Dynagas LNG Partners LP

Thank you for standing by, ladies and gentlemen. Welcome to DynaGas LNG Partners conference call on the fourth quarter 2021 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 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 the automated message advising your line is open. 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 of the webcast contains certain forward-looking statements within the meaning of the Safe Harbor Preservation Act, 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 LNG, the 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 pass the floor to Mr. Lauritsen. Please go ahead, sir.

Morning, everyone, and thank you for joining us in our three-month and the 31st December 2021 earnings conference call. I'm joined by our CFO, Michael Greggos. We have issued a press release announcing our results for the said period. Certain non-GAAP measures will be discussed on this call. 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 on to slide three of the presentation. We are pleased to report the results for the three months ended 31st December 2021. All six LNG carriers in our fleet are operating under their respective long-term charters. The COVID-19 outbreak is still causing operational and logistical challenges for the industry. Despite this, we are pleased to report 100% utilization for our fleet for the fourth quarter of 2021. For the fourth quarter of 2021, we reported net income of 16.9 million, earnings per comment unit of 38 cents, adjusted net income of 11.4 million, adjusted earnings per common unit of 23 cents, and adjusted EBDA of 24.7 million. Our thoughts go out to everyone affected and suffering as a result of the crisis in Ukraine. We continue to closely monitor this ongoing situation including the implications of economic sanctions, trading and restrictions, and other considerations that may affect our business. The partnership is in compliance with all applicable U.S. and EU sanctions. It is our understanding that the current U.S. and EU sanctions regime have exempted certain LNG shipping operations and do not materially affect the business operations or financial conditions of the partnership. Also, the partnership's counterparty are currently performing their obligations under their respective time charters in compliance with applicable U.S. and E.U. rules and regulations. Sanctions legislation is changing rapidly, and the partnership is continuously monitoring the ongoing situation. 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, our quarter results continue to reflect our stable contractually-based operating model as our fleet continues to operate with 100 percent utilization. Adjusted net income for the quarter increased by 6.5% to $11.4 million compared to the fourth quarter of 2020 due to decreased finance costs and slightly higher voyage revenues for the quarter. Our adjusted EBITDA amounted to $24.7 million, a 1.2% increase compared to the fourth quarter of 2020, and our adjusted EBITDA margin amounted to 69%. Since our debt refinancing in the fourth quarter of 2019, we embarked on a comprehensive deleveraging path, having repaid through the quarterly installments on our credit facility 108 million in debt, resulting in a decrease in our net leverage to 4.8 times from 6.6 times, an increase in book value of our equity of 21 percent, and a doubling of our profitability, with our profitability having stabilized at 23 cents earnings per common unit for the fourth quarter. Turning to slide five, As of end December, we had 567 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. For the full year 2021, we generated 97 million in EBITDA, 70 percent of which was utilized for debt service, 44 million in adjusted net income, and 80 million in operating cash flow. Looking forward, we anticipate that our profitability will be impacted by the third special surveys and dry dockings of the three steam turbine LNG carriers, Clean Energy, Amur River, and Ob River, which will take place in the first and second quarter of this year and which we expect will come in at a total cost of approximately $6.5 million. per vessel, including installation of their respective ballast water treatment systems and excluding the off-hire during the dry-dug period. Moving to slide six, in line with our strategy of using our contracted cash flow to reduce leverage for the quarter, we utilized 68 percent of our unlevered cash flow to service debt and interest payments. Excluding working capital changes, operating cash flow for the quarter was $21 million. After debt service payments and payments to preferred unit holders, we generated $5 million excluding working capital changes and payments required under our interest rate swap for the quarter. And our cash balance increased by about $5.7 million to $97 million. In this slide, we also show our fleet-wide cash flow break even per day per vessel versus our fleet contracted time charter rates for the quarter, which amounted to $63,600 per day per vessel. For the quarter, we had a per vessel fleet average cash break even per day after all operating GMA and debt service payments of $49,500 per day with our contracted fleet time charter rate being 1.28 times our fleet cash break-even levels, excluding preferred distributions. That wraps it up from my side. I will pass the presentation over to Tony. Thank you, Michael.

So, let's move on to slide seven. Our fleet It currently counts six LNG carriers with an average age of about 11.6 years. The charterers of our vessels are substantial gas producers, namely Equinor of Norway, Gazprom Marketing and Trading of Singapore, and Yamal Trade of Singapore. As of 18th March 2022, the fleet's contracted backlog is about 1 billion, equivalent to an average backlog of about 166 million per vessel, and the fleet's average remaining charter period per vessel is about 6.9 years. Moving on to slide eight. Our strategy is to conclude long-term charters with LNG producers. Our earliest potential availability will be in the third quarter of 23 for the vessel Arctic Aurora. The next available vessel may be the Clean Energy, which contract expires in 2026. Bar any unforeseen events and vessel scheduled dry dockings, our fleet is 100% employed for the remainder of 22, 96% for the year 23, and 83% for 24 and 25. All of the vessels in our fleet are employed on time charter contracts, under which the charterer pays major voyage-related variable costs, such as fuel, canal fees, and terminal costs. Two of the vessels, namely the Lena and Yenisei River, are under dry dock and OPEX cost pass-through contracts, that in general provide for protection for reasonable inflation in operating expenses. We are optimistic about the general market outlook for LNG shipping in the near, medium, and long term. We see growing demand for LNG that is traded on a global infrastructure that is under continuous expansion and now allows for efficient pricing of LNG and shipping. Natural gas is increasingly recognized as a source of energy that forms part of the solution to reduce global emissions. When looking into the future demand for LNG shipping and LNG, it is impossible not to recognize current events in Ukraine as a potential watershed moment. Although the long-term effects may still not be fully understood, what seems to be clear is that Europe will significantly increase the portion of LNG in their gas consumption profile at the expense of pipeline gas. In 2021, Europe imported approximately 78 million tons of LNG compared to 90 and 83 million tons in 2019 and 2020, respectively. However, during the first two months of 2022, European imports of LNG has increased and is equal to an annualized 128 million tons. With additional regasification capacity being announced by various countries across the European continent, we believe there is a significant upside to European LNG import demand. We expect that the increased demand from Europe will be met with competition from Asian demand, which will therefore keep gas prices relatively high, which is often correlated with high shipping rates. In terms of LNG shipping availability, we have seen charters become very reluctant to sublet any vessels for term. We believe the main driver for this decision is cargo value. At, for example, $40 per MBTU, the value of an ex-ship cargo is approximately $150 million, versus an FOB price in the U.S. Gulf at around $30-plus million. As a result, shipping costs become insignificant, and the Charter's focus will be to ensure that their shipping needs are conservatively covered. As a result, the term energy shipping market has seen a significant increase in shipping rates. On the flip side, the energy spot market is soft, although improving, as charters can show short-term shipping availability in the market as an optimization exercise. Under normal situations, increased European imports may lead to an overall decrease in shipping demands as, for example, the U.S. Gulf to Europe is a shorter in distance than the U.S. Gulf to Asia. However, we believe that given the large amount of LNG required to cover for European pipeline gas, LNG producers will be required to operate at very high utilization, which coupled with high gas prices and conservative shipping portfolios will result in a strong LNG shipping market in the medium and long term. Another factor contributing to a strong shipping market is a significant increase in shipbuilding prices driven by inflation and limited availability of LNG in new building slots. Let's move on to slide nine. We are an established and experienced LNG shipping company which has a proven track record of safe and reliable operations. Our fleet is unique as it provides for trading versatility. Our vessels can operate in sub-zero and icebound areas, as well as in conventional areas, which we believe provides flexibility to our customers, as well as a wide market reach to ourselves. Our vessels are employed on term contracts that provide for significant and long-term cash flows. During the past two years, we have embarked on a comprehensive deleveraging plan by utilizing our contracted cash flow to strengthen our balance sheet and build equity value over time. It is worth to note that while our market cap is currently approximately $115 million as per yesterday's closing, our annual debt amortization amounts to $48 million per annum. We believe that this deleveraging process will provide a foundation for future growth initiatives. The long-term market for LNG shipping is looking favorable, driven by increased LNG demand in years to come. Significant increases in new building prices the past year due to limited shipyard capacity and inflationary pressures have been accompanied by a notable increase in time charter rates and charter terms. Momentum for LNG has never been stronger, driven by the need for energy security and the diversification of sources of supply, as well as the role of LNG in the global transition into a lower-carbon future, which LNG ships playing an integral role in achieving these objectives. We have now reached the end of the presentation, and we now open the floor for questions. Thank you.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for the automated message advising your line is open. Please state your first and last name before you ask your question. If you wish to cancel your request, please press star 2. Once again, that's star 1 if you wish to ask a question. We will now take our first question. Please go ahead. Your line is now open.

Good morning, gentlemen. This is Chris Robertson on for Randy Givens at Jefferies. How are you? We're good. Hi, Chris. So the fleet's fully contracted this year for most of next year, so you should generate fairly steady and predictable cash flow. So since the revenues are kind of locked in, can you talk about the other levers which you have some control over, such as OPEX and costs? What's the impact of cost inflation at the moment, and what are you doing to control costs this year?

Yeah, although we're in an inflationary environment, we don't think our operating costs will be materially affected. So, you know, we expect the costs will be, you know, for this year will probably be like 2% to 3% up from last, from 2021.

Can I just add something to that? I mean, you know, two of our contracts, being the Lena and the Yenisei River, they are under, you know, cost pass-through contracts. So even if there is, you know, an increase in operating expenses, we will have those all within reason. Normal inflation is, of course, you know, a reasonable, you know, cost increase. Other things that we are actively doing to manage cost is that, for example, you know, DynaGas, LTD, our ship manager, has, you know, owned training and recruitment centers around the main, you know, around the major, you know, shipping hubs. That means that, you know, we are very much in control over the crewing expenses, which is a significant expense. And I think that's a good way of, you know, controlling, you know, the cost to the level that we can.

Okay. I guess, building on my first question, so you mentioned in the release that you intend to use the stable cash flows to continue to de-lever the balance sheet and improve liquidity, setting yourself up for some future growth initiatives. Can you talk a bit about how you're thinking about growth, what direction you'd like to take the fleet in and when, and would ordering a new build vessel be contingent on having a long-term contract in place first?

Yeah, thank you for that question. You know, the good news here is that, you know, time is on our side. You know, we're building up equity value. We do that by the, you know, organically reducing debt. We do that, I mean, relative to our market cap, you know, it's quite, you know, it's... we believe that this is a very good of creating value going forward. When it comes to fleet growth, we are getting closer, we believe, to a point where, you know, we will do something. So if that means, you know, buying a sponsor vessel or if that means, you know, you know, buying a second-hand vessel, or if that means ordering a new build, you know, that is yet to be seen. And if we were to order a new build, it is most likely that that would have to be covered by a long-term contract.

Got it. All right, yeah, that's it for us. Thanks for taking our questions. Thank you.

Thank you. We will now take our next question. Please go ahead. Your line is now open.

Hi, Michael. This is Ben Nolan over at Stiefel. Have a couple for you. So I wanted to, first of all, just to clarify on the dry docking days, I saw you have in there the time frame. Are we, should I model like 30 days for those each being out? Maybe 45, something like that?

Yeah, I think around 30 days should be enough per vet. Okay.

All right, that was easy. My next one is, you talked about... talk to tony about uh... europe looking to import more lg and given the situation and everything else uh... we know we've been hearing a lot more activity around the f s r u market obviously at the sponsor level you do have to have a series which i believe are operating at carriers but uh... e any any sort of revised interest there either you know to uh, to, to perhaps, uh, you're, you're talking about buying things, maybe buy into FSRU or, uh, alternatively, uh, you know, your vessel that comes off contract next year, your thoughts about maybe marketing that as a conversion project or something like that?

Yeah. So, um, Look, I mean, there is definitely more interest in the FSRU space, and in particular around the European continent. That is definitely happening. We also, I mean, we believe that that's an interesting segment, I mean, obviously because of that development, but also because there are other projects around the world where You know, Europe will be a preferred location now, and so you'll have maybe a vacuum in other destinations. Now, as you pointed out, the vessels are chartered out on term to, you know, some charterers that are not using them as FSRUs, and they will run into, you know, next year. And, I mean, that is... you know, something that we could consider. But obviously, you know, it is also something, you know, these vessels are also something that our sponsor have been you know, taking the risk for, you know, carrying the risk since the contracting until this moment. So I don't think that would be a very easy discussion. Now, when it comes to converting some of the units that we have coming off charts in the future, that is definitely something we could look at. For example, for some of the designs, we have the conversion drawings ready. So that is probably something that is more realistic.

Okay, that's helpful. And then lastly for me, you were pretty clear about it, but just to make it absolutely crystal clear, is it related to your charters to Russian counterparties or counterparties that have Russian... Ownership. You're still 100% being paid and everything is up to date and so forth. There's no, you know, I understand that the charters are still valid and good and not sanctioned and what so forth. But in terms of cash flows, the cash is still coming in and everything is operating as it should, correct?

Right, Ben. That's right. I mean, what we've seen is that there's been some, you know, LNG shipping has not been a target. Therefore, you know, sanctions that have been issued are not affecting us or our economic performance. They're also not targeting the, you know, the LNG producers and the counterparties that we have agreements with. So these charters are running as before the sanctions were issued. Okay, perfect. That's all I needed. Thank you.

You're welcome. Bye.

We have no further questions at this time. I will now hand the call back to Mr. Lauritsen for closing remarks.

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

That does conclude the conference for today. Thank you for participating. You may all disconnect.