capacity, storage capacity, and then also distribute some of that smaller storage capacity at a cluster of data centers.

Speaker Change: It's an unbelievably exciting opportunity for natural gas and the natural gas paradigm to be a participant in the whole technological revolution that's before us.

Speaker Change: They are also very, very sensitive to emissions, and so diesel is clearly not something that they are highly confident in using moving forward, and they certainly, they, meaning the co-lay and off-takers, co-location, excuse me, and off-takers are certainly aware.

Speaker Change: of the challenges and costs around some of the more alternative solutions. And so natural gas falls right in the sweet spot at scale. And as I mentioned...

Speaker Change: You know, if you've got 22 gigs just by the end of the decade that's coming online, and if we get even just a small fraction of that market share, it's an unbelievably exciting opportunity for Stabilus.

Great, thank you. I'll turn it back. Great, thanks Marty.

Speaker Change: We'll go now to Barry Hames with Sage Asset Management. Please go ahead, your line is open.

Barry Hames: Thanks so much. One quick housekeeping question. How many gallons did you produce in the quarter? And could you remind us what the annual capacity is? That's the first question.

Speaker Change: Very good morning. Thanks for the question. We don't disclose publicly gallons sold, and that's really for competitive reasons, because most of our competitors are

Speaker Change: are private. Our utilization, I can tell you, in the quarter was pretty good. It was close to 90 percent at George West and in the high 70s at Port Allen.

Speaker Change: The capacity there is 100,000 gallons a day for our George West plant and about 25,000 gallons a day for our Port Allen plant. So call it 45 million gallons a year from our own production, but that doesn't count third party.

Speaker Change: molecules that we also source through our commercial activities in our logistics department.

which is about 30 supply points around the U.S.

Got it. And then second question, if I could...

Speaker Change: I would think it would be relatively easier for the data center guys to, if they're going to get power from natural gas, to get it off the pipeline, if there's pipeline availability.

Speaker Change: but there may be places where there isn't. So I'm sort of trying to understand where you guys, where your solution would fit, you know, what your sweet spot would be.

Speaker Change: No, you're right on. It's, it's, it's, just early indications by...

Speaker Change: That growing list of customers that we have started to have engagement with, in some instances as much as half of their rollout, which might be several gigs over the next five years, are not on natural gas pipelines.

So the quantum is material.

and so...

Speaker Change: So we are still in fairly early stages of trying to fully quantify that.

But also, it's one thing to just...

Speaker Change: Rapidly responds to a location, but really I think our perspective is rather than try and shoot from the hip We want to better understand their entire portfolio So we can be thoughtful and ensuring that they've got reliable cost-effective

Speaker Change: And so we're in the throes of doing that, but as I mentioned, it could be as much as half of these locations that these co-location and off-takers are rolling out don't have natural gas pipeline access at all.

And also, I'll say that even if they did...

Speaker Change: on the on the backup in Peking side, natural gas pipeline sometimes can be challenged in many states. Look at Texas alone. You know, oftentimes, especially in the winter months...

Speaker Change: There's intermittency in those natural gas pipelines and sometimes they're either providing maintenance or or unclogging those pipelines Sometimes they've got a discontinue use commercially because because you've had disruptions in the pipelines and so having a backup from LNG or a third-party source That's got a lot of storage

that we can deploy.

Speaker Change: A universe of prospects that aren't on natural gas pipelines, that certainly is a large part of the universe, but there's also a universe of those that are on pipelines that also want to have that redundancy. This 99.999 or the five nines is real.

Speaker Change: and it's something that they are very sensitive to about maintaining the ongoing flow of power and data generation out of these centers.

Speaker Change: Great, thanks so much. Lots of good luck. Yep, thanks. Thank you.

Speaker Change: We'll turn now to Matt Dane with Teton Capital Management. Please go ahead, your line is open.

Matt Dane: Thank you. I wanted to ask about the aerospace market. I was curious how it has developed relative to your expectations.

Speaker Change: And then secondarily also, is the aerospace market an industry where we should expect long-term contracts to play a role over time?

Speaker Change: So I'll answer that. The first question is, actually it has. It's playing out...

Speaker Change: really along the lines of how we've expected. And what I mean by that is we expected a little bit of lumpiness and volatility.

Speaker Change: There's certainly a main participant in that market right now who's got the lion's share of market share.

Speaker Change: As you can imagine, there are regulatory inputs and other variables that come into play when it comes to launching R&D for rockets.

Speaker Change: And so I'd say it's where we anticipated. We are fortunate to have a little bit of rateability and contractual coverage in our aerospace business. That's a new phenomenon that really occurred a few months ago. And so we're excited about that. We think we can build upon that.

Speaker Change: And we think that over the ensuing years, that not all roads will go through one company. There will be others, which there are now, but those others will enhance their capabilities.

Speaker Change: and continue to need LNG to not only support their research and development activities, but also their launch activity.

you know another provider does.

Speaker Change: but certainly a cluster of launches that if you aggregate can be a very exciting opportunity for us as well.

Speaker Change: And so, as you know, we're the market leader, and we've got a track record of safe and reliable fuel supplying to these high-performance rocket boosters, and we expect to continue to maintain and protect that market position as this market continues to evolve over the ensuing years.

Great. Thank you, Wesley.

Thank you. You're welcome.

Speaker Change: That will conclude the Q&A portion of today's call. I would now like to turn the floor over to Mr. Ballard for his closing remarks.

Mr. Ballard: Thank you everybody. We're excited about today, but certainly tomorrow, and we look forward to talking to you down the road.