Dynagas LNG Partners LP

NYSE:DLNG

Earnings Call Analysis

Dynagas LNG Reports Solid 2023 Results, Secures Long-Term Charters

Dynagas LNG Partners sustained a profitable quarter with a notable full-year performance. In Q4 2023, net income reached $10.5 million, translating to earnings of $0.21 per common unit, despite a slight 9.5% decrease from the previous year due to lower unrealized gains on interest rate swaps and the absence of a prior debt extinguishment gain. Adjusted net income for the quarter was substantial at $10.3 million. Full-year net income amounted to $35.9 million, with adjusted net income at $25.8 million and adjusted EBITDA hitting $94.4 million. The company boasts a robust balance sheet, demonstrated by a net debt to last 12 months EBITDA ratio of 3.7x, and maintains a strong contracted backlog of approximately $1.11 billion, guaranteeing an average backlog of around $185 million per vessel with no vessel availability until 2028.

Steady Performance Amid Industry Changes

Dynagas LNG Partners LP, an owner and operator of LNG carriers, delivered a steady performance for the fourth quarter of 2023, reporting a net income of $10.5 million and earnings per common unit of $0.21. The adjusted figures, accounting for specific financial items, bring the net income to $10.3 million and adjusted earnings per common unit to $0.20. For the entire year, the company achieved commendable results with a net income of $35.9 million, which translates to earnings per common unit of $0.66, showing the company's resilience and its ability to maintain profitability in a challenging environment.

Strategic Financial Management

Part of the company's success can be attributed to its strategic financial management. Throughout the year, Dynagas experienced a slight 9.5% decrease in net income for the fourth quarter compared to the year before, stemming from variations in unrealized gains on interest rate swaps and the absence of a prior gain on debt extinguishment. Nevertheless, increased voyage revenues and other income from insurance claims helped offset this decrease. The fine-tuning of the company's operational and finance costs underpins its strategic commitment to deliver shareholder value without diluting equity.

Prudent Capital Stewardship

The careful management of capital was evident with a net debt to EBITDA ratio of 3.7x, highlighting a solid balance sheet and a net debt to total book capitalization ratio of 43%. Strong cash flows substantiate the company's rigorous approach. With an operating cash flow of $64.4 million and a free cash flow of $60.2 million for the year, Dynagas secured a robust cash position of $73.8 million by the end of the quarter. This disciplined approach has positioned Dynagas to resolve its upcoming September 2024 debt maturity through a prudent financing agreement, with a term sheet already signed for lease financing of 4 out of 6 LNG carriers for up to $345 million.

Charter Backlog Securing Future Income

The company's fleet of 6 LNG carriers, averaging 13.6 years in age, boasts a strong charter backlog of approximately $1.11 billion, averaging about $185 million per vessel. With an average remaining charter period of nearly 6.9 years, including with major gas companies like Equinor of Norway and Singapore's SEFE and Yamal Trade, Dynagas has carved out a reliable revenue stream well into the future. The company has no vessel availability until 2028, ensuring a stable income horizon. This is a testament to their commercial strategy that lays emphasis on securing long-term charters with gas companies, making the partnership a reliable bet for steady performance in the upcoming years.

Industry Outlook

On a broader scale, the LNG industry is under expansion with the global fleet comprising approximately 670 large vessels and an active newbuilding order book. About 53% of the existing fleet's capacity is expected to be delivered between now and 2028. The majority of these new orders are earmarked for specific charters, leaving a mere 28 carriers without fixed employment. This industry overview underscores a growth-focused landscape where Dynagas seems well-positioned with its existing charters and proactive management of its fleet.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners Conference Call on the Fourth Quarter 2023 Financial Results.

We have with us today 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'd 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 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 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 full year and 3 months ended 31st December 2023 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 get started and move to Slide 3 of the presentation. We today present the results for the full year and 3 months period ending on December 31, 2023. We are pleased to announce that all 6 LNG carriers in our fleet were operating on the long-term charters with esteemed international gas companies.

For the third quarter -- for the fourth quarter of 2023, we reported net income of $10.5 million and earnings per common unit of $0.21. Our adjusted net income stood at $10.3 million, translating to adjusted earnings per common unit of $0.20. Furthermore, our adjusted EBITDA for the same period reached $27.4 million.

For the full year '23, we reported net income of $35.9 million and earnings per common unit of $0.66. Our adjusted net income stood at $25.8 million, translating to adjusted earnings per common unit of $0.39. Furthermore, our adjusted EBITDA for the full period reached $94.4 million. We are pleased to share that subsequent to the quarter, the partnership has signed a term sheet with a major leasing company in Asia for the lease financing of 4 of our 6 LNG carriers in an amount of up to $345 million.

The financing has received credit approval and is subject to signing of documentation and customary closing conditions. The transaction is expected to close in the second quarter of 2024. The partnership intends to combine proceeds from this new financing with other sources of liquidity to fully repay the partnership's debt maturing in September '24.

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

[Michael Gregos, executive]

Thank you, Tony. Turning to Slide 4. Net income for the full year amounted to $35.9 million or $0.66 per common unit. Adjusted net income amounted to $25.8 million or $0.39 per common unit and adjusted EBITDA for the year was $94.4 million. In the fourth quarter, net income saw a slight decrease of 9.5% to $10.5 million compared to the same quarter last year. This reduction is primarily linked to a decrease in unrealized gain on our interest rate swap of $3.2 million and the absence of a $3.1 million gain on debt extinguishment that we recognized in the previous year. However, this was partially mitigated by an uptick in voyage revenues of $3.9 million as a result of a higher charter rate on the Arctic Aurora, which entered the charter with Equinor in September 2023, as well as by the $2.9 million of other income recognized in the fourth quarter of 2023, which represents income from insurance claims.

Adjusted net income for the quarter is reported at $10.3 million a noteworthy increase from $7 million last year, driven mainly by the voyage revenue growth previously mentioned. This was counterbalanced by increased operating expenses by $0.6 million and finance cost by $0.4 million due to higher interest expenses under the floating leg of our credit facility.

For consistency, we've excluded cash receipts and unrealized gains on our interest rate swap from adjusted net income, which if included, brings our adjusted net income and earnings per common unit to $16.7 million and $0.37, respectively. The time charter equivalent rate per day for the fourth quarter stood at $65,700 with operating expenses of $15,172 per day, leading to a cash breakeven per vessel of $46,300 per day.

Turning to Slide 5. Our net debt to last 12 months EBITDA ratio has improved to 3.7x indicative of a solid balance sheet and prudent capital management, culminating in a book equity value of $448 million and a net debt to total book capitalization ratio of 40%.

Our consistent emphasis on using organic cash flow for debt reduction without diluting shareholder value has proven to be a prudent strategy as can be seen by the consistent increase in book equity value per common unit.

Moving to Slide 6. We concluded the quarter with a strong cash position of $73.8 million, operating cash flow of $20.2 million. And after accounting for the capital expenditures like the installation of ballast water treatment systems on our steam LNG carriers, free cash flow of $17.4 million. For the full year, our operating cash flow amounted to $64.4 million, and our free cash flow was $60.2 million. We are pleased to announce that we have signed a term sheet with a prominent Asian leasing company for the lease financing of 4 out of our 6 LNG carriers to address our September debt maturity.

This financing will provide us with up to $345 million in funding. We're happy to report that this financing plan has already been granted credit approval and is contingent upon the completion of definitive documentation and the satisfaction of customary closing conditions.

We plan to utilize the proceeds from this financing in conjunction with other sources of liquidity to completely repay the partnership's debt that comes due in September 2024. We expect to close this transaction within the second quarter of 2024. Over the past few years, we've been strategically reducing our leverage in an organic manner. And by addressing the upcoming maturity of our debt, we're setting a solid foundation for financial stability. And that wraps it up from my slide. I will pass the presentation over to Tony.

[Tony Lauritzen, executive]

Thank you, Michael. Let's move on to Slide 7 of the presentation. At present, our fleet consists of 6 LNG carriers with an average age of approximately 13.6 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 28th March '24, the fleets contracted backlog amounts to approximately $1.11 billion, equating to an average backlog of about $185 million per vessel. Furthermore, the fleet enjoys an average remaining charter period of approximately 6.9 years. We are confident that our charter profile is strong and positions our partnership for stable income in years to come.

Let's move on to Slide 8 of the presentation. Our commercial strategy is securing long-term charters with the gas companies. We have built up a solid contracted backlog and by no unforeseeable 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 Article Aurora, which will come off a Rio Grande LNG contract in 2033, followed by Yenisei and Lena River in 2034, provided that charter's extension options are not expanded.

The global fleet of LNG carriers currently comprises approximately 670 large vessels, exhibiting a diverse range of sciences and propulsion systems. The newbuilding order book accounts for roughly 53% of existing fleets, mainly scheduled for delivery between now and 2028. The majority of these orders are already committed to specific charters, leaving only 28 carriers without dedicated employment.

The main objectives of the global order book are twofold, to replace aging vessels and to accommodate the growing LNG production capacity. Notably, around 18% of the existing fleet comprises steam powered vessels below approximately 140,000 cubic meters in capacity with an average age well above 20 years, rendering them undersized and inefficient in today's operational environment.

Current liquefaction capacity stands at approximately 471 million metric tons with an additional 46% of new liquefaction capacity already FID-ed and at various stages of construction for start-up before 2030. The expansion is primarily driven by projects in the U.S., Canada and Mexico region, representing about 46% followed by Qatar at 30% with additional contributions from various other regions, including Russia, Africa, Australia and Malaysia.

In the medium to long term, we anticipate the order book being absorbed through the replacement of all the vessels and the transportation of additional LNG production. However, in the shorter term the charter market may face short-term challenges as vessel deliveries are front-loaded compared to the multiyear growth in LNG production.

Given these factors, we believe our portfolio is well structured with contractual availability only in 2028. Nevertheless, global demand for LNG remains robust. Questions have been raised regarding the impact of Chinese economic growth and LNG demand. Beijing has maintained its growth target of 5% for '24, narrowing the figures set for '23 and recent data from import suggest a notable increase in China's energy imports during Q1 '24 compared to '23. European energy import volumes reached historical highs in '23 and are expected to continue increasing in the medium term up to '26, projected to rise from approximately 120 million tonnes in '23 to 140 million tonnes in '26.

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

At the vessel level, our current charters are performing and fulfilling their obligations with the vessels actively trading.

While President's Biden temporary pause on pending permits for new LNG projects have been announced, it is not targeted to impact already permitted brownfield or expansion projects. Our agreements with the U.S. LNG export for the next decade for the Clean Energy and Arctic Aurora are proceeding as planned, year-marked for Phase I trains 1 to 3, which are fully permitted.

According to NextDecade, construction of the Rio Grande Energy facility is progressing in line with schedule with overall completion for train 2, is approximately 14% and 4.4% for train 3.

Let's move to Slide 9. The partnership has demonstrated its commitment to its debt reduction strategy. Since December 2, '19, until 28th March '24, it successfully repaid $264.4 million in debt significantly lowering its net leverage from 6.6x to 3.7x. Additionally, the partnership has increased its book equity value by 44%, standing at $448 million as of 31st December '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 that LNG plays a pivotal role in building the 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, facilitating its production, transportation, storage and consumption.

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

Operator, you can now open the floor for questions.

[Operator]

[Operator Instructions]

Our first question comes from Ben Nolan with Stifel.

[Benjamin Nolan, analyst]

Congrats on getting some term sheet for the refinancing. I was curious, Michael, if you can give a little color on what you -- what the cash outflows would look like on a quarterly basis or the interest and amortization, any thoughts as to sort of what that would look like.

[Michael Gregos, executive]

Yes. So I mean, let's say, on average, the -- this will have, let's say, a profile of about 8 years. So on an as adjusted basis, it's about 23 years. We -- the margin on this financing is right below where we are today. But let's not forget that in September, our swap expires, so we will be, let's say -- our debt will be under floating interest. So that's what we can provide at this stage. But -- okay, I am pleased to say that the margin is quite below where we are today.

[Benjamin Nolan, analyst]

Right. So I guess what I'm trying to get to is what's the -- relative to your cash flows coming in, how much of the -- how much is going out or would you anticipate going out onto the debt service?

[Michael Gregos, executive]

Well, let's say, on aggregate, I mean you have to -- depending on where our interest rates -- let's say, the amort element would be about close to $45 million, and the interest element would be, let's say, somewhere slightly south of $20 million. So there is post that number, there is a cash buildup.

[Benjamin Nolan, analyst]

Okay. And are there any restrictions on what you can do with the excess cash after amort interest?

[Michael Gregos, executive]

No, no. There's no restrictions. There's no dividend restricts either, yes.

[Benjamin Nolan, analyst]

Okay. Perfect. And just since you mentioned it, any thoughts as to what the -- what you might would do with the excess cash flow after debt servicing.

[Michael Gregos, executive]

I think it's a bit too early to say. Our next step is just to close this financing and I think it's a bit too early to say what the next step will be on how to utilize this excess cash.

[Operator]

[Operator Instructions]

There are no further questions at this time. At this point, I'd like to turn the call back over to Tony Lauritzen for closing comments.

[Tony Lauritzen, executive]

Okay. Thank you, all. We appreciate your time and attentiveness. Thank you for your participation. And we look forward to connecting with you again on our next call. Take care. Goodbye.

[Operator]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.