Dynagas LNG Partners LP (DLNG) 2018 Q3 法說會逐字稿

Thank you for standing by ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Third Quarter 2018 financial results. We have with us Mr. Michael Gregos, Chief Financial Officer of the company. (Operator Instructions) I must advise 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 risk 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. Gregos. Please go ahead, sir.

Good morning, everyone, and thank you for joining us in our Third Quarter Earnings Conference Call. We've issued a press release announcing our results for the said period. Certain non-GAAP measures will be discussed on this call. And we have provided the description of those measures as well as a discussion of why we believe this information to be useful in our press release.

Moving on to Slide 3. Under recent developments. In August, the Yenisei River upon completion of its mandatory 5-year special survey and dry docking was delivered earlier than anticipated to its charter contract with Yamal in order to serve the Yamal LNG project with a firm charter period being extended from 15 years to 15.5 years. In addition, the Arctic Aurora entered its extended time charter contract with Equinor and following this contract, all of the partnerships' vessels are contracted as we will describe later in the presentation. On October 23, we closed our Series B Preferred Units offering and received net proceeds of $53 million and on October 11, the partnership announced a quarterly cash distributions of $0.25 per common unit in respect of the third quarter 2018, which was paid on October 26.

Moving on to Slide 4. The result of the quarter met our expectations as fleet utilization was 99% and operating expenses on the dry dock of the Yenisei River were below budget. For the quarter, we generated $7.5 million in distributable cash flow and $23.5 million in EBITDA. We are pleased with the performance of our manager as vessel daily operating expenses came in at $11,600 per day per vessel for the quarter, versus $11,200 for the corresponding period of 2017 and the cost of the dry dock of the Yenisei River ended up at $2.4 million, which is $1 million below the budget with only 16 or higher days. For the quarter, our average gross time charter hire on a cash basis amounted to about $60,000 per day per vessel, whereas our cash breakeven excluding our distributions to preferred and common unitholders and our dry docking cost amounted to about $40,000 per day.

During the past 2 years, all of our vessels have completed their 5-year mandatory class special surveys and dry docks, while at the same time they are gradually transitioning into their previously entered into long-term contracts. In October, the Lena River completed its dry dock and subsequently entered its interim time charter with a U.S. energy producer pending a delivery to the Yamal contract next year. Following the completion of the Lena River special survey and dry dock in October, the partnership has no scheduled dry docks until 2022.

Moving onto Slide 5. For the quarter, our distributable cash flow available to common unitholders after payment to preferred unitholders amounted to $5.8 million and we paid $8.9 million in cash distributions to our common unitholders, resulting in a distribution coverage ratio of 0.66x. For the quarter, we had cash coverage ratio of 1x with cash coverage representing adjusted EBITDA less interest, loan principal and preferred equity dividends divided by actual distributions to common unitholders. As previously advised, our distribution coverage was expected to be below 1x with the current distribution being partly funded by cash on hand.

Moving on to Slide 6. There is a high level of visibility and predictability in our future cash flow generating capacity, given that all of our LNG carriers are employed on long-term contracts with an average contract duration of approximately 10 years. Our simplified debt structure is composed of $474 million term loan B, which is amortizing annually by $4.8 million, and which has a floating interest rate; and $250 million unsecured notes, which mature in October 30, 2019, and which we expect to refinance in advance of their maturity.

Our capital structure also consists of $130 million in preferred equity consisting of our 9% $75 million Series A preferred and our 8.75% $55 million series B preferred issued last month. At the end of the quarter, we have liquidity of $89.5 million and the net debt to last 12 months EBITDA of 6.6x. Our net debt to total capitalization amounts to 62% pro forma our $55 million preferred equity issuance, which is an improvement from the previous quarter. With respect to the refinancing of our $250 million unsecured notes, we are exploring a number of alternatives and are keeping all of our options open. As part of this exercise, we're currently performing a strategic review, which will also encompass our financial objectives with respect to improving our financial credit profile, our liquidity and growth prospects.

Moving on to Slide 7. Our fleet currently counts 6 high specification and versatile LNG carriers with an average age of about 8.3 years in an industry where expected useful economic lifetime is 35 years. Our long-term contracts with Gazprom, Equinor and Yamal LNG, a joint venture between TOTAL, CNPC, NOVATEK and the Silk Road Fund, showed well-established LNG export projects in icebound areas. Our clients have entered into long-term off-take agreements with LNG users and our vessels are vital to their efforts to monetize their production of natural gas. Our $1.4 billion in remaining contracted revenue and over 10 years of average remaining contract life provide the partnership with the benefits of stable cash flows and high utilization rates.

Our contract backlog amounts to $230 million per vessel, which is best-in-class on a per vessel basis versus our peers. Our fleet is fully contracted through 2020 and 92% contracted in 2021, assuming that Equinor does not exercise its option to extend the Arctic Aurora contract. Beyond 2021, 80% of our fleet is contracted until 2026 in which 1 charter expires. Thereafter, we have 2 charter expiries in 2028 and 2 in 2034.

Moving on to Slide 8, the drivers for our long-term charters were the unique characteristics of our high specification fleet, including their ice-class capabilities and our manager's track record. Our fleet is able to operate across the globe including in icebound areas and under the harshest weather conditions. This means that we are able to and have been successful in pursuing business opportunities in 2 different markets, namely the conventional shipping and the unique market for icebound trades.

Moving on to Slide 9. The partnership together with our sponsor has a market share of 80% for vessels with Arc-4 or equivalent ice class notations. We've used the ability to trading in icebound areas as an important advantage due to the current and ongoing construction of LNG production terminals within icebound areas and in particular, the Northern Sea Route where Yamal LNG has recently commenced production.

We also expect further projects to be developed in that region. 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. We also expect further projects to be developed in that region. We view the ability to perform niche operation as an important driver in securing attractive long-term charters going forward. We have inserted the industry slides in the presentation as an appendix since Tony Lauritzen unfortunately cannot be on this call. We have now reached the end of this presentation, and I will now open the floor to questions.

(Operator Instructions) We will now take our first question.

This is Randy Giveans with Jefferies. So I guess, a few quick questions. So regarding the Lena River, does the current contract go all the way through until when the multiyear contract with Yamal starts? And what kind of rate is that until then? Like, is there any off time between the end of the current contract and the start of the Yamal?

That's right. The contract that goes up till the moment that the Yamal charter is expected to commence in July of next year, given that we understand that Yamal needs the Lena River as soon as possible, so we don't expect any significant downtime between the 2 contracts.

Perfect. Okay. And then with that, what is the rate of the current one?

Well, I can't disclose the rate. I mean, the rate is lower than the rate that she was trading in under the Gazprom contract. All I can say is that this fixture was done at the very early stages before the LNG spot market took off.

Okay. That's fair. Now are you seeing any spot rate differential or how much is the spread for a steam versus a kind of DFDE vessel?

Well, because of all of our vessels are employed, we -- and are trading under long-term contracts, we don't have any spot exposure. So any of the information that we have is not first-hand information. But we have seen steam turbines earning $100,000 a day in the spot market, and very modern XDF, MEGI type vessels earning double that. That's what we see others doing but because we are fully contracted, we don't have this spot exposure.

Sure. Just trying to get a read today for the market. I guess, 2 more quick questions. Now with the capital that you have is an additional drop-down, maybe the Clean Ocean or another vessel likely in the next 3 to 6 months?

I think our immediate focus is the refinancing of our notes. That's our immediate focus. So I can't really comment on when exactly we're going to do a drop-down.

Okay. And I guess lastly, is there any -- with the whole $250 million kind of still outstanding for refinancing that but obviously, all of your vessels, like you said, fully contracted for many years, is there any concerns, fears, questions about the current level of the distribution?

Well, listen, I mean, I can only give you a general answer here. I mean, we are reviewing how to maximize value going forward. Like I said, the refinancing of our notes is a high priority but we also are concerned that we're getting little to no credit for the current distribution and our current equity yield has kind of hindered our ability to grow. So we will be looking at how distribution can be used to improve equity value over time.

Okay. What about unit repurchases with that current yield of 14%?

Well, unit repurchases, when we have -- as I said, when we have a bond to refinance, they are not exactly on the top of our list right now. As I said, our top priority is to refinance the bond. Given our contract coverage, we are in a very fortunate position. We are in a very strong position. Our ships have fixed-rate contract, our operating expenses are predictable. So we know more or less what we are expected to generate in terms of cash on a steady-state basis over the next couple of years.

We will now take our next question.

This is Fotis Giannakoulis from Morgan Stanley. I would like to ask you about the impacts that you might have noticed in the market from the increase in Henry Hub price the last few weeks. I understand that you do not have vessels actively employed in the spot market but I assume your customers, they transport cargos worldwide. You should have seen any impact on the spot trade on the one hand and if you think that this can have any implications for producers around the world and giving a new momentum to projects in Russia, given your strong relationship there?

Yes. No, Fotis, as you know, we don't really have that much spot exposure. So the information that we have on the impact of the -- we haven't seen -- we don't have any first-hand information on what the short-term impact has been on the shipping side on the -- by the increase of Henry Hub. Having said that, obviously, an increase in the Henry Hub is very supportive for future LNG projects, and it's definitely -- it underpins the positive fundamentals of this industry.

And do you think that projects outside of the U.S., they might try to take advantage of this increase? Do you see more momentum on projects like the Arctic projects, the expansion in Russia? And also Qatar has announced that they're going to bring online a large expansion in the next few years. Are there any discussions right now for potentially securing tonnage with long-term contracts, something that you would be able to participate?

Definitely, on the Arctic LNG 2, that's a project, which will happen. There are huge ambitions for the exports of LNG coming out of Russia, and given how the Yamal project materialized in very, very difficult circumstances, we can feel very, very confident that these projects will materialize irrespective of where Henry Hub prices are. I mean these are projects, which will happen. And obviously, given the relationship, we would very much hope to be a part of this process to provide shipping for this project. Now as far as Qatar is concerned, obviously, Qatar is the largest producer in the world, and there are ambitions in the Russians also to increase LNG productions dramatically. But we haven't seen anything from our side and any shipping requirements from the Qatari side.

And I understand that your sponsor is involved in the FSRU market with newbuilding FSRUs. The last couple of years, that has been a market with very little activity, if any. Has this changed? Do you see projects reaching FID and contracts being awarded? How is the situation there? What is the supply/demand market in the FSRU market?

Yes. It's true. We have FSRUs for deliveries in 2021. I mean, there are projects out there, which we're looking at. There is activity. Obviously, these projects, they take a long time to materialize and we have seen that there may be as a compression in the economics of these projects and also on the period side, but it's also very specific on the project-by-project basis.

And one last question, given your group's involvement across different sectors and also your focus on LNG, yesterday, one of your peers was questioning the available returns on long-term LNG shipping contracts. They think that they are not very attractive buying an LNG carrier and putting it into a multiyear contract. Is this your view? Do you see that there is some return compression or some increase in the cost of capital that makes long-term charters not particularly attractive? Is there any sort of potentially, given the strengthening of the spot market trying to have a more exposure in the spot market if it's possible?

It's true. I mean, on the conventional shipping side, that means the deals that we have seen, the economics are not something that we would do. But -- so it is true that there are very slim margins in the -- let's say, in the conventional LNG business and this is why we're very active in this niche ice class trade where the economics are obviously, much better. The spot market is very interesting. I mean, obviously, everyone knows that the spot market is extremely strong. The -- obviously, we're not actively involved in this market but -- and I cannot tell you we will actively get involved in this market but all I can say it is we believe that at least in 2019, the spot market will continue and maybe in 2020, you will see a reversion to more normalized rates.

(Operator Instructions) There are currently no questions in the queue, sir.

Okay. Thank you for -- so that wraps it up for the third quarter call. Thank you very much, and we'll see you next quarter.

That does conclude our conference for today. Thank you for participating. You may all disconnect.