Dynagas LNG Partners LP

NYSE:DLNG

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners Conference Call on the First Quarter 2024's Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer; and Mr. Michael Gregos, Chief Financial Officer of the company. [Operator Instructions] 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 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 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'll pass the floor to Mr. Lauritzen. Please go ahead, sir.

[Tony Lauritzen, executive]

Good morning, everyone, and thank you for joining us in our 3 months ended 31st March 2024 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 start the presentation and move to Slide 3. We today present results for the 3-month period ending on 31st March 2024. We are pleased to announce that all 6 LNG carriers in our fleet were operating under long-term charters with esteemed international gas companies. For the first quarter of '24, we reported net income of $11.8 million and earnings per common unit of $0.23. Our adjusted net income stood at $12.4 million, translating into adjusted earnings per common unit of $0.25. Furthermore, our adjusted EBITDA for the same period reached $29 million.

We are also pleased to report that subsequent to the quarter, we concluded a new lease financing agreement with China Development Bank Financial Leasing for 4 out of our 6 LNG carriers. This financing totaling $345 million, along with available cash reserves, has enabled us to fully repay our existing debt before the facility's maturity in September '24.

After a long period of strategic deleveraging, we now enjoy significantly lower debt levels and a flexible financing package with 2 of our LNG carriers debt-free. This positions us well for the partnership's next phase.

I will now turn the presentation over to Michael, who will provide you with further comments to the financial results.

[Michael Gregos, executive]

Thank you, Tony. Moving on to Slide 4. We are extremely pleased with closing of our $345 million lease financing for 4 out of our 6 LNG carriers, which, along with $63.6 million cash on hand, refinanced the remaining balance of $408 million under our initially $675 million senior secured credit facility at a significantly reduced margin and with an age-adjusted profile of about 23 years.

Our 3 steam turbine LNG carriers built 2007 and 2008 have been lease financed with a tenor of 5 years and a purchase obligation at the end of 5 years of 20% of the initial financing amount. Our 2013 built vessel, Arctic Aurora, has been leased financed with a tenor of 10 years, with a purchase obligation of 15% of the initial finance amount.

Following this refinancing, our total debt outstanding stands at $345 million, a reduction of $75 million compared to the prior quarter, while 2 of our vessels are now debt-free. Following this floating rate refinancing, our total annual debt amortization will amount to $44 million. We expect that this refinancing group will provide the partnership with greater flexibility as there are no financial covenants and no prohibition on distributions to our common unitholders. On a steady-state basis, we expect to reduce financial leverage even further based on our current run rate EBITDA of $116 million to approximately 3x.

Moving to Slide 5. Following the recent refinancing, we project the free cash flow to common equity after distribution to preferred unitholders to be approximately $8 million per quarter contingent on the current SOFR rates, utilization and operating expenses. Please note that our interest rate swap expires in September. And therefore, from that point on, we will be fully exposed to current SOFR rates. This slide outlines the pro forma cash breakeven per vessel per day based on the terms of our new financing. For these calculations, we've utilized actual Q1 data for operating expenses, administrative expenses and preferred distributions. We have also projected the debt service for the next 12 months using current SOFR rates and the scheduled amortization of the lease financing.

As illustrated, the daily cash breakeven per day vessel is $49,600, excluding preferred distributions, compared to our actual contracted net rate of $71,380 per vessel per day in Q1.

Moving on to Slide 6, just a couple of words in the first quarter. Adjusted EBITDA and adjusted net income were up by 23% and 87.7%, respectively, primarily due to the increase in the voyage revenues of the Arctic Aurora following its new time-charter party agreement with Equinor, which commenced in September 2023. As previously mentioned, we are very satisfied with the new lease financing arrangement secured for 4 of our vessels. These arrangements are structured to be organically repayable and do not restrict distributions to our common unitholders. Our main objective going forward is to focus on the utilization of our free cash flow.

That wraps it up from my side. I will pass the presentation over to Tony.

[Tony Lauritzen, executive]

Thanks, Michael. Let's move on to Slide 7 of the presentation. Currently, our fleet comprises of 6 LNG carriers, with an average age of approximately 13.9 years. Our present charters include multiple gas companies such as Equinor, SEFE and Yamal Trade. Also, Rio Grande LLC, a subsidiary of NextDecade, has forward chartered our vessels Clean Energy and Arctic Aurora.

As of June 2024, our fleet contracted backlog stood at approximately $1.07 billion, which translates to an average of about $178.3 million per vessel. The fleet also enjoys an average remaining charter period of approximately 6.6 years.

Moving on to Slide 8. Our commercial strategy is centered on securing long-term charters with prominent gas companies, ensuring a stable revenue stream. As a result of this approach, we have accumulated a solid contract backlog. Barring any unforeseen events, we have no contractual vessel availability until the year 2028, when the Clean Energy, Ob and Amur River will be available. Following this, the Arctic Aurora will come off of Rio Grande LNG contract in 2033, with the Yenisei and Lena River coming available in the year 2034, provided that the charters do not exercise their expansion options.

The global fleet of LNG carriers have expanded rapidly, with a newbuilding order book now exceeding more than 50% of the existing fleet. Most of these newbuilds are scheduled for the midway between now and 2028, and a significant majority of these orders have already been committed to specific charters. In the medium to long term, we anticipate that the current order book will be absorbed through the replacement of aging vessels and the global need to transport future incremental LNG production.

Notably, around 18% of the current LNG fleet consist of smaller steam-powered vessels with an average age exceeding 23 years. This older segment is likely to be phased out or replaced as newer, more efficient vessels come online. Additionally, increased transportation needs will arise from the 35% expansion in new LNG capacity, which has already been approved and is at various stages of construction scheduled to come online before the year 2030. Given these factors, we believe our portfolio is strategically well positioned with no contractual availability until 2028.

In general, we anticipate that the long-term demand for LNG will remain strong due to several factors. These include its favorable emission profile compared to traditional fossil fuels to grow in global demand for electrification, the efficiency of combined cycle power plants fueled by natural gas, the existing global infrastructure for LNG production and distribution and the absence of a superior alternative on a comparable scale.

Let's move to Slide 9. Our new financing arrangements are not only low leverage, flexible and low cost but also come with long tenors, significantly enhancing our strategic flexibility for future initiatives. A major achievement in our financial management has been the substantial reduction in debt where we have successfully lowered our outstanding debt from $675 million in September 2019 to $345 million today. This reduction has also improved our net debt-to-EBITDA ratio bringing it down from 6.6x in September '19 to 3.3x by March '24.

Also, a multiple portion of our fleet, amounting to 33%, now operates free of debt, thereby strengthening our asset base and providing a robust foundation for future growth. Our equity book value has seen significant growth, rising from $311 million in September 2019 to $457 million as of March 2024. Alongside this, our run rate EBITDA has improved from $95 million in September 2019 to $116 million as of today.

Our strategy of organic deleveraging supported by contracted cash flows have been instrumental in maintaining a stable and predictable financial profile. We have ensured sustained income strength, and as of today, we maintain a contracted average revenue backlog of $178 million per vessel.

In summary, with newly found financial flexibility, a solid foundation of contracted cash flows, reduced leverage and a broadened strategic vision, we believe the partnership is in a stable pace and well equipped to explore new opportunities.

Thank you for your attention. We now have concluded. We now have concluded the presentation, and we invite you to ask any questions you may have.

[Operator]

[Operator Instructions] Our first question comes from the line of Ben Nolan with Stifel.

[Benjamin Nolan, analyst]

First, congrats on the finalization of the new financing. I wanted to ask first, you guys talked about sort of the next phase of the company. The free cash flow of -- depending on what interest rates are, call it, $8 million a quarter, it sounds like your top priority here is for distributions. But could you maybe talk through what -- sort of how you think about where you envision that cash flow going and when you expect to make some sort of announcement about when that happens?

[Michael Gregos, executive]

Yes. Ben, well, for the moment, the ink from our refinancing is still wet, I mean, we closed it yesterday. We just paid $63 million of our own cash to fully repay our previous credit facility. So I guess we have to evaluate this on a quarter-by-quarter basis given the prevailing circumstances at the time, and whether to utilize our cash for growth or distribution to common unitholders or otherwise. So I think it's a what's the space situation.

[Benjamin Nolan, analyst]

Okay. And is this something that we should expect some sort of -- in the coming quarter, for instance, some sort of change or is it a little further out?

[Michael Gregos, executive]

Well, as I said, we are going to evaluate this on a quarter-by-quarter basis. I don't have something to tell you now. We cannot commit on the timeline of when a decision will be made and what the decision will be, but it's on the radar screen.

[Benjamin Nolan, analyst]

Okay. And then for my second question, third, whatever it is. You have those 2 now unencumbered assets. Do you think there's any potential to be able to finance those separately? Or is the thinking that those probably just remain unencumbered?

[Michael Gregos, executive]

No, in theory, it is possible to finance them. I think we've taken the decision for the moment that it's best for the partnership to keep them unencumbered. It's in line with our strategy of deleveraging and bringing the leverage down.

[Operator]

[Operator Instructions] Mr. Lauritzen, it seems that there are no other questions at this time. I'll turn the floor back to you for any final comments.

[Tony Lauritzen, executive]

Okay. Thank you. We appreciate your time and your attention. Thank you for your participation, and we look forward to connecting with you again on our next call. Thank you very much, and goodbye.

[Operator]

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