Dynagas LNG Partners LP (DLNG) 2015 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners' conference call on the fourth-quarter 2015 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. 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.

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

Morning, everyone, and thank you for joining us in our fourth quarter and year ended 31 December 2015 earnings conference call. I'm joined today by our CFO, Michael Gregos.

We have issued a press release announcing our results for the said period. Certain non-GAAP measures will be discussed on this call. 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 fourth quarter and the 12 months ended December 31, 2015. In particular, we're focused on the performance of our fleet from a safety, operational, and technical point of view, and we are satisfied to report that during the said periods, our fleet reported between 98% and 99% utilization, which we believe is reflective of the quality of our fleet and our managers' operational ability. The fourth quarter and the 12 months ended 31 December 2015 were strong financial periods for the Company. Our fleet's income is produced from multiyear time charter contracts with international energy companies who pay a fixed daily rate for the chartered vessels. As the charterers also pay the majority of variable costs such as fuel, the partnership enjoys steady and visible cash flows that are not indexed to oil or gas prices. With our fleet fully contracted through 2016 and 83% contracted through 2017, we intend to focus our attention on increasing contract coverage, and safe and efficient operations going forward.

Turning to slide 3. Although 2015 was characterized by a capital market that was dislocated from our business, we have performed on our growth strategy. On December 21, 2015, the partnership completed at $240 million acquisition of the Lena River, a 2013-built ice-class and winterized LNG carrier, which is on charter to Gazprom until fourth quarter 2018. The acquisition was partly financed by a new $200 million term loan facility entered into on 17 December 2015 and secured by the Lena River and the Yenisei River.

A quarterly cash distribution for the fourth quarter of 2015 of $0.4225 per common and subordinated units was announced in January 21, 2016, and was paid on February 12, 2016, to all unitholders of record as of February 5, 2016. The cash distribution is equal to an increase of 15.8% of the partnership's minimum quarterly distribution per unit. Following the acquisition of the Lena River, we intend to recommend to the Board a further increase of the quarterly cash distribution per common and subordinated units of between 4% and 6% annualized, which would, if accrued, become effective for the distribution with respect to the quarter ending March 31, 2016. Our January 21, 2016 the partnership further announced a cash distribution of $0.5625 per unit of its Series A preferred units for the period from November 12, 2015 until February 12, 2016. The distribution was paid on February 12, 2016 to all unitholders of record as of February 5, 2016. Distributions on the Series A preferred units will be payable quarterly on the 12th day of February, May, August, and November at an equivalent of $0.5625 per unit.

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 4 of the presentation, I will review some recent financial highlights. It was another stable quarter in which we continued to deliver positive results. Q4 2015 adjusted EBITDA amounted to $28.5 million, which is relatively unchanged compared to the same period last year. For the quarter we owned an average number of 5.1 vessels versus 3.8 vessels in Q4 of 2014, which reflects the ownership of an additional sixth vessel, the Lena River, for about 10 days in December 2015. For the fourth quarter, average daily charter hire gross of commissions on a cash basis amounted to about $78,900 per day per vessel, and our average daily operating expenses amounted to about $13,100 per day per vessel, which is slightly increased versus the last quarter.

Our total cash flow breakeven, excluding cash distribution, amounted to about $41,700 per day. Adjusted net income for the fourth quarter amounted to $15 million, or $0.38 per common unit. Please note the full calculation of adjusted EPU per common unit, we have deducted the cumulative dividend on preferred units as of December 31. Moving on to the 12-month period between December 31, we reported distributable cash flow of $72.4 million, adjusted net income of $60.9 million, and adjusted EBITDA of $113.2 million, all in line with our expectations. For the 12-month period ended December 31, our fleet average daily hire gross of commissions amounted to $79,450 per day.

Moving on to slide 5, you can see the fourth quarter 2015 results versus the same period of 2014. As you can see, our financial performance for the quarter was stable in comparison with the previous quarter. We expect the Lena River acquisition, with its related time charter, will enhance our financial performance in 2016.

Moving on to slide 6 to discuss distributable cash flow. Cash available for distribution is $18 million for the fourth quarter of [2014], as compared to $18.6 million for the fourth quarter of 2014, as a result of slightly increased operating costs and marginally lower utilization levels. For the fourth quarter, we distributed $15 million to our common subordinated and general partner units, emanating from the quarterly per-unit cash distribution of $0.4225, and $1.7 million to our preferred unitholders, which gives us the coverage ratio of 1.08 times, whereas for the full-year of 2015 we had a coverage ratio of 1.15 times.

Just a few words on our latest acquisition of the Lena River for $240 million, with a time charter attached until the third quarter of 2018. The time charter Gazprom generates about $25 million in annual EBITDA, and generates about $8.5 million in cash available for distribution, which would bring our total projected 2016 cash available for distribution to slightly under $80 million on a steady state basis. As you know, we announced that following the Lena River acquisition, we intend to recommend a cash distribution increase of 4% to 6%, which would imply total cash distributions for the year between $70 million to $71 million, and therefore projected total coverage ratio of about 1.10 to 1.12 times, including distributions preferred unitholders which we feel is appropriate.

Moving on to slide 7, just a few words on our capital structure and liquidity. As of December 31 we had about $49 million in cash on hand. This was significantly enhanced in early 2016 after the drawdown of the final tranche of $66 million under a new financing facility related to the acquisition of the Lena River, which was utilized to repay the $35 million in seller's credit due to our sponsor, with the remaining $30 million retained as cash on the balance sheet. Therefore, the Lena River acquisition and the recent $200 million bank facility significantly enhanced the cash flow and liquidity of the partnership. As of December 31, we had $688 million in total debt, and following the drawdown of the final tranche in early 2016, debt as of today amounts to $755 million. We are fortunate enough to not have any near-term maturities, since our first maturity is our $250 million note, which matures in October 2019, and thereafter our two secured facilities which mature in late 2020 and 2021, respectively.

We currently have a fleet of six LNG carriers following the acquisition of the Lena River, all on long-term contracts which are expected to generate a 12-month forward run rate EBITDA of approximately $136 million, which equates to a debt to EBITDA of about 5 1/2 times. The Lena River acquisition was about 70% debt finance, with the remainder being financed from the net proceeds of our $75 million preferred offering last July. Going forward, our base case scenario is that during the course of the year, the equity and debt capital markets will not be open to us to fund further growth. Even though the traditional banking markets are open to us, since we are at the higher end of our leverage target, we would like to combine fleet growth with deleveraging. As a result, we will have to look at alternatives to fund further fleet growth and delever our balance sheet, the most obvious option being acquiring vessels with sponsor support in one form or another.

Moving on to slide 8, this slide outlines our cash distributions history since we went public in November 2013. The growth in our fleet has allowed us to increase our cash distributions to unitholders by 15.8% since our first cash distribution in February 2014. Following the Lena River acquisition, and assuming the Board approves the previously announced cash distribution increase of 4% to 6%, the growth in cash distributions since we went public will amount to between 20% to 22%. Given the current equity capital market environment, and looking beyond the cash distribution increase already announced in connection with the Lena River acquisition, we will have to examine whether there is any reason to further increase our cash distributions per unit when we think of our next dropdown opportunity.

Ultimately this decision will be based on whether we believe the market will recognize that we have a stable of six fully financed LNG carriers on term contracts, with first class counterparties, with no capital commitments going forward, no new equity required to maintain the cash distribution and the distribution coverage ratio, and with our first debt maturity coming in Q4 2019. Valuations are currently not rewarding distribution growth, so any further fleet growth could be focused on protecting our balance sheet and coverage ratio, since at these equity yields, it seems investors are not rewarding any further growth in cast distributions. It is important to understand that we rely to a certain extent on the capital markets for growth of distributions, but we do not rely on the capital markets for our ongoing current cash distributions, since our current cash distribution payout is sustainable, given our current time charter contracts, and base as reasonable expectations of where we expect contractor contracts will be renewed.

That wraps it up for my side, I will pass the presentation over to Tony.

Thank you, Michael. Let's move on to slide 9 to summarize the partnership's current profile. The partnership's fleet currently counts six high-specification versatile LNG carriers with an average age of about 5.5 years, in an industry where expected useful economic lifetime is about 35 years. Our vessels have unique features that enable them to operate as conventional LNG carriers, as well as operate in ice-bound areas that are restricted for conventional vessels. We have a strong diversified customer base with leading LNG companies, namely BG Group, Gazprom, and Statoil. These charterers are leaders in the field and only work with top-performing service providers. Our contract backlog is about $607.7 million and our average remaining charter period is about 3.8 years.

Let's move on to slide 10. Five out of the six vessels in our fleet have ice class 1A notation. Our fleet is fully contracted into 2016, and 83% for 2017, a time we expect the LNG shipping market to be very strong due to the current ongoing construction of new LNG production plans, measured against the perceived relatively insufficient order book, combined with an existing fleet that contains a large number of undersized and aged vessels. We have a unique fleet. It can handle conventional LNG shipping as well as operate in ice-bound and subzero areas. This means that we are able to pursue business opportunities in two different markets, namely conventional shipping and a unique market for ice-bound trade. The drivers behind several of our charters were the ice-class features of our fleet, as well as the operational track record in such conditions. As an extension of the ability to operate in ice-bound areas, we are the only company in the world with a current capability and experience in transiting the Northern Sea routes, which we deem an important advantage due to the ongoing development of LNG production along these routes. We see a strong need going forward for vessels with ice-class and winterization features.

Our multiyear fleet employment profile, first-class customer base, and the staggered maturity of our charterers provide solid cash flow visibility going forward. Our charterers are performing very well on their charter obligations, and the vessels are utilized. The contractual relationship between our customers and the vessels are on a time-charter party basis. Charter parties are very powerful contracts where the charterer pays a fixed day rate to the owner, regardless if the vessel is being used or not, and all major variable costs such as fuel costs, are for the charterer's account. Therefore the partnership enjoys a visible and stable revenues that are unaffected by oil or gas prices. Going forward we will be focused on securing further contract coverage.

Moving on to slide 11. We had previously stated that we believe our sponsor will invest further in LNG tonnage, which in turn improves the partnership's growth potential. On 15 September 2015, our sponsor announced the entering into shipbuilding contracts for five ice-class Arc-7 type LNG carriers with DSME that will be delivered in 2017 and 2019. These five vessels have been chartered for long-term charters to the Yamal LNG project, from delivery until minimum the end of the year 2045. Our sponsor has established a joint venture ownership in the Arc-7 type LNG carriers, under which agreements Sinotrans LNG Shipping Limited and China LNG Shipping (Holdings) Limited each owns 25.5% of the respective shipbuilding contracts. The partnership will have the right to acquire 49% interest in the vessels after their delivery, pursuant to an omnibus agreement. Our sponsor also chartered to Yamal LNG all four of the existing optional vessels from 2019 onwards, for a minimum 15-year period each. This underlines the value of ice-class and winterized LNG carriers.

Let's move to slide 12. We intend to continue to focus, among other things, on the creative growth going forward. Our potential dropdown candidates now count nine LNG carriers, where all of the vessels have contracts in place. All dropdown candidates are high-specification, ice classed, and winterized.

Let's move on to slide 14. The current existing LNG world fleet consists of 424 vessels on the water and 135 vessels in the order book, totaling 559 vessels, as shown on the bar to the left. The average cargo size today is about 143,000 cubic meters. If we add up all vessels in the existing fleet with sizes below 139,999 cubic meters, meaning well below the average cargo size, we count about 141 vessels, which is about 33% of the existing world fleet. The average age of these undersized vessels are about 18 years old. When we compare these, on average, old and undersized vessels of 141 units with the order book of 135 units, we note that these aged and smaller units counts a larger number than the order book. Furthermore, 89% of the order book has already been committed to charterers. This means that there are very few new buildings that may be available to facilitate the need to replace, on average, old and small tonnage, and to carry the incremental LNG production volumes, in an environment where LNG cargo production capacity is expected to grow faster than shipping capacity.

Let's move on to slide 15. World energy consumption has been steadily increasing over time. The largest sources of energy comes from coal, oil, and gas. Since the early 1980s, gas has been the fastest-growing resource of those commodities. Going forward, we believe that coal- and oil-related consumption will be second-rated to gas, due to environmental reasons, and gas consumption will continue to grow faster than coal and oil. Based on the current construction of new LNG production terminals, the forward sale of new LNG as well as FID taken on new LNG terminals, we expect the next years and to the end of the decade to be dominated by strong LNG production growth. It is conservatively forecasted that about 140,000,000 tons of new annual incremental LNG will come to the market between now and 2020. This represents a total increase of 57% compared to 2015. As the last years have been quite static with little new incremental LNG delivered to the market, the next years are said to be characterized by strong growth.

The production figures are conservative. Out of the 140,000,000 tons of incremental annual production expected to be added to the market by 2020, we assume that the majority are coming from terminals already under construction, meaning higher probability of project materialization. The source of this new LNG is primarily from Australia, North America, Russia, and Southeast Asia. We continue to believe that the Far East will remain the largest buyers going forward. However, strong growth may be experienced from existing European markets, and we also believe that we will continue to see the development of new niche markets such as South Asia, Middle East, and South America. We believe that there are sufficient buyers for the new LNG to be absorbed. The majority of the new LNG export volumes have sale agreements or offtake agreements in place. We believe that the existing import markets will continue to increasingly rely on LNG as a competitive and clean energy resource. However, we also believe that several new entrants will import LNG going forward, and in particular absorb uncommitted LNG.

Let's move to slide 16. When we compare LNG supply to LNG shipping capacity available from now until 2020, we will remain confident (inaudible) looks very favorable. The growth in LNG production, set at 57% within 2020, is estimated to outpace increase in LNG shipping capacity, set at 32% within the same period. We believe that LNG shipping is set to tighten going forward, and in particular from 2017 onwards. From 2018 onwards we believe there will be a shortfall of shipping. It is this imbalance that will drive rate increases, and that makes our vessels so desirable going forward. Additionally, the partnership fleet is ice classed and winterized, enabling the flexibility to pursue the best of two different markets.

There are also several other factors that may drive LNG shipping demand further. About 33% of the existing worldwide fleet may be considered substandard specification in today's environment, due to their small size and their average age of 18 years. We may see part of these vessels exiting the market, in particular due to size. We may see an increase in reexported cargos driven by price differences between markets, thereby creating shipping distances. We may see LNG production above nameplate production. Several LNG terminals are exporting below nameplate production due to temporary technical or political issues. If the Panama Canal expansion is delayed, cargoes going from the East Coast US to the Far East need to travel a much longer distance. Conventional LNG carrier sizes does not permit the passing through the current Panama Canal. Actual production may also be higher than forecasted due to additional projects and fast-paced projects, such as FLNG. This will all lead to additional need for LNG carriers.

The potential rechartering possibilities of part of our fleet will be in 2017 at the earliest, and beyond which we expect to be a period of high world fleet utilization. This will be further supported by Arctic LNG coming onstream, and requiring ice-class vessels which DLNG is in a great position to provide.

We have now reached the end of our presentation, and I'll now open the floor for questions. Thank you.

(Operator Instructions)

Fotis Giannakoulis from Morgan Stanley. Please go ahead. Mr. Giannakoulis, your line is open, please ask your question.

We will move on to the next line. Gregory Lewis from Credit Suisse.

Yes, thank you, and good afternoon, gentlemen. I guess my first question is, Tony or Michael, feel free to answer, but you seem very aware and focused on the fact that the capital markets are not open, and clearly you are in a position to move forward and maintain cash flows with the capital markets being closed. My question more around, you know you did the dropdown, that was a success, the Lena River boosts the backlog, but as we think about going forward you know currently you know the stock is yielding about 19%, your preferreds are yielding I think low teens.

Realizing the commitment to continue to move the distribution higher, you know just given uncertainty in the market, whether it's on the financing side, realizing that your backlog is solid, does it make sense to move forward with this distribution increase with the stock yielding where it is, or could that potential cash flow scheduled to go out the door be better used to put Dynagas in a better financial position, whether it's building cash or delevering? Just curious on your thoughts around that.

Yes, that's a great question, Greg, hi. Listen, we thought about this a lot. On the Lena River we felt that increasing the cash distribution makes sense because we're at such a great place. We don't have any CapEx going forward. Our balance is, we're generating a lot of cash. We might be a bit higher on where we wanted to be in terms of leverage. So there is no company specific reason for us to do a drop without increasing the distribution.

Having said that, your question is very topical because going forward, we will have to ask ourselves that question. We have to find an answer to that question because clearly, where the markets, where our valuation is today, no one is getting rewarded for increasing the distribution. We clearly saw that in our case.

So I guess what I'm saying is if anything doesn't really change in terms of how the market looks at us and how it appreciates what we're doing or who we are, we have to consider the possibility of doing drops for other reasons, other than distribution growth.

Okay, okay, fine, thank you. And then just one other question. It's been much publicized and clearly you have a very strong relationship with BG, the Shell-BG merger has gone through, I think part of Shell's key re -- one of their, not key reasons but mentioned reasons for doing this is the potential cost synergies. They believe they will have, by having LNG exposure in both the Pacific and Atlantic basins, or Southeast Asia and Atlantic basins. What types of conversations are, is Dynagas at this point having with BG and/or Shell, and in terms of, could we see a changing of trading patterns for those vessels, now that Shell and BG have joined together?

Thank you. I'll answer that question. First of all, as you rightly pointed out, we've, as a partnership, has very good relationship with BG Group. As of, on the sponsor level we've had it since the inception of the company. At the same time, we've also on sponsor level done a lot of business with Shell. So we feel that the integration of the two companies is beneficial. Our counterpart is a very, very substantial counterpart.

When it comes to the trading of the cargo, and if we may see a change in patterns, that we feel is too early to say. That is just something that we need to see how that goes going forward. What we can say is that both Shell and the BG people, they've, has been appreciating the relationship that we've had very much.

Okay, perfect, thank you very much, gentlemen.

The next question is from the line of Fotis Giannakoulis from Morgan Stanley. Please go ahead. Mr. Giannakoulis, your line is open, please ask your question.

(Operator Instructions)

Gregory Lewis from Credit Suisse.

Hey thanks, guys, I figured I'd hop in for one more question while Foti gets his technical difficulty straightened out.

If you can talk a little bit about the order book and supply, just as, we see the stated order book, we know where the spot rates are today. The spot rate market is very challenged. How has that been impacting the global order book? Have we seen any delays? Is it just sort of the order book just keeps moving forward, and we should expect all of this tonnage to be delivered in a timely manner, and I mean given your outlook for recovery let's say in the medium-term, have we seen new orders starting to filter into the market?

Yes, thank you very much. The order book is currently a couple of 30% of the current fleet, so we have 135 vessels in total on order. And we haven't seen much adding to the order book lately. I think it will take a little bit of time before we see a substantial increase in the order book.

Also given where the spot market is right now, that's not encouraging, right. I think it's really important to point out that although the spot market is challenging and undoubtedly soft, we still see the supply of LNG coming to the market.

This year is an exciting year because we have several projects adding production, which is kind of a change from 2015 in particular the previous years. We have now volumes coming from Australia, we have from the United States through Sabine Pass, and it looks like in [goal] LNG will be up and running, either the end of this quarter or into next quarter.

So this is all good signs for the long-term. But as said, I think that the ordering that we will see going forward will not be much speculative, it will be against projected volumes.

Okay great. And then just one final one from me. Clearly we're looking at where spot rates are hovering encompassing into the $30,000 range, high $20,000's for at least the last few months. What type of impact has that on the term market? If there was a vessel in the market, is there even an opportunity to term out in terms of, let's call it a two, three year charter in the market, or right now really the spot market is kind of bouncing along the bottom and the term markets closed.

Yes, well, so at this moment you wouldn't see a lot of liquidity in the long-term contracts, simply because when the spot market is cheap, that's not a good moment for the owner to start discussing long-term deals. It is a good moment for the charter to continue picking cheap tonnage. So we have seen almost very, very little liquidity in the long-term market.

I think the exception is actually the deals that we did on a sponsor level, which are due to the ice class features and the winterization features of the vessels, resulted in concluding charters very much in the expected revenues that our average charter profile yields, maybe even slightly above. So we think that our fleet really is quite different from our peers. Thank you.

Okay, thanks again, Tony.

(Operator instructions)

Well thank you very much 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.

This concludes today's conference. Thank you all for participating. You may now disconnect.