Stabilis Energy, Inc. (SLNG) CEO Jim Reddinger on Q1 2020 Results – Earnings Call Transcript


Stabilis Energy, Inc. (OTCQX:SLNG) Q1 2020 Earnings Conference Call August 6, 2020 11:00 AM ET

Company Participants

Jim Reddinger – President & Chief Executive Officer

Andy Puhala – Senior Vice President & Chief Financial Officer

Conference Call Participants

Bill Dezellem – Tieton Capital

Operator

Greetings and welcome to the Stabilis Energy Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that today’s conference is being recorded. Before we begin today’s call, I’d like to remind everyone that today’s conference call will contain forward-looking statements within the meanings 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 August 6, 2020.

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 these 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 any undue reliance on any forward-looking statement.

At this time I’d like to turn the call over to Mr. Jim Reddinger, President and CEO of Stabilis Energy. Please go ahead.

Jim Reddinger

Thanks Donna and good morning everybody. This is Jim Reddinger, President and CEO of Stabilis. And with me is Andy Puhala, our Senior Vice President and Chief Financial Officer. I would like to welcome you to our second quarter 2020 earnings conference call. It goes without saying that the second quarter 2020 was a challenging quarter for many companies including Stabilis. We saw both volumes of LNG sold and revenues fall over 60% from the first quarter which as a reminder the first quarter was a record quarter for us.

These Q2 results were not unexpected, as we discussed the challenges we were beginning to see on our last earnings call. We responded to this decrease in business activity quickly and aggressively by reducing costs, including headcount reductions, salary and other compensation reductions, the capital expenditure freeze and discretionary expense reductions; including travel and consulting costs.

However most importantly, we pivot our sales team to focus on new market opportunities that provide sales and growth opportunities despite the broader market downturn. We think these efforts have paid off and we’re putting and are putting us in a position to successfully manage through the downturn. In fact it appears that our activity levels bottomed out in May and are now improving month-over-month.

Later I’ll discuss some of the new project wins and opportunities we see that give us reason for optimism about the recovery and validate the growth strategy we’ve been discussing in our last several calls.

But first I’ll turn the call over to Andy for some comments on the financial results.

Andy Puhala

Thanks Jim. For the second quarter Stabilis reported revenues of $5 million, a decrease of 64% versus the $13.8 million reported in Q1. LNG segment revenues were $4 million compared to $12.5 million in the quarter ended March 31, 2020. The sequential decrease is primarily due to a 62% decrease in LNG gallons delivered due to the impact of the COVID-19 crisis, the related shutdowns and the resulting decrease in industrial activity particularly with our oil and gas-related customers.

Normal seasonal factors also contributed to the first — as the first quarter is typically our strongest quarter due to winter peaking activities. George West facility utilization fell to 31% down from 74% in Q1. Our Power delivery segment reported revenue of $1 million down 25% sequentially. Net equity income from our BOMAY joint venture was $0.9 million compared to a net loss of $0.2 million in the previous quarter.

Our China joint venture provided a bright spot in the quarter, as the JV resumed operations after the shutdown that impacted its results earlier this year. As a result adjusted EBITDA for the quarter was a negative $800,000 down from the positive $1.5 million in the first quarter. There were no adjustments to EBITDA in the current quarter. Net loss for the quarter increased to $3.5 million compared to a net loss of $1.1 million in the preceding quarter.

Moving to the year-over-year results, revenues contracted by 55% in the second quarter compared to Q2 of 2019. LNG segment revenues decreased by $7.1 million year-over-year due to the crisis, lower natural gas prices accounted for approximately $300,000 of the reduction.

As mentioned previously the utilization of our George West plant was 31% in Q2 down from 76% in the year ago quarter. The Power Delivery segment was not included in our prior year quarter as our merger transaction closed subsequent to Q2 of last year. Adjusted EBITDA as I mentioned was a loss of $0.8 million in the quarter compared to positive EBITDA of $1.7 million in the year ago quarter.

Net loss increased to $3.5 million from $1 million in the year ago quarter. We finished the quarter with $7.1 million in cash on hand which was aided by net dividends received of $1.8 million from our BOMAY joint venture and also benefited from a reduction in net working capital during the quarter. We believe we have adequate cash and access to sources of liquidity to manage through the current cycle. I’ll now turn the call back to Jim for some additional remarks. Jim?

Jim Reddinger

Thanks Andy. As I mentioned earlier although the COVID-19 crisis had a significant impact on our business in the second quarter we’re seeing some encouraging signs for the future. We have signed contracts with several new Mexican customers since our last call including a greenhouse and a remote power customer that are both currently taking deliveries of LNG.

In addition we have several new contracts with Mexican customers in the final stages of negotiation that include several mining customers that have the potential to utilize significant volumes of LNG on a long-term basis. In the U.S., we achieved one of our goals for 2020 by securing our first marine bunkering contract that will begin providing technical services revenue immediately and have significant activity beginning in January of 2021.

We also signed a multiyear renewal with a major customer for winter peaking services in the Northeast beginning in Q4 of this year. And as indicated in our last call we signed a contract with a major customer in the aerospace industry that we expect to provide strong LNG volumes later this year and into the future. And we have several opportunities that we’re actively pursuing with similar customers.

We also recently completed a short-term pipeline interruption contract for a new customer in Texas. Our sales pipeline is strong and growing and these new contracts and opportunities will significantly broaden our customer base and reduce our reliance on some of our traditional oil and gas-related customers going forward.

We’re excited about these new opportunities. And although the pace at which we’re able to recover to previous revenue levels remains uncertain, we’re excited about the future and confident that we’ll be able to continue to successfully manage through the crisis as the world goes back to work.

Finally as I mentioned last quarter our long-term strategy remains unchanged. We seek to become the preeminent small-scale LNG provider in North America by providing superior value and service to our customers. We believe that small LNG will continue to become an increasingly important and growing piece of North America’s energy solution. In the short term, we’re focused on increasing and diversifying sales controlling costs and maintaining liquidity.

With that I’ll turn the call over to Donna for questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question today is coming from Bill Dezellem of Tieton Capital. Please go ahead.

Bill Dezellem

Thank you. A couple of questions to start with here, one was the last time that George West was operating at 31% utilization?

Jim Reddinger

Good question, Bill. I will have to go back and confirm it for you. But, it’s probably about, 18 months to 24 months.

Bill Dezellem

And what was the absolute bottom low point. And if we measure it on a weekly basis, if that’s a reasonable way to do it, for George West utilization? And where are you running at today?

Jim Reddinger

Andy, do you have those numbers, in front of you?

Andy Puhala

Yeah. We’re running — as of July, Bill, we were running at about 40%. And the bottom of the utilizationm it got down to about 22%, in May.

Bill Dezellem

Great, thank you. And then, relative to the oil and gas market, I recognize, there’s not a lot of fracking, taking place. But are you finding that there is a preference for e-frac, for the — for those instances where fracking is taking place? Or could you talk about that dynamic?

Jim Reddinger

Well. I can talk about it before, the shutdown started, the COVID shutdown started. There was a significant momentum, towards using e-frac applications, throughout multiple basins in the U.S.

I don’t know that we can really draw any conclusions about during the crisis, given most if not all the activity we were seeing going on shutdown for a period of time. But there certainly has been significant momentum for the e-fracs moving forward, for a variety of economic. And environmental issues as well.

Bill Dezellem

Yeah. And I guess, where I was going with the question, Jim was now that the rig count has stabilized-ish, are you sensing that that momentum that e-frac had may return, meaning that in the cases where there is a frac job that’s going to take place, that the operator would rather that be done with an e-frac fleet, rather than a traditional? Or is it simply too early to know.

Jim Reddinger

I have no reason to think the momentum that, the e-frac saw before the shutdown is going to change. So I do think, it will continue going forward. Again, it’s a better cost alternative, in some cases. And it’s a better emissions profile, in a lot of cases, both. Environmental, emissions, noise et cetera.

So we have no reason to think that change, Bill. Given a lot of the oilfield activity it feels like it’s getting ready to gear up, in Q3 and Q4. And we are preparing to do that with a few customers. But I don’t really have anything more specific, than the trends we already saw for you on the e-frac side, which were positive.

Bill Dezellem

Great. Thank you, Jim. I’ll step back and re-queue up.

Jim Reddinger

Thanks, Bill.

Operator

[Operator Instructions] We will move back to Bill with Tieton Capital. Please go ahead.

Bill Dezellem

Great. Thank you. I won’t abide by the two question rule anymore.

Jim Reddinger

No problem.

Bill Dezellem

Would you discuss just with the business in general, over the course of March really through today, what you — kind of trends, and behaviors, and activities? It sounds like, utilization bottomed out in May. But what about prospect interaction, et cetera? Are there any characteristics that you can give us from a trend line perspective, in terms of what you’ve been seeing, since things started to go south, in March?

Jim Reddinger

Well. I think, what I’d say Bill is downturns are never positive for anyone. But as we’ve been through a few of these with this business now, in all cases, we’ve been able to continue pretty significant customer interactions during those downturns.

But probably most importantly, we’ve been able to use them to find new customers and new segments. A lot of the downturns we’ve been through, including this one have had significant negative impact on the oilfield sector, as we’ve all witnessed. This one has had an impact on some of the larger industrial sector activity as well.

But as I talked about in my comments, one of the things that I’m happy about as we come out of this or worked through is what I should say is, we’ve got a lot more exposure now and some growth with some of the customers, we’ve seen in Mexico. We’ve got some significant new activity in the aerospace sector and some encouraging activity now in the marine sector.

So, we’re really seeing the opportunity, during this downturn to focus on those new markets, which I think coming out of it. As oilfield activity rebounds will just put us on stronger footing for having a larger and more diversified base of business. So from that perspective, it’s consistent with other downturns, where we’ve really been able to use it as an impetus to pivot and grow in the new places.

Bill Dezellem

Did you sense at all, a lack of interest early on? And I’m thinking March and April, maybe into May of customers to even have discussions with you, as they were trying to figure out their own work from home situation? Or did the ongoing conversations pretty much continue throughout, the whole lock down.

Jim Reddinger

I was impressed that — with — really most people didn’t miss a beat, in going to work from home. We were having consistent customer dialogue. I think it actually probably even accelerated, in early April, as the lockdown first started. I think the employees everywhere we’re pretty cognizant of keeping their activity up.

I’m not saying that, order activity increased but interactions and discussions with the customers certainly were very active. So I’ve been pleasantly surprised, that we’ve been able to keep that moving. Obviously some sectors like we talked about in the oilfield were still dealing with their own issues. But we haven’t really lost touch with anyone.

Bill Dezellem

That’s great. Thank you. And then, let’s talk about a few of your wins that you referenced in the press release. First of all, the U.S. aerospace customer, would you talk just to, why they need LNG. And what it is that they’re doing that they weren’t able or aren’t able to do in what I’d call a more traditional sense?

Jim Reddinger

Yeah. I’d say Bill, at some point would like to talk about it more. We’re under some pretty strict NDA restrictions with these customers in particular. But the best I can say is, it’s an interesting new — some interesting new applications where LNG is being used as a fuel, as propellant for some of the activities going on in the aerospace side.

Bill Dezellem

All right. Thank you. The marine bunkering, did we hear you say that significant volumes will begin in January? Or is that when some of the engineering revenues will become meaningful?

Jim Reddinger

We’re going to start — we’re starting the engineering work now. And so, there’s a lot of engineering, safety process, procedure, operational work to be done now. And then we anticipate the actual bunkering events will begin in significant volumes, either late fourth quarter this year or first quarter of 2021.

One of our objectives as a company was to secure at least one marine bunkering contract in 2020. So we’re happy we’re able to get this one across the finish line. And now we’re going to be able to be part of the — really the development of this project with one of the major Trans-Pacific shippers located on the West Coast.

So we’re excited about it. I know, they’re enthusiastic to get their testing and pilot programs underway. So starting next year there should be more significant volumes of bunkering activity that occur.

Bill Dezellem

And, Jim, given this win, does it accelerate or raise the interest with any other customers? Or is there not a spillover benefit?

Jim Reddinger

Well, we hope it will. I mean, yes, there’s obviously financial benefits to this. But for us the biggest win for the future is the expertise we’re going to be able to develop, again, in the processes and procedures, the safety procedures and the efficient setup of equipment and operations to bunker large volumes of fuel into marine vessels. So our goal was, both from a revenue perspective, to get into marine, but probably more importantly from an experience perspective, so we can start to grow along with the sector as more and more bunkering activity starts happening.

Bill Dezellem

And is it your sense that there is a fair amount of additional bunkering activity, marine bunkering, under discussion?

Jim Reddinger

Yes. I mean, everything we can see and feel, it looks pretty significant. A lot more of the — both in the Atlantic and the Pacific, the container ships, car carriers a number of different vessels are either being converted or coming into service LNG-ready. As we’ve talked about in the past largely driven by the IMO 2020 standards that are required globally for shippers. So we’re seeing that momentum really pick up.

Bill Dezellem

And cruise ships, do they fit in that category also?

Jim Reddinger

Yes there’s a number of cruise ships that you can read about in the news that are being converted along Florida’s East Coast from Fort Lauderdale, Miami, up to some of the more northern ports there. But cruise ships will be one of the leaders. They get a lot of benefit from, I guess, the social responsibility and marketing aspect of being cleaner. And they also just get a lot of benefit from the customer experience, where you don’t have black smoke and soot and all those things happening on the boats.

Bill Dezellem

And it makes complete sense. And are you finding that the cruise ships, because they’re not operating now, that they have put these plans on hold as they try to cut their own CapEx, or just one of those unique situations where they’re moving forward in spite of that?

Jim Reddinger

I don’t have the schedule in front of me, but I know many of them or most of them have already made those capital commitment. So I think that, to use the pun intentionally, that ship has already sailed. They’ve already made those commitments. So that’s going to happen.

Bill Dezellem

Great. Thank you. And may I continue with more questions? Or would you prefer I stepped out?

Jim Reddinger

Operator, is there anyone else in the queue? Or should we keep going with Bill?

Operator

You can keep going with Bill.

Jim Reddinger

Thanks.

Bill Dezellem

Great. Thank you. So let’s shift if we could to the remote power generation contract in Mexico. Would you please discuss what it is that that customer is doing? I think I have a bit of an image in my mind, but I don’t want to mischaracterize it as I think about it. Would you please talk about it? And then the size also please?

Jim Reddinger

Yes. The largest customer we’re serving now in Mexico is using LNG to power generators that are supplementing the power grid. Some of that for summer cooling, air conditioning purposes. Others — but some of it’s also just for general supplement to the power grid.

And so, we bring LNG down from the U.S. We take it across the border, we bring it into the site where the power generation is happening. We store it there and then we revaporized it into the generators. And right now, they’re burning anywhere from three to five truckloads a day?

Bill Dezellem

And is that a new win? Or do you have a new win in addition to your largest customer?

Jim Reddinger

So, that — it is the largest customer right now and it is a new win. We’ve also secured a greenhouse that’s using LNG for heating purposes. And that’s approximately a half a load to a load today. And then, we’ve got two other mining contracts that have been verbally awarded that were under contract discussions with, that combined could be anywhere from four to five truckloads a day. So all these together are pretty significant new volumes into Mexico.

Bill Dezellem

No, that’s very helpful. And the two mining customers, the four to five loads, that’s combined or that would be —

Jim Reddinger

That would be combined. That would be combined. They’re each approximately two to three loads a day.

Bill Dezellem

Well, that’s fantastic. And for each of those, what’s the time frame before the verbal commitment that you have now would practically turn into volumes being shipped?

Jim Reddinger

Within the next eight weeks is my anticipation, four to eight weeks.

Bill Dezellem

You believe, you could be shipping product at the rate of two to three loads a day in the next couple of months?

Jim Reddinger

Yes. We’ve started the technical setup. There’s some equipment that needs to arrive at the customers’ sites for some of this to happen. But yes we do believe that it’s imminent?

Bill Dezellem

Okay. So this — these are in addition to then some of the mines that are being proposed and would actually take time for the mining company to prepare the site to actually do the mining. These are actual mines that are working right now?

Jim Reddinger

Yes, they’re working now and they’ve got power generation, process heat other needs that they’re already running on other fuels that they’d be converting to LNG.

Bill Dezellem

No congratulations on almost getting that across the finish line. And then we did see — I believe it was in the Houston Chronicle that you have been granted approval to take LNG into Mexico via rail. How significant or important is that particularly in light of all these wins that you’re discussing here?

Jim Reddinger

Yes. And just to clarify, it wasn’t Stabilis specifically but there were — the U.S. authorities approved LNG transportation by rail in general. We do think it’s a significant development. I mean, obviously another transportation mode of transportation it can only help the efficiency of our ability to move LNG. Right now a few things are going to need to happen including the capital investment in railcars and rail loading and receiving terminals for LNG to make that all happen. But we do anticipate that will come. So we think it’s a very positive development, but it’s going to take a little time to really become a practical alternative.

Bill Dezellem

Great. Okay. That’s appreciated. And then would you talk to us about your permitting and site preparation et cetera for your plant or plants in Mexico?

Jim Reddinger

Yes. We’re still in the queue for that in Mexico. And given some of the shutdowns the government enacted and is still enacting down there that process is — continues to be a bit stalled. We’re just working with — working with the agencies and are waiting to work with the agencies when they get back online. So I don’t have any specific guidance on that right now other than to tell you that it’s been stalled out with COVID close downs.

Bill Dezellem

And so Jim, would it be fair for us to be thinking about you trucking volumes into Mexico and to supply these wins and in some cases your margins will be lower just because the trucking distance will be a little bit further than what you would otherwise want and that will continue until you have these plants up and running? Or do you think that you’ll just keep trucking product down and the new plants when they are up and running will be serving all new customers that we aren’t even talking about yet today?

Jim Reddinger

Yes, our growth strategy in general has been to leverage our distribution capabilities and our sales expertise to grow new markets before we put plants into them. So creating volumes in certain regions of Mexico that are enough to sustain a plant is how we think about building those markets for plants. So in some cases, Bill where we’ve got customers built up putting in a plan will make sense in that area. In other cases, based on a variety of factors about gas power other availability, we may continue to ship in from third-party sources. So I can’t — I don’t we’re not really giving project-by-project margin or anything like that. I can’t tell you that the new sales have been priced to be profitable attractively profitable on a stand-alone basis based on them being shipped in from farther away sources. So if we were to put plants in this area that would certainly reduce some of the transportation costs on our side and improve the margins.

Bill Dezellem

Great. Thank you. And so finally, if we think about what you’ve been describing, even if the oil field does not come back as it appears as though it may in Q3 and Q4 that bottom in may probably holds and volumes continue to grow from this point forward because of the new wins that you have in place both in the U.S. and in Mexico?

Jim Reddinger

Yes absent any changes in the market which I can’t predict, right now we feel like we’re — yes we feel like we’re on pace for that.

Bill Dezellem

Excellent. Thank you for taking all my questions. I do appreciate it.

Jim Reddinger

Appreciate you been, Bill. Thanks. Operator, are we all set with questions?

Operator

We’re showing no other questions pending at this time. Do you have any closing comments?

Jim Reddinger

No. I appreciate everybody being on. And we look forward to having improving results next time we talk next quarter. Thanks much.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time and have a wonderful day.

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