Dynagas LNG Partners LP

Thank you for standing by, ladies and gentlemen, and welcome to the DynaGas LNG Partners Conference call on the third quarter 2020 financial results. We have with us Mr. Tony Lauritsen, 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. At which time, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today. At this time, I would like to read the Safe Harbour Statement. This conference call and slide presentation of the webcast contains certain forward-looking statements within the meaning of the Safe Harbour Provision of the Private Security Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risk 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 now I'll pass the floor to Mr. Lauritsen. Please go ahead, sir.

Morning, everyone, and thank you for joining us in our three and nine months and the 30th September 2020 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. Moving on to slide three of the presentation. We are pleased to report the results for the three months and nine months ended 30 September 2020. All six LNG carriers in our fleet are operating under their respective long-term charters with international gas producers. Despite the ongoing operational challenges the industry is going through with respect to COVID-19, we are pleased to report 100% utilization for the fleet for the third quarter of 2020. The ongoing impact of COVID-19 has so far been operationally manageable due to our manager's COVID-19 response plan, which has been implemented with the support of our seafarers, charters, and employees, for which we are grateful. For the third quarter of 2020, we reported net income of $10 million, earnings per common unit of $0.20, adjusted EBDA of $24.3 million, and adjusted earnings per common unit of $0.21. When compared with the same period in 2019, this improved performance is attributable to an increase in voyage revenues and a decrease in interest and finance costs coupled with stable vessel operating expenses. In August 2020, we entered into an at-the-market offering program pursuant to which the partnership may offer and sell common units having an aggregate offering price of up to 30 million of its common units. We expect that the ATM will be utilized selectively, and to date, the partnership has issued and sold 122,580 common units, resulting in net proceeds of about 0.4 million under this ATM program. We paid in August 2020 a quarterly cash distribution of $0.5625 per Series A preferred unit for the period from May 12 to August 11, 2020, and a quarterly cash distribution of $0.54116 per Series B preferred unit for the period from May 22 to August 21, 2020. Subsequent to the quarter, we paid in November. 2020, a quarterly cash distribution of 56 cents and a quarter per Series A preferred unit for the period from August 12 to November 11, 2020, and declared a quarterly cash distribution of 54 cents and 11 sixteenths per Series B preferred unit for the period from August 22 to November 21, 2020, to be paid on or about November 23, 2020. Going forward, we intend to continue our strategy of using our cash flow generation to delever our balance sheet, reinforce liquidity, and generate cash so as to build equity value over time, which will enhance our ability to pursue future growth initiatives. I will now turn the presentation over to Michael, who will provide you with further comments to the financial results.

Thank you, Tony. Turning to slide four, we are pleased with the third quarter results. Net income for the quarter increased by close to 313 percent to $10 million over the third quarter of 2019. Our adjusted EBITDA increased by 1.7 percent to $24.2 million compared to the third quarter of 2019. The improvement in our financial performance compared with the same period last year is attributable to the reduced financing costs following our transformative debt refinancing in the fourth quarter of 2019. Turning to slide five, since our debt refinancing, our profitability has steadily increased and has now stabilized at increased levels compared to prior quarters with adjusted earnings per common unit of 21 cents for the third quarter Reflecting the stable nature of our contract-based operating model and the limited variability of our operating and finance expenses, our weighted average interest expense was reduced from 6.5 percent in the third quarter of 2019 to 3.27 percent in the third quarter of 2020, reflecting lower libel rates and decreases in our weighted average indebtedness from $734 million in the third quarter of 2019 to $639 million in the third quarter of 2020. Our primary focus right now is the organic deleveraging of the balance sheet. Moving on to slide six, for the quarter we generated $27.6 million in operating cash flow, including working capital changes. Excluding working capital changes, we generated operating cash flow $18.9 million, and cash flow after debt service payments, other financing items, and payments to preferred unit holders amounted to $4 million, in line with our prior guidance. For the quarter, we increased our cash balance by $12.8 million to $76 million. Slide 7, this slide gives you a snapshot of certain financial metrics. As of the end of September, we had $627 million debt outstanding under one credit facility, all of which has been hedged with an interest rate swap for the life of the loan until its maturity in September 2024. Our leverage metrics continue to decline, with net debt trailing last 12 months EBITDA of 5.7 times and are expected to continue to decline as we repay $48 million in debt per annum. We have no scheduled capital expenditures until 2022, which is when three of our LNG carriers will undergo their special surveys. Our stable operating model has proved resilient in light of the COVID-19 pandemic. We project for the year adjusted earnings per common unit to amount to about 71 cents, assuming no common unit issuances under our ATM program, resulting in a projected 2020 earnings multiple of 3.4 times based on the current common unit price. Moving to slide eight, we are continuing to execute our strategy of organically deleveraging our balance sheet with our contracted cash flows, which has resulted in a drastic 55 percent reduction in interest expenses in Q3 2020 versus Q3 2019. We expect that as a result of the amortization requirement on the CRIT facility, our total projected net leverage will decrease from 5.7 times to 3.5 times in 2024 on a steady-state basis and assuming the Arctic Aurora is renewed at rates similar to its current contract. This deleveraging exercise will require some patience. As we deleverage, equity value will increase over time, positioning the partnership for the next step, including future growth. Moving on to slide nine, in this slide we show our fleet-wide cash flow breakeven per day per vessel versus our contracted time charter rates for the quarter. Our fleet cash breakeven rate for the quarter amounted to $48,300 per day per vessel versus our $61,000 per day per vessel contracted rates. That wraps it up from my side. We will continue the presentation with Tony Larson.

Thank you, Michael. Let's move on to slide 10. Our fleet currently counts six LNG carriers with an average age of about 10.3 years. We have a diversified customer base with substantial gas producers, namely Equinor, Gazprom, and Yamal LNG. The fleet's contract backlog is about $1.15 billion, equivalent to an average backlog of about $192 million per vessel. And the fleet's average remaining charter period per vessel is about 7.9 years. Five out of the six vessels in our fleet are assigned with ICE Class 1A FS notation and winterization features. the fleet can handle conventional LNG shipping as well as operate in icebound and sub-zero areas. In general, we view the ability to perform conventional and niche operations as an important driver in securing attractive long-term charters. Moving on to slide 11. All the vessels in our fleet are employed on time charter contracts with asset-strong investment-grade counterparties under which the charter pays all major voyage-related variable costs such as fuel, canal fees, and terminal costs. Two of the vessels, namely the Lena and the Yenisei River, are under dry dock and OPEX cost pass-through contracts, and in general provides protection for reasonable inflation in operating expenses. Based on the charter coverage and bar any unforeseen events and not taking into account scheduled dry dockings, the fleet is estimated to be 100 percent contracted in 2020, 92 percent in 21, 83% in 2022, which remains unchanged until 2026. Our earliest potential availability is the Arctic Aurora, which will be available in the third quarter of 2021, provided that Equinor does not exercise disruption to extend the contract. The next available vessel after the Arctic Aurora may be the Clean Energy, which contract expires in 2026. Although the charter market for LNG carriers has been challenging in Q2 and Q3 of 2020, in particular due to the global COVID-19 situation, the prompt LNG shipping spot market has improved substantially, driven by a decline in cancellation of U.S. cargos, improved gas pricing, and moving closer toward the winter season when gas is typically used for heating. The positive pricing differential between Pacific Gas and European gas prices are relatively large for prompt and nearby gas. However, forward gas prices suggest this arbitrage is coming off from January, February 2021. As a result, there is high demand and high charter rates offered in the spot to very short-term markets. However, less liquidity and lower charter rates offered for longer and forward starting time charters. Although our revenue have not been affected by the COVID-19 situation, as all our vessels are employed on term contracts, we are monitoring the situation and outlook. From an operational point of view, we are taking strict measures to protect our seafarers, office staff, and other stakeholders along the logistics chain. So far, we have not had any seafarers on board testing positive to COVID-19, which we thank all involved for their adherence, patience, and diligence. Let's move to slide 12. Five out of the six energy carriers have been designed, constructed in accordance with and are assigned with ICE class 1AFS notation being equivalent to an ARC4 notation. These LNG carriers are also winterized down to minus 30 degrees. While the ice class notation is in part concerned with the vessel's hull and machinery and ice-breaking capability, the winterization features are concerned with features that are installed to ensure trouble-free operation in sub-zero areas. Our partnership and our sponsor represent a total market share of about 82% of the global ARC-IV equivalent LNG carrier fleets. Our fleet is frequently calling icebound and sub-zero areas, indicating that our charters are able to unlock the value of the ice class notation and winterization features. The fleet's typical area of navigation with regards to icebound or sub-zero areas are the northern sea routes, where the vessels can operate during summer seasons, typically from July to November, the Sakhalin Island, and northern Norway. As our fleet can perform operations in icebound, sub-zero, and conventional areas without any significant difference in operating cost, we believe our fleet has a broader market reach compared to our peers. Moving on to slide 13. Our operating costs have been relatively competitive and stable since the inception of the partnership, while our utilization has stood at levels above 95 percent during the same period. The combination of high utilization rates and competitive operating expenses underlines our focus on managing our cost base while preserving a safe and efficient fleet and further give evidence of a well-performing manager that enables the partnership to maximize the available income from the charter contract. Moving on to slide 14. We are an established and experienced energy shipping company known as a reliable service provider able to operate in particularly harsh environments as well as conventional areas. Our fleet is unique and provides for trading versatility. Our focus continues to be on operational performance, which translates into high utilization and cost control. Our vessels are employed on term contracts, which cash flow is largely utilized to organically reduce debt. At the current, we are amortizing our debt with $48 million per annum, and we expect that the reduction of debt will reduce our break-even cost over time. We expect that the solid contract revenue backlog of $1.15 billion and significantly reduced interest rate expenses will allow us to de-level our balance sheets and reinforce our liquidity so as to build equity value over time, which we believe will enhance our ability to pursue future growth initiatives. We have now reached the end of the presentation, and I now open the floor for questions.

Thank you very much.

Ladies and gentlemen, we will now begin the Q&A session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Again, that's star 1 if you have a question. Our first question for today is from Ben Nolan from Stiefel. Please go ahead.

Good afternoon, guys. So I wanted to ask a quick question on the Arctic Aurora. Obviously, it's one of the only moving parts. I'm appreciating that you don't... There is time yet before... Equinor needs to declare their option, but was hopeful that, or could you maybe elaborate a little bit on the option? Is it at the same price or charter rate as the existing contract, or is there a little bit of a step up in the rate?

Yeah, I can comment on that. The options are priced at an escalated price. The price of the option is, I would say, a good step up from where the charter rate is today. That being said, of course, it all depends on markets. If You know, if Equinor will declare this or not. And there is still, you know, plenty of time to go.

Okay. But in today's market, you would probably foresee some sort of maybe a new contract with a longer duration or something like that rather than probably them exercising the option.

Is that sort of a fair way to think of it? Yeah, look, as I kind of alluded to in the prepared remarks, I mean, what we're seeing now is that we see a very strong spot market, but that strong spot market is is partly driven by the price arbitrage between Pacific Gas and Atlantic Gas, which is, you know, that arbitrage is very strong now. But the forward pricing does not you know, support the same, you know, the same level of charter rates as we see today. So, given that the Arctic Aurora comes open, you know, in Q3 of next year, yes, we, you know, as it stands right today, we do not expect the same market conditions in Q3 as there is in the spot market today. So, I think it's, you know, it's a reasonable assumption that you make.

And then just am curious on the private side, maybe as it relates to the long-term prospects for the partnership, have you guys, you know, you have been very active with Yamal and the Arctic LNG2 tendering is progressing. Obviously, it's a bit different than the first one, but I was curious whether or not that is an area of interest to the group and maybe, you know, maybe something that could potentially add to the long-term pipeline.

Yeah, thank you. Definitely it is something that is of interest to the group. You know, that being said, you know, I'm just judging from what we read in the newspaper, you know, and disclosed information, it seems like, you know, most of the Arc 7 LNG contracts will go to, you know, the Smart LNG, which is this joint venture between Novatec, you know, and Softconflot. So I think that, you know, the opportunities for ARC-7 energy carriers, you know, are very remote for the, you know, for the group. You know, that being said, we think that there may be potential opportunities on the more conventional shipping side or the lighter ice class vessels that would be required potentially, you know, for the buyers of... of Arctic Energy to volumes. Okay.

And then lastly for me, it looks like you've slowed down any ATM selling. Should we assume, or for modeling purposes, that at the current price you're not or you don't anticipate being active on the ATM program unless maybe there's a better price?

Yes, yes, Ben. That is a correct assumption, yeah. I can't see us issuing equity at these prices. Okay.

All right.

That does it for me.

I appreciate it, guys. Thank you. Thank you, Ben.

Thank you very much. As a reminder, if you have a question, please press star 1 on your telephone keypad. Our next question is from Randy Givens from Jefferies. Please go ahead.

Howdy, gentlemen. How's it going? Hi there, we're good. Hi, Randy. Great. You know, obviously not really many moving parts here, so just looking at the cash on hand, looking at the kind of goal to further de-lever the balance sheet, all of these things, you know, your weighted average interest rate, as you show on slide 8, is 3.25%, 3.5%. Why not just more aggressively repurchase some of these preferreds that are yielding, I don't know, 11% in the market?

Yeah, no, thanks, Randy. That's a great question. Listen, our credit facility currently only permits us to buy back preferreds from proceeds from the ATM program. So we can't use existing cash, organic cash, which is sitting on the balance sheet, to repurchase the preferreds. That's the way that the credit facility is currently structured. But, you know... You know, if we can raise meaningful amounts under our ATM program, you know, at prices that make sense, then, you know, definitely the first use of policies that we believe would be the buying back the preferred. So that's something which is on the table.

Well, can you either amend the current facility or, you know, maybe take a second lien against something to free up some capital?

Well, we did amend it because there was a blanket prohibition of buying back the preferred, so we amended it to be able to buy back the preferred with proceeds from the ATM.

Got it. As you just mentioned three minutes ago, the ATM is not really an attractive offering here at these unit prices. Yeah, correct. All right. Well, I guess the steady as she goes. All right, that's it for me. Thank you. Thank you.

Thank you very much.

There are no further questions at this time, so I'll hand the floor back to CEO Tony Lurickson to conclude the conference call. Thank you, sir.

Well, we would like to thank you for your time and for listening in on our earnings call. We look forward to speaking with you again on our next call. Thank you very much and stay safe.

Ladies and gentlemen, that does conclude the call. Thank you everyone for joining. You may now disconnect.