Dynagas LNG Partners LP (DLNG) on Q1 2022 Results - Earnings Call Transcript
Operator: 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. I must advise you 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.
Tony Lauritzen: 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 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 as opposed to 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 to the financial results.
Michael Gregos: 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.
Tony Lauritzen: 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 23% for the Arctic Aurora. The next available vessel may be the Clean Energy, which contract expires in 2026. Bar 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. 2 of the vessels, namely the Lena and Yenisei River, are under dry-dock and OpEx cost pass-through contracts that in general provides for 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 into 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 order placed today may give 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.
Operator: The first question comes from Nolan with Stifel.
Benjamin Nolan: I guess I wanted to start a little bit on the vessels that are contracted to Gazprom first, but just -- and you're pretty clear that there's no disruption to contract tenor or cash flows or anything else. Just finishing that circle, I guess, should, at some point, sanctions be lifted, there's no -- there's -- the contracts in that case would still remain in place. And so there's no -- this doesn't change anything at all with respect to the contracts that you have on the vessel. Is that correct?
Tony Lauritzen: 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.
Benjamin Nolan: Okay. That's helpful. But the other one that was -- you didn't mention is the other 2 vessels, the Lena and the Yenisei Rivers that are on contract to Yamal. I appreciate that, that's not -- or I believe that, that is not a Russian entity. But could you maybe talk through that? Is that not subject to any of the same dynamics that you would have on the Gazprom vessels? Or where do those 2 ships at -- with respect to the contract structure?
Tony Lauritzen: Yes, exactly. So the counterparty to -- on 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 -- the majority is owned by Novatek, then you have CNPC, Total and the Silkroad Fund also into the shareholding structure.
Benjamin Nolan : Okay. And that company is not subject to any sanctions or anything else? It should be -- can finally be independent of that, correct?
Tony Lauritzen : That's right. There is no -- yes, there is no sanctions that -- to that company that affects the Partnership.
Benjamin Nolan : 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?
Tony Lauritzen : Yes, exactly. So from -- at this moment, the company is not -- I mean, the charter of the Ob River and the Amur River is not instructing the vessels to lift any cargo out of Sakhalin. Now these vessels are, let's say, rather under the instruction of Gazprom Marketing and Trading to serve their portfolio. When it comes to the Lena and the Yenisei River, we expect that potentially these vessels will lift cargo out of Sabetta into the summer. But I don't believe it's open yet for these vessels to do so. But yes, I mean, these vessels are under the full instruction of the charter rate, which is Yamal Trade.
Benjamin Nolan : Right. Okay. That's helpful. And I think that scores me away on all things Russia here. The -- I'm curious, lastly, you talked about the possibility of converting perhaps the Arctic Aurora into an FSRU. When it comes off contract in 1.5 years or so, is that -- I guess appreciating that at the moment most people are looking for quick fixes, and that would probably not be available for maybe 2.5 years or so. But is that something that you're currently out trying to market? And is it something that you feel like if there is an appetite, it's something that we could know about, I don't know, later this year or sooner? Just because I know there's long lead time items and other things that would need to be ordered in order for conversion to take place.
Tony Lauritzen: Thank you, Ben, for the question. So for the Arctic Aurora, which -- contract expires in September, October next year. To be honest, there is -- she comes open before we could have the long lead item available. So what we are foreseeing with the Arctic Aurora is more realistically to charter her as a conventional carrier from the time that she comes open. And actually, September, October from a seasonality point of view, it's a very, very good position. So that's what we are most likely thinking with the Arctic Aurora. Now when it comes to the newbuilding market, if you place an order today, you'd be lucky to get a '26 position. And now more realistically, you will get a '27 position, and we even -- we have even started to hear about '28 positions too. There is a real tightness in the shipbuilding market. And the shipyard, they are really preferring to build repeat designs, ordinary carriers, nothing out of the ordinary. So what we see more likely is an opportunity potentially for the Clean Energy when she comes open in 2026. She is a very good candidate for an FSRU conversion. She has very big boilers, which is required in a closed-loop configuration. So we have previously done a study on the vessel and the sister ships for such possibility. And this is rather a position that is being marketed and could be further marketed. When it comes to a time line, we don't have a time line on it, we are just kind of in discussion with a couple of projects that could have a potential interest in the ship, but we would evaluate both using her as an FSRU and as a conventional ship depending what is more attractive and what is more realistic.
Benjamin Nolan : Okay. That's helpful. But one way or the other, it's still quite a few years before that would happen. I guess, for my last question, is it -- your cash balance is continuing to build the debt balance is continuing to fall in your accreting equity. Are you any closer to being in a position to think about growth at all? And if so, how would you envision that manifesting? Is this something where maybe you could order a vessel, I don't know it might be too expensive at the moment? I would think, in my opinion, they are. But -- or thinking about maybe perhaps drop downs? Or is it -- are we still at this point in delevering mode and too early to really be serious about any growth capital?
Michael Gregos : 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, which 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.
Benjamin Nolan : Would you think about ordering a new vessel? I mean, you're creating cash, you're building -- there's no need to do a drop down and have something that's immediately cash flow. And you could certainly incubate something at this point and wouldn't need the parent for that. Is that at all in the possibility for you?
Tony Lauritzen : 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.
Operator: 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.
Tony Lauritzen: Thank you all for your time and for listening in on our earnings call. We look forward to speak with you again on our next call. Thank you very much.
Operator: Ladies and gentlemen, this does conclude today's presentation. You may disconnect, and have a wonderful day.
