Dynagas LNG Partners LP Q4 FY2022 Earnings Call

Thank you for standing by ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Fourth Quarter 2022 Financial Results. With us today we have Mr. Tony Lauritzen, Chief Executive Officer; and Mr. Michael Gregos, Chief Financial Officer of the company. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference call 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 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 contains certain forward-looking statements within the meaning of the safe harbor provision 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 the 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 pass the floor to Mr. Lauritzen. Please go ahead, sir.

Good morning, everyone, and thank you for joining us in our three months ended December 31, 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 in this call. We have provided a description of those metrics, as well as a discussion of why we believe this information should 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 December 31, 2022. All 6 LNG carriers in our fleet are operating under their respective long-term charters with international gas companies. The fleet utilization was 100% for the 11th consecutive quarter, which is a testament to the fleet's performance. For the fourth quarter of 2022, we reported net income of $11.6 million, earnings per common unit of $0.24, adjusted net income of $7 million, adjusted earnings per common unit of $0.11, and adjusted EBITDA of $23.6 million. For the full year of 2022, we recorded net income of $54 million, earnings per common unit of $1.15, adjusted net income of $30.6 million, adjusted earnings per common unit of $0.52, and adjusted EBITDA of $89.5 million. Our thoughts go out to everyone affected and who continues to suffer as a result of the crisis in Ukraine. We continue to closely monitor this ongoing situation, including the implementation of economic sanctions, trading restrictions, and other considerations that may affect our business. It is our understanding that the current U.S. and EU sanctions regime have not materially affected the business operations or financial conditions of the partnership. The partnership has one syndicated credit facility in place. One of the lenders in this credit facility was Amsterdam Trade Bank. However, following the designation of Amsterdam Trade Bank by OFAC as a SDN, the partnership, in agreement with all lenders, agreed to a voluntary prepayment of $80.7 million from $50 million restricted cash collateral, which was a driving prepayment of the entire participation of Amsterdam Trade Bank in the credit facility. Consequently, Amsterdam Trade Bank is no longer part of the credit facility. On the back of a very strong LNG market, we entered into a new approximately 3-year time charter party agreement with Equinor for the employment of our LNG carrier, Arctic Aurora, with expected delivery in September 2023. 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. Net income for the fourth quarter decreased by 31% to $11.6 million compared to Q4 2021, primarily due to a decrease in the unrealized gain on our interest rate swap transaction of $8.1 million, which was partially offset by changes in the realized gain on our interest rate swap, and due to an increase of $3.2 million in interest and finance costs, which impacted us but was offset with an interest rate swap cash received of $4.3 million, as can be seen in the cash flow statement. For the fourth quarter, we had a gain on debt extinguishment of $2.1 million following the voluntary prepayment of one of our lenders in our syndicated loan facility. Adjusted net income for the fourth quarter amounted to $7 million, compared to $11.3 million at the same time last year. The decrease is attributable to the increase in interest and finance costs as a result of the higher interest expense paid under our credit facility. For consistency with prior quarters, adjusted net income excludes cash receipts and unrealized gains on our interest rate swap and the gain on the debt extinguishment. If we add risk growth as a realized gain from our interest rate swap of $4.3 million, adjusted net income would have amounted to $11.3 million or $0.23 per common unit instead of $0.11. Adjusted EBITDA for the fourth quarter was relatively stable at $23.6 million, as compared to $24.7 million last year. The charter equivalent for the quarter amounted to $62,200 per day with OpEx of $14,000 per day and the full vessel cash breakeven for the quarter of $47,900 per day, excluding distribution to preferred unitholders and the aforementioned voluntary prepayments. Turning to Slide 5. As of December, we had $500 million debt outstanding, which is 100% hedged until Q3 2024. We are continuing our comprehensive deleveraging path, which commenced in the first quarter of 2020, resulting in a decrease in our net leverage from 6.6x to 4.7x and a steady increase in our book value of equity, which today stands at $424 million. Operating cash flow for the quarter was $13.4 million and free cash flow after a CapEx installation of the ballast water treatment systems and other LNG carriers amounted to $11.3 million. Again, please be reminded that this excludes the $4.3 million in realized swap gains. For the full year, we generated $57 million in operating cash flow which includes $54 million in free cash flow, equivalent to free cash flow of about $1.45 per common unit. Moving to Slide 6. Our cash balance for the quarter was reduced by $17.8 million to $80 million, primarily as a result of the aforementioned $18.7 million voluntary prepayment, which was deducted from the restricted cash collateral accounts. We have three dry docks scheduled for 2023, which are expected in the third quarter of 2023. However, three of our LNG carriers operate under pass-through time charters with a dry bulk allowance of 20-21 days under which vessels remain on hire during dry bulk. That wraps it up from my side. I will pass the presentation back to Tony.

Thank you, Michael. Let's move on to Slide 7. Our fleet currently counts six LNG carriers with an average age of about 12.6 years. The time charterers of our vessels are Equinor of Norway, SEFE of Singapore, and Yamal Trade of Singapore. As of today, March 17, 2023, the fleet's contract backlog is about $1 billion, equivalent to an average backlog of about $166 million per vessel, and the fleet's average remaining charter period is about 6.4 years. Moving on to Slide 8. Our strategy is to conclude long-term charters with LNG producers. On the back of a strong LNG market, we entered into a new time charter agreement with Equinor for the employment of our LNG carrier, Arctic Aurora, expected to deliver in approximately September 2023. The new time charter period is about 3 years, adding about $116.5 million to the partnership's existing contracted revenue backlog. We are very pleased with the new charter and appreciate that Equinor has employed the vessel from the time it is delivered from the shipyard until 2026. The earliest contract we delivered for any of our six LNG carriers is in the first quarter of 2026 for Clean Energy subject to the terms of applicable charter. Barring unforeseen events and scheduled vessel dry-dockings, our fleet is 100% employed until and including 2025. Following the destruction of the natural gas pipeline delivered from Russia to Europe, the price for natural gas reached record levels and extreme volatility during 2022. The drop in Russian pipeline supply to Europe was offset by LNG imports, demand restructuring, and other factors. During 2022, European energy imports rose by approximately 60%, which positioned Europe as the largest LNG importer globally. This was made possible as China has reduced its demand, along with new energy supply coming from the United States. Exiting 2022, natural gas prices contracted to healthier levels that are currently more supportive of consumer economic sustainability. That being said, we expect gas prices to be volatile going forward, with prices reflecting competition between Europe and the continued resurgence of demand in the far east. Going forward, we believe that LNG buyers will continue to secure long-term LNG supplies to manage their energy security needs and price volatility, which in turn will support new energy projects reaching successful FIDs. 2022 saw record numbers for a total of 47 projects, producing about 63.5 million tons per annum. On the back of strong European demand, we believe that the 150,000 to 160,000 cubic meters LNG carrier segment is ideally positioned to supply LNG to land-based and FSRU import terminals in Europe. This is particularly relevant for FSRUs, which typically have less flexibility to manage the importation of large cargo sizes due to limited storage capacity compared to a land-based terminal. In light of the above, we believe there will be strong demand for our fleet going forward, and we continue to see the healthy market developing important opportunities for our fleet. Let’s move on to Slide 9. The partnership has remained committed to its strategy of reducing debt and has successfully repaid $175 million in debt since September 2019 until the Q4 2022 period, reducing its net leverage from 6.6x to 4.7x. Moreover, it has increased its book equity value by 35%, now standing at $423.9 million. Going forward, we believe the Partnership's continued efforts to deleverage will further enhance equity value through stable long-term cash flow visibility. We believe that LNG is a critical ingredient to a future with lower emissions. Demand for LNG is expected to continue to grow at a transitional rate as the shift from current fuels to cleaner energy sources continues. Long-term LNG shipping rates remain robust, driven by long-term demand for LNG shipping underpinned by long-term SPAs from buyers needing to manage their energy security and price volatility. Consequently, we believe that the outlook for energy shipping remains positive. We have now reached the end of the presentation, and we will now open the call for questions. Thank you.

Thank you. We have a question coming from the line of Ben Nolan with Stifel. Please proceed with your question.

Thank you. Hey, Michael, Tony, can you guys hear me okay?

Yes.

So, I have a couple. The first relates to how you're thinking about the timing and the availability of refinancing the loan that's been in place for a while now, and you've prepaid in some cases. But does the increase in interest rate environment maybe potentially even lately assume disruptions in the debt financing market, does that change at all how you're thinking about when it’s possible or when it's prudent to think about a new credit facility?

Well, I think the crisis that has been going on recently has happened in the past couple of weeks. So, we don't really know what the effect will be. We've had some preliminary discussions prior to what happened with Silicon Valley Bank. We get the impression that the markets will have opened despite the increase in interest rates. What we are seeing is a lot of demand for quality projects that we can provide, which is in short supply in the shipping credit market. As we have said in the previous quarter, we do want to be proactive and arrange this refinancing well before the maturity in September 2024. We haven't had any challenges, and we found that we will be able to secure pretty solid terms on this refinancing. We will just have to see what the impact of interest rates will be, but my personal opinion is it should have a limited impact, as the fundamentals of the LNG market are strong.

Right. Okay. And then I just wanted to follow up for modeling purposes. You said that there are 3 vessels that are scheduled for dry dock in the third quarter, 2 of which are covered under the terms of the contract for 21 days. Do you have an estimate for how long you anticipate each of these dry docks will last?

20 to 30 days is a reasonable assumption.

Okay. That's helpful. And then lastly for me, this is just maybe more strategic, we've seen a number of other LNG-focused MLPs go private or seek to go private. You guys are trading at about a third of your common book value of equity, despite adding to your contract coverage at good rates, deleveraging the balance sheet, and improving the risk profile of the partnership, etc. At any point, does it just make sense to no longer be public?

Hi, Ben. Look, I can say that there's been no discussion on that project level. So, no, that is not a consideration.

Okay. All right. That does it for my questions. I appreciate it, guys.

Thank you very much.

Thank you. At this time, I'll turn the call over to CEO Tony Lauritzen for your closing remarks.

Okay. Thank you, everyone. We would like to thank you 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.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.