Earnings Call Transcript - DLNG Q2 2022

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Second Quarter 2022 Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer; and Mr. Michael Gregos, Chief Financial Officer of the company. 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 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 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, include, 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 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.

Tony Lauritzen, CEO

Good morning, everyone, and thank you for joining us for our earnings conference call for the three months ended June 30, 2022. I'm joined today by our CFO, Michael Gregos. We have issued a press release announcing our results for the third period. Certain non-GAAP measures will be discussed on 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. Moving on to Slide 3 of the presentation. We are pleased to report the results of the three months ended June 30, 2022. All six LNG carriers in our fleet are operating under their respective long-term charters. The fleet's utilization was 100% for the ninth consecutive quarter, as defined in our press release. For the second quarter of '22, we reported net income of $11.1 million, earnings per common unit of $0.22, adjusted net income of $9.1 million, adjusted earnings per common unit of $0.17, and adjusted EBITDA of $22.9 million. In terms of operational highlights, during the second and third quarters of 2022, we successfully completed the special surveys and dry dockings of the Clean Energy, Amur River, and Ob River, including ballast water installation in all three vessels in accordance with current regulatory requirements. Our hearts 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, trading 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 their obligations under their respective time charters in compliance with applicable U.S. and EU rules and regulations. Our vessels named Clean Energy, Ob River, and Amur River are on charter to the previous Gazprom Marketing and Trading of Singapore, which has been renamed Securing Energy for Europe Marketing and Trading, and which we will henceforth refer to as SEFE. SEFE has been placed under the control of the German government. The parent of SEFE has received a loan commitment of approximately EUR 9.8 billion from the German government. So effectively, the Clean Energy, Ob River, and Amur River are trading on routes as directed by SEFE and are no longer sub-chartered by SEFE to Sakhalin Energy. 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.

Michael Gregos, CFO

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. Net income for the quarter increased by 22% to $11.1 million, primarily due to a $4.8 million gain under our interest rate swap, which was partially offset by the $2.8 million cost and 20-day scheduled off-hire days associated with a special survey and dry docks of the Clean Energy and the Amur River. The Clean Energy class survey commenced on March 16 and was completed on April 15, and the Amur River's class survey commenced on June 25 and was completed on July 29. The second quarter dry docking and special survey cost of $2.8 million consists of $2.2 million for the Clean Energy and approximately $600,000 for the Amur River. As of today, we have completed the third special survey and dry docks of our three steam turbine vessels. Third quarter earnings will reflect the completion of the scheduled special survey and dry dock of the Amur River and the Ob River, the cost of which for the third quarter is expected to amount to about $8 million in total, $3.6 million for the Amur River and $4.2 million for the Ob River, without taking into account the lost revenue due to 67 off-hire days as a result of the scheduled class survey costs, the impact of which will be about $4 million for the third quarter. Including the installation of the ballast water treatment system, which is capitalized, the total cost of the third special survey and dry docks of our three steam turbine vessels amounted to $17 million, excluding off-hire time; $2.6 million impacted our Q1 P&L; $2.8 million impacted our second quarter P&L; and as I stated before, $8 million is expected to impact our third quarter P&L; and $3.6 million relates to the installation of the ballast water treatment system, which will be capitalized. Turning to Slide 5. As of the end of June, we have $543 million in debt outstanding under one 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 first quarter of 2020, having repaid through the quarterly installments on our credit facility $132 million in debt, resulting in a decrease in our net leverage to 4.6x from 6.6x and an increase in the book value of our equity of 32%. Moving to Slide 6. In line with our strategy of using our contracted cash flow to reduce leverage, for the quarter, we utilized 76% of our unlevered cash flow to service debt and interest payments. Excluding working capital changes, operating cash flow for the quarter was $17.5 million. Our cash balance decreased by about $6.4 million to $100 million, primarily due to working capital changes. Our per vessel quarterly breakeven rate, including all operating, G&A expenses, debt service payments, and class survey costs amounted to $53,300, excluding preferred distributions versus our fleet-contracted time charter rates for the quarter, which amounted to $62,000 per day per vessel. That wraps it up from my side. I will pass over the presentation to Tony.

Tony Lauritzen, CEO

Thank you, Michael. So let's move on to Slide 7. Our fleet currently counts six LNG carriers with an average age of about 12.1 years. The charterers of our vessels are Equinor in Norway, SEFE of Singapore, and Yamal Trade of Singapore. As of today, the fleet's contract backlog is about $950 million, equivalent to an average backlog of about $158 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 reputable LNG producers. The earliest contracted redelivery date for any of our six LNG carriers is in the third quarter of '23 for the Arctic Aurora, with the second earliest contract redelivery in the first quarter of '26 for the Clean Energy, both subject to the terms of the applicable charter. Barring unforeseen events and vessel scheduled dry dockings, our fleet is 100% employed for the remainder of '22, 96% for '23, and 83% for '24 and '25. There is a very high demand for LNG and LNG time shipping. As such, we believe that the Arctic Aurora should be in a very good position to benefit from a strong period market. All the vessels in our fleet are employed on time charter contracts, under which the charter pays the major voyage-related variable cost such as fuel, canal fees, and terminal costs. Two of the vessels, namely Lena and Yenisei River, are under dry dock and OpEx cost pass-through contracts and, in general, provide protection for reasonable inflation and operating expenses. Let's move on to Slide 9. Since September 2019 until Q2 '22, the partnership has repaid $132 million in debt, increased its cash balance from $66 million to $100 million, decreased net leverage from 6.6x to 4.6x and increased book equity value by 31% to $410 million. The partnership's deleveraging efforts should continue to build equity value on a contractual structure basis as we continue to benefit from stable long-term cash flow visibility. The situation regarding Russia and Ukraine has shed light on a fragile European energy infrastructure and general global underinvestment into LNG production and receiving facilities. The EU's goal to replace 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 FSRUs for long-term contracts, two of which are from the private fleet of Dynagas Ltd. Post current charters, we believe the partnership has the potential to continue the conversion of existing LNG carriers to FSRUs as an alternative to conventional LNG charters, and both alternatives will be considered. So we believe the combination of the availability of the Arctic Aurora against the strong markets 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'll now open the floor for questions. Thank you.

Operator, Operator

Our first question is from Ben Nolan with Stifel.

Benjamin Nolan, Analyst

Thank you, Tony and Michael. I have two questions. First, regarding what Tony mentioned about the FSRUs, Europe has been a strong market lately. I believe you said the partnership might explore converting some of the vessels, although all except the Arctic Aurora have long-term contracts. Is there a way to modify or adjust any of the other vessels to make one available? Additionally, are there specific older steamships or TFEs that might be more suitable for conversion compared to the others?

Tony Lauritzen, CEO

Yes. Thank you, Ben. You are entirely right that what the partnership is considering is the conversion of its existing fleet, and that would be post-charters. Of course, the earliest availability is the Arctic Aurora and that will be in a very strong position. It is difficult to convert within such a short period of time because there are lead times on equipment and so on. But for example, the Clean Energy, which is coming open in '26, is actually not so far away, given that the shipyards are booked out and the Clean Energy is a very good candidate for an FSRU conversion. In the past, we stated that we've done some conceptual studies and so on. Given that we've also had a good intake, we have good boiler configurations, it is a suitable candidate for conversion. That is something that we are considering. And of course, we are considering just normal onward chartering activity as well.

Benjamin Nolan, Analyst

Okay. Yes, that's helpful. And then maybe for Michael, I believe you guys had sort of paused on buying back the preferreds in the last year or so. I've noticed that both tranches are now trading a little bit below par in the kind of lower 20s. Any thinking about sort of stepping that back up since you're now below par again?

Michael Gregos, CFO

Well, we previously mentioned that under our credit facility, we would need a waiver to buy back the preferred shares. We did obtain a waiver allowing us to buy back preferred shares from the proceeds of our ATM, which we initiated in 2020 but never really issued equity under that program. As it stands now, we still require a waiver under our credit facility to use existing cash for buying back our preferred shares.

Benjamin Nolan, Analyst

Okay. That's right. All right. Well, I appreciate it. Thank you.

Michael Gregos, CFO

Thank you, Benjamin. Thank you.

Operator, Operator

Thank you. There are no further questions at this time. I would like to pass the floor back over to CEO, Tony Lauritzen, for any closing comments.

Tony Lauritzen, CEO

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. Goodbye.

Operator, Operator

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