Dynagas LNG Partners LP (DLNG) 2014 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners conference call on the third quarter and nine month 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 that this conference is being recorded today, Tuesday, November 11, 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 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.

I now pass the floor to Mr. Lauritzen. Please go ahead, sir.

Good morning, everyone, and thank you for joining us in our third quarter 2014 earnings conference call. I am 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 a discussion of why we believe this information to be useful in our press release.

We are pleased to report the Partnership's earnings for the third quarter of 2014, which are in line with our expectations. In particular, we are focused on the performance of our fleet from a 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 the 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 energy carriers, the four constant growth in the LNG industry will enable our sponsor to make further commitments to LNG carriers and other related assets, which will further enhance the Partnership's growth prospects.

Turning to slide 3 to discuss recent achievements. On September 25, we completed our second acquisition of the year and acquired the Yenisei River, a 2013 built 155,000 cubic meter ice class LNG carrier contracted to Gazprom until third quarter 2018 for a purchase price of $257.5 million. On September 15, we closed a $250 million public offering of senior unsecured notes with maturity in 2019. The notes bear an interest rate of 6.25% per annum.

The net proceeds of $244.3 million was used to partly finance the acquisition of the Yenisei River. On October 22, 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 5. This cash distribution represents a 6.85% increase compared to the Partnership's minimum cash distribution of $0.365 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 23, 2014. Following the acquisition and addition to our fleet of the Yenisei River on September 25, Management intends to recommend to the Board a further increase in the quarterly cash distribution of between $0.03 to $0.035 per unit which will become effective for the cash distribution with respect to the quarter ending December 31, 2014.

We are pleased with the results for the third quarter and nine month period ended September 30, 2014, for which adjusted EBITDA was $22.6 million and $56.1 million respectively. Moving on to 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 a 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 fleet with modern, high specification, and versatile 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 with the addition of Statoil to our list of charterers.

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 $0.03 to $0.035 per unit. Such distribution increase would potentially represent a total cash distribution increase of about 15% compared to our minimum cash distributions.

We have optimized our capital structure. We raised $120.5 million from our June 2014 follow-on equity offering whose net proceeds were used to partly finance the Arctic Aurora acquisition, and we closed an offering of $250 million senior unsecured notes at an attractive 6.25%.

Our fleet has been performing very well with 100% utilization since our IPO and with strong operational and safety key performance indicators. This strong operational performance underpinned by multi-year charters to first class counter-parties have led to solid financial performance.

We have been focused on increasing our contracted backlog and employment profile. Since our IPO, we have increase our contracted backlog to $710.8 million with an average remaining charter period of 5.3 years, up from 3.5 years at time of IPO.

I now turn over the presentation to Michael to provide you with the quarter's financial results.

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 unsecured 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 debt 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 September 30 were in line with our expectations supported by outstanding operational performance and 100% utilization.

In June and September of this year, we acquired two 2013 build 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 hire amortization for 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 30, 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 costs for the nine month period amounted to $7.5 million, which is broken down in $6.7 million interest costs, $394,000 in amortization and deferred financing fees, and $360,000 in commitment fees. For the three month period ended September 30, our average daily higher gross of commission amounted to $78,240 per day.

Moving on to slide 6, we outline 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 of 2014. As of September 30, the Partnership had total available liquidity of $65.1 million, comprised of $35.1 million in cash, including minimum cash liquidity requirements imposed by our lenders and $30 million of borrowing capacity under our $30 million sponsor facility.

Total indebtedness as of September 30 was $580 million, which includes $330 million under our senior secured revolving credit facility which has loan amortization of $20 million per annum until the first quarter of 2021, and $250 million outstanding under our normal 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 a 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 weighted average interest rate on the $330 million senior secured facility amounted to 3.1%.

Moving on to slide 7 to discuss distributable cash flow, we start from adjusted EBITDA, EBITDA interest and finance costs, add back amortizations, deferred financing fees, and interest income. Maintenance capital expenditure, reserve for drydocking are based on the drydock cost of $1.6 million per vessel, as well as estimated off-hire and lost revenues during the drydock period.

Replacement capital expenditures 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 estimate $3.4 million in maintenance CapEx reserve and $10.9 million in 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 the shipping deliveries in June and September.

As a reminder, new builds have a useful life of at least 35 years, and our ships have an average remaining useful life of around 30 years. Our coverage ratio for the third quarter of 2014 and run rate going forward amounted to 1.18 times.

Moving on to slide 8. Slide 8 outlines the drop-down economics of our first two acquisitions. The Partnership acquired two 2013 build 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 Partnership's Board of Directors approved a cash distribution increase of 6.8%, resulting in the quarterly cash distribution of $0.39 per quarter for the third quarter and which will be paid on or about November 12 to unit holders of record as of November 5. Following the Partnership's acquisition of the 2013 build LNG carrier Yenisei River on September 25 of this year, the Management of the Partnership intends to recommend to the Board a further increase the Partnership's quarterly cash distribution of between $0.03 and $0.035 per unit which would become effective for distribution with respect to the quarter ending December 31.

Management can provide no assurance that it will make such recommendation, and if such recommendation is made that it will be approved by the Board. If this cash 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 accretive to distributions per unit. I now turn the presentation back over to Tony.

Thank you, Michael. Let's move to slide 9 to summarize the Partnership's profile. Following the Yenisei River acquisition, the average age of our five large LNG carriers is about 4.9 years in an industry where expected useful economic lifetime is 35 years.

We have a strong and diversified customer base with investment grade counterparties, namely BG Group, Gazprom, and Statoil. These charterers are leaders in their field and only work with the top performing service providers.

Moving on to slide 10. Our fleet currently consists of five LNG carriers, four of which have 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 to be very strong.

We are the only company in the world with the capability and experience in transiting the Northern Sea routes. Our multi-year fleet deployment profile, diversified first class customer base, and the staggered maturity of our charters provide solid cash flow visibility going forward.

Let's move to slide 11. We intend to continue to focus on accretive growth going forward. As you may know, we have the right to purchase from our sponsor a further five optional vessels, so we have a large sponsor asset base and substantial drop-down 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 listing charter Gazprom and one is chartered to Cheniere. Our sponsor is constantly evaluating new project opportunities that have the potential to provide us with additional growth opportunities beyond these five optional vessels.

Moving on to slide 12 for an overview of our growth and cash distributions. At our IPO, our minimum quarterly cash distribution per unit was $0.365, 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 an analyzed distribution of $1.56 per unit. This cash distribution of $0.39 will be paid on November 12 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 $0.425 per unit, which is equivalent to an annualized distribution of between $1.68 and $1.70 per unit.

This quarterly cash distribution will become effective for the fourth quarter of 2014 and will be payable in February 2015. Such an increase would potentially imply an increasing 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. While the last three years have been a period characterized by modest growth in LNG production, we expect the next years and through the end of the decade to be dominated by strong growth. Significant incremental LNG volumes are already expected to come on stream from the next year and in 2016 when Australia, Southeast Asia and the US will add on production.

We expect that the actual production during this period may be 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 2013 volumes. As further US projects have been approved by FERC and as other projects 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 line of 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 technical or political reasons. US export volumes included in these 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 are 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 that come off charter in the years 2017 and 2018 are on average sized 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 rechartering 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 Instructions)

Your first question from Credit Suisse comes from the line of Gregory Lewis. Your line is now open.

Good afternoon, gentlemen. Tony, if you would not mind, could you provide a little bit more color background on -- clearly, you guys are confident in the 2017 tight market in the LNG space. Could you sort of balance that against what we have seen 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 I mean, what gives you that level of confidence that these projects come in a timely fashion as opposed to if it's a 2017 project being delayed to 2019 or 2020.

Okay. Yes. First of all, we base most of our forecast on projects that are either under construction or the [FID] has been taken. So, we do the high probability of those volumes actually coming on stream. And regardless of commodity prices, these volumes will have to be transported. In LNG, it's very difficult to reduce production while it's up and running.

So from that point of view, we feel that we have been quite conservative in our forecast going forward. Interestingly enough, when we are on this subject, we have seen in the short-term market, which the Partnership is 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 fixing 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 are using for the production is either under construction or FID. And as well, we see in the short-term market that the falling oil prices haven't had any -- haven't led to reduced fixing activity of LNG carriers.

Okay. Great. Just following up on your comment on the -- I am hearing an echo so bear with me. But the Clean Planet is a vessel that's trading in the spot market. I'm assuming that's the vessel that you are referring to that's having opportunities. If you could just provide a little bit of any color you could shed on the Clean Planet and given the shrink in the spot market in the near medium term, is that an opportunity for the parent company to lock in the Clean Planet on a long-term contract as the potentially third drop-down candidate into Dynagas?

Yes. So, yes. All the optional vessels on a sponsor level, there are two vessels that are already completed in the art and trading. It's the Clean Ocean and the Clean Planet. Both of those vessels were fixed almost immediately and out of their yards to carry short-term -- well, to do short-term trading for all major traders.

Since we are very confident in 2015 and 2016 in terms of that the market 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 a long-term employment that would qualify the vessels for drop-down candidates into the Partnership.

Okay. Thank you very much.

You're welcome.

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

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

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 2018, 2019. So I think that the process of charter securing vessels going for forward volumes have already started.

Okay. Is that at rates that you would image or that you were thinking about or would you sort of like want to wait until the market tightens a bit so that you could sort of get better rates there?

We would prefer to wait because we are 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 energy coming on stream. That is a tremendous amount, so we do expect that to have an impact. So I think waiting is good.

Okay. And just like one further question on the Russian (inaudible) -- 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?

No, we've not had any affect at all on our business. This is sanctions imposed have been more on an individual level and for companies involved in forward production, so that hasn't affected us at all.

Okay. That was it for me. Thank you very much.

You're welcome.

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

Good morning. Can you talk, Tony, about the -- in your chart, 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?

Yes. We -- you mean the upward pressure, right?

Well, no. I guess in your chart on page 14. It looks like your demand is kind of meeting your supply. It would mean that you are not seeing that pricing upward pressure, yes, I guess to that point.

I mean, this graph there can be understood in a couple of ways. If you look at the as what is carved out as existing uncommitted vessels that you will 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 leave vessels that is are coming off charter in a short-term market. That will dominate that. So, we are actually quite confident already from 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 if the actual capacity coming on stream.

So, while we see the end of 2016 into 2017 between 30 million to almost 60 million tons of LNG, actual capacity shows that within end 2016, we may have much as 74 million tons of new LNG coming. So basically, we are very confident that the market will pick up quite imminently going forward. By that, I mean in particular in 2015 and 2016.

That's wonderful. I appreciate that insight. 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 nat gas. Does that impact your thoughts on demand capacity, global trade on at all?

It does. I mean, we view that in a very positive way. Some time back, it was the topic of Chinese shale gas was widely discussed. Would China be sufficient by their own shale gas. And I think that this deal 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 is being used in the infrastructure in general, that’s good news for us.

Okay. And just, Mike, on the dividends. You kind of stated upside, downside in terms of what you could given the drop-down vessel. Given the terms and everything on the vessel, what determines your upside on the dividend versus the bottom end of that range?

Well, it depends on -- basically depends on the financing. We are going to file a universal shale early December. Our next drop-down will be primarily issued with equity. Our last drop-down, the Yenisei River, was nearly all debt. So we would like to normalize our capital structure at lower levels. We can expect, let’s say, higher percentage of equity on our next bill. So it really depends on what, on the financing terms, whether you’re on the debt side, on the equity issue. So I think these are the main parameters, I guess.

Okay. Wonderful. And then the Cheniere vessels that you have chartered, are you already seeing volumes from Sabine Pass? Has that already begun moving from that region?

No, it has not started moving yet. We expect it to move into 2015. That's when it will start moving.

Okay. All right. Wonderful. Appreciate the time.

You're welcome.

(Operator Instructions)

Your next question from Deutsche Bank comes from Amit Mehrotra. Your line is now open.

Thank you very much. You posted very smooth and consistent performance, so congrats for that. My first question is last quarter, you mentioned that had drop-downs would average about every six months or so, or you said that was a relatively good assumption. Does that imply the next one in March or April time frame? Is that sort of still the time frame for the next drop-down or do you see opportunity to maybe accelerate the pace of that?

Yes. The exact timing we don't know. It also depends on the market conditions. For us, as soon as we can.

Okay, and just a follow-up. With respect to the vessel, the Clean Planet, the contract terms changed from to be determined to trading spot market. I totally understand sort of wanting to exploit the strength in the spot market, but with respect to the Partnership, it's a little bit of a balance obviously between maximizing cash flow and having visibility.

I just want to confirm that the expectation would be to get those fixed for longer periods next year and 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-a-vis acquiring those assets?

So we absolutely expect to charter these vessels on time contracts and to drop them down into the Partnership. And when it comes to length of period, we are typically exploring the five to ten year region.

Okay. Great. Thanks very much, guys.

You're welcome.

There are no further questions at this point. I will pass the floor back for closing remarks.

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

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.