Dynagas LNG Partners LP
Q3 2014 Earnings Call Transcript

Published: 11 Nov 2014

[Operator:]

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners Conference Call on the Third Quarter and Nine Months 2014 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’ll be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, November the 11th, 2014. At this time, I would like to read the Safe Harbor statement. 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. Investors are cautioned that such forward-looking statements involve risks and uncertainties, which may affect Dynagas LNG Partners’ business prospects and results of operations. Such risks are more fully disclosed in Dynagas LNG Partners filings with the Securities and Exchange Commission. And I’ll now pass the floor to Mr. Lauritzen. Please go ahead, sir.

[Tony Lauritzen:]

Good morning, everyone, and thank you for joining us in our third quarter 2014 earnings conference call. I’m joined today by our CFO, Michael Gregos. Yesterday we issued a press release announcing our third quarter and first nine months of 2014 results. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures as well as the discussion of why we believe this information to be useful in our press release. We are pleased to report the partnership earnings for the third quarter of 2014, which are in line with our expectations, in particular, we are focused on the performance of our fleets and the safety operational and technical point of view. During the third quarter, we have had 100% fleet utilization, which is reflected in our financial results. With our fleets fully contracted until second quarter 2017, we continue to focus our attention on further fleet growth. The five LNG carriers currently owned by our sponsor Dynagas Holding LTD provides us with specific growth candidates. In addition and beyond these five LNG carriers, the forecasted growth in the energy industry, will enable our sponsor to make further commitments to LNG carriers and other related assets which will further enhance the partnerships growth prospects. Turning to slide 3 to discuss recent achievements. On September 25th, we completed our second acquisition of the year and acquired the Yenisei River, at 2013 built 155,000 cubic meter, ice class LNG carrier contracted to gas come until third quarter 2018, for a purchase price of $257.5 million. On September 15th, we closed a $250 million public offering of senior unsecured notes with maturity in 2019. The notes bear an interest of 6.25% per annum, the net proceeds are $244.3 million, which used to partly finance the acquisition of the Yenisei River. On October 22nd, we announced a quarterly cash distribution for the third quarter of 2014 of $0.39 per unit. This cash distribution will be paid on or about November 12 to all unit holders on record as of November 5th. This cash distribution represents a 6.85% increase compared to the partnerships minimum cash distribution of 36.05 per unit. This increase in cash distribution is a result of the incremental cash flow produced by the Arctic Aurora, which was acquired by the partnership and added to the fleet on June 23rd 2014. Following the acquisition, and in addition to our fleet of the Yenisei River on September 25th, management enhanced to recommend to the board a further increase in the quarterly cash distribution of between $3.0 to $3.05 per unit, which will become effective for the cash distribution with respect to the quarter ending December 31st 2014. We are finished with the results for the third quarter and nine month period ended 30th September 2014, for which adjusted EBITDA was 22.6 million and 56.1 million respectively. Moving onto slide 4, on Wednesday we marked the first year anniversary of our IPO. And I would like to use this opportunity to briefly discuss our achievements during the first year as the publicly traded partnership. We are a growth oriented limited partnership, and within 2014 we completed two vessel acquisitions and grew our fleet from three to five units, which represents a fleet unit growth of close to 69% on a cargo carrying capacity basis. We have grown our fleets with modern high specification and versified vessels that are ice class, and winterized and offers trade flexibility to our charters. In addition to fleet growth we have increased our customer diversification in addition of Statoil to our list of charters. Our cash distribution increased by 6.85% following the acquisition of the Arctic Aurora, following the recent acquisition of the Yenisei River, we intend to recommend to the board to further increase the cash distribution of between $3.0 to $3.5 per unit. Such distribution increase would potentially represent a total cash distribution increase of about 15% compared to our minimum cash distribution. We had optimized our capital structure; we raised 120.5 million from our June 2014 follow on equity offering, with net proceeds were used to partly finance the Arctic Aurora acquisition. And we closed an offering of $250 million senior unsecured notes and an attractive 6.25%. Our fleet has been performing very well with a 100% utilization since our IPO, and with strong operational and safety key performance indicators, this strong operational performance underpinned by multi-year charters to the first class counterparties have led to solid financial performance. We have been focused on increasing our contracted backlog and employment profile, since our IPO we have increased our contracted backlog to 710.8 million with an average remaining charter period of 5.3 years, up from 3.5 years at the time of IPO. I’ll now turn over the presentation to Michael to provide you with the quarter’s financial results.

[Michael Gregos:]

Thank you Tony. Turning to slide 5 of the presentation, I will review some recent financial highlights. This was another productive quarter, in which we grew our fleet and diversified our capital base with a $250 million senior secured note giving us additional financial flexibility. Our conservative capital structure at the time of our IPO has allowed us to fund our latest vessel acquisition from our sponsor entirely with cash on hand, and that’s attractively priced with a 6.25% coupon. In addition, we are pleased that the largest portion of our new notes was absorbed by high quality institutional investors. Our results for the third quarter and nine month period ended 30th September, were in line with our expectations supported by outstanding operational and a wonderful performance and 100% utilization. In June and September of this year, we acquired two 2013 built LNG carriers. Therefore the number of vessels in our fleet at the end of the quarter was five LNG carriers whereas the average number of vessels in our fleet for the third quarter was 4.1 vessels. For the third quarter of 2014, the partnership generated distributable cash flow of 16.3 million, adjusted EBITDA of 22.6 million, and net income of 14 million. Adjusted net income, which is net income adjusted for non-cash time charter high amortization into the third quarter, amounted to 14.3 million. Adjusted EPS for the third quarter of 2014 amounted to $0.40 per common unit. For the nine month period ended September 30th, we reported distributable cash flow of 41.2 million adjusted net income of 37 million, and adjusted EBITDA of 56.1 million. Interest and finance cost for the nine month period amounted to 7.5 million, which was broken down in 6.7 million interest cost, 394,000 in amortization of deferred financing fees, and 360,000 in commitment fees. For the three month period ended September 30th, our average daily hire gross of commission amounted to $78,240 per day. Moving onto slide 6, we outlined our key financial metrics, which are primarily driven by the growth in our fleet from three to four vessels as the contribution of the fifth vessel; the Yenisei River amounted to only five days in the period. We will operate five vessels for a full quarter in the fourth quarter 2014. As of September 30th, the partnership had total available liquidity of 65.1 million, compared to 35.1 million in cash including minimum cash liquidity requirements enforced by our lenders, and a 30 million of borrowing capacity under our 30 million sponsored facility. Total indebtedness as of September 30th was 580 million, which includes 330 million under our senior secured revolving credit facility, which had loan amortization of 20 million per annum until the first quarter of 2021. And 250 million outstanding under our non-amortizing 6.25% unsecured notes due October 2019. This equates to a net debt to 12 month forward estimated run rate EBITDA of approximately 4.9 times, which we believe is at the top of the range, but in line with our target leverage of around 4.5 to 5 times, and which we believe is a prudent strategy given the stability of our revenues, which are underpinned by time charters with the remaining average duration of 5.3 years. For the 330 million senior secured facility, we are still reaping the benefits of low floating interest rates, but continue to monitor the market. For the quarter, our weight of average interest rate on the 330 million senior secured facility amounted to 3.1%. Moving onto slide 7 to discuss distributable cash flow, we’ll start from adjusted EBITDA, EBITDA interest and finance cost, add back amortization of deferred financing fees and interest income. Maintenance capital expenditure reserved for dry-docking our base on a dry-dock cost of 1.6 million per vessel, as well as estimated of hire and loss revenues during the dry-dock period. Replacement capital expenditure reserve is a reserve to replace the vessels at the end of their useful life. On a 12 month forward run rate basis for our five LNG carriers, we estimated 3.4 million in maintenance CapEx with earned reserve, and 10.9 million replacement CapEx reserve, which in total amounts to 14.3 million. Depreciation on a 12 month forward run rate basis for the year, should total around 24 million, and this takes into account specifically raised in June and September. As a reminder, new builds had a useful life with at least 35 years, and our ships had an average remaining useful life of around 30 years. Our coverage ratio for the third quarter 2014 and run rate going forward amounted to 1.18 times. Moving onto slide 8, slide 8 outlined the dropdown economics of our first two acquisitions, the partnership acquired two 2013 built LNG carriers with ice class capabilities for an aggregate price of 492.5 million, which are expected to generate annual EBITDA of 46.7 million, representing an average EBITDA multiple of 10.5 times in line with our guidance. Following the Arctic Aurora acquisition, the partnerships board of directors approved the cash distribution increase of 6.8% resulting in a quarterly cash distribution of $0.39 per quarter for the third quarter, and which will be paid on or above November 12 to usable reserve record as of November 5th. Following the partnerships acquisition of the 2013 build energy carrier at Yenisei River on September 25th of this year, the management of the partnership intends to recommend to the board a further increase of the partnerships quarterly cash distribution of between $0.03 and $0.35 per unit, which will become effective for distribution with respect to the quarter ending December31st. Management can provide no assurance that it will make such a recommendation, and this such recommendation made that it will be approved by the board, If this cost distribution increase is approved, this will represent cash distribution increase of around 15% since our IPO 12 months ago. This is in line with our strategy of dropping down LNG carriers, which are approved to distributions per unit. I’ll now turn the presentation back over to Tony.

[Tony Lauritzen:]

Thank you Michael. Let’s move to slide 9 to summarize the partnerships profile. Following the Yenisei River acquisition, the coverage age of our five LNG carriers is about 4.9 years in an industry, where expected use for economic lifetime is 35 years. We have a strong and diversified customer base with investment grade counterparties the BG Group, Gazprom and Statoil, these charters are leaders in their field and only work with the top performing service providers. Moving on to slide 10, our fleet currently consist of five LNG carriers, four of which have high class ice class 1A notation, our fleet is fully contracted in 2014, 2015 and 2016, and also for the majority of 2017, at which time we expect the LNG shipping market should be very strong. We are the only company in the world with the capability and experience in charters in transit in the Northern Sea Route. Our multi-year fleet employment profile diversified first class customer’s base and a staggered maturity of our charges provide solid cash flow visibility going forward. Let’s move to slide 11, we tend to continue to focus on accretive growth going forward. As you may know, we have the right to purchase from our sponsor, add further five optional vessels, so we have a large sponsor, asset base and substantial dropdown growth potential. Three of those vessels are already on the water and trading, and the remaining two are under construction with delivery in 2015. All optional vessels are high specification, ice class, winterized and extremely versatile. These optional vessels include two vessels already chartered to first class customers, with an average five years employment. Of the two chartered vessels, one is chartered to our existing charter at Gazprom and one is chartered to Cheniere. Our sponsor’s is confidently evaluating new project opportunities, that have the potential to provide us with additional growth opportunities beyond these five optional vessels. Moving onto slide 12 for an overview of our growth in cash distributions. As our IPO, our minimum quarterly cash distribution per unit was $0.0365 equivalent to an annualized distribution of $1.46 per unit. Following the Arctic Aurora acquisition, the quarterly cash distribution was increased to $0.39 per unit, equivalent to annualized distribution of $1.56 per unit. This cash distribution of $0.39 will be paid on November 12th for the third quarter of 2014. The increase represents a 6.85% growth compared to our minimum quarterly distribution. Following the acquisition of the Yenisei River, we intend to recommend to the board to increase the quarterly cash distribution, so it would amount to between $0.42 and $0.0425 per unit, which is equivalent to an annualized distribution of between $1.68 and $1.70 per unit. This quarterly cash distribution would become effective for the fourth quarter of 2014 and will be payable in February 2015. Such an increase will potentially imply an increase in cash distribution of about 8% when compared to the third quarter 2014 cash distribution, and about 15% when compared to the minimum distribution per unit. Let’s move to slide 14 for an update on the LNG shipping market outlook. Well the last three years have been a period characterized by a modest growth in LNG production, we expect the next year and through the end of the decade to be dominated by strong growth. Significant incremental LNG means our already expected to come on stream from the next year and in 2016, when Australia, Southeast Asia, and the U.S., will add on production. Expect that the actual production during this period maybe well above what is estimated in the LNG production table. Actual added capacity within end 2016. May turn out to be about 74 million tons per annum, a 30% increase compared to June ‘13 volumes. As further U.S. projects have been approved by FERC and its other project’s also look likely to receive approvals, we have adjusted the LNG production forecast upwards. From a supply point of view, we have increased our forecast to about 160 million tons of new LNG will come to the market between now and 2020. This represents an astounding total increase of 68% compared to 2013 production. The source of the commodity is primarily from Australia, Southeast Asia, North America, Russia, and Africa. We continue to believe that the Far East will remain the largest buyers going forward, meaning that the LNG carrier ton-mile requirements are expected to remain high. The production figures are conservative and increased production in existing projects has not been included. Several LNG production facilities in the world remains significantly underutilized due to the technical or political reasons. U.S. export volumes included in this projections have been estimated to 80 million tons coming from Sabine Pass, Cameron, Freeport, Lake Charles, Cove Point and Corpus Christi. When we compare LNG supply to LNG carrier shipping capacity available from now until 2020, we remain confident that the market for shipping will remain tight. From 2018 and onwards, we expect prospects for LNG carriers to be particularly strong, leading to higher charter rates. Part of our competition going forward our vessels that come off charter, such vessels are on average of older age than our fleets and therefore also much smaller in size, as vessels used to be built with smaller sizes in the past. Vessels have come off-charter in the years 2017 and 2018 are on average size, about 138,000 and 139,000 cubic meters. The average size of vessels coming off charter between now and 2020 are about 137,500 cubic meters, which should give a relative strong preference to our fleet, which is on average close to 152,000 cubic meters and extremely versatile. The potential re-charting possibilities of our fleet will be in 2017 and beyond, which we expect to be a period of high total fleet utilization. This will be further supported by Arctic LNG coming on stream and requiring ice class vessels. We have now reached the end of our third quarter presentation, and I now open the floor for questions, thank you.

[Operator:]

Thank you very much indeed. We now begin the question and answer session, [Operator Instructions]. Your first question from Credit Suisse, comes from the line of Gregory Lewis, your line is now open.

[Gregory Lewis:]

Thank you and good afternoon gentlemen. Tony, if you wouldn’t mind, could you provide a little bit more color background on, I mean clearly you guys are confident in 2017, tight market in the LNG space, could you balance that against what we’re seeing lately in terms of lower commodity prices, major oil companies, delaying CapEx programs. I guess, what are the companies or your customers saying to you and what gives you that level of confidence that these projects come at a timely fashion, as opposed to if it’s a 2017 project being delayed to ‘19 or ‘20?

[Tony Lauritzen:]

Okay yes, well first of all we base most of our forecast on projects that are either construction, or the – has been taken. So we needed a high probability of those volumes actually coming on stream. And regarding, I mean regardless of commodity prices, these volumes will have to be transported. In LNG it’s difficult to reduce production volumes up and running, but from that point of view, we feel that we’ve been quite conservative in our forecast going forward. Interestingly enough, when we’re on the project, we have seen in the short-term markets which the partners are not involved in, but we have seen a tremendous development during the last couple of months there. So although commodity prices have been down, we have seen basically an all-time short-term fixed activity in that space, and also charter rates pointing upwards. So I think that these two factors underlines our confidence in the market going forward, first of all, as you said that the forecast that we’re using for the production is either under construction or – and as well, we’ve seen the short-term market that the revolving oil prices haven’t had any, haven’t led to reducing activity of LNG carriers.

[Gregory Lewis:]

Okay, great. And just following up on your comment on the – I’m hearing an echo, but – so bear with me. So the Clean Planet is a vessel that’s traded in the stock market. I’m assuming that’s the vessel that you’re referring to that’s having opportunities. If you could just provide a little bit of, any color you can shed on the Clean Planet and given the strength of this market in the near medium term. Is that an opportunity for the parent company or locking the Clean Planet on a long-term contract as the potential lead third dropped down candidate in to Dynagas?

[Tony Lauritzen:]

Yes all the optional vessels on a sponsor level, there are two vessels that are already completed in the water and trading the Clean Ocean and the Clean Planet. And both of those vessels were fixed almost immediately out of the odds to carry short-term, well to do short-term trading for oil majors and traders. Since we are very confident in 2015 and 2016 in terms of that the markets will improve. We feel it’s very prudent to trade those vessels in the short-term market until we can secure a good contract in 2015 or so for long-term employment that would qualify the vessels for dot com candidates into the partnership.

[Gregory Lewis:]

Okay. Thank you very much.

[Tony Lauritzen:]

Welcome.

[Operator:]

Thank you sir. Now from Morgan Stanley your next question comes from the line of [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Thank you for taking my question. So just a quick follow-up on the tendering activity, so you think for these like large 2016, 2017 projects, the tendering activity will start in 2015, can you maybe give us like some idea that the first half of the year, second half, and so like how you expect that to develop?

[Tony Lauritzen:]

We are already seeing tender activity at this moment. And that is for commencement, some in 2015, some in 2016 and also 2017, and also further out as in ‘18, ‘19, so I think that the process of charter securing vessels going for forward volumes have already started.

[Unidentified Analyst:]

Okay. And is that a sort of rates that you’d imagine that you were thinking about, or would you like want to wait till the market tightens just a bit so that you could get better rates there?

[Michael Gregos:]

Yeah, we would prefer to wait because we’re seeing a tremendous activity at this moment. So – also we do estimate that in 2015 and 2016 that we may see an aggregate of 74 million tons of LNG coming on stream and that is tremendous amount. So we do expect that to have an impact. So I think rating is good.

[Unidentified Analyst:]

And just like one further question on the Russian – the sanctions and all these issues with the Russians in Russian energy markets and with the west. Have you had any effect on your business there or do you, if you could maybe give us some color on how you see that developing?

[Tony Lauritzen:]

No we have not had any effect at all on our business. This is sanctions in post – have been more on an individual level and for companies involved in forward production. So that hasn’t affected us at all.

[Unidentified Analyst:]

Okay. Well that was it from me. Thank you very much.

[Tony Lauritzen:]

Welcome.

[Operator:]

Thank you very much. Now from Merrill Lynch your next question comes from the line of Ken Hoexter. Your line is now open.

[Ken Hoexter:]

Great. Good morning. Sorry, good afternoon there. Can you talk to me about ten year charts, it looks like demand doesn’t outstrip supply until even after 2018 in your chart. So can you just kind of review why you don’t see maybe the pricing pressure continuing until a couple of years from now?

[Tony Lauritzen:]

Yeah I mean we’re assuming a pricing upward price all right. We –

[Ken Hoexter:]

I guess – in your chart on page 14, it looks like your demand is kind of meeting your supply, so it would mean that you’re not seeing that, the pricing upward pressure yet, I guess to that point?

[Tony Lauritzen:]

I mean the – this graph, there can be understood in a couple of ways. If you look at the – as what it’s carved out, existing uncommitted vessels. Right, that you’ll see already from now are increasingly growing in terms of units. These are vessels that are on average old and small. So actually we believe that already from 2015-2016 the vessels that are modern and large will be very, very attractive. We think it’s very likely that the charters will program good, efficient, large vessels for term. And the vessels that are coming off charter in a short-term market, that will dominate. So we are actually quite confident already now going into next year from that point of view. Also, one thing that has not been so well, let’s say or so clearly stated in the production table above, is that its actual capacity coming on stream. So while we see end of 2016 into 2017 between 32 almost 60 million tons of LNG, actual capacity shows that within into 2016 we may have as much as 74 million tons of new LNG coming. So this – so basically we are very confident that the market will tick up quite eminently going forward. And by that, I mean in particular in 2015 and 2016.

[Ken Hoexter:]

Wonderful. I appreciate that, another thought on the, I guess over the weekend in the journal there was kind of details of the Russian and Chinese pipeline agreement for that gas, does that impact your thoughts on demand capacity, global trade, on – at all?

[Tony Lauritzen:]

It does, I mean we view that in a very positive way. Some time back, it was the top big Chinese shale gas was widely discussed, would China be sufficient by their own shale gas. And I think that obesity of clearly underlines that China do not feel confident at all in relying on their own shale gas. So I think this is a very positive news and I think it’s, I think it signals that China, as a country, would rely much more on clean energy and to a large extent gas. So the more gas that has been used in the infrastructure in general that’s good news for us.

[Ken Hoexter:]

Okay just like on the dividend, you kind of stated upside, downside in terms of what you could, given the dropdown vessel. Given that in terms and weakening on the vessel, what determines your upside on the dividend versus the bottom-end of that range?

[Tony Lauritzen:]

Well it basically depends on the finance; we’re going to fall in universal shale, early December. Our next dropdown will be primarily issued with equity, our last dropdown, the Yenisei River, was nearly old debt. So we would like to normalize our capital structure at lower levels, we can expect, let’s say, higher percent – percents of equity on our next bill. So it really depends on what, on the financing terms, whether you’re on those debt side, on the equity issue. So I think these are the main parameters I guess.

[Ken Hoexter:]

Okay, wonderful. And then are these in your vessels so that you have chartered are you’re already seeing volumes from Sabine Pass, has that already begun moving from that region?

[Tony Lauritzen:]

No, it has not started moving yet, we expect it to move in 2015, that’s when it will start moving.

[Ken Hoexter:]

Alright, I appreciate the time.

[Tony Lauritzen:]

Welcome.

[Operator:]

Thank you very much indeed. [Operator Instructions] And your next question from Deutsche Bank from the line of Amit Mehrotra, your line is now open.

[Amit Mehrotra:]

Yeah great, thank you very much. Posted very smooth and consistent performance so congrats for that. My first question is, last quarter you mentioned that dropdowns would average about every six months or so, you said that was a relatively good assumption. That implies the next one in March or April time is that sort of still the timeframe for the next dropdown and do you see opportunity to maybe accelerate the pace of that?

[Tony Lauritzen:]

Yeah, I mean the exact timing we don’t know, it also depends on the market conditions, but yeah for us, as soon as we can.

[Amit Mehrotra:]

Okay, and just a follow-up with respect to the vessel, the Clean Planet, the contract terms changed from to be determined, to trading stock market. I totally understand wanting to exploit the strength in the stock market, but with respect to the partnership it’s a little bit of a balance obviously, between maximizing cash flow and having visibility. So I just want to confirm that the expectation would be to get those fixed for longer period next year at hopefully higher rates. And then also, what is the minimum contract length that you would need to see for it to be acceptable for the partnership vis-à-vis acquiring those assets?

[Tony Lauritzen:]

Okay, so we absolutely expect to charter these vessels on term contracts and to drop them down into the partnership. And when it comes to length of period, we are typically exploring the 5 to 10 year region.

[Amit Mehrotra:]

Okay, great, thanks very much guys.

[Tony Lauritzen:]

Welcome.

[Operator:]

Thank you very much. And there are no further questions at this point. I shall pass the floor back for closing remarks.

[Tony Lauritzen:]

We would like to thank you for your time and for listening in on our earnings call, thank you very much.

[Operator:]

And with many thanks to our speakers today, that does conclude the conference. Thank you all for participating, you may now disconnect. Thank you gentlemen.