Dynagas LNG Partners LP Q2 FY2021 Earnings Call

Thank you for joining us today for Dynagas LNG Partners' Conference Call regarding our Second Quarter 2021 Financial Results. Present with us are Mr. Tony Lauritzen, our Chief Executive Officer, and Mr. Michael Gregos, our Chief Financial Officer. Currently, all participants are in listen-only mode. We will have a presentation followed by a question and answer session. I want to inform you that this call is being recorded today, Wednesday, September 8, 2021. Additionally, the Company has published its results in a press release that is publicly available. I would like to remind everyone that today's presentation and conference call will include forward-looking statements, as defined under federal securities laws. This call and the accompanying slides contain certain forward-looking statements as per the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts and include expectations about Dynagas LNG Partners’ financial performance, growth opportunities, market charter rate expectations, the impact of COVID-19 on our financial condition and operations, and the LNG industry in general. Such forward-looking statements are based on current management expectations and involve risks and uncertainties that could cause actual results to differ. I urge you to refer to Slide 2 of the webcast presentation for the complete forward-looking statement, which is also included in the press release. Please take a moment to read it. Now, I will hand it over to Mr. Lauritzen. Please proceed, sir.

Good morning everyone, and thank you for joining us for our earnings conference call for the three months ended June 30, 2021. I'm joined today by our CFO, Michael Gregos. We have issued a press release announcing our results for the said period. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures as well as a discussion of why we believe this information to be useful in our press release. Let's move on to Slide 3 of the presentation. We are pleased to report the results for the three months ended June 30, 2021. All six LNG carriers in our fleet are operating under their respective long-term charters with international gas producers. The COVID-19 outbreak is still causing operational and logistical challenges for the industry. Despite this, we are pleased to report 100% utilization for our fleet for the quarter. For the second quarter of 2021, we recorded a net income of $9.1 million, earnings per common unit of $0.17, adjusted net income of $10.4 million, adjusted earnings per common unit of $0.20, and adjusted EBITDA of $23.6 million. We paid in May 2021, a quarterly cash distribution of $0.5625 for Series A Preferred Unit for the period from February 12 to May 11, '21 and the quarterly cash distribution of $0.546875 per Series B Preferred Unit for the period from February 22 to May 21, '21. Subsequent to the quarter, we paid in August '21, a quarterly cash distribution of $0.5625 Series A Preferred Unit for the period from May 12 to August 11, '21, and a quarterly cash distribution of $0.546875 per Series B Preferred Units for the period from May 22 to August 21, '21. During the quarter, we issued about $2.15 million worth of common units at an average price per unit of about $2.88 under the amended and restated $30 million ATM sales agreement, which has about $26.5 million of remaining availability. As previously announced, we were pleased to enter into a new time charter party agreement with Equinor for the deployment of our LNG carrier, named Arctic Aurora. Under the new time charter agreement, the Arctic Aurora is expected to be delivered to Equinor in September '21, immediately upon the expiration of the current charter party. The new time charter is about two years, and the annual gross revenues from the time charter agreement are expected to be about $21.5 million. Equinor has had the ice-class and winterized carrier on charter since our delivery from builders in 2013. Going forward, we intend to continue our strategy of using our cash flow generation to delever our balance sheet, reinforce our liquidity, and generate cash to build equity value over time, which will enhance our ability to pursue future growth initiatives. I will now turn the presentation over to Michael, who will provide you with further comments on the financial results.

Thank you, Tony. Turning to Slide 4. Our quarter results continue to reflect our stable operating model as our fleet continues to operate with 100% utilization. Adjusted net income for the quarter increased by 5% to $10.4 million compared to the second quarter of 2020, reflecting decreased finance costs, which were counterbalanced by an increase in operating and G&A expenses. Our adjusted EBITDA amounted to $23.6 million, a 2% decrease compared to the second quarter of 2020. Since our debt refinancing in 2019, our profitability has steadily increased and is now stabilized at current levels, with adjusted earnings per common unit of $0.20 for the second quarter, reflecting our stable contract-based operating platform and financial profile. Moving on to Slide 5. In line with our strategy of using our contracted cash flow to reduce leverage, for the quarter, we utilized 71% of our adjusted EBITDA to service debt and interest payments. For the quarter, we generated $15.8 million in operating cash flow, including a negative working capital adjustment of $3 million. Excluding the working capital changes, operating cash flow for the quarter was $18.8 million, in line with the prior quarter. And after debt service payments and payments to preferred unitholders, we generated $4 million in line with the prior quarter and our prior guidance. For the quarter, our cash balance increased by about $2.7 million to $86.7 million due to the aforementioned changes and proceeds of $2.1 million from the issuance of common units under our ATM program, the last sale of which took place in May. Moving on to Slide 6. This slide gives you a snapshot of certain financial metrics. As of end June, we had $591 million of debt outstanding under one credit facility, all of which has been hedged with an interest rate swap for the life of the loan until its maturity in September 2024. We have no scheduled capital expenditures until 2022, which is when three of our LNG carriers will undergo their third special surveys and the installation of their ballast water treatment plants. Moving on to Slide 7. We are continuing to execute our strategy of organically deleveraging our balance sheet with the cash flows from our contracts, which we believe is the only sustainable way of positioning the partnership for future growth.

Thank you, Michael. Let's move on to Slide 9. Our fleet currently counts six LNG carriers with an average age of about 11.1 years. The charters of our vessels are substantial gas producers, namely Equinor, Gazprom, and Yamal LNG. As of today, September 8, the fleet contract backlog is about $1.09 billion, equivalent to an average backlog of about $1.82 million per vessel, and the fleet's average remaining charter period per vessel is about 7.4 years. Moving on to Slide 10. Our strategy is to conclude long-term charters with reputable LNG producers. After concluding a new two-year charter contract with Equinor for the vessel Arctic Aurora, our earliest potential availability will be in the third quarter of '23 for the same vessel. The next available vessel after the Arctic Aurora may be the Clean Energy, which contract expires in 2026. Barring any unforeseen events and except vessel scheduled dry dockings, our fleet is 100% employed for the remainder of '21, 100% for the year '22, and 95% for the year '23. All the vessels in our fleet are employed on time charter contracts with strong counterparties, under which the charter pays major voyage-related variable costs, such as fuel, canal fees, and terminal costs. Two of the vessels, namely the Lena and Yenisei River, are under dry dock and OpEx cost pass-through contracts, that generally provide protection for reasonable inflation in operating expenses. Although we do not have immediate shipping availability, it is worth mentioning that Q2 '21, which is typically a slow season for LNG shipping, was active and healthy, particularly for charters of six months and longer. There was generally strong demand for LNG, while at the same time, less than expected LNG supply from non-U.S. suppliers led to high gas prices. This enabled the U.S. to increase LNG exports, with most of the additional supply directed to the Far East. Coupled with waiting time in the Panama Canal, this resulted in high demand for available LNG carriers. In general, we are optimistic about the outlook for LNG shipping, driven by a growing demand for LNG and a mature global infrastructure network that supports worldwide trading of LNG and consequently, an efficient pricing of both LNG and shipping. Although our charter incomes have not been affected by the COVID-19 situation, as all of our vessels are employed on term contracts, we are monitoring the situation and outlook. From an operational point of view, we are taking strict measures to protect our seafarers, office staff, and other stakeholders along the logistics chain.

Five out of our six LNG carriers have been designed and constructed in accordance with and are assigned ice class 1A FS notation. These LNG carriers are also winterized down to minus 30 degrees. While the ice class notation is partly concerned with the vessel's hull and machinery and icebreaking capability, the winterization features are installed to ensure trouble-free operation in sub-zero areas. Our partnership and our sponsors represent a total market share of about 82% of the global ice class 1A FS or equivalent LNG carrier fleet. Our fleet frequently calls on ice-bound and sub-zero areas, indicating our charterers are able to unlock the value of the ice class notation and winterization features. The fleet's typical area of navigation regarding ice-bound and/or sub-zero areas includes the Northern Sea route, where the vessels can operate during the summer season, Sakhalin Island, and Northern Norway. As our fleet can perform operations in ice-bound sub-zero and conventional areas without any significant difference in operating costs between the two areas, we believe our fleet has a broader market reach compared to similar type vessels without ice class or winterization features.

We are an experienced LNG company known as a reliable service provider, able to perform core operations in particularly harsh environments. Our fleet is unique and provides trading versatility. Our focus continues to be on operational performance, which translates into high utilization and cost control. Our vessels are employed on term contracts with key industry participants, and this cash flow is largely utilized to organically reduce debt. At present, we are amortizing our debt with about $48 million per annum, and we expect that the reduction of debt will lower our breakeven cost over time. We expect that the solid contract revenue backlog of $1.09 billion and competitive cost of debt will allow us to delever our balance sheet, reinforce our liquidity, and generate cash to build equity value and our cash position over time, which we believe will enhance our ability to pursue future growth initiatives. We have now reached the end of the presentation, and I now open the floor for questions. Thank you.

Our first question today is from Ben Nolan from Stifel. You may proceed.

Good morning or afternoon, Michael, Tony. So I have just a couple of questions. The first one is on OpEx. I know in the press release you talked a little bit about that the OpEx is a little bit higher than it had been, and it was related to COVID. Any insight as to how you expect that to play out going forward as to whether this quarter's run rate is what you would expect?

Yes, I think the current run rate is what we would expect. The increase was due to the fact that because of COVID last year, there weren't any changes done, and costs were much lower than they would have been. So the current run rate is what we would expect going forward.

Okay. Thanks, Michael. And then secondly, for you, obviously there's not a whole lot of moving pieces in the capital structure here, but one of the ones that is at least possible, and I was curious about was you have the 9% preferreds that are now trading somewhat above par, better callable effectively anytime. Is there any thinking or any ability, do you think, to perhaps refinance those maybe at a lower coupon to enhance the organic cash retention?

Well, I think it's challenging to be able to refinance them with similar types of products at the cost, which would make sense. Hopefully, as we build up liquidity, let's say we look at the company at this particular stage on an organic basis, what can be done organically. Right now, we have $87 million on the balance sheet, of which $50 million is restricted. We want to maintain some free liquidity for whatever might happen as protection and just in case an opportunity comes up, we can act quickly. But I think at this particular stage, we would rather maintain the current liquidity on the balance sheet rather than buy a small part of the preferred back. If in the future, organically we can do something with the preferred, that's something that is of great interest to us because it's the most expensive piece of our capital structure. It's something that we're looking at and thinking about how we can deal with this in the best way.

Okay. But it sounds like for now, at least, you're waiting to build up the cash balance before there's anything actionable there. That's fair. Okay, all right. Cool. That does it for me. Appreciate it. Thanks, guys.

Our next question is from Randy Giveans from Jefferies. Please go ahead.

Gentlemen, how is it going?

Hi, Randy.

I guess two questions. You mentioned your last ATM sale was back in May. Any plans on using that again this year? And also, what is your current unit count?

No, at this particular stage, we don't have any plans to issue any further equity under our ATM. I think we mentioned this in our prior call that if we are going to make any further sales, we have to have a very good idea of what we’re going to do with the money. So until that happens, I don't think we're going to make any further sales under the ATM. But now, the share count is 36,802,247.

All right. Well, thank you very much for that. And then my final question. Just looking at your fleet, as you mentioned, maybe some drop-down opportunities or acquisitions. You have a fully chartered fleet for the next two-plus years; what is the partnership looking at in the meantime? Are there some growth potential opportunities maybe from a newbuilding side, second-hand side, or purely looking at kind of additional drop-downs from the sponsor?

Thank you, Randy. Listen, I think Michael also alluded to we don't have any immediate plans of acquiring any of the plants, vessels, or ordering new buildings. We want to keep the status quo for a couple more quarters to build up more cash on the balance sheet and reduce debt a little bit further. We think time is on our side; our balance sheet is getting stronger. The debt on the parent vessels is getting lower. So we don't have any immediate plans on the growth side, but at some point, it will come.

Got it. All right. Well, that's it for me. Thank you.

Thank you.

Thank you, Randy. Thanks.

And there are no further questions waiting. I'll now hand the call back to CEO, Tony Lauritzen.

Well, thank you to everyone for your time and for listening in on our earnings call. We look forward to speaking with you again on our next call. In the meantime, thank you very much, and stay safe.

That does conclude the conference for today. Thank you, everyone, for joining. You may now disconnect.