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

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

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

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

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

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

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

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

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

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

With that, I’ll turn it over to Andy.

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

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

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

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

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

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

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

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

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

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

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

So I think the two leading indicators for you are as you see us investing in CapEx and OpEx because that’s an indicator. We’re seeing green shoots. And the other is certainly would be an announcement that we have with respect to being awarded a contract or several.

Martin Malloy: Thank you very much. I’ll turn it back.

Westy Ballard: Yes.

Operator: Thank you. We will take our next question from Jeff Grampp with Alliance Global Partners. Please go ahead.

Jeff Grampp: Good morning guys. Thanks for the time.

Westy Ballard: Good morning.

Andy Puhala: Good morning.

Jeff Grampp: Stick – sticking on the LNG bunkering opportunity there, it’s – so I think it’s starting to materialize here in a really interesting way in 2024 and beyond with the new ships being commissioned. Hoping to get an update there just in terms of kind of how you guys see that playing out for the company just big picture standpoint. And then from a contracting standpoint, does that market operate differently than how most of the business is done today from a size and duration standpoint? Or how are you guys thinking about kind of pursuing that opportunity as it relates to the contractual aspects of it?

Westy Ballard: Yes, both great questions. I think when you think about the first question, you got to really think about really what’s that addressable market and the perspective we have on that. And so what we’re really looking for is we’re looking for as sticky a revenue base as possible. And so more specifically think about those vessels that are making ratable and routine calls into port and they need fuel. So I think cruise ships, think some of those car carriers, those car carriers coming out of Asia and Europe, they’ve got to deliver floor plan models to these auto dealers in the U.S. So they’re making fairly predictable routine ports of call, I think container ships. Those are all three likely candidates categorically speaking for us to be thinking about.

And then I think also we want to own our backyard. We’ve got infrastructure already in place in close to the Gulf of Mexico. That’s not really as much a container ship or a car carrier, but you do have cruise lines coming in at the port of Galveston, but also it’s a large chemical and tanker market for us to be really excited about as well. So those four categories, and if you kind of follow those ports that’s kind of where we’re thinking about the infrastructure. Now I will caveat that with – with no – no port is the same, each port in each jurisdiction, each state has its own kind of unique permitting and regulatory environment, but rest assured. We’ve been doing this for a few years. And so we’ve got a pretty strong technical and engineering and legal capability on our staff.

We’ve got memorandums of understanding across most of the Gulf of Mexico ports. We’ve operated in California. We’ve operated on the East Coast. So we have a very strong appreciation about how to get licensed and approved in those markets. But those are the markets that make sense to us that kind of ratable, consistent sticky revenue base. I think when you think about size and contract, the center of those contracts really – really is varied. We said and announced that we did a six month contract that that completed in the quarter, but also these contracts could be a year, 2, 3, 4 years. There is no real specific model right now just given the nascent nature of the industry. But it stands to reason that if people are going to spend large numbers of capital investment for this small infrastructure that’s got heavy demand, many are going to want some guarantees and offtake.

We’re not different. We’re going to have that similar perspective. But I will say one of the unique attributes of our business is we’ve got a mobile asset fleet. So we are going to test trial certain markets on the East Coast or along the Gulf Coast to help establish those trade lanes. I’d say also the revenue and margin opportunity different as it relates to the difference between that and our industrial business is multiples larger. It’s significant. On any given day, we’re trucking a 100,00 to 200,000 gallons to a customer location. Those marine bunkering on any bunkering might be 0.5 million gallons to 1 million gallons alone. So it’s considerable multiples and considerably longer contract tenors than that’s kind of more spot market we have in our core business.

That was a lot to unpack. So I hope that helps.

Jeff Grampp: No, that’s great. I appreciate the thoughts there. And my follow-up is on the capital side of things. I think you guys mentioned it was like $5 million in the quarter. It sounds like a lot of that was for the critical components for this new train that maybe sound a little opportunistic. I mean, correct me if I’m off base there. But any kind of expectations for CapEx pace going forward? Is it more opportunistic as some of these contracts potentially materialize or any kind of color you can provide about go forward capital plans would be great?

Westy Ballard: Yes, I think, it’s a blend. This was – certainly had some opportunistic undertone to it. But candidly, we know this asset, we know this configuration very well. The price was attractive, but we also have very strong belief that this is going to be rolling out into a market in a fairly short period of time. When you think small scale versus the world scale, those are 10 year, 12 year FID [ph] to liquid flowing. Ours is anywhere between nine months to 15 months. So we can in a very modular fashion roll this out quickly. The beauty of this asset is, as I mentioned, we know, so it’s got a lot of optionality for us, but to repeat myself, I think I have very strong conviction. We’re going to build this train out very quickly.

I think also as we think about CapEx moving forward, we’ve got the predominant amount of OpEx with great operating leverage. So CapEx will scale and we’ll be thoughtful in that capital structure and you’re talking about numbers anywhere between 50 to 350 based upon opportunity. We want to have some commercial meat on the bone before we start outlaying that kind of capital. And that’s why we’re pedaling so fast and hard to with these discussions, with these vessel owner and operators to, as they establish kind of their infrastructure needs. It’s a bit of a chicken in the egg, but I think we’re going to be thoughtful about how we capitalize it. But we’re excited because there’s an enormous tsunami of demand that’s on the way.

And we think that given our footprint, our mobility, our experience, we will be at the forefront. Also, remember that Chart Industries owns 8% of our company and we have a wonderful relationship with Chart. They’re arguably one of the premier manufacturers of a lot of this equipment. So when you think of supply chain and that capital expenditure side, we’ve got a very tethered relationship and we think that our cost will be very competitive and our turnaround supply chains and critical item needs will be very expeditious. And so that’s kind of how we think about it.

Jeff Grampp: Great. I look forward to following along and best of luck.

Westy Ballard: Yes, thanks.

Operator: [Operator Instructions] We will take our next question from Barry Haimes with Sage Asset Management. Please go ahead.

Barry Haimes: Thanks so much for taking my questions and apologize if I missed something earlier. My line was going in and out, I had to redial in. But I had a couple questions. One is I don’t think I heard you guys talk about the space market. Could you give an update on how that’s been in the quarter and what the outlook is for the year? And then second question is in terms of the export license, any plans to take advantage of that? Where does that stand? Thank you.

Westy Ballard: Yes, no, thank you. Good morning. The space business is incredibly exciting from our perspective. We’ve been servicing that market since early 2018, and it’s a relevant element of kind of the way we think about things. I’ll say this, it’s really got a similar complexion to our industrial business though, meaning, and it’s a fairly lumpy business right now. It’s a lot of fits and starts and stops. And so until there’s more consistency and longer-term contracts, it’s a challenge to really think more strategically about. But it’s certainly, it’s relevant. It’s exciting. I think over the ensuing years, you’ll have a much larger and broader audience of customer right now. There’s kind of a one large consumer of our goods and our LNG we think that changes.

I don’t think that changes today, but it does change as others come online and they’re rocket and programs come online as satellites continue to get more and more robust and launched in a space. And so it’s a great business. We’re excited about it. It’s just going to be lumpy and choppy and it’s very similar to kind of our industrial business now. I think moving forward, the other question was in and around, what was the other question? Excuse me?

Barry Haimes: The export license?

Westy Ballard: Yes, export, excuse me. That’s also we are very bullish on that. We think the structural elements of supply and demand, certainly in the European continent are real. It didn’t really materialize last year because you saw a massive build of inventories, and then this winter was a fairly mild winter in Europe. We don’t think that mild nature of weather in Europe is sustainable. Ultimately, it’s going to get chilly again in Eastern Europe and the drawdowns and those inventory levels will happen. It’s hard to predict when but we have spent a lot of time interacting with offtake to take our molecules and third-party molecules that we can source pretty seamlessly to fill that market. We’d like to get two, three year kind of contracts on that.

It’s just, I think you’ve got some gun shy offtake right now, given, as I mentioned, the full tanks in Europe and really kind of the expectations or lack thereof of cold winter again. So it’s a kind of wait and see. But the punchline here is we are incredibly bullish on that aspect of our business when and how it materializes is still developing.

Barry Haimes: Got it. And then one last question. I didn’t catch what was the equipment that you bought related to the new train and if you talked about either what was the cost of that and what the all-in costs would be of this next train? Thanks.

Westy Ballard: Yes, so the way to think about this, the train was a very similar train that we have in our South Texas location. We understand the asset incredibly well, understand how to deploy that. We will logically put that in our South Texas to expand that capacity, double the capacity. But also what’s great and unique about it is it allows us and affords us the optionality to move that elsewhere in a market for infrastructural needs as well. So that’s exciting for us. When you think about the cost, it was a considerable portion of our cost, probably in excess of 70% of our CapEx for the first half of the year. But that and if you think kind of along the lines of putting that, say doubling our facility, that’s probably a $40 million to $45 million kind of all in soup to nuts investment. And I think with pretty expedited returns on cash – cash on cash returns on capital.

Barry Haimes: Right. And what’s the protected timeline in terms of when that would start producing LNG?

Westy Ballard: Yes, so the way to think about that is in, it’s – there’s a little variability here because supply chain, but that’s anywhere between call it nine months, 10 months to call it 15 months. I’d like to put a finer point on it. It’s a little harder to do. But rest assured that as when we start installing that train and kind of communicate that with you all, we’ll have a much finer point on it. But that’s kind of a good range to think about, nine months to 14 months, 15 months, somewhere in that vicinity.

Barry Haimes: Great. Thanks very much. Good luck going forward.

Westy Ballard: Yes. Thank you. Thanks.

Operator: All right. And this concludes the Q&A portion of today’s call. I would now like to turn the floor over to Mr. Ballard for closing remarks.

Westy Ballard: Thanks everybody for joining us this morning, and we look forward to seeing you in the future and on the road. Take care.

Operator: Thank you. And this concludes Stabilis Solutions second quarter 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day.