Dynagas LNG Partners LP (DLNG) 2014 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners' conference call on the second quarter 2014 financial results. We have with us Mr. Tony Lauritzen, Chief Executive Officer, and Mr. Michael Gregos, Chief Financial Officer, of the Company.

(Operator Instructions).

I must advise you the conference is being recorded today, Wednesday, August the 6th, 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 now pass the floor to Mr. Lauritzen. Please go ahead, sir.

Good morning, everyone, and thank you for joining us in our second quarter 2014 earnings conference call. I'm joined today by our CFO, Michael Gregos.

Turning to slide three of the presentation, I will review some recent highlights for our fleet of four LNG carriers. Earlier today, we issued a press release announcing our full quarterly results.

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.

We are pleased with the results for the second quarter of 2014. As you know, we acquired the 2013 build 155,000 cubic meter ice-class LNG carrier named Arctic Aurora on June 23rd this year. So, our second quarter financial results reflect the operation of this fourth vessel only for seven days.

Our financial performance for the second quarter of 2014 reflects an excellent operational performance, with 100% utilization for another quarter.

For the second quarter of 2014, the Partnership reported distributable cash flow of $12.6 million, adjusted EBITDA of $16.7 million, and net income attributable to unit holders of $10.2 million.

Included in the three and six month period ended June 30th was a $900,000 non-recurring, non-cash TC amortization charge. Excluding such charge, we would have recorded net income for the three and six month period ended June 30th of $11.1 million and $22.1 million, respectively.

Let's turn to slide four for our recent achievements. During the second quarter, we successfully completed a follow-on equity offering and utilized $120.6 million from the net proceeds to partially finance the acquisition of the Arctic Aurora. In addition, we entered into a new $304 million senior secured revolving credit facility with Credit Suisse in order to refinance all our debt, as well as finance the remaining portion of the Arctic Aurora acquisition, which was completed on June 23rd.

For the second quarter of 2014, we declared a cash distribution of $0.365 per unit, which will be paid on or about August 12th to record holders on August 5th.

Our Board has approved management's recommendation to increase the quarterly cash distribution to all unit holders to $0.39 per quarter or equivalent to $1.56 on an annualized basis, with respect to the third quarter 2014 operations. This represents a distribution per unit increase on an annualized basis of 6.8% since our IPO in November 2013, and provides for an effective yield of about 6.9%, based on yesterday's closing price. We expect increased cash distribution to be paid in November of this year.

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

Thank you, Tony. I start on slide five.

Our income statement reflects our first-class operational performance. We reported net income for the second quarter and six months ended June 30th, of $10.2 million and $21.2 million, respectively. I would like to note that our results include a one-off non-cash time charter amortization expense of $900,000.

For the six months ended, our operating expenses per LNG carrier amounted to $11,950 per day, in line with our expectations, while our increase in general and administrative expenses reflects our operation as a public company since November 2013. Following our equity offering, we have 35.5 million units outstanding.

Going on to slide six, our balance sheet is in excellent shape. As of June 30th, 2014, we had $335 million in debt outstanding, and average debt of about $84 million per LNG carrier, which we consider to be very modest.

Since we have not swapped any portion of our debt, we are continuing to take advantage of low floating interest rates, and, as a result, our weighted average interest rate is approximately 3.1% for the six months ended June 30th. However, we are continuously reviewing our interest rate strategy.

As mentioned before, in June we raised $120 million net proceeds in our follow-on equity offering, in order to partially finance the Arctic Aurora, with the remainder being financed from our senior secured revolving facility.

Going on to slide seven, as a summary of our financial performance, we highlight the stability of our revenues, which are underpinned by multi-year time charters and first-class operational performance.

As of June 30th, the Partnership had total available liquidity of $73.6 million, comprised of $43.6 million in cash, including minimum cash liquidity requirements imposed by our lenders, and $30 million of borrowing capacity under our interest-free sponsor facility.

Under our new senior secured revolving credit facility, we pay $20 million per annum in principal payments until the first quarter of 2021. We believe our modest leverage gives us financial flexibility for future growth opportunities as we evaluate future drop-downs. This gives us the flexibility to consider raising debt capital to fund our next drop-down.

Turning to slide eight, here we present the brief economics of the Arctic Aurora acquisition, which we acquired for $235 million with a time charter attached to Statoil until 2018, and which is expected to generate approximately $21.7 million in annualized EBITDA.

Following this drop-down, the Board of Directors has approved management's recommendation for an annualized distribution increase of about 6.8% to $1.56 per unit from $1.46 per unit per annum.

I will now turn over the presentation to Tony to provide you with the fleet and industry update.

Thank you, Michael. Let's move to slide nine.

After the Arctic Aurora acquisition, the average age of our four LNG carriers is about 5.5 years, and our contract backlog has increased to $625 million. Also, the acquisition of the Arctic Aurora broadens our customer base with yet another first class counterparty, which gives our clients the flexibility to utilize its ice-class capabilities. Our average remaining charter term is now about 6 years.

Let's move to slide 10. Our fleet currently consists of 4 LNG carriers, 3 of which have ice class 1A notation. Currently our fleet has 100% contract coverage for the calendar date in 2014, 2015, and 2016, with first-class counterparties, and 75% contract coverage for our calendar dated 2017, a time we expect the LNG shipping market to be very strong. Our multi-year fleet employment profile, diversified first-class customer base, and the staggered maturity of our charters, provides solid cash flow visibility going forward.

Let's move to slide 11 for an update on the LNG shipping market outlook. So, let's move to slide 11.

As you know, we have the right to purchase from our sponsor a further 6 optional vessels. So, we have a large sponsor asset base and substantial drop-down growth potential. 3 of those vessels are already on the water and trading, and the remaining 3 are under construction with delivery in 2014 and 2015. All optional vessels are high specification, ice-class, winterized, and extremely versatile.

These optional vessels include 3 vessels already chartered to first-class customers with an average 5 years employment. Of the 3 chartered vessels, 2 are chartered to our existing charter Gazprom, and 1 is chartered to Cheniere.

So, now let's move to slide 13. From a supply point of view, it is conservatively expected that about 120 million tons of new LNG will come to the market between now and 2020. This represents an astounding total increase of 50% compared to 2013 production. The source of this incremental commodity is primarily from North America, Australia, 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. US production included in these projections has been 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 well be granted licenses and add to export volumes.

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 onwards, we expect the prospects for LNG shipping to be in particular strong, leading to higher charter rates.

Part of our competition going forward are vessels that come off charter. Such vessels are, on average, of substantial older age than our fleet, and, therefore, also much smaller in size, as vessels used to be built to smaller sizes in the past. Vessels that come off charter in the years 2017 and 2018 are, on average, about 134,000 cubic and 135,000 cubic meters. The average size of vessels coming off charter between now and 2020 are about 135,000 cubic meters, which should give a relative strong preference to our fleet, which is, on average, just above 151,000 cubic meters and extremely versatile.

The potential re-chartering 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 energy coming on stream and requiring ice-class vessels.

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

Thank you very much, indeed, sir. (Operator Instructions). And from Stifel, your first question comes from the line of Ben Nolan. Your line is now open.

Good morning, and thanks, guys, for the -- taking the time to answer the questions.

I guess I'm sort of trying to think about how you guys are considering the timetable for the drop-down of the other three assets the sponsor currently has that are already contracted and in the water. Could you maybe outline, at least, what you guys are thinking in conjunction with the sponsor as to the timetable when you would expect those to come to the market, or be dropped down?

Well, nothing has really changed. I mean, we would like the drop down our next vessel as soon as possible. When we have something to announce, obviously we'll announce it. So, I don't have anything new to tell you.

Okay. And then, so, the first one, and then, I don't know, were you thinking, maybe, like every six months, or is that kind of a fair reference point to use?

It's a case-by-case basis. I mean if you look at the whole fleet which is left to be dropped down, six months as an average would be reasonable. Some could be shorter than that.

Okay. Okay, that's helpful. And then as it relates to sort of what the sponsor has going on with respect to the other vessels that have yet to be delivered but should be soon, and then also as it relates to sort of the strategy going to add more vessels, could you maybe frame out for me what the appetite is at the moment among charters to put assets on long-term charters today? I mean, do you think that -- do you think that there's a high likelihood will be chartered for a long duration in the near term, or is it probably more likely that they'll just be on short term charters for the shorter term until rates were to improve?

Yes, let's address the first question first, as it regards -- as it relates to the vessels that are coming from the yard and how the charterers appetite is. We do see a lot of appetite, actually, in the market, but some of it is with front commencement, but more of it is with commencement a little bit further out.

So, what we would seek to do, in order to find the right customer with the right profile, with the right terms of the agreement, on a sponsor level, we would use the short-term market to facilitate the deal that we want until that is in place.

And when we look at, a little bit, at the big picture, there is, as we mentioned earlier, we're looking at a potential 50% increase in production from now until 2020, which is really not a long period of time. So, we see that as very likely that, on a sponsor level, we would expand further.

Okay. And the sponsor is actively participating in tenders as they come up and that sort of thing? That's fair to assume, correct?

Yes, that is fair to assume. We participate in all tenders that we feel that is good for our Company, and also on a sponsor level we're looking at several non-tender-basis projects.

Okay. And then my last question, it relates to the OpEx. It was a little bit higher this quarter than what it had been. Is that a good run rate to use, the -- oh, what's it, $12,300 or so? Or was there something in the quarter that maybe taking delivery of the vessel pushed it a little higher, something like that?

No. I mean, if you look at it on a six month basis, we're pretty much in line with what we had communicated on our IPO, which was close to $12,000 a day, which I think is a reasonable assumption, yes.

Okay, perfect. All right. Well, that is very helpful, and thanks for taking the time.

Thanks, Ben.

Thank you.

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

Yes, hi. I've been struggling what to ask, because everything is so predictable in your Company, but what I want to see is how the market looks like right now? I have been hearing from other operators that they have more open vessels that they are struggling to find any contract, even if this contract is a very short-term contract. Are there any discussions about chartering the open vessels that your sponsor owns?

If I remember well, there are 3 vessels that they will come in 2016 and onwards that they are still uncontracted. And if there are any discussions at what levels do you think that these vessels can be chartered?

Yes, thank you for the question. There is actually quite a -- when we look at the short-term market right now, and it has been going on for a couple of weeks already, there is really a lot of activity. We see pretty much all modern tonnage being chartered out, some for shorter periods, and that just underpins the need in the market for the tonnage and the charterers' preference for a good size, et cetera.

So, we feel confident with the way that the market is going. We do think that the market will strengthen between now and towards the end of the year, and, in particular, into 2015. That has to do with incremental volumes coming, and also we see that charterers are relying on good, modern tonnage, which they get used to, and they want to extend the relationships with.

So, I think that's what we've seen the asset looks, the bottom of the curve, so to say, when it comes to short-term fixing. That is our take on it.

Going forward, yes, we think it's very likely that the 3 uncommitted vessels that are held on a sponsor level which the Partnership do not have exposure to, we think it's very likely that they will be fixed on term charters, and we think that the rate of hire for those term charters will be in line with what we have already concluded on an average basis. We don't see that the term market has moved substantially up or down.

And you mentioned about the projects that they are going to come online in a year and a half or two years. Usually, how soon these projects they will need to secure vessels? And which are the projects that are coming sooner that still do not have vessels?

Yes. Okay, so, I mean, when you look at the fixing of vessels in advance of a project commencement, it's always difficult to say when the incremental employment of vessels will take place, because, I mean, as you indirectly point out, the large projects currently have committed the -- on a term basis, the base link that they need in their shipping portfolio.

But what we normally see is that projects, on average, because it's costly at the time of budgeting to secure an over-supply of vessels, they go for the base case, and we see that after startup or before startup, when they really see what is available in the market against what their actual needs are, then they start to conclude more charters.

So, when we look at, for example, Papua-New Guinea that started up very successfully this summer, which is an Exxon project, actually, a few years in advance they committed -- well, in advance they committed the base shipping need that they had, and then I think it was probably about a year and a half, two years, before the project startup they committed another two vessels, and when they were quite close to the commencement, then they went in the market and they -- then they committed quite a substantial shipping capacity for their project.

So, I think that we will see a combination of this going forward, as well. So, what we have coming on stream, going forward, is that we have -- well, first of all, we have the incremental production in Angola that we're all waiting for that, hopefully, they will fix the production problem that they've had there for quite some time.

Then we have BG's Australian project, which we expect that will come towards the end of this year. As far as we hear, everything is going according to schedule. Once we step into 2015, then we have Sabine Pass, and the commencement of the startup of the US exports, going forward.

Thank you very much, Tony, for this color.

I have one last question about the drop-downs. We saw that the first drop-down was at $235 million. First of all, I want to ask you, I saw that your EBITDA estimate for this vessel is slightly lower than what I have been calculating, based on your -- the data that we had from the IPO prospectus. Have you assumed some utilization factor that brings this number about $1 million lower?

And my -- the second part of my question is that I understand that the vessels, the three vessels that you have in your drop-down pipeline, they have slightly higher rate than this vessel, the Aurora. How are you going to think the drop-down price? Is it going to be a multiple of EBITDA, similar multiple of EBITDA? Or it's going to be the same price, approximately, as the Aurora?

The next vessels, the next potential candidates, they have a higher charter rate. So, I mean, obviously, there's not a linear relationship here, and each case is, obviously, looked at, at its own merits. So, in terms of the multiple, again we reiterate what we previously said that the multiple would be around 10 to 11 times. Now, where within that range, I don't know where it's going to be.

Now, regarding the -- your estimates, I'm not quite sure what you're referring to, because nothing has really changed from our perspective. I mean, we assume a 99% utilization, and so maybe we can catch up offline about what your assumptions. But there hasn't been any change from our perspective in terms of utilization or the figures that we have already communicated.

Thank you very much, Michael. That's all I had.

Okay.

Thank you very much, sir. Now from Bank of America you have a question from the line of Shawn Collins. Your line is open, sir.

Great, thank you. Hi, Tony. Hi, Michael.

Hi.

Hi.

Hey, so, in the US, Freeport seemingly got final approval yesterday, which is positive. I'm less familiar with Australia. Can you comment on the terminal activity that you're seeing in Australia, and what you expect over the next couple of years?

Yes. Well, we -- first of all, we concur that the FERC approval of Freeport was -- it was expected, but it was very good news. We think that will translate into -- it will definitely translate into more need, more requirement, which is good. And likely we'll see very long hauls coming out as a result of this, so, we think that's all positive.

When it comes to Australia, it is expected that, going forward, Australia will be a substantial -- it is a large producer of LNG today, but going forward it is expected that it will be a substantial producer.

In our estimate, we have seen that we will see within 2020, I believe it is, we have estimated about 80 million tons or so of incremental production coming from Australia, maybe beyond a little bit 2020. But, basically, we see Australia as a big producer going forward.

Great, thank you very much. And then just thinking about demand for LNG in the Far East, I think spot prices have recently dropped below $15, towards a low point. Can you just comment on what you are seeing for demand in the Far East? And I'm assuming that it has recently started to firm, or kind of bounce off of the bottom, but if you could just comment on what you're seeing there, that might be helpful.

Yes, thank you. Well, now we're in the summer period, so I think it's expected that once we go towards the winter that the Far East -- Far Eastern prices will increase from its current level. What we do see in the short-term market is that several trading organizations also expect the LNG prices in the Far East to increase. So, we see that they are starting to take positions in vessels for storage to try to materialize on the contango in the market that is presently.

So, I do concur with you that we -- and it seems like there in the consensus in the market, also, for LNG prices to increase in the Far East going forward, and it's important to keep in mind that if you take Japan, China, and Korea together, that is 60% of the world's import market of LNG. So, it's very, very important.

Got you. That's great. That's helpful. Thank you.

Just a modeling question. I know on page three of the presentation, average daily hire gross is $77,200 per carrier. I have a daily rate in my model of more like $80,000 or $81,000. So, I'm just kind of confirming that it sounds like I'm high and I need to adjust downwards a bit. Is that right?

Yes. Yes, correct. Although we'll get the full -- because we only had the fourth vessel traded for just a couple of days in the quarter, so, I think next quarter we'll get the full idea. But the number is around there, yes.

Okay. That makes sense. And, actually, just following up on that, yes, I've got in my model that you had the Arctic Aurora for 30 days in the second quarter, but it sounds like that's not the case, it was really only a couple of days.

And then second, what is the daily rate for the Arctic Aurora, if you're disclosing that?

Yes. The Arctic Aurora we actually owned for seven days in the quarter, and the daily rate is -- it's around $77,500.

Understand. Okay, that's great. Okay. Well, thank you very much for the time and the insight, Tony and Michael. I appreciate it very much.

You're welcome.

Thank you.

Thank you, sir. (Operator Instructions). There we are. From Clarkson's you have a question from the line of Matthew Phillips. Your line is open, sir.

Hey, guys. A quick question on the TCE rate reported in the quarter. It ticked down from 1Q. You mentioned the amortization charge you had during the quarter. Was it completely due to that? And do you expect that to be recurring at all going forward?

No, it's a non-recurring charge. That explains, primarily, the difference, and also the fact that we had one additional vessel for seven days in the quarter.

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

Thank you.

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

Well, thank you, everybody for participating. We appreciate your time, and if you do have any questions or you need anything from us, just give us a call. Thank you very much.

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