Excelerate Energy, Inc. (NYSE:EE) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Hello and welcome to the Excelerate Energy Third Quarter 2023 Earnings Conference Call. My name is Elliot and I’ll be coordinating you your call today. [Operator Instructions] I’d now like to hand over to Craig Hicks, Vice President of Investor Relations and ESG. The floor is yours. Please go ahead.
Craig Hicks: Good morning everyone. Thank you for joining Excelerate Energy’s third quarter 2023 financial results call. Participating on the call today are Steven Kobos, President and Chief Executive Officer; and Dana Armstrong, Executive Vice President and Chief Financial Officer. Our third quarter 2020 results press release and presentation were released yesterday afternoon and can be found on our website at ir.excelerateenergy.com. I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Our actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update or revise them.
Today’s remarks will also refer to certain non-GAAP financial measures. We have provided a reconciliation to the most directly comparable GAAP financial measures at the back of the presentation. Now, I’d like to turn the call over to Steven Kobos, Chief Executive Officer of Excelerate Energy.
Steven Kobos: Thanks Craig and good morning, everyone. Today, I’m going to talk about our financial and operational performance during the quarter, our recent commercial updates, and our growth strategy. Then I’ll pass the call over to Dana, who will provide more detail on our financial results for the quarter. Let’s just start by talking about who we are as a company. Excelerate Energy is a leading provider of flexible LNG infrastructure and integrated solutions. We enhance energy security for countries around the world and we help them to transition to a clean energy future. These fundamental tenets of who we are remain unchanged. We’ve got a geographically diverse and resilient business model designed to deliver predictable earnings results, which is exactly what we did.
Excelerate reported very strong financial results in the third quarter. Our adjusted EBITDA came in at $107 million, and net income was close to $47 million. The results we delivered during the quarter were driven primarily by higher revenues in our core regasification business, outperformance of our gas sales contracts in Brazil and lower-than-anticipated expenses across the fleet. Our FSRU and terminal services business, which is underpinned by stable long-term contracts is the cornerstone of our business model. It consistently generates positive cash flow and gives us the financial flexibility to execute our growth strategy. Our strong performance year-to-date has given us the confidence to increase our full year adjusted EBITDA guidance to $340 million to $350 million.
And on November 7th, the Excelerate Board of Directors declared another $0.025 dividend per share to shareholders of record as of November 28th. In addition to delivering another quarter of strong earnings results, we optimized our near-term and long-term financial position by executing two new commercial agreements. On October 17th, we signed a 10-year contract with Petrobras to charter the FSRU Sequoia. This agreement demonstrates our commitment to help enhance Brazil’s energy security. It is an important step in furthering our long-term sustainable growth plan in South America. Earlier this week, we signed a long-term LNG sale and purchase agreement for SPA with Petrobangla. This long-term SPA is a significant milestone for Excelerate. It represents the next phase of our plan to integrate our business in Bangladesh.
On the operations front, the FSRU Excelsior completed its seasonal service at the Bahia Blanca gas port in Argentina at the end of August. Now the Excelsior is back on hire with the German government. It’s currently at the Navantia shipyard in Spain for customer-requested technical upgrades. Beyond that, the construction of our newbuild FSRU, called 3407 with Hyundai Heavy Industries is making great progress and remains on track for delivery in June 26th. Finally, in October, we released our inaugural sustainability report, which highlights our 2022 global sustainability activities and environmental performance results. Excelerate has outsized importance in the global energy landscape. Around the world, geopolitical instability including the ongoing war in Ukraine and the conflict in the Middle East has highlighted the importance of having flexible energy infrastructure, which is capable, both of mitigating the effect of unforeseen events and the intermittency of renewable energy.
We are an indispensable energy company in the world we live in. In Finland, the disruption of the Baltic Connector pipeline has raised serious concerns about energy security in the region. Subsea Pipeline, which connects Finland and Estonia is expected to be out through the winter. In the meantime, Finland will continue to rely primarily on our FSRU, the Exemplar to meet its natural gas needs. Given the disorder that countries around the world are facing, the need for energy security and the essential services that Excelerate provides has never been greater. We believe this will be so for decades to come. Excelerate has a legacy of using its FSRU fleet to strengthen the energy security for customers across its global footprint. As the needs of our customers change, the flexibility of our fleet allows us to offer a variety of integrated services to meet best their needs.
On one hand, our FSRUs are used as cost-effective insurance for countries looking to stabilize their energy system or advance their transition to renewable energy. On the other hand, in some markets, our FSRUs operated close to maximum send out re-gas capacity to deliver base-led natural gas supply to our customers. For example, this is how our FSRUs are used by our customers in Pakistan and Bangladesh where future demand for LNG and natural gas is expected to be robust. This shouldn’t be a surprise to anyone, given that the combined population of these 2 countries is over 400 million people. Higher utilization markets are an important part of our growth strategy. They create opportunities for long-term infrastructure uplift from LNG and gas sales through our terminals.
Regardless of how our customers utilize our services, the fixed fee revenues from our FSRUs and terminals create an exceptionally strong foundation for sustainable growth. Our recently announced long-term charter agreement with Petrobras is a great example of how valuable security of supply can be for our customers. Last month, we signed a 10-year contract with Petrobras to charter the FSRU Sequoia to enhance Brazil’s energy security and support its transition to renewable energy. Under the agreement, which will commence on January 1, and Excelerate will deploy the Sequoia to provide regasification services in Brazil at the Bahia Re-gas Terminal. The deployment of the Sequoia, which is one of the most modern FSRUs in the global fleet will help ensure the operational continuity of the Bahia terminal after the expiration of the current terminal lease agreement on December 31st of this year.
Petrobras was one of the world’s earliest adopters of FSRUs. They know the asset class extremely well. We appreciate the fact that Petrobras selected Excelerate to be their preferred partner for FSRU services in Brazil. Financially speaking, this is a great deal for Excelerate. After purchasing the Sequoia for $265 million in Q2, we secured a long-term contract for the vessel at the high end of the range of current market rates for FSRUs. We did what we said we would do. Importantly, the deal expands our core re-gas business, which allows for even stronger visibility to predictable near-term and long-term cash flows. Another good example of how our flexible FSRUs are utilized is our recently announced LNG SPA with Petrobangla. Under this 15-year agreement, Petrobangla has agreed to purchase from Excelerate, 0.85 million tons per annum of LNG in 2026 and 2027 and 1 million tons per annum from 2028 to 2040.
The SPA volumes, which we expect to be back to back on the supply side will be delivered to Excelerate’s two existing FSRUs, the Excellence and the Summit LNG in Bangladesh. Long-term LNG offtake agreements like this SPA are an essential part of our integrated growth strategy to lock in ratable economic uplift on our existing infrastructure. We are focused on optimizing our FSRU fleet and evaluating strategic investments in new assets and infrastructure to further our growth. The sustained tightness of the FSRU market should create new opportunities for Excelerate to connect LNG to downstream customers. To capitalize on these incremental opportunities, we plan to invest in additional FSRUs and LNG infrastructure that will position the company to expand our presence in markets with a growing demand for LNG.
This includes regions such as Sub-Saharan Africa, in countries such as India, Pakistan, Vietnam, and Bangladesh. Our Pirate LNG project is a great proof point of the strategy. Pirate LNG is a critical part of Bangladesh’s plan to support its ever-growing economy by providing natural gas to new and existing customers in the southern and western regions of the country. The project scope includes an offshore [Indiscernible] LNG import terminal and a 270-kilometer 1 billion cubic feet per day onshore pipeline to [indiscernible] is the country’s third largest city. We recently signed a nonbinding charter sheet with Petrobangla for Pyra. The term sheet, which details the broad commercial parameters and framework for the deal represents an important milestone in the development of the project.
We are now positioned to advance several critical work streams for the project, including our ongoing discussions with potential equity partners and lenders and the negotiations of the definitive agreements. In summary, we expect this focused approach to expanding our presence in markets with growing demand for LNG and will result in more near-term earnings and cash flow growth, while we continue to develop our longer-term organic capital projects. With that, I’ll now turn the call over to Dana.
Dana Armstrong: Thanks Steven and good morning everyone. We are very pleased with Excelerate’s performance in the third quarter of this year. Our third quarter net income was $47 million, which is an increase of $9 million or up 25% as compared to the prior year third quarter. As compared to the second quarter of this year, our net income was up $17 million. Our third quarter adjusted EBITDA was $107 million, an increase of $29 million or up 37% over the prior year third quarter and up $18 million as compared to the second quarter of this year. The year-over-year increases in net income and adjusted EBITDA were primarily driven by higher charter rates in Finland, Argentina, Brazil and Germany and lower operating lease expenses driven by the purchase of the Sequoia in the second quarter.
These year-over-year increases were partially offset by the end of our contract in Israel in the fourth quarter of last year. The increase in adjusted EBITDA versus last quarter was driven by higher margins on our gas sales contracts in Brazil, inflation index adjustments on certain contracts that were effective in early Q3 along with lower vessel operating costs. Excelerate continues to benefit financially from having a portfolio of stable long-term contracts. This portfolio has been strengthened by our recent FSRU charters, which have all been contracted at higher rates that are reflective of the increased market value for the asset class. As of September 30th, our FSRU and terminal assets had roughly $3.5 billion, a remaining contracted cash flows with a weighted average remaining life of seven years.
Including the new Sequoia Charter with Petrobras signed in October, our contracted FSRU and terminal services portfolio has grown to over $4 billion of remaining contracted cash flows. Total CapEx for the third quarter was $12 million, which included $4 million of maintenance CapEx, mostly related to vessel upgrades for the FSRU Excelsior. Year-to-date through the third quarter, our maintenance CapEx was $16 million. On a full year basis, we expect to spend between $20 million to $25 million on maintenance CapEx. As previously mentioned, the FSRU Excellence is performing its planned dry dock activities this quarter. The vessel left for dry dock in early November, and we expect the vessel to return to service in Bangladesh, by late December.
Because the Excellence is under a build, own, operate transfer or BOOT structure, the related expenses will not be classified as maintenance CapEx, but instead, the financial impact of the dry dock will be recognized through our income statement. The full effect of the dry dock on our fourth quarter EBITDA results is included in our full year guidance. Based on the strong financial results we’ve delivered through the third quarter, we are raising our adjusted EBITDA guidance for 2023. For the full year, adjusted EBITDA is now expected to range between $340 million and $350 million. Excelerate is well positioned financially to execute on our focused growth strategy, and we look forward to advancing our plans to create value for our shareholders.
With that, we’ll open up the call for Q&A.
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Q&A Session
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Operator: Thank you. [Operator Instructions] First question comes from Chris Robertson with Deutsche Bank. Your line is open.
Chris Robertson: Hey, good morning Steven and Dana. Thanks for taking my questions and congratulations on the really solid quarter.
Steven Kobos: Thanks Chris. Appreciate it.
Chris Robertson: Sorry, I thought I couldn’t hear you guys for a second there. Yes, I just wanted to dive down a bit further into the new Petrobras agreement. I guess, how should we think about that in terms of incremental EBITDA that, that new contract brings? And how should we compare that with the prior arrangement that you had there versus this new agreement? Is there any kind of put and take with regards to gas sales upside? Is it primarily just fixed fee arrangement here? Just a little bit more detail would be helpful.
Steven Kobos: Thanks, Chris. I appreciate the question. I’m going to hand it over to Dana here in a second about the EBITDA uplift. And I think once you hear from her, you’ll realize it’s a great deal. It’s really important to us. It’s 10 years of predictable revenue. And the fact of the matter is it’s better than anybody’s getting in Europe. So, we like Petrobras. This is the deal that Petrobras wanted to do, which is always an important consideration. You heard from Dana with the addition of this contribution, we’re over $4 billion of future contracted cash flows. But another thing that’s interesting about this one, it has CPI index every two years. So we’re really — you can model it. We’ve had some concerns about the variability in Brazil in the past with the gas sales impact of reliance on hydropower and intermittency from that, but this is going to be solid earnings that you can model year in, year out, and we couldn’t be happier.
As I said in my remarks, Petrobras has been out FSRUs since the get-go. And the fact that they’re counting on us for — to be their exclusive moving forward, FSRU partner is fantastic. But Dana, do you want to give Chris color on what we’re–
Dana Armstrong: Yes, Chris, so just to add to that, to be a little bit more specific, we’re expecting our EBITDA in the mid-$60 million range over the near term. And that’s going to increase over time because of the CPI escalator, so it’s a very solid, profitable contract for us. In fact, it’s one of our — probably is our most profitable TCP that we have. So, again very excited about it. In comparison to gas sales, Steven stated, the gas sales, as you can tell, have been lumpy over the past two years and not predictable. So even though we had great performance this year, Brazil gas sales, that’s not guaranteed in the future. So, we’re definitely happy with this deal. Does that answer your question?
Chris Robertson: It does. Yes, it sounds like a good deal for you guys, and I like the predictability of the cash flows here from that. I guess moving on, on the — centered in Dubai, I was under the impression that there was an extension of one of the FSRUs there through 2030. And if you could comment on the FSRU, the Express, I’m under the impression that it’s kind of on a rolling contract basis. What’s the status of the Explorer in terms of the contract expansion? And then how should we think about the rolling contract nature on the Express?
Steven Kobos: Yes. Well, thanks, Chris. We can we can jump down into that. I was just in UAE a few weeks ago. That extension on Explorer, we announced that, gosh, if you like, back in January or so. And what’s telling about Explore kind of fits into our narrative about energy security. Because that was an extension off of a charter that was going to expire in 2025. So, you had somebody three years before an end date saying, hey, we really would like to see an extension of that through 2035. So, I took it as a tell, we took it as a tell that energy security is important. People are thinking about locking in energy security sooner than they otherwise would. And it’s a critical piece of what Dubai needs for their energy mix and not just in the heat of summer.
