Dynagas LNG Partners LP (DLNG) 2013 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen. Welcome to the Dynagas LNG Partners conference call on the fourth-quarter 2013 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 will be a presentation followed by a question and answer session (Operator Instructions) I must advise you that this conference is being recorded today, Friday, February 21, 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 security litigation reformat 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 now pass the floor to Mr. Lauritzen. Please go ahead, sir.

Good morning, everyone. This is Tony Lauritzen. Thank you for joining us in our fourth-quarter and FY13 earnings conference call. I'm joined today by our CFO, Michael Gregos.

Turning to slide 3 of the presentation, I will read you recent highlights for our fleet of three LNG carriers. Yesterday we issued a press release announcing our fourth-quarterly results. Certain non-GAAP measures will be discussed on the call. We have provided a description of both metric measures, as well as a discussion of why we believe this information to be useful in our press release.

We are pleased with the results for the fourth quarter of 2013. The partnership reported distributable cash flow of $12.9 million in the fourth quarter of 2013, an increase of 31% from the same quarter last year when we reported $9.9 million.

The partnership reported adjusted EBITDA for the fourth quarter of 2013 of everything from $4 million compared to $14.7 million for the fourth quarter of 2012, an increase of about 18.2%. Finally the partnership reported net income attributable to unit holders of $11 million for the fourth quarter 2013, compared to $8.8 million in the same period of 2012 representing an increase of 25.3%.

For our fourth-quarter operations, we declared and paid on 14 of February 2014, a cash distribution of $0.1746 dollars per unit with respect to the period ended December 31, 2013. Representing a pro rated distribution for the period and the closing date of the IPO through December 31, 2013. This corresponds to an annual distribution of [$1.46] per unit as consistent with our cash distribution policy with the partnership's current fleet count.

Our current annual distribution of $1.46 provides for an effective yield of approximately 6.8%, based on yesterday's closing price. I would like to remind you that the partnership has elected to be been treated as an association, taxable as a corporation for United States Federal income tax purposes, and that we are a 1099 filer.

Turning to slide 4, we had outstanding operational performance for the fourth quarter of 2013. Our fleet of three LNG carriers operated at 100% utilization. Our results for the fourth quarter of 2013 are consistent with our projections for the partnership's initial operating period following the completion of the IPO.

Going forward, Dynagas Partners is committed to a minimum annual distribution of $1.46 per unit. The partnership is also uniquely positioned to grow its earnings and distributions with options to purchase up to seven Ice Class LNG carriers from its sponsor. Four of these vessels, three of which are already on the water, are employed on long-term contracts.

Now I turn over the presentation to Michael Gregos to provide you with a financial update.

Thank you, Tony.

I start on slide 5. Growth revenues were $21.7 million for the fourth quarter of 2013 compared to $20.9 million for the fourth quarter of 2012. All of our LNG carriers are employed under contracts with an average remaining duration, excluding optional period, of 3.2 years. Therefore two characteristic of the partnership is visibly liquid and stability of revenues.

The vessel operating expenses for the fourth quarter of 2013 decreased by 30% to $2.8 million from $4.1 million for the fourth quarter of 2012. This reduction was attributable to the fact that, for the fourth quarter of 2013, we had no special survey and dry dock repairs as for the fourth quarter of 2012, we incurred peripheral dry dock costs associated with a mandatory five year special survey on the ground by one of our vessels.

Our next dry dock and special service is scheduled to take place in 2017 and 2018. All docks on the per day per vessel basis amounted to $10,300 per day. G&A expenses were more or less flat quarter to quarter.

I note that we expect 2014 G&A expenses to increase in line with a $4,000 perspectives due to increased costs associated with being a public company. Net interest expense increased by 18%, $2.9 million, mainly due to the rise of and the gross commission the first financing expenses, which amounted to $700,000 and increased commitment fees related to the undrawn amount of $48 million under our present revolving credit facility. That brings us down to net income attributable to Dynagas Partners of $11 million for the fourth quarter.

Turning to slide 6, for another view of our balance sheet; we have cash liquidity of $27.7 million for the year ended 2013. We are in compliance with all of our debt covenants. Outstanding interest bearing debt amounted to $214 million for the period ending 2013, compared to $380 million for the period ending 2012, as a result of the significantly leveraging of our balance sheet following our IPO in November.

Under our new revolving credit facility, we have $262 million of availability, which reduces by $5 million quarterly starting March 31, 2014. We have no required amortization until the available amount reduces to the debt outstanding. Our strategy for the time being is to take advantage of low short term interest rates and we are therefore not yet hedged our interest rate exposure but we are monitoring the situation.

I would like to point out that we have a conservative capital structure, which we believe serves as a solid starting point for a partnership with significant growth prospects. As of December 31, 2013, net interest bearing debt over annualized adjusted EBITDA was 2.7 times. But we expect that this ratio will increase as we experience drop-down growth.

Turning on to slide 7, EBITDA increased by 18% from the fourth quarter of 2012 to the fourth quarter of 2013, and was approximately $17 million. Our third year 2013 adjusted EBITDA increased by 29.5%, which represented an increase in the time chart equivalent rate earned by our vessels in 2013. Distributable cash flow generation for the fourth quarter amounted to $12.9 million.

The quarterly distribution flow for the fourth quarter 2013 represents a pro rated quarterly distribution of $0.365 per unit, in line with a cash distribution policy which implies a coverage ratio of 1.18 times.

Moving on to slide 8 with the financial highlight of our initial fleet, it is important to note that this page reflects our performance without the impact of any potential vessel acquisitions. We expect full year EBITDA for the three LNG carriers we currently own to be about $65 million, and we expect these three LNG carriers to generate cash available for distribution of $48 million, based on a target of 1.1 times total unit distribution product ratio to get to the minimum quarterly distribution of $43.8 million or $1.46 per unit annually.

Now I turn over the presentation to Tony Lauritzen to provide you with a fleet and industry update.

Thank you, Michael.

In slide 9, we provide a fleet summary, including the contracted base and respective exploration dates per vessel. Our fleet consist of three LNG carriers, two of which have ice class 1A notation. We have a relatively young fleet with a combined age of 6.6 years, well below the respected industry average.

Currently we have 100% contract coverage on our fleet calendar date for 2014 and 2015, with first class counter parties, namely BG Group and Gazprom. Our total revenue back log of $217 million. Our multi-year fleet performance profile in a staggered expiration date of our chapters provided solid cash flow visibility going forward.

Moving to slide 10, beyond our initial fleet, we have the right to purchase from our sponsors seven optional vessels. Three of those vessels are already on the water and trading and the remaining four are under construction with delivery in 2014 and 2015. All optional vessels are of high specification ice class, winterized, and extreme diversified.

These optional vessels include four vessels already charted to first class customers with an average five year deployment. Of the four charted vessels, two are chartered to our existing charter of Gazprom, one is chartered to Statoil, and one is charted to Cheniere.

Moving to slide 11, the four already contracted optional vessels currently owned by our sponsor are projected to produce between $22 million and $25 million annual EBITDA under their respective five year contracts. Assuming we exercise our option to purchase these vessels, our cash flow potential will grow significantly. Let's move to slide 13 for an industry update.

From an LNG supply point of view, it is conservatively expected that about 110 million tons of new project LNG will come to the market between now and 2020. This represents a total increase of 47%, compared to 2013 production. The source of this commodity is primarily from United States, Australia, Russia, and Africa.

We expect that the far east will remain the largest buyer going forward, meaning that the ton mile is expected to remain high. The production figures presented are conservative and increased production in existing projects such as [Angola] LNG has not been included.

US production has export research an estimated to 30 million tons coming from Sabine Pass, Freeport, Lake Charles and Cove Point. We believe that the total production from such projects may turn out to be higher and additional US projects may also be granted licenses and add in export volumes.

When we compare LNG supply to the shipping capacity available from now until 2020, we remain confident that the market for shipping will on average be tight. From the period 2017, 2018, and onwards, we take note that the prospects should be particularly strong. Part of our competition will be vessels that come off their charters going forward.

Such vessels are on average significantly older than our fleet. For example, vessels that come off charter in the years 2016, 2017, and 2018 are on average 19, 18 and 18 years old, respectively. This means that our fleet is not only substantially younger, such competitor vessels are on average smaller in size, which will give a relative preference to our fleet. Our potential re-chartering possibilities of the fleet will be in the years 2016 until 2018, which we expect to be a period of high world fleet utilization.

Also importantly, Russian Arctic LNG, which will be requiring ice class vessels, are due to come on stream from 2017 and onwards.

We have now reached the end of our fourth-quarter presentation, and I now open the floor for questions.

Thank you very much indeed, sir.

(Operator Instructions)

Your first question from Deutsche Bank comes from the line of Justin Yagerman. Your line is now open, sir.

This is Taylor Mulherin on for Justin this morning. How are you?

Good. We're all good.

Good. I wanted to ask you a question about the timing of the expected drop-downs. It appears three vessels of the sponsor that have been delivered -- wanted to get an idea of when you might become more active with regards to those.

And then secondly, just a little bit of color longer term. You mentioned in the past maybe benchmark two drop-downs per year in the near term Is that something that you're still comfortable to committing to?

Yes. Yes. Thanks, Taylor. Nothing has changed since our guidance at the time of the IPO. Our plan is for two drop-downs per year and we have significant pipeline of vessels, so we're going to be busy the next three years.

Okay. And then could you just remind me with respect to the ice class part of the business. One, remind me what month of the year that route is in operation. And then if you could just provide any other color on what premium you receive when operating on that route for your vessels.

Yes. The route is open from the July to November on average. Of course it depends on the actual season and what the weather conditions are. When it comes to the to the premium that we would charter our customers for performing that route, it is very difficult for us to give an exact number on it because it is up to a discussion at that period of time.

Okay. And my last one just around your chartering strategy.

I saw that the vessels that have been chartered at the sponsor are on five-year charters. Is that a good benchmark to use going forward for the vessels that don't have charters yet, those new builds? Is it a five-year contract what you're expecting to use going forward?

Yes. We would typically look at five years and up. That is the typical contract that we would be looking at.

Okay. I appreciate your time. Thank you.

You're welcome.

Thank you very much, sir. Now from Credit Suisse, your next question comes from the line of Gregory Lewis. Your line is now open, sir.

Thank you. Good afternoon, guys.

Hi.

I guess my first question is regarding the outlook for new buildings. Now, clearly you have a nice pipeline; you have four vessels on the water, you've three new builds. As we think about the timing of ordering a LNG vessel and the delivery time, I'm assuming right now it's around 2.5, 3 years. I guess really what I'm wondering is, are you having ongoing conversations with any shipyards right now in terms of potentially having some additional orders placed so that beyond the initial seven vessels that's are targeted for the Dynagas [optional], how can we think of potential new builds in the out years for deliveries in as such for 2016 and 2017.

Yep. This is Tony. If you were to order a vessel today from any of the top quality shipyards, you could expect delivery in 2017 if you're lucky, maybe in 2016. So that's the period of time that potential vessels could come on the water.

When we look at our strategy going forward for ordering, we -- it is likely that, we will order at one stage. We are in discussion with several projects about potential new buildings. So that is ongoing discussions that we have. If we cannot commit to a specific period of time that we would expect to place any orders right at this moment.

It sounds like what you're saying is when you think about doing some project, that if we were to see orders, is there the potential that they would come -- would they be -- would they be ordered on the back of a contract or do we think we would just have orders to take slots up in the yard?

Yes. I mean lately we have seen quite a lot of projects coming to us, through the industry in general, asking to order against projects. So I think it is likely that we could see that at some stage going forward. That being said, we have basically all of the vessels that we have now in our fleet. They were ordered without a contract.

Okay. Perfect, guys. Thank you very much.

You're welcome.

Thank you very much indeed, sir. Now from Morgan Stanley, your next question comes from the line of Fotis Giannakoulis. Your line is now open, sir.

Yes, hello. I want to ask about the way that you're planning to execute the drop-downs. Clearly your current balance sheet is very strong and I can say that it's under levered. How much debt are you planning to issue for the next drop-down versus equity?

I think as we had guided at the time of the road show, our plan was on average each drop-down would -- we would have a mix of 50% debt to 50% equity. So I think that is our plan. And some drop-downs might be a bit higher. Some might be slightly lower. But I don't think we're going to converge too much from that on average.

The only reason I'm asking is because right now you are below this 50% target. And I'm wondering if you intend to restore this level ratio to your target run?

Yes. Yes. Certainly. Absolutely. Yes.

Okay. And can you give us some guidance about the pricing of the initial drop-down or at least your distribution growth target that you have?

Yes. Well, in terms of pricing, I think we should be thinking around -- somewhere around 10 to 11 times the EBITDA, in that range I would say. In terms of distribution growth, again as we guided at the time of our IPO, you know our vessels they laid the back drop for highly visible double-digit growth in 2016. So, you know, we can guide annual distribution growth of around 10% per year basis two drop-downs per year.

Thank you, Michael. One last question about the market. I understand that your near-term market is a little bit irrelevant for you since your vessels are chartered long-term. Your [partner] still has three vessels which are not contracted, three new building vessels. Are there any discussions about the chartering of these vessels that could increase further your pipeline? And how is the chartering market for vessels that they will be delivering 2016?

Okay, this is Tony. We are currently in discussions on pretty much all the positions for our chartering opportunities. When it comes to the market in 2016 -- which is some time from now, already we do see quite a lot of term inquiries already commencing from 2015, 2016 and 2017.

Can you give us an idea of what type of rates and durations we're looking at?

It is very difficult to give right now what -- you know, to say what rates we're looking at. But in terms of the period, five years and up is what we're looking at.

Okay. Thank you very much for your answers.

You're welcome.

Thank you.

Thank you very much indeed, sir. Now from Bank of America, you have a question from the line of [Sean Collins]. The line is now open, sir.

Great. Hey, Tony. Hey, Michael. Congrats on your first quarter.

Thank you very much.

You're welcome. Hey, can you just comment on US LNG production and specifically the Sabine Pass and what you're hearing any commentary or color around the status and progress of that situation?

Yes. Certainly.

The Sabine Pass it is -- the Cheniere that is owning that terminal. We have chartered a ship of one of our optional vessels is chartered to Cheniere to lift exactly those volumes. So in our conversations, the commencement of the charter, meaning the completion of the terminal, is as we understand on track and we expect production to start middle of 2015.

Got you. Great. That's helpful. Very helpful.

And then just second, can you comment on the current trends and what you're currently seeing in the LNG vessel order book and if it's -- if the outlook for that has changed materially since you went public in December?

We have -- since we went public in November, we have not seen a great deal of ordering in the LNG space. We have seen the ordering of two additional LNG carriers so far to our knowledge. And we think the reason for the lack of orderings has been a lot to do with access to financing, the industry's access to financing. Because there are certainly quite a few projects that are looking to take on new buildings going forward. Of course we also have to wait and see until these projects are mature and ready to sign on new buildings. We do expect it to be some ordering this year and we also expect it to be some ordering into next year as well.

Okay. Great. That's helpful. I appreciate it. And then just last question. And I know that Fotis had touched upon this, but just wondering what you're seeing in terms of the charter term rates out there. I think -- I feel like in November we were seeing rates, current rates close to the $90,000 level or at least certainly above, you know, your rates of $76,000. Just wondering, you know, what the market looks like right now that you're hearing, if you can comment on rates?

Yes. Sure. When we look at very short-term picture, a voyage, two voyages, or a couple of months charter, we have seen some softening of the rates. That is expected. The reason for that I think is because in January and February, we haven't seen so much cargo liquidity. There has not been that many cargoes that it is able to pull out of the program and make up for a sale.

When it comes to more term chartering activity which is the market that we are exposed to, we haven't seen very much of a change. We -- the $90,000 a day figure that you mentioned that you saw at the time that we did the IPO, I think we have probably come down a little bit from that figure at this stage. That being said, in the discussions that at least we have going forward -- that is, you know good modern vessels that are larger, have great efficiencies going forward, have good charter ability, we see that the term market hasn't moved very much.

Okay. Okay. That's helpful.

Great. Well, thank you for taking my questions. Thank you for the time.

You're welcome.

Thank you, Mr. Collins. Now from Barclays, you now have a question from the line of Marc Silverberg. The line is now open, sir.

Hi, guys. Just one quick one left for me. Just was curious to hear your quick thoughts around potential third party acquisitions and your thought around adding that to your strategy to facilitate growth. I guess general commentary over opportunities that may be out in the marketplace today, particularly given your now public currency.

Thank you. Yes. We are monitoring the -- that market as well, to do market acquisitions. We have looked at a few opportunities. But we were not successful in that for various reasons. But that is something that we will keep monitoring.

Perfect. That's all I had. Thank you.

Thank you very much, sir.

(Operator Instructions)

Gentlemen, as there are no further questions, I shall now pass the floor back to you for closing remarks.

Well, thank you very much for everybody for participating. Thank you very much. I hope that we answered all of your questions. If not, do not hesitate to contact us and we can do everything we can to assist you. Thank you very much.

Thank you very much, gentlemen. Many thanks to our speakers today. That does conclude our conference. Thank you for participating. You may now disconnect.