Stabilis Energy, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. The filing is under the name Stabilis Energy, Inc. (ticker SLNG). Financial statement amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Stabilis produces, markets and sells LNG, and provides LNG transportation, equipment rental and related services. Its Power Delivery segment includes a Brazilian subsidiary and a 40% interest in China-based BOMAY. The 2019 American Electric combination and Diversenergy acquisition make the year-over-year comparison less like-for-like: Power Delivery contributed $1.31 million of Q1 2020 revenue but had no reported revenue in Q1 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $13.84 million | $12.98 million |
| Net loss | $1.05 million | $0.56 million |
| Net loss attributable to Stabilis | $1.05 million | $0.74 million |
| Operating loss | $0.81 million | $0.20 million |
| Net loss per share, basic and diluted | $0.06 | $0.06 |
| Operating cash flow | $0.35 million | $1.20 million |
| Capital expenditures | $0.11 million | $0.29 million |
Revenue increased 6.7%, as rental, service and other revenue rose 73% to $4.71 million, partly offsetting an 11% decline in LNG product revenue to $9.13 million. Direct costs of revenue were $9.02 million, implying gross profit of approximately $4.82 million and a 34.9% gross margin, versus approximately $4.08 million and 31.4% in Q1 2019. Operating loss widened as SG&A rose 59.9% to $3.19 million, largely reflecting acquired businesses and public-company transition costs. LNG product cost as a share of LNG product revenue improved from 73% to 67%, attributed to better George West plant utilization and a higher share of volumes sourced from that plant.
Cash and cash equivalents were $3.16 million at March 31, down from $3.98 million at year-end. Current assets were $11.85 million and current liabilities $12.75 million, a working-capital deficit of approximately $0.90 million. Total assets were $85.75 million and stockholders’ equity $66.19 million. Management reported $7.4 million of debt principal and $10.7 million of debt plus finance lease obligations, of which $4.6 million was due within 12 months. The filing states the company was in compliance with debt covenants; estimated 2020 interest payments were approximately $0.9 million.
Operating cash flow declined by $0.85 million, which management attributed primarily to increased working capital and a higher net loss. Investing activities used $0.10 million and financing activities used $1.01 million; cash decreased by $0.82 million overall. Related-party interest expense was $0.24 million.
Material changes, outlook and risks
- Management said COVID-19’s Q1 impact was concentrated in Power Delivery. BOMAY’s facility was closed for about four weeks and resumed operations; the shutdown and supply-chain disruption contributed to a roughly $0.2 million quarterly loss, compared with $1.1 million net income in the preceding quarter. The Brazilian subsidiary experienced activity declines beginning in March, expected to continue at least through mid-2020.
- The LNG segment had no material COVID-19 impact during Q1, but management anticipated a significant Q2 decline among upstream oil and gas customers, including hydraulic fracturing and frac sand operations, amid low oil prices. Efforts to redirect sales toward non-oilfield demand had some success, but management said replacing all near-term oilfield revenue remained uncertain.
- Management reported headcount reductions, temporary salary cuts and other cost controls. It cited utility and pipeline sales, lower operating costs as a share of sales, improved plant utilization and the 2019 cancellation of $7.0 million of Chart Industries debt in exchange for stock as support for its view that operating cash flows would fund the business for the next 12 months. Despite recurring operating losses and negative working capital, management concluded its plans addressed liquidity concerns and that the company could continue as a going concern.
- No specific numerical financial guidance was provided. The company said it could pursue refinancing or debt or equity financing, and could not yet determine the CARES Act’s impact on its financial condition, results or liquidity.
- Contingencies include a disputed potential purchase-price adjustment of approximately $4.3 million related to American Electric’s 2018 asset sale; the filing reported no update as of March 31, 2020. M&I Electric was also named in a class action related to a 2017 chemical-release incident; the company said insurers had engaged counsel and management did not expect a material adverse effect. Environmental compliance costs were not expected to be material.
- COVID-19, energy-price volatility, LNG demand, customer concentration, access to financing, project execution and regulatory approvals are among the stated risks. Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q2 oilfield activity declines were offset by non-oilfield demand, and the resulting effects on revenue, utilization and cash flow.
- Cash runway and the timing and amount of debt and finance lease payments, particularly the $4.6 million due within 12 months and management’s liquidity assumptions.
- Progress and potential exposure in the disputed $4.3 million working-capital adjustment and the M&I Electric class action.
- BOMAY’s operating recovery and the Brazilian subsidiary’s activity, including the impact of currency translation and joint-venture results.
- Whether reported margin improvement and cost controls persist as acquired-business costs, SG&A and LNG demand evolve.