Dynagas LNG Partners LP Q1 FY2022 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the First Quarter 2022 Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer; and Mr. Michael Gregos, Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. Please note that this conference is being recorded today. Please be reminded that the company announced its results with a press release that has been publicly distributed. At this time, I would like to remind everyone that in today's presentation and conference call, Dynagas LNG Partners will be making forward-looking statements. These statements are within the meaning of the federal securities laws. This conference call and slide presentation of the webcast contain certain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements in today's conference call that are not historical facts including, among other things, the expected financial performance of Dynagas LNG Partners business, Dynagas Partners LNG ability to pursue growth opportunities, Dynagas Partners LNG expectations or objectives regarding future and market charter rate expectations and in particular, the effects of COVID-19 on the financial condition and operations of Dynagas Partners LNG and the LNG industry in general, may be forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended. Matters discussed may be forward-looking statements, which are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to Slide 2 of the webcast presentation, which has a full forward-looking statement, and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it. And now, I'll pass the floor to Mr. Lauritzen. Please go ahead, sir.

Good morning, everyone, and thank you for joining us in our 3 months ended 31st March 2022 earnings conference call. 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. We can move to Slide 3 of the presentation. We are pleased to report the results for the 3 months ended 31st March 2022. All 6 LNG carriers in our fleet are operating under their respective long-term charters. Our fleet reported 100% utilization for the first quarter of '22 and for the eighth consecutive quarter included. For the first quarter of 2022, we reported net income of $23.9 million, earnings per common unit of $0.57, adjusted net income of $10 million, adjusted earnings per common unit of $0.19 and adjusted EBITDA of $22.9 million. Our thoughts go out to everyone affected and suffering as a result of the crisis in Ukraine. We continue to closely monitor this ongoing situation, including the implications of economic sanctions, trade restrictions and other considerations that may affect our business. The Partnership is currently in compliance with applicable U.S. and EU sanctions. It is our understanding that the current U.S. and EU sanctions regime have broadly exempted LNG shipping and do not materially affect the business operations or financial conditions of the Partnership. Also, the Partnership's counterparties are performing all of their obligations under their respective time charters in compliance with all applicable U.S. and EU rules and regulations. Our vessels named Clean Energy, Ob River and Amur River are on charter to Gazprom Marketing and Trading of Singapore, which is owned indirectly by Gazprom Germania. Gazprom Germania, including its subsidiaries, has been placed under the control of the German government, which company has also received a loan commitment of approximately EUR 9.8 billion from the German government. Essentially, this all means that the 3 respective charters of Clean Energy, Ob River and Amur River are now under German control instead of Russian control. The change in control has had no impact on our revenue. Sanctions legislation is changing rapidly, and the Partnership is continuously monitoring the ongoing situation. 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, contractually based operating model as our fleet continues to operate with 100% utilization. The quarter was mainly impacted by the special survey, dry-dock of our 2007-built LNG carrier Clean Energy, which commenced on 16th March, was completed on April 15, and which $2.6 million was attributable to this quarter. Vessel operating expenses were 10% higher versus Q1 2021, although they were 5% lower than the previous quarter. As a result, adjusted net income for the quarter decreased by 5.7% to $10 million compared to the first quarter of 2021, and adjusted EBITDA amounted to $22.9 million, a 4.2% decrease compared to the first quarter of 2021. Looking forward, we anticipate that next quarter's earnings will also be impacted firstly with the balance of the Clean Energy special survey and dry-dock, which is anticipated to amount to $2.7 million, excluding the installation for the ballast water treatment plant, which will be capitalized. Please also note that the Amur River commenced its special survey and dry-dock on June 26, and the Ob River is expected to commence a special survey and dry-dock on July 20 with each vessel being expected to be off-hire for about 25 days. Moving to Slide 5. As of the end of March, we had $555 million debt outstanding under our credit facility, all of which has been hedged with an interest rate swap leading to a fixed interest rate of 3.41% for the life of the loan until its maturity in September 2024. We are continuing our comprehensive deleveraging path, which commenced in the fourth quarter of 2019, having repaid through the quarterly installments in our credit facility, $120 million in debt, resulting in a decrease in our net leverage to 4.7x from 6.6x and an increase in our book value of equity by 30%. Moving to Slide 6. In line with our strategy of using our contracted cash flow to reduce leverage for the quarter, we utilized 72% of our unlevered cash flow to service debt and interest payments. Excluding working capital changes, operating cash flow for the quarter was $15.8 million. After debt service payments, Clean Energy class survey costs and payments to preferred unitholders, we generated a little under $600,000, excluding working capital changes. Our cash balance increased by about $9.6 million to $106 million, primarily due to working capital changes. Our per vessel quarterly breakeven daily rate, including all operating G&A expenses, debt service payments and class survey costs amounted to $55,300 excluding preferred distributions versus our fleet contracted time charter rates for the quarter, which amounted to about $62,200 per day per vessel. That wraps it up from my side.

Thank you, Michael. Let's move on to Slide 7. Our fleet currently counts 6 LNG carriers with an average age of about 11.9 years. The charterers of our vessels are Equinor of Norway, Gazprom Marketing and Trading of Singapore and Yamal Trade of Singapore. As of 20th June 22, the fleet contract backlog is about $978 million, equivalent to an average backlog of about $163 million per vessel. And the fleet's average remaining charter period is about 6.6 years. Moving on to Slide 8. Our strategy is to conclude long-term charters with reputable LNG producers. Our earliest potential availability will be in the third quarter of 2023 for the Arctic Aurora. The next available vessel may be the Clean Energy, which contract expires in 2026. Barring any unforeseen events and vessel scheduled dry-dockings, our fleet is 100% employed for the remainder of '22, 96% for the year '23, and 83% for '24 and '25. There is strong demand for LNG and term shipping. As such, we believe that the Arctic Aurora should be in a good position to benefit from this period market. All the vessels in our fleet are employed on time charter contracts, 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. Let's move on to Slide 9. Since September 2019, the Partnership has repaid $120 million in debt, increased its cash balance from $66 million to $106 million, decreased net leverage from 6.6x to 4.7x and increased book equity value by 30% to $403 million. The Partnership's deleveraging efforts should continue to build equity value on a contractually structured basis as we continue to benefit from stable long-term cash flow visibility. The Russian-Ukraine situation has shed light on a fragile European energy infrastructure and a general global underinvestment in LNG production and receiving facilities. The EU's goal to replace 50 Bcm of Russian pipeline gas imports with LNG imports has increased competition for LNG supply and shipping, which has resulted in a significant increase in time charter rates and periods. With the opening of the Arctic Aurora in Q3 '23, we believe the Partnership will have exposure to strong shipping fundamentals. Some European countries are looking to accelerate their infrastructure development by chartering FSRUs. Germany, which currently does not have any LNG import facilities, has recently chartered 4 FSRUs for long-term charters, 2 of which are from the private fleet of Dynagas Ltd. 87% of the newbuilding order book has already been tied up with employment, which underlines a long-term demand for LNG. And LNG orders placed today may have deliveries in '26, '27 or even later. Therefore, post current charters, we believe the Partnership has the potential to consider conversion of existing LNG carriers to FSRUs as an alternative to conventional LNG charters. Both alternatives will be considered. We believe the combination of the availability of the Arctic Aurora against a strong market and the further strengthening of our balance sheet places the Partnership in a favorable position. We have now reached the end of the presentation, and I now open the floor for questions. Thank you.

The first question comes from Benjamin Nolan with Stifel.

I wanted to start by discussing the vessels contracted to Gazprom. It's clear that there has been no disruption to the contract duration, cash flows, or any other aspect. To wrap this up, should sanctions be lifted, the contracts would still be in effect. Therefore, there is no change at all regarding the contracts associated with the vessels, is that correct?

That is correct, Ben. There's been no change whatsoever in the contractual structure. The charter party is identical. There has been no change whatsoever. The only change is in the control side, not in the actual ownership side further off the chain. So the contractual structure, the charter party structure is exactly the same.

Okay. That's helpful. However, you didn't mention the other two vessels, the Lena and the Yenisei Rivers, which are contracted to Yamal. I understand that this is not a Russian entity, but could you discuss this? Are those vessels not influenced by the same dynamics as the Gazprom vessels? Where do those two ships currently stand in terms of their contract structure?

Yes, exactly. So the counterparty to the Lena and the Yenisei River are Singaporean entities. It is a company called Yamal Trade Pte Ltd. And which is the same counterparty as it always was. Now this company is ultimately owned by a joint venture company, which is majority owned by Novatek, then you have CNPC, Total and the Silkroad Fund also in the shareholding structure.

Okay. Is that company subject to any sanctions or anything else? It should finally be independent of that, correct?

That's correct. There are no sanctions that impact this company or the Partnership.

Okay. And with respect to those vessels, really all of your vessels, are you guys still lifting cargoes from Russian facilities, whether it's Yamal or Sakhalin or what have you?

Yes, exactly. At this moment, the company is not instructing the vessels to lift any cargo out of Sakhalin. These vessels are currently operating under the direction of Gazprom Marketing and Trading to support their portfolio. Regarding the Lena and Yenisei River, we expect that these vessels may lift cargo out of Sabetta into the summer, but I don't believe that capability is available yet. These vessels are fully guided by the charter rate set by Yamal Trade.

That's helpful. I think I've covered everything regarding Russia. Lastly, I'm curious about the possibility of converting the Arctic Aurora into an FSRU once it comes off contract in about 1.5 years. Considering that many people are currently looking for quick fixes, this could take around 2.5 years. Are you actively marketing this possibility? And if there is interest, could we potentially have updates on it later this year or sooner? I ask because there are long lead time items and other things that would need to be ordered for the conversion process.

Thank you, Ben, for the question. Regarding the Arctic Aurora, which contract expires in September or October next year, we realistically expect to charter her as a conventional carrier once she becomes available. Given the seasonality, September or October is a very favorable time. In terms of the newbuilding market, if you place an order today, you might receive a delivery for 2026, but more realistically, it would be for 2027, with some discussions about 2028 deliveries as well. There's a significant tightness in the shipbuilding market, and shipyards prefer to build repeat designs and ordinary carriers. We see a potential opportunity with the Clean Energy when she becomes available in 2026, as she's a strong candidate for an FSRU conversion due to her large boilers, which are necessary for a closed-loop configuration. We have conducted a study on the vessel and her sister ships for this purpose, and there is potential for marketing this position further. We currently don't have a timeline, but we are in discussions with a few projects that may have interest in the ship. We will evaluate using her as an FSRU or as a conventional ship based on which option is more attractive and realistic.

Okay. That's helpful. But it will still be several years before that happens. For my last question, your cash balance is increasing while your debt balance is decreasing, and you are accumulating equity. Are you any closer to considering growth? If so, how do you envision that taking shape? Could you potentially order a vessel, or is that too expensive right now? In my opinion, it seems like a possibility. Or are you thinking about perhaps dropdowns? Or are we still focused on paying down debt and not ready to seriously consider any growth capital?

Yes. Hi, Ben. This is Michael. No, I think we haven't changed our strategy. I mean, each quarter that passes, the Partnership is stronger than the previous quarter as a part of this deleveraging process. When we want to make a move, we have to be as strong as possible. And we have to solve for acquiring a vessel that is accretive and would not increase leverage. And that is also in light of there will be some equity required for fleet expansion. So we're getting there slowly. But future growth is something that is definitely on our minds.

Would you consider ordering a new vessel? You're generating cash and building, so there's no immediate need for a drop down to ensure cash flow. You could definitely incubate something at this stage without needing the parent company for support. Is that a possibility for you?

Ben, this is Tony. Yes, I mean, look, we are basically looking at all options, and we don't exclude that one. I mean we couldn't share any color on it now. I do agree with you that shipbuilding prices are getting very expensive, also slot availability is extremely tight, but it is an alternative that could be considered.

And this concludes the Q&A portion of today's call. I'd like to turn it back over to Tony for any closing remarks.

Thank you all for your time and for listening in on our earnings call. We look forward to speaking with you again on our next call. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may disconnect, and have a wonderful day.