Earnings Call: Q1 2021

Jun 18, 2021

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LMG Partners Conference Call on First Quarter 2021 Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer and Mr. Mikhail Gregos, Chief Financial Officer of the company. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. 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 I now pass the floor to Mr. Lorentz. Please go ahead, sir. Good morning, everyone, and thank you for joining us in our 3 months ended 31st March 2021 earnings conference call. I'm joined today by our CFO, Michael Gregos. We have issued a press release announcing our results for the same 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. Moving on to Slide 3 of the presentation. We are pleased to report the results for the 3 months ended 31st March 2021. All 6 LNG carriers in our fleet are operating under their respective long term charters with international gas producers. Despite the ongoing operational challenges the industry is going through with respect to COVID-nineteen, we are pleased to report 100% utilization For the fleet for the Q1 of 2021. For the Q1 of 2021, we reported net income of €15,900,000 earnings per common unit of €0.36 adjusted net income of 10,600,000 Adjusted earnings per common unit of €0.21 and adjusted EBITDA of 23,900,000. We paid in February 2021 a quarterly cash distribution of 0 point 5 $6.25 per Series A preferred unit For the period from November 12, 2020, to February 11, 2021, and a quarterly cash distribution Well, dollars 0.54 $11.16 per Series B preferred unit for the period from November 22, 2020 to February 21, 2021. Subsequent to the quarter, we paid in May 2021 a Quarterly cash distribution of 0 point 5 $6.25 per Series A preferred unit for the period from February 12 to May 11, 2021, and the quarterly cash distribution of 0 point 54.11 Pro Series B preferred unit for the period from February 22 to May 21, 2021. Also subsequent to the quarter, we issued about $2,150,000 worth of common units At an average price per unit of about $2.87 under the amended and restated $30,000,000 ATM sales agreement, which has about EUR 26,500,000 of remaining availability. We also entered into a new time charter party agreement with Equinor For the employment of our LNG carrier, Arctic Aurora. Under the new time charter agreement, the Arctic Aurora is expected To be delivered to Equinor in September 2021 immediately upon expiration of the Current charter party with Equinor. The new time charter party is about 2 years, and the annual gross revenues from the time charter agreement are expected to be about EUR 21,500,000. Going forward, we intend to continue our strategy of using our cash So generation to de level our balance sheet, reinforce our liquidity and generate cash as to build equity value over time, which will enhance our ability to pursue future growth initiatives. I will now turn the presentation over to Michael, Who will provide you with further comments to the financial results? Thank you, Tony. Moving over to Slide 4. Our quarter results continue to reflect our stable operating model as our fleet operates with 100% utilization. Adjusted net income for the quarter increased by 49 percent to $10,600,000 compared to the Q1 of 2020, And our adjusted EBITDA was virtually unchanged at $23,900,000 compared to the Q1 of 2020. The increase in adjusted net income compared to the same period last year is attributable to a reduction in our weighted average interest rate from 4.89% in the Q1 of 2020 to 3.13% in the Q1 of 2021 And a reduction in our weighted average indebtedness from $662,000,000 to $614,000,000 Since our debt refinancing in 2019, our profitability has steadily increased and has now stabilized at current levels With adjusted earnings per common unit of $0.21 for the Q1, reflecting our stable contract based operating platform and financial profile. Slide 5. In line with our strategy of using our cash flow to reduce leverage. For the quarter, we utilized 71% of our adjusted EBITDA to service debt And interest payments. For the quarter, we generated $22,900,000 in operating cash flow, including a positive working capital adjustment of $4,000,000 Excluding working capital changes, operating cash flow for the It was $18,900,000 and after debt service payments and payments to preferred unitholders, we generated $4,000,000 in line with our prior guidance. For the quarter, our cash balance increased by about $9,000,000 to $84,000,000 Due to the aforementioned changes and proceeds of EUR 1,300,000 from issuance of common units under our ATM program. Slide 6. As of March as of end of March, we have BRL 603,000,000 debt outstanding under 1 credit facility, all of which has been hedged with an interest rate swap for the life of the loan until its maturity in September 2024. We have no scheduled capital expenditures until 2022, which is when 3 of our LNG carriers will undergo their 3rd special surveys and installment of a ballast water treatment plans. Slide 7. We are continuing to execute we have organically deleveraging our balance sheet with the cash flows from our contracts, which we believe is the only sustainable way Positioning the partnership for future growth. Compared to the same period 2 years ago before our refinancing in 2019, Our weighted average interest has decreased by 63%, and our weighted average indebtedness has decreased by $108,000,000 which has resulted in a reduction in interest expense of $7,000,000 per quarter. This natural deleveraging process takes time, we expect that as a result of the $48,000,000 amortization requirement on our sole credit facility, our total projected net leverage will decrease from 5.4x to less than 3.5x in 2024 on a steady state basis. Slide 8. In this slide, we show our fleet wide cash flow breakeven per day per vessel versus our contracted time charter rates for the quarter. If you look at the breakdown, we have a competitive cash EBITDA breakeven of $17,000 per day per vessel. Cash interest expense represents $8,900 per day per vessel and repayment of debt is around $22,000 per day. Our contracted fleet time charter equivalent of $60,680 per day per vessel is well above Fleet cash breakeven levels of $48,000 per day per vessel, excluding preferred distributions. That wraps it up from my side. I will pass over the presentation to Tony. Thank you, Michael. Let's move on to Slide 9. Our fleet currently counts 6 LNG carriers with an average age of about 10.9 years. The charters of our vessels are substantial gas producers, Being Equinor, Gasfron and Yamal LNG. The fleet's contract backlog is about $1,120,000,000 Equivalent to an average backlog of about EUR 187,000,000 per vessel, and the fleet's average remaining charter period per vessel is about 7.7 years. Moving on to Slide 10. All the vessels In our fleet, our employees on time charter contracts with asset strong counterparties under which the charter pays all major voyage related variable costs, such as fuel, canal fees and terminal costs. 2 of the vessels, namely the Lena and Yenise River, Our under dry dock and OpEx cost pass through contracts and in general provides protection for reasonable inflation in operating expenses. We are focused on building Chyrem charter coverage and also concluding a new 2 year charter contract with Equinor for the vessel Arctic Aurora. Our earliest potential availability will be in the Q3 of 2023 for the same vessel. The next available vessel after Galactic Aurora Maybe the Clean Energy, which contract expires in 2026. Bar any unforeseen events and vessel scheduled drydockings, Our fleet is 100% employed for the remainder of 2021, 100% for the year 2022 94% for the year 2023. Although our revenues have not been affected by the COVID-nineteen situation as all of our vessels are employed on time contract, we are monitoring the situation and outlook. From an operational point of view, we are taking Let's move on to Slide 11. 5 out of our 6 LNG carriers have been designed, Constructed in accordance with and are assigned with ICE Class 1A FS notation. These LNG carriers are also going to rise down to While the ice class notation is in part concerned with the vessel's hull and machinery and ice breaking capability, Demonstration features are concerned with features that are installed to ensure trouble free operation in subzero areas. Our partnership and our sponsor represent a total market share of about 82% of the global ICE Class 1A Fs Equivalent LNG carrier fleet. Our fleet is frequently calling ice bound in subsea areas, indicating our charters are able to unlock The value of the ice class notation and winterization features. The fleet's typical area of navigation with regards to ice bound and or Subzero areas are the Northern Sea Route where the vessels can operate during summer season, the Sakhalin Island and Northern Norway. As our fleet can perform operations in ice bound, subzero and conventional areas without any significant difference in operating cost Between the two areas, we believe our fleet has a broader market reach compared to the same type of vessels without ice class or winterization Thank you, Chase. Let's move on to Slide 12. We are an established and experienced LNG shipping company known as a reliable service provider able to operate in particularly harsh environments as well as conventional areas. Our fleet is unique and provides for trading versatility. Our focus continues to be on operational performance, which translates into high utilization and cost control. Our vessels are employed on term contracts, which cash flow is largely utilized to organically reduce debt. At the current, we're amortizing our debt with 48,000,000 per annum, and we expect that the reduction of debt will reduce our breakeven cost over time. We The solid contract revenue backlog of DKK 1,120,000,000 and competitive cost of debt will allow us to delever our balance sheet, reinforce our liquidity and generate cash as to build equity value and cash as to build equity value and our cash position over time, which we believe will enhance our ability to pursue future Growth Initiatives. We have now reached the end of the presentation, and I now open the floor for questions. Thank you. Our first question for today is from Randy Giveans from Jefferies. Please go ahead. Ladies and gentlemen, how's it going? Good. Thank you. Hi, Andy. Hey. I guess first question, in the release and even just now in your closing comments, You've talked about some future growth initiatives. So maybe what are some of those potential opportunities? Would it be some large Scale consolidation that we've seen in the space or maybe even selling into that market? Or are you just looking at kind of drop downs from the parent? Well, I think right now, all we can say is that we're Focusing on organically deleveraging the balance sheet, each quarter that passes The partnership is stronger, and it's just better positioned for future growth opportunities. We're not alluding to anything specific. Just We need to position the partnership for whatever future growth opportunities come out. Okay. That's fair. And then with that growth, we're continuing to see ongoing ATM, but it's just like very All numbers, right, dollars 2,000,000 here, dollars 2,000,000 there. Is that the plan, just to continue to slowly trickle out shares and then Why do it here at under $3? Yes. Yes. No, you're right. I mean, we Very small amounts under our ATM program. I think we were doing it primarily to test the waters and to see much money can be raised and what the impact is on the share price? Going Forward, if we are to raise further equity under our ATM program or otherwise, we believe we need to have a pretty good idea Of what the money will be used for. So I think we're going to be reluctant to issue meaningful amounts of equity without some form of identified use of proceeds. Got it. Okay. And then I guess the last question on the preferreds. Clearly, your highest cost of debt, all those preferreds. Any plan on those? Just kind of continuing to keep both the series out there, Maybe growing for an additional preferred or doing the opposite and kind of paying those down? Yes. No, I mean, listen, we do have a lot of Cash on our balance sheet. But to a certain extent, we are insulated Given our contract based operating model, but we do want to retain some free liquidity as a protection In case there's an operational issue or something unexpected occurs, so we're mindful of Initiating a preferred buyback program or buying back the or redeeming a portion of the preferreds. Got it. Good deal. Well, pretty straight and simple. So that's it for me. Thank you. Thank you. Thank you. Thank you, Stevens. Our next question comes from Ben Nolan from Stifel. Please go ahead. Hey, it's Michael. So now that you have a new contract with Equinor, very little Well, no near term market exposure. The debt balance keeps coming down. The cash balances, Michael, you just talked about is rising. I know in the past you had indicated there wasn't really Flexibility into your credit facility, but do you think at some point that could be a conversation to be had The credit profile is really better come against some flexibility that enables us to have conversations about Growth or other things as opposed to sort of being limited under the terms of the credit agreement? Well, we don't want to give false promises. I think that That discussion can be had. We have said in the past that Under the current credit facility, it will be I mean, right now, as you know, it's prohibited. In order To reinstate some form of a dividend, that will be a difficult discussion with the bank. At this particular stage, we feel that, that discussion is if we initiated It's not the right time, and it's not we don't think we would be successful in that discussion. So I think it's a discussion that we can have further down the line as the leverage comes down. I mean, if you look at our leverage, I think it's a bit too high in order to have this We have to be in a position of lower leverage in order to have a discussion. Sure. And honestly, I wasn't even thinking about dividends. That seems like it's a little ways away. I was thinking more about, okay, well, You're talking about future growth and some of these other things. And again, I agree that the leverage probably would maybe It can come down some, but I guess the idea is we've been talking about the credit profile is better. At some point, open the window so that some capital can be We circulated into growth opportunities that maybe you're not allowed to do at the moment, and that's sort of where I was thinking. But Then just to be clear, our credit facility does not prohibit us from growing the company as long as We can comply with the financial. We have some leverage covenants, but there's definitely no restriction on growing the company. Okay. So if the opportunity presented itself, you could buy, let's say, a portion of 1 of the Sponsor vessels today, you met the credit or the covenant restrictions, correct? Yes, that is correct, Sven. Okay. Cool. Well, actually, Tony, I'm curious Or maybe another way to think about that is even on a dropdown. I mean, there's quite a few tenders being talked about in the market. Obviously, The sponsor might be able to participate in those. Any thoughts as to whether that might be something that the partnership, Now that you're not really paying a dividend, you could sort of warehouse growth capital that doesn't necessarily immediately generate cash flows. Any thoughts about Possibly participating in something like that? Yes, Ben, look, I don't think it's impossible that in the future Sure that the company could undertake growth CapEx directly. It is something that is Not being discussed. It's something that we're looking at. But still, we would need to free up more capital and get the leverage down a bit. But yes, that's not an impossibility. And is the group looking at some of these Any opportunities that are in the market? I'm curious. Yes, sure. I mean, I think it's pretty much anything. Yes, for sure. I mean there are many tenders at the moment for various projects. And yes, the A sponsor is looking at it, the wider group is looking at it. And I think, to be honest, pretty much every other LNG Shipowner is looking at it, too. So definitely, there is a lot of new projects on the LNG Sea. I think we've seen the reemergence of a little bit longer charters tied up to Linked to these various projects. So I think energy is a pretty, pretty interesting space at the moment. Yes. Are the returns one of the things we've heard is that the returns are kind of lackluster. How do you find sort of what's being bantered about with respect to return profile on New long term contracts and assets for new projects? Yes. That's a really good question. And of course, most of the projects That we're talking about in general. The commercial offers have not been sent in, so it's kind of early days. So Some of them commercial offers are in. Our general feeling is that returns are better, less competitive than what they used to be. Amortization period of vessels may be shorter. There is Owners want to protect themselves for inflation going forward. So I think what we're seeing is Before having seen any conclusion of any project, it just looks like the market is offering a little bit higher numbers, More conservative, so longer periods, protection of inflation and just more robust charter values in general. Interesting. All right, Tony and Michael, appreciate it. Thank you. Thank you. Thank you. Bye. Thank you. There are no further questions at this time. I will now hand back to Tony Lauritzen, CEO, for any closing comments. We would like to thank you 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 and stay safe. Thank you, sir. Ladies and gentlemen, that does conclude the call. Thank you everyone for joining. You may now disconnect.