Earnings Call: Q3 2020

Nov 13, 2020

Welcome to the Dynagas LNG Partners Conference Call on the Third Quarter 2020 Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer and Mr. Michael Grevos, 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. I now will pass the floor to Mr. Lauritzen. Please go ahead, sir. Good morning, everyone, and thank you for joining us in our 3 9 months ended 30 September 2020 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. Moving on to Slide 3 of the presentation. We are pleased to report the results for the 3 months 9 months ended 30 September 2020. All 6 7 gs 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 Q3 of 2020. The ongoing impact of COVID-nineteen has so far been operationally manageable due to our manager's COVID-nineteen response plan, which has been implemented with the support of our seafarers, charterers and employees for which we are grateful. For the Q3 of 2020, we reported net income of $10,000,000 earnings per common unit of $0.20 adjusted EBITDA of $24,300,000 and adjusted earnings per common unit of $0.21 When compared with the same period in 2019, this improved performance is attributable to an increase in voyage revenues and a decrease in interest and finance costs coupled with stable vessel operating expense. In August 2020, we entered into an at the market offering program pursuant to which the Partnership may offer and sell common units having an aggregate offering price of up to €30,000,000 of its common units. We expect that the ATM will be utilized selectively and to date, the partnership has issued and sold 122,580 common units, resulting in net proceeds of about €400,000 under this ATM program. We paid in August 2020 a quarterly cash distribution of €0.5625 per Series A preferred unit for the period from May 12 to August 11, 2020 and a quarterly cash distribution of $0.54.1116 per Series B preferred unit for the period from May 22 to August 21, 2020. Subsequent to the quarter, we paid in 2020 a quarterly cash distribution of $0.5625 per Series A preferred unit for the period from August 12 to November 11, 2020 and declared a quarterly cash distribution of $0.54 and 11.16 per Series B preferred unit for the period from August 22 to November 21, 2020 to be paid on or about November 23, 2020. Going forward, we intend to continue our strategy of using our cash flow generation to delever our balance sheet, reinforce liquidity and generate cash, so 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. Turning to Slide 4. We are pleased with the 3rd quarter results. Net income for the quarter increased by close to 3 13 percent to $10,000,000 over the Q3 of 2019. Our adjusted EBITDA increased by 1.7 percent to $24,200,000 compared to the Q3 of 2019. The improvement in our financial performance compared with the same period last year is attributable to the reduced financing costs following our transformative debt refinancing in the Q4 of 2019. Turning to Slide 5. Since our debt refinancing, our profitability has steadily increased and has now stabilized at increased levels compared to prior quarters with adjusted earnings per common unit of $0.21 for the 3rd quarter, reflecting the stable nature of our contract based operating model and the limited variability of our operating and finance expenses, our weighted average interest expense was reduced from 6.5% in the Q3 of 2019 to 3.27% in the Q3 of 2020, reflecting lower LIBOR rates and decreases in our weighted average indebtedness from 7.30 $4,000,000 in the Q3 of 2019 to $639,000,000 in the Q3 of 2020. Our primary focus right now is the organic deleveraging of the balance sheet. Moving on to Slide 6, for the quarter we generated $27,600,000 in operating cash flow, including working capital changes. Excluding working capital changes, we generated operating cash flow of $18,900,000 and cash flow after debt service payments, other financing items and payments to preferred unitholders amounted to $4,000,000 in line with our prior guidance. For the quarter, we increased our cash balance by $12,800,000 to $76,000,000 Slide 7, this slide gives you a snapshot of certain financial metrics. As of the end of September, we had $627,000,000 debt outstanding under one 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. Our leverage metrics continue to decline with net debt to trailing last 12 months EBITDA of 5 point 7 times and are expected to continue to decline as we repay $48,000,000 in debt per annum. We have no scheduled capital expenditures until 2022, which is when 3 of our LNG carriers will undergo their special surveys. Our stable operating model has proved resilient in light of the COVID-nineteen pandemic. We project for the year adjusted earnings per common unit to amount to about $0.71 assuming no common unit issuances under our ATM program, resulting in a projected 2020 earnings multiple of 3.4x based on the current common unit price. Moving to slide 8, we are continuing to execute our strategy of organically deleveraging our balance sheet with our contracted cash flows, which has resulted in a drastic 55% reduction in interest expenses in Q3 2020 versus Q3 twenty nineteen. We expect that as a result of the amortization requirement on the Krotz facility, our total projected net leverage will decrease from 5.7 times to 3.5 times in 2024 on a steady state basis and assuming the Arctic Aurora is renewed at rates similar to its current contract. This deleveraging exercise will require some patience as we deleverage equity value will increase over time, positioning the partnership for the next deck, including future growth. Moving on to Slide 9, in this slide, we show our fleet wide cash flow breakeven per day per vessel versus our contracted time charter rates for the quarter. Our fleet cash breakeven rate for the quarter amounted to $48,300 per day per vessel versus our $61,000 per day per vessel contracted rates. That wraps it up from my side. We will continue the presentation with Tom Vergheme. Thank you, Michael. Let's move on to slide 10. Our fleet currently accounts 6 LNG carriers with an average of about 10.3 years. We have a diversified customer base with substantial gas producers, namely Equinor, Gazprom and Yamal LNG. The fleet's contract backlog is about SEK 1,150,000,000 equivalent to an average backlog of about SEK 192,000,000 per vessel. And the fleet's average remaining charter period per vessel is about 7.9 years. 5 out of the 6 vessels in our fleet are assigned with Ice Class 1A FS notation and winterization features. Therefore, the fleet can handle conventional LNG shipping as well as operate in ice bound and subzero areas. In general, we view the ability to perform conventional and niche operations as an important driver in securing attractive long term charters. Moving on to Slide 11. All the vessels in our fleet are employed on time charter contracts with asset strong investment grade 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 Yenisei River, are under drydock and OpEx cost pass through contracts, that in general provides protection for reasonable inflation in operating expenses. Based on the charter coverage and bar any unforeseen events and not taking into account scheduled dry dockings, the fleet is estimated to be 100% contracted in 2020, 92% in 2021, 83% in 2022, which remains unchanged until 2026. Our earliest potential availability is the Arctic Aurora, which will be available in the Q3 of 2021, provided that Equinor does not exercise their option to extend the contract. The next available vessel after the Arctic Aurora may be the Clean Energy, which contract expires in 2026. Although the charter market for LNG carriers has been challenging in Q2 and Q3 of 2020, in particular due to the global COVID-nineteen situation, the prompt LNG shipping spot market has improved substantially, driven by a decline in cancellation of U. S. Cargoes, improved gas pricing and moving closer toward the winter season when gas is typically used for heating. The positive pricing differential between Pacific Gas and European gas prices are relatively large for prompt and nearby gas. However, forward gas prices suggest this arbitrage is coming off from January, February 2021. As a result, there is high demand and high charter rates offered in the spots to very short term markets. However, less liquidity and lower charter rates offered for longer and forward starting time charters. Although our revenue have not been affected by the COVID-nineteen situation, as all our vessels are employed on term contracts, we are monitoring the situation and outlook. From an operational point of view, we are taking strict measures to protect our seafarers, office staff and other stakeholders along the logistics chain. So far, we have not had any seafarers on board testing positive to COVID-nineteen, which we thank all involved for their adherence, patience and diligence. Let's move to slide 12. 5 out of the 6 LNG carriers have been designed, constructed in accordance with and are assigned with ICE Class 1AFS notation being equivalent to an Arc IV notation. These LNG carriers are also winterized down to minus 30 degrees. While the ice class notation is in part concerned with the vessel's hull and machinery and ice breaking capability, the winterization features are concerned with features that are installed to ensure trouble free operation in subzero areas. Our partnership and our sponsor represents a total market share of about 82% of the global Art IV equivalent LNG carrier fleets. Our fleet is frequently calling ice bound and subzero areas indicating that 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 or subzero areas are the Northern Sea Route where the vessels can operate during summer season, typically from July to November, 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, we believe our fleet has a broader market reach compared to our peers. Moving on to Slide 13. Our operating costs have been relatively competitive and stable since the inception of the partnership, while our utilization has stood at levels above 95% during the same period. The combination of and further give evidence of a well performing manager and and further give evidence of a well performing manager and enables the Partnership to maximize the available income from the charter contract. Moving on to slide 14. 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 are amortizing our debt with SEK 48,000,000 per annum and we expect that the reduction of debt will reduce our breakeven cost over time. We expect that the solid contract revenue backlog of SEK 1,150,000,000 and significantly reduced interest rate expenses would allow us to de level our balance sheet and reinforce our liquidity so as to build equity value 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 very much. Ladies and gentlemen, we will now begin the Q and A session. Our first question for today is from Ben Nolan from Stifel. Please go ahead. Yes. Good afternoon, guys. So I wanted to ask a quick question on the Arctic Aurora. Obviously, it's one of the only moving parts. Appreciating that you don't or there is time yet before Equinor needs to declare their option, but was hopeful that or could you maybe elaborate a little bit on the option? Is it at the same price or charter rate as the existing contract? Or is there a little bit of a step up in the rate? Yes, I can comment on that. The options are priced at an escalated price. The price of the auction is, I would say, a good step up from where the charter rate is today. That being said, of course, it all depends on markets, if Equinor will declare this or not. And there is still plenty of time to go. Okay. But in today's market, you would probably foresee some sort of maybe a new contract with a longer duration or something like that rather than probably them exercising the option. Is that sort of the fair way to think of it? Yes. Look, I mean, as I kind of alluded to in our in the prepared remarks, I mean, what we're seeing now is that we see a very strong spot market, but that strong spot market is partly driven by the price arbitrage between Pacific Gas and Atlantic Gas, which is that arbitrage is very strong now. But the forward pricing does not support the same level of charter rates as we see today. So given that the Arctic Aurora comes open in Q3 of next year, yes, as it stands right today, we do not expect the same market conditions in Q3 as there is in the spot market today. So I think it's a reasonable assumption that you make. Okay. Good. And then just I'm curious on the private side, maybe as it relates to the long term prospects for the partnership. Have you guys you have been very active with Yuval and the Arctic LNG2 tendering is progressing. Obviously, it's a bit different than the first one, but was curious whether or not that is an area of interest to the group and maybe something that could potentially add to the long term pipeline? Yes. Thank you. Definitely, it is something that is of interest to the group. That being said, I'm just judging from what we read in the newspaper and disclosed information. It seems like most of the ARC7 LNG contracts will go to the Smart LNG, which is this joint venture between Novatek and SovComflot. So, I think that the opportunities for ARC7 LNG carriers are very remote for the group. That being said, we think that there may be potential opportunities conventional shipping side or the lighter ice class vessels that would be required potentially for the buyers of Arctic LNG to volumes. Okay. And then lastly for me, it looks like you've slowed down any ATM selling. Should we assume or for modeling purposes that at the current price you're not or you don't anticipate being active on the ATM program unless maybe there's a better price? Yes, yes, Ben. That is a correct assumption, yes. I can't see us issuing equity at these prices. Okay. All right. That does it for me. I appreciate it, guys. Thank you. Thank you, Ben. Thank you very much. Our next question is from Randy Giveans from Jefferies. Please go ahead. Howdy, gentlemen. How's it going? Hi, Randy. Great. Obviously, not really many moving parts here. So just looking at the cash on hand, looking at the kind of goal to further delever the balance sheet, all of these things, your weighted average interest rate, as you show on Slide 8, is 3.25%, 3.5%. Why not just more aggressively repurchase some of these preferreds that are yielding, I don't know, 11% in the market? Yes. No, thanks, Randy. That's a great question. Listen, our credit facility currently only permits us to buy back preferreds from proceeds from the ATM program. So we can't use existing cash, organic cash, which is sitting on the balance sheet to repurchase the preferreds. That's the way that the credit facility is currently structured. But if we can raise meaningful amounts under our ATM program at price that makes sense, then definitely the first use of coal season, we believe, would be buying back the preferred. So that's something which is higher on the top. Well, can you either amend the current facility or maybe take a second lien against something to free up some capital? Well, we did amend it because there was a blanket prohibition of buying back the preferred. So we amended it to be able to buy back the preferred with proceeds from the ATM. Got it. Well, that yes, as you just mentioned 3 minutes ago, the ATM is not really an attractive offering here at these unit prices. Yes. Yes. All right. Well, I guess the steady as she goes. All right. That's it for me. Thank you. Thank you. Thank you very much. There are no further questions at this time. So I'll hand the floor back to CEO, Tonya Lauritzen, to conclude the conference call. Thank you, sir. Well, we would like to 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 and stay safe. Ladies and gentlemen, that does conclude the call. Thank you everyone for joining. You may now disconnect.