Dynagas LNG Partners LP Q3 FY2023 Earnings Call

Thank you for being here today, and welcome to Dynagas LNG Partners' conference call regarding our financial results for the third quarter of 2023. Joining 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. I would like to inform you that this conference is being recorded. The company has released its results via a press release that is publicly available. I want to remind everyone that during today’s presentation and call, Dynagas LNG Partners will be making forward-looking statements as defined by federal securities laws. This call, along with the accompanying slide presentation, contains certain forward-looking statements protected under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements made in this call that are not historical facts, including anticipated financial performance, growth opportunities, and expectations regarding market conditions and the impacts of COVID-19, may be regarded as forward-looking under the Securities Exchange Act of 1934. Discussions may include forward-looking statements based on management's current expectations that involve risks and uncertainties, which could lead to different outcomes. I would like to direct your attention to Slide 2 of the presentation, which includes the full forward-looking statement that was also part of the press release. Please take a moment to review the entire statement. Now, I will turn it over to Mr. Lauritzen. Please proceed, sir.

Good morning, everyone, and thank you for joining us in our three months ended 30 September '23 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 and 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 to Slide 3 of the presentation. We today present the results for the three-month period ending on September 30, 2023. We are pleased to announce that all six LNG carriers in our fleet were operating under long-term charters with esteemed international gas companies. For the third quarter of '23, we reported net income of $1.4 million and a loss per common unit of $0.04. Our adjusted net income stood at $3.1 million, translating to adjusted earnings per common unit of $0.01. Furthermore, our adjusted EBITDA for the same period reached $20.4 million. From an operational perspective, it was a busy period during which we completed the scheduled dry docks of the Yenisei River, Lena River and Arctic Aurora, including installation of ballast water treatment equipment in accordance with current regulations. Also, the Arctic Aurora was delivered to her new time charter party agreement with Equinor ASA in September 2023. The vessel has been continuously on charter with Equinor since she was delivered from her builders in 2013. I will now turn the presentation over to Michael, who will provide you with further comments to the financial results.

Thank you, Tony. Net income for the third quarter decreased by $6 million or 81% to $1.4 million compared to $7.4 million in Q3 2022. This decline was mainly due to a $13 million decrease in the unrealized gain on our interest rate swap and a $2.2 million increase in loan interest, although these were partially offset by a $3.9 million increase in the realized gain from our swap transaction. The quarter's net income was also affected by the scheduled five-year special survey dry docks of the Arctic Aurora, Lena River, and Yenisei River, which resulted in a $9.8 million increase in dry docking and special survey costs. However, this was offset since, under the time charter contracts for two of our LNG carriers, the special survey and dry dock costs are covered on a pass-through basis. Of the total dry dock and special survey cost of $17.3 million for the quarter, $11.6 million was reimbursed by the time charters, which is reported separately in our profit and loss statement as revenues from contracts with customers. Additionally, the three vessels that underwent dry docking were on hire for 56 days out of the total 110 dry-dock days for the quarter in line with their time charter agreements. Furthermore, while we experienced an increase in operating expenses of $3.6 million compared to the same period last year, $3 million of this increase was related to two LNG carriers contracted on an operating expense pass-through basis, leading to a corresponding increase of $3 million in voyage revenues. Notably, compared to Q3 2022, voyage revenues increased by 23.7% from $29.9 million to $37 million, largely due to a $2.7 million increase from the deferred revenue amortization related to the new time charter party agreement with Equinor for the Arctic Aurora, which began in September 2023, as well as higher available days. Adjusted EBITDA for the third quarter remained stable at $20.4 million. The time charter equivalent for the quarter was nearly $72,000 per day, primarily due to the increase in variable revenues from the two LNG carriers on an operating expense pass-through basis, along with the previously mentioned noncash straight-line deferred revenue amortization, which is reconciled with actual cash revenue receipts in the cash flow statement. Operating expenses for the first quarter were $19,200 per day, with a per vessel cash breakeven of $50,200 per day, excluding distributions to preferred unitholders and including the realized gain from the interest rate swap. Adjusted net income for the third quarter of 2023 was $3.1 million compared to $4.5 million in the same quarter last year, primarily due to increased interest and finance costs from the higher interest expense on our credit facility's floating leg. Adjusted net income does not consider cash receipts and unrealized gains from our interest rate swap. If we incorporate this quarter’s realized gain from the interest rate swap of $6.5 million, adjusted net income would have been $9.6 million or $0.18 per common unit instead of $0.01. As of the end of September 2023, we had $432 million in outstanding debt under our current credit facility. We are actively pursuing our deleveraging strategy initiated in the first quarter of 2020, which has brought our net leverage down to 4.1 times and increased our equity book value to $441 million. This quarter, we generated $21 million in operating cash flow. Our cash balance rose from $52.9 million at the end of the previous quarter to $64.9 million, and our credit metrics are improving. However, it's important to mention that current liabilities increased by $10.3 million this quarter, primarily due to payables related to the three vessel dry docks, which are expected to decrease in the coming quarters. Concerning our debt maturity in September 2024, we are currently discussing refinancing our credit facility, which we aim to finalize, close, and fund within the first quarter of 2024. That concludes my remarks.

Thank you, Michael. Let's move on to Slide 7 of the presentation. Currently, our fleet includes six LNG carriers with an average age of about 13.3 years. Our existing charters involve gas companies such as Equinor from Norway, SEFE, and Yamal Trade from Singapore, along with Rio Grande LNG, a subsidiary of NextDecade for the forward-chartered vessels, Clean Energy and Arctic Aurora. As of December 7, 2023, our fleet's contracted backlog is approximately $1.16 billion, which translates to an average backlog of around $193 million per vessel. Additionally, the fleet has an average remaining charter period of about 7.2 years. We are confident in the strength of our charter profile, positioning our partnership for stable income in the coming years. Moving to Slide 8, our commercial strategy focuses on securing long-term charters with gas companies. We have established a robust contract backlog, and barring unforeseen events, we will have no contractual vessel availability until 2028 when Clean Energy, Ob, and Amur River are expected to be available. The next available vessel after that is Arctic Aurora, which will conclude its contract with Rio Grande LNG in 2033, followed by Yenisei and Lena River in 2034, assuming their charter extension options are not taken. Current liquefaction capacity is around 473 million tonnes per annum, with an additional 205 million tonnes per annum of LNG liquefaction capacity already approved and under construction, set to start before 2030. This indicates a total increase in energy liquefaction capacity of about 40%. Approximately 40% of this growth will come from US export projects, 25% from Qatar, and the remaining 35% will derive from various projects, including those in Russia, Africa, Australia, Canada, and Mexico. Several expansion projects are also underway in the US Gulf of Mexico and elsewhere, at different stages of development. The current LNG carrier fleet consists of about 630 vessels. The order book is at 46%, excluding slot reservations for Qatar Phase 2 and Mozambique LNG, and 56% if we consider those slot reservations materializing. Notably, only 23 vessels from the order book are not tied to a time charter. While the increase in fleet capacity significantly surpasses the growth in liquefaction capacity, we anticipate that older and smaller vessels, particularly those under 140,000 cubes, making up about 17% of the global LNG carrier fleet, will be phased out. From time to time, we observe that while LNG carriers under construction are delivered on schedule, LNG trade constructions are often delayed. To mitigate exposure to any potential market uncertainty during this period, we have structured our charter portfolio to remain fully employed through 2027. Moving to Slide 9, the partnership has shown its dedication to its debt reduction strategy. From December 2019 to the end of September 2023, we have successfully repaid $242 million in debt, significantly reducing net leverage from 6.6 times to 4.1 times. Moreover, we have achieved a 42% increase in book equity value, which is now at $441 million as of September 30, 2023. Looking forward, we are optimistic that our ongoing efforts to reduce debt will further enhance equity value through stable, long-term cash flow visibility. We strongly believe that LNG plays a crucial role in creating a future with lower emissions. The demand for LNG is expected to keep rising as the world transitions away from coal and other polluting fossil fuels towards cleaner energy alternatives. Natural gas has a relatively low emissions profile when burned, and important drivers for natural gas include its ability to generate power quickly and effectively as needed, along with the presence of well-established global infrastructure for its production, transportation, storage, and consumption. Given these encouraging developments and facts, we maintain a positive outlook on the long-term prospects of LNG shipping. Thank you for your attention. We have now concluded the presentation and invite any questions you may have. Thank you.

Thank you. Our first question comes from Ben Nolan with Stifel. Please go ahead with your question.

Hi, thanks, Tony, Michael. I only have one question. Regarding the refinancing of the debt, I know you have been working on this for some time, and it sounds like it will happen in the first quarter. My question is whether the holdup has been on your side or if getting banks to underwrite is more challenging with the Yamal vessels involved. Can you provide any insight into why it is taking so long?

No, I don't think that challenging is the right word. We're trying to find the optimal solution. There is demand for financing our vessels, so I wouldn't say there's a holdup. We've been working on it for some time, and it looks like we're moving towards a conclusion.

Okay. And so the Yamal stuff isn't really a factor or a problem?

Our entire fleet has a robust contract backlog when viewed as a whole. There are not many noteworthy LNG projects available in the market for banks to finance. What I can say is that there is demand for our offerings, but they also need to align with our requirements.

Sure. All right, I appreciate it. Thank you.

Thank you. There are no other questions at this time. I'll turn the floor back to Mr. Lauritzen for any final comments.

We appreciate your time and your attentiveness. Thank you for your participation and look forward to connecting with you again on our next call. Thank you very much.

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