Dynagas LNG Partners LP (DLNG) 2017 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 2017 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 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 now I shall pass the floor to Mr. Lauritzen. Please go ahead, sir.

Morning, everyone, and thank you for joining us in our full year and fourth quarter ended 31st December 2017 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.

Turning to Slide 3 of the presentation. We have stated in our last earnings call that we would be aiming at covering part of our availability in 2018. The Arctic Aurora has entered into a new 3-year time charter agreement with Statoil. The charter is expected to commence in the third quarter of 2018, in direct continuation of the current charter with Statoil. Statoil will have the options to extend this new charter by 2 consecutive 12-month periods at escalated rates. As a result, the contract backlog has increased by about $61 million over the charter's firm period.

In April 2017, the Clean Energy became available for employment, at which time we entered into 2 consecutive short-term charters with Gazprom to employ the vessels through the end of August 2017. Following the expiration of these charters, the vessel is employed on an additional short-term charter with PetroChina until her 8-year contract with Gazprom from the July 2018. Although we have been successful in employing the Clean Energy on the short-term market, such market was, although improving, weaker than her long-term charter.

Our adjusted EBITDA for the period was reported at $26.9 million, with corresponding adjusted income of $7.6 million. The partnership reported a net income of $5.6 million, and distributable cash flow was reported at $11.8 million.

A quarterly cash distribution for the fourth quarter of 2017 are $0.4225 per common unit, was paid on January 18, 2018. The cash distribution is equal to an increase of 15.8% over the partnership's minimum quarterly distribution per unit.

The partnership paid on 12 February 2018 a cash distribution of $0.5625 for each of its Series A Preferred units for a period from November 12, 2017 to 11 February 2018. 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, provided the same is declared by the partnership's Board of Directors.

I will now turn the presentation over to Michael, who will provide you with further comments to the financial results.

Thank you, Tony. Moving on to Slide 4. The results of the quarter were within our expectations. For the quarter, we generated $11.8 million in distributable cash flow and $27 million in EBITDA. We are pleased with our operating performance for the quarter, with utilization of 99% and vessel daily operating expenses of $12,200 per day.

For the quarter, our average gross time charter hire on a cash basis amounted to about $66,000 per vessel per day, whereas our cash breakeven, including our distributions to preferred and common unit holders, amounted to about $70,000 per day.

Some guidance on 2018. We have 3 dry docks in 2018, and we expect they will cost about $10.5 million in total. We believe the dry docks will be Q2 and Q3 events. We will have some limited spot exposure as the Yenisei River and the Lena River roll off their existing charters in Q2 and Q3 of 2018 until they enter their Yamal contracts. The Arctic Aurora is entering her new contract in Q3 of this year after she performs her dry docking.

Moving on to Slide 5. In this slide, we see the progress of our distributable cash flow and contract backlog since we went public. In the last 3 quarters, we have experienced a material increase in our revenue contract's backlog due to the Yenisei River and the Lena River being chartered to Yamal with 15-year time charter contracts. At the same time, we have experienced a decreasing EBITDA and a weakening in distribution coverage, which follows our shift to the longer-term charters with greater visibility, albeit at lower, but attractive charter rates.

Moving on to Slide 6. Currently, you are aware that we are tapping into our existing cash balance in order to fund the current distribution, which is possible because of our healthy cash position. However, this is not something which we believe is in our unit holders' interests.

Specifically, during Q4 2017, our distributable cash flow available to common unit holders was $10 million, and we paid $15 million in cash distributions to our common unit holders. We are very much a long-term-focused company, and we will take a long-term look at cash flow and distribution coverage, which should follow shifts in long run sustainable earnings. As a result, we will seek to align our distribution coverage with a long-term secured cash flow of our fleets.

Moving on to Slide 7. In this slide, we highlight the cash flow generating capacity of our existing fleet with a growth potential from dropping down the optional vessels. We estimate that the long-term run rate EBITDA of the existing partnership's 6 vessel fleet, once all our LNG carriers have been delivered to their long-term contracts, will be about $95 million.

The first 4 potential dropdowns, which are fully owned by our sponsor, would add approximately $22 million of EBITDA each, whereas the 5 Arc-7 LNG carriers on time charter to Yamal, which our sponsor owns 49% of, are expected to produce dividend streams of approximately $5 million annually. We have added this expected stream of dividends to the estimated EBITDA number for simplicity purposes.

Dropdowns may improve our distribution coverage. And as a result, we intend to drop down 2 vessels within this year, subject to the approval of our board and raising the equity capital for the acquisitions. We would not need to raise additional debt capital since all the existing debt financing on our sponsors' vessels, which is amortizing debt at very attractive terms, is transferable to the partnership, subject to certain conditions being met.

By way of an example, please note that the total annual debt service of the 4 dropdown candidates, wholly owned by the sponsor, amounts to approximately $19 million to $20 million per vessel.

Moving on to Slide 8 to our debt profile, which as of 31st of September, stood at $729 million, and which consists of $479 million in secured Term Loan B debt and $250 million in our unsecured note. Our low amortization of $5 million per year is supported by a long-term contracted fleet, and it is noteworthy that our contract expiries far exceed our debt maturities. 34% of our debt has no exposure to floating interest rates.

Due to the contracted nature of our cash flows, we see our unsecured note and Term Loan B trading well in the secondary market, which reaffirms our outstanding access to credit markets. This year, we expect to focus on the refinancing of our unsecured note, which is maturing in October 2019.

Moving on to Slide 9. We had a strong capital structure, supported by our long-term profitable charter backlog. Our current strengths are our conservative chartering policy, predictable running costs, specializing modern fleet and healthy liquidity. As of today, our total debt-to-capitalization stands at 61%, and we ended up the year at around 6x net debt-to-EBITDA.

Looking across the capital structure, we believe we have outstanding access to credit and preferred equity markets in order to fund potential dropdowns. However, the reduced price of our common units has raised our cost of equity to the point where we currently do not consider it as a source of expansion capital.

We believe that our distribution level should be sustainable over a period of time, reflecting the equally long-term cash flow of our existing fleet and that of our dropdown candidates. We have best-in-class, long-term contracts secured at attractive charter rates, few MLPs can [boast with a] 10.4-year average contract duration and a $1.5 billion backlog.

That wraps it up from my side. I'll pass over the presentation to Tony.

Thank you, Michael. Let's move on to Slide 10 to summarize the partnership's profile. Our fleet currently counts 6 high specification and versatile LNG carriers, with an average age of about 7.5 years in an industry where expected useful economic lifetime is 35 years.

We have a diversified customer base with substantial energy companies, namely Gazprom, Statoil, PetroChina and Yamal LNG, which the latter is an international joint venture between TOTAL, CNPC, NOVATEK and the Silk Road Fund. Our contract backlog is about $1.49 billion, and our average remaining charter period is about 10.4 years, which compares well versus our peers.

Our vessels have also served customers such as Shell, Qatargas, RasGas, Marubeni, Woodside, KOGAS, CPC, North West Shelf and other major oil and gas companies. We therefore have a large customer base that we're able to contract with.

Moving on to slide 11. Our fleet of LNG carriers are largely fixed on long-term time charters with strong and reputable energy companies. Drivers for our charters were the characteristics of the fleet, including its ice class notations and our organization's track record. Compared to other shipping segments, LNG shipping is a highly industrial segment, where owners and charterers work very closely together and mutual performance is key. Charters typically program the vessels for its trade for long periods of time.

After employing the Clean Energy to PetroChina and extending the Arctic Aurora to Statoil, we only have limited availability going forward in 2018 and onwards. We are 85% contracted in 2018, 92% contracted in 2019 and 100% contracted in 2020, assuming that the Yenisei and the Lena River will enter their long-term charters at the earliest date in their delivery windows. We are now pursuing opportunities for the availability that we have in 2018, given that we believe the market is on an improving trend.

Let's move to Slide 12. We have a unique fleet. 5 out of the 6 vessels in our fleet have ice class 1A notations. The fleet can handle conventional LNG shipping as well as operate in icebound and subzero areas. This means that we are able to, and have been successful, in pursuing business opportunities in 2 different markets, namely conventional shipping and a unique market for icebound trade. The initial capital expenditure for an ice class vessel is somewhat more expensive than conventional carriers. However, the operating cost between our ice class-type carriers and conventional carriers are very similar.

The company, together with our sponsor, has a market share of 75% for vessels with Arc-4 or equivalent ice class notation. There are only 3 other LNG carriers in the world with the equivalent notation, which, to our knowledge, are chartered out for long term. We view the ability to trade in icebound areas as an important advantage due to the current and ongoing construction of LNG-producing terminals within icebound areas, and in particular in the Northern Sea Route.

Yamal LNG has recently commenced production, and we also expect further projects to be developed in that region. We view the ability to perform niche operations as an important driver in securing attractive long-term charters going forward.

Further to that, our fleet is optimized for terminal compatibility, which is of significant importance in a market that is changing from a fixed route trade to a worldwide trade. The fleet consists of groups of sister vessels that provides for overall relatively better economics and efficiencies.

Let's move to Slide 14. In summary, we are experiencing ongoing substantial growth of LNG production from new projects, primarily in the U.S., Russia and Australia. The world LNG carrier fleet appears too small to carry those additional volumes in the long term, and there are too many small and old technology vessels. There appears to be sufficient demand for the new LNG from existing and new importers with floating regasification projects, creating accelerated demand.

The LNG shipping market is maturing with increased fixture activity on the back of an improving spot market, increasing LNG production and a larger LNG carrier fleet.

The current LNG world fleet and the order book, including FSRUs and FSUs, totals about 584 vessels. The order book, counting 107 vessels, is about 22% of the world fleet. As much as 30% of the world fleet is below 140,000 cubic meters and aged. These vessels are small, with average size of about 135,000 cubic meters. This is well below the average cargo size. We expect that most of these undersized and aged vessels will fade out of the market and be replaced with larger and younger tonnage.

As seen on the graph on the upper-right side, almost all vessels built prior to 2006 are small turbine-driven vessels, and about 49% of the world fleet is steam-driven. Furthermore, 81% of the order book has already been committed for employment. This means that there are very few newbuildings that may be available to replace, on averaged undersized and aged tonnage and to carry expected incremental LNG production.

According to the order book, most newbuilds will be delivered during 2018, which is also a period we expect significant additional LNG production. There are only very few yards in the world that has the experience and capability to build such vessels. And if one were to order today, our guess is that yards would be able to offer tonnage for delivery in the first or more likely second quarter of 2020 at the earliest.

Let's move to Slide 15. We are now in a period with strong growth in LNG production. It is conservatively forecasted that LNG production will increase by more than 50% within 2022. It is also assumed that project output on existing terminals may increase going forward, adding additional supply. The majority of the new LNG is coming from terminals already under construction, meaning a high probability of project materialization.

We expect to see imminent production increases from Australia, U.S. and Russia. It is likely that the Far East will remain the largest buyers going forward, in particular with growing imports to China. We believe we will continue to see the emergence of new niche markets in areas such as South Asia, Africa, Middle East and South America, where large volumes will be imported by FSRUs.

We also 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, and we believe that existing import markets will continue to increasingly rely on LNG as a price competitive and Clean Energy resource.

Let's move to Slide 16. 2017 LNG production was up 11% compared to 2016. As expected, in particular, Australia and the U.S. have been the largest incremental producers so far. The trend is expected to continue going forward, with existing projects such as Gorgon, PFLNG, Wheatstone Train 1, Sabine Pass and Yamal LNG ramping up capacity. And new projects, such as Cove Point, Yamal LNG Train 1 and Train 2, Cameron LNG, Elba, Wheatstone Train 2, Ichthys and Prelude being added.

In March 2017, the industry saw the world's first cargo being produced by a floating LNG terminal, namely the PFLNG Satu, which gives confidence to floating LNG production technology, and we expect Golar's FLNG Hilli to follow soon.

Let's move to Slide 17. The Far East is still the largest consumer of LNG, and demand is growing. The Far East demand is fueled by recovery in Japan and Korea. And China's pushed to replace coal with gas for heating and power generation. While Japan and Korea have long been relying on LNG as an energy resource, China completed its first LNG import terminal in 2008 and, today, have 13 completed terminals and 10 under construction. Growth in Chinese average LNG imports have averaged 17% per annum in the last 5 years. China is now the second largest importer of LNG behind Japan, and we expect the need for LNG into China to continue to grow going forward.

Let's move to Slide 18. With the U.S. projected to become one of the world's largest exporters of LNG, it is important to monitor where those volumes are being shipped. Based on shipping volumes in 2017, 9% of the volumes went to South America; 24% to Central America, including Caribs; 16% to Europe, including Turkey; 37% to the Far East; 11% to the Middle East; and 3% to India and Pakistan.

Analysis indicates that the Sabine Pass requires about 1.76 vessels for every million tonne of LNG produced. At full production, we expect Sabine Pass to produce 27 million tonnes per annum over 6 trains. This means that one would require about 47 vessels fully utilized per annum to serve this terminal alone. If we conservatively estimate that the U.S. exports will produce 69 million tonnes of LNG per annum within 2021, U.S. volumes may require about 121 vessels alone. That is equivalent to 25% of the current world fleet.

Let's move to Slide 19. As we have 2 vessels with limited availability in 2018, we want to see how the short-term market is developing. In the year 2000, 2% of all LNG were sold spot. In 2015, after years of substantial international investments in LNG infrastructure, this number had increased to 37%. As a result, we see a steady increase in spot and short-term fixture activity.

In 2016 and 2017, spot fixtures accounted for 89% and 91% of all fixtures, respectively. We expect going forward that the spot shipping market will be substantial. And therefore, we believe that niche operators, in general, will be better suited to conclude longer-term deals.

Let's move to Slide 20. We experienced new import markets emerging, in particular, we have floating regasification terminals, which we term, FSRU imports, that allows for quick market access.

In 2016, 22 million tonnes, equivalent to 8% of the worldwide production, were exported to new markets, and the majority of those volumes were discharged into FSRU terminals. Although most incremental demand going forward will come from land-based terminals, the FSRU landscape is important because it develops very quickly, and is accelerating LNG demand growth.

The FSRU market has grown steadily over the past years. In 2016, floating regas made up 16% of total regasification capacity. This number is expected to increase to 22% within 2020, which does not include the more than 40 proposed FSRU projects. Over the next 12 months, 10 FSRU projects are expected to come online, growing the number of countries with FSRU solutions to 23.

In summary, when we compare LNG supply to LNG shipping capacity available from now and forward, we remain confident that the market outlook for shipping looks favorable. The growth in LNG production set at above 50% within 2022 is estimated to outpace increase in LNG shipping capacity of 22% within the same period. A large portion of the new LNG will be delivered already within 2019, meaning we should expect the period ramping up to that point and subsequent years to result in an improved and increasingly healthy shipping market.

Additionally, the partnership's fleet is largely ice classed and winterized, enabling the flexibility to pursue the best of 2 different markets, which has proven to have been a strong advantage so far in securing long-term charters.

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

(Operator Instructions) Your first question is from Randy Giveans from Jefferies.

This is Chris Robertson on for Randy. I was wondering if we could get some additional color around the distribution, in particular, how low of a cash balance and coverage ratio would you be comfortable with until the new contracts start in 2019. And are you committed to the current distribution level? Or is there a possibility that, that might be reduced in the coming quarters?

Chris, well, we're not looking at the near term. We have to look at the long term as far as the distribution is concerned because once our Yamal contracts start, we have a very good visibility of what our cash flows will look like. What I can say is it's an ongoing analysis. We would like to end up with a distribution coverage of above 1x, which is sustainable for the longer term. And we're very fortunate because we can use the word long term because we have the long-term contracts, which is a necessary ingredient for having sustainable distribution. So that's all I can say at this point.

Okay. And one follow-up. With regards to Slide 11, I know that you've mentioned it during the call, but the Yenisei River and the Lena River, do you plan on operating those in the Cool Pool between the charters?

Yes, that could -- I mean, that could be a possibility. Another possibility would be to find a charter that would fill that gap in its entirety and we would prefer the latter.

Our next question today is from Frank Galanti from Stifel.

This is Frank Galanti on for Ben. So in the call, you guys talked about wanting to drop down 2 vessels in 2018, but you'd mentioned that your equity capital was too expensive to be considered a source, and you would look to the debt markets to fund those dropdowns. Can you talk about which types of debt capital, and their respective interest rates that would be available to make that, would work?

Frank, no, we said the opposite. We said that the debt -- we do not have to arrange debt capital because we can essentially transfer the existing loans, which are at the sponsor level, into the MLP subject to certain conditions being met. We obviously would not be able to access the common equity market. We would need to fund the equity portion with a combination of preferred equity and service credit for the sponsor.

Okay. Yes. And then I know that this is at the parent, as from my other question, but the 2 FSRU newbuilds, I just had a question on if there have been any development in regard to contracting those vessels.

Well, thank you very much for the question. That is something that has been -- that's being working on throughout. And as of now, these vessels are still open for employment. But I can confirm that on a sponsor level, it's been looked at several opportunities for those.

Okay. And then if I could ask a final question, just regarding the Cool Pool and what kind of utilization rates you guys are seeing.

Yes, thank you. So I mean, obviously, this is -- we are involved in the Cool Pool, so we do have some insight to what's going on there. I think the utilization should be around above 80% at current. Yes, I think that's how specific we can get at this point.

Okay. And is that trending any direction from the -- I guess, from December, January? Or is that [all you can think]?

Well, no. I think that utilization, in general, has been up when we look at -- I mean, if we look at, let's say, the last 6 months or so. And we've seen an increase in utilization and in freight income. We did see that when gas prices [were peaking] in the Far East over Christmas at, what was it, $11, $12, that charter rates were very good at that point. We were kind of -- there's a lot of spread in the spot market. So we saw everything from $75,000 to $100,000 a day. I would say that in the last few weeks it's come off a little bit, but we are, again, starting to see activity picking up again. So we expect that when the Chinese New Year is over, people are back on their desk in the Far East, that, that activity will continue. And we will see -- we'll see the result of new volumes that are coming on stream and into the market.

Our next question is from the line of James Jang from Maxim Group.

I just have a quick one. So relating to the Yenisei River and the Lena River, if oil -- if gas prices drop dramatically, will there be options to use these vessels to store offshore?

Well, there's always -- I mean, there's always an option to use a vessel to store. What we typically would see, if there is a contango in the gas market, so that forward prices are much higher than current prices, yes, we would typically see that vessels are being used for storage from time to time and, at least, they slow-steam towards their destination. So yes, I mean, theoretically, if gas prices were to fall dramatically and forward prices would stay up, yes, we agree that would be an opportunity for storage.

(Operator Instructions) We have a follow-up question from Randy Giveans.

This is Chris again. With regards to the ice class vessels, I know that you had mentioned some shipyards in terms of timing of delivery of newbuilds. But in terms of those ice class vessels, is there a big difference between how many yards are specialized enough to build those? And how long would it take for a delivery of one of those vessels?

When it comes to the construction time, it would probably be very similar as the conventional one. The main difference is equipment and the grade of steel being used. But we don't foresee that on a typically Arc-4 type. So that would take longer time than a conventional ship because when you build -- when you make an order for a ship, there's always a queue in the shipyard. So construction doesn't -- normally doesn't start the day that you sign the paper for a contract, it starts when the queue allows you to start construction. So I don't expect that conventional -- that an ice class carriers will take a longer time than -- yes, than a conventional ship.

Okay. There's been some talk around the spot charter rates, but have the 3, 5, and 7-year time charter rates responded in recent months as well?

Yes. I think we've seen -- along with a substantial improvement in the spot market, we've seen everything from multi-months to multi-year charters being discussed. So yes, we can answer affirmative to that.

I believe there are no further questions, sir.

Okay. So thank you for your time and for listening in on our earnings call. We look forward to speaking with you again on our next call. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, that does conclude the conference. You may now all disconnect your lines.