Dynagas LNG Partners LP

NYSE:DLNG

Earnings Call Analysis

LNG Carrier's Soft Earnings and Strong Charter Outlook

The LNG shipping company reported a Q3 2023 net income of $1.4 million, with a $0.04 loss per common unit, and adjusted net income of $3.1 million or $0.01 per share. A notable unrealized loss on an interest rate swap and dry-dock costs impacted profits, yet $9.6 million in adjusted net income could be realized with the swap gain. The firm is on a deleveraging path with net leverage at 4.1x, an equity book value of $441 million, and $432 million in debt. Operating cash flow was $21 million. The backlog stands at $1.16 billion with robust charters including Equinor and Rio Grande LNG, and extended charters until at least 2028.

Operational Highlights and Financial Performance

For the third quarter ending September 30, 2023, the company's six LNG carriers, with an average age of 13.3 years, were fully employed under long-term charters with notable international gas companies. Despite a loss per common unit of $0.04, the adjusted net income was $3.1 million, a decrease from $4.5 million year-over-year, primarily due to heightened interest and finance costs. Adjusted EBITDA remained stable at $20.4 million, with a substantial increase in voyage revenues by 23.7%, from $29.9 million to $37 million, boosted by the newly commenced charter agreement with Equinor and higher available days.

Cash Flow and Debt Position

The company's deleveraging efforts continued, manifesting in a $242 million debt reduction since December 2019, lowering the net leverage to 4.1x and boosting the book value of equity to $441 million. Operating cash flow for the quarter stood at $21 million, with an increase in the cash balance from $52.9 million to $64.9 million. Despite a $10.3 million rise in current liabilities due to dry dock payables, these are anticipated to fall in subsequent quarters. The firm is actively discussing the refinancing of its credit facility anticipating a deal in the first quarter of 2024.

Long-term Charter Strategy and Market Position

The company's commercial strategy prioritizes long-term charters, resulting in a robust backlog of approximately $1.16 billion and ensuring stable income over an average remaining charter period of 7.2 years. With no vessel availability until 2028 and significant ongoing global expansion in LNG liquefaction capacity, the company is well-positioned to benefit from industry trends. Its proactive charter management strategy has fully employed the fleet through 2027, mitigating exposure to market uncertainties during this growth phase.

Industry Outlook and Strategic Commitments

Predicted increases in liquefaction capacity and a shift towards cleaner energy contribute to a positive outlook for the LNG shipping industry. The company's strategic charter alignment and continued debt reduction signify commitment to strengthening equity value through predictable cash flows. This approach aligns with the broader transition to low-emission energy sources, with LNG playing a crucial role in this landscape.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, ladies and gentlemen. And welcome to Dynagas LNG Partners Conference Call on the third quarter 2023 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 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 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 such as defined in the 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 which 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, executive]

Good morning, everyone, and thank you for joining us in our 3 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 3-month period ending on September 30, 2023. 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 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.

[Michael Gregos, executive]

Thank you, Tony. Turning to Slide 4. Net income for the third quarter decreased by $6 million or 81% to $1.4 million compared to $7.4 million in Q3 2022, primarily due to the decrease in the unrealized gain on our interest rate swap of $13 million and the increase of $2.2 million in loan interest which were partially offset by the increase in the realized gain on our swap transaction of $3.9 million.

Net income for this quarter was also impacted by the scheduled 5-year special survey dry docks of the Arctic Aurora, Lena River and Yenisei River, which commenced and were completed within the third quarter and resulted in an increase of $9.8 million in dry docking and special survey costs which was, however, offset by the fact that under the time charter contracts for 2 of our LNG carriers, the time charters pay for the special survey and dry dock costs on a pass-through basis.

Therefore, out of the total dry dock and special survey cost of $17.3 million for the quarter, $11.6 million was reimbursed from the time charters to the company and which has been reported in a separate line item in the P&L statement, revenues from contracts with customers.

In addition, the 3 aforementioned vessels, which were dry docked, remained on hire for 56 days out of the total 110 dry-dock days for the quarter as per the provisions of their respective time charter parties.

Similarly, although we experienced an increase in OpEx of $3.6 million versus the same period last year, $3 million of this increase relates to 2 LNG carriers, which are contracted on an OpEx pass-through basis meaning that for these 2 LNG carriers, there was a corresponding increase of $3 million in voyage revenues.

It is noteworthy to point that compared to Q3 2022, voyage revenues increased by 23.7% and from $29.9 million to $37 million, mainly attributable to the increase of $2.7 million due to the deferred revenue amortization relating to the new time charter party agreement with Equinor for the employment of the Arctic Aurora, which commenced in September 2023 and the higher available days.

Adjusted EBITDA for the third quarter was relatively stable at $20.4 million. TCE for the quarter amounted to close to $72,000 per day. The elevated TCE relative to prior quarters is mainly due to the increase in the variable revenues of the 2 LNG carriers contracted on an OpEx pass-through basis as explained before. As well as the aforementioned noncash straight-line deferred revenue amortization, which is reconciled with actual cash revenue receipt in the cash flow statement.

OpEx through the first quarter amounted to $19,200 per day with a per vessel cash breakeven for the quarter 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 quarter -- for the third quarter of 2023 amounted to $3.1 million compared to $4.5 million same time last year, the decrease being mainly attributable to the aforementioned increase in interest and finance costs as a result of the higher interest expense paid under the floating leg of our credit facility.

Adjusted net income excludes cash receipts and unrealized gains on our interest rate swap. If we include this quarter's realized gain from our interest rate swap of $6.5 million, as can be seen in the cash flow statement, adjusted net income would have amounted to $9.6 million or $0.18 per common unit instead of $0.01.

Moving to Slide 4 (sic) [ Slide 5 ] . As of the end of September 2023, we had $432 million debt outstanding under our current credit facility. We are continuing our comprehensive deleveraging path, which commenced in the first quarter of 2020, resulting in a decrease in our net leverage to 4.1x and a steady increase in the book value of our equity, which today stands at $441 million. In this quarter, we generated $21 million in operating cash flow.

Turning to Slide 6. Our cash balance for the quarter increased from $52.9 million at the end of the previous quarter to $64.9 million and our credit metrics continue to improve. It should be noted, however, that current liabilities in this quarter increased by $10.3 million due to the increase in payables mainly associated with the 3 vessel dry docks and which are expected to decrease in the next quarters. With respect to our debt maturity in September 2024, we are currently in discussions for the refinancing of our current credit facility, which we hope to sign, close and fund within the first quarter of 2024.

That wraps it up from my side.

[Tony Lauritzen, executive]

Thank you, Michael. Let's move on to Slide 7 of the presentation. So at present, our fleet consists of 6 LNG carriers with an average age of approximately 13.3 years.

Our current charters include gas companies such as Equinor of Norway, SEFE and Yamal Trade of Singapore as well as Rio Grande LNG, a subsidiary of NextDecade for the forward chartered vessels, Clean Energy and Arctic Aurora.

As of 7 December 2023, the fleet's contracted backlog amounts to approximately $1.16 billion equating to an average backlog of about $193 million per vessel. Furthermore, the fleet enjoys an average remaining charter period of approximately 7.2 years. We are confident that our charter profile is strong and positions our partnership for stable income in the years to come.

Moving on to Slide 8. Our commercial strategy is securing long-term charters with gas companies. We have built up a solid contract and backlog and by no unforeseen events. We have no contractual vessel availability until 2028 when the Clean Energy, Ob and Amur River will be available.

The next availability after this is the Arctic Aurora, which will come off a Rio Grande LNG contract in 2033 following by Yenisei and Lena River in 2034, provided that charter's extension options are not exercised.

According to [indiscernible], current liquefaction capacity is approximately 473 million tonnes per annum. With another 205 million tonnes per annum of additional LNG liquefaction capacity already FID-ed and under construction for start of -- prior to 2030. This represents a total increase in energy liquefaction capacity of about 40%. Approximately 40% of this expansion will come from U.S. export projects, 25% from Qatar and the remaining 35% will be split between the average projects, including Russia, Africa, Australia, Canada and Mexico.

Additionally, there are a number of expansion projects in the U.S. Gulf of Mexico and elsewhere at different stages of taking FID. The current LNG carrier fleet accounts about 630 vessels. The order book stands at 46%, excluding slot reservations made for Qatar phase 2 and from Mozambique LNG and 56% if we assume that those slot reservations will materialize. It is interesting to note that only 23 vessels of the order book are not committed to a time charter.

Although the increase in the fleet capacity is well above the increase in liquefaction capacity, we believe that older and smaller vessels, in particular vessels under 140,000 cubes representing about 17% of the global LNG carrier fleet will be phased out.

In any case, we see that from time to time -- what we see that from time to time in the industry is that LNG carriers under constructions are delivered on time while LNG [ trades ] under constructions are delayed. Therefore, we have engineered our charter portfolio so that we are fully employed throughout 2027 in order to eliminate our exposure to any potential market uncertainty during part of this period.

Moving on to Slide 9. The partnership has demonstrated its commitment to its debt reduction strategy since December 2019 until end of September '23, we successfully repaid $242 million in debt, significantly lowering the net leverage from 6.6x to 4.1x. Additionally, the partnership has achieved a 42% increase in book equity value standing at $441 million as per 30 September '23.

Looking ahead, we are confident that the partnership's ongoing efforts to reduce debt would further augment equity value through stable, long-term cash flow visibility. We firmly believe the LNG plays a pivotal role in building a future with reduced emissions. The demand for LNG is projected to continue as the world progressively shifts away from coal and other pollutant fossil fuels in favor of cleaner energy sources.

Natural gas has a relatively low emission profile when combusted and other key drivers of natural gas is its ability to generate power swiftly and effectively as and when needed. And the existence of a well-developed global infrastructure for facilitating its production, transportation, storage and consumption.

Considering these promising 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 you to ask any questions you may have. Thank you.

[Operator]

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

[Benjamin Nolan, analyst]

I really just have one. The -- as it relates to the refinancing of the debt, it's been something I know that you guys have been working on for quite a while. And I appreciate that it sounds like it's a 1Q type of event. I guess my question is, what's -- has this been -- is the holdup been something on your side? Or maybe is it a little bit more challenging to get banks to underwrite with the Yamal vessels in there. Any color as to sort of what the -- why it's taking so long?

[Michael Gregos, executive]

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

[Benjamin Nolan, analyst]

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

[Michael Gregos, executive]

Well, I mean, listen, our -- we have -- if you look at our whole fleet, we have a strong contract backlog, if you look at it in its totality.

So there aren't that many interesting LNG projects out there in the market to be financed by banks. So all I can tell you is that there is demand for what we have to offer. It also has to be something that fits our needs.

[Operator]

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

[Tony Lauritzen, executive]

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.

[Operator]

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