Earnings Call: Q2 2020

Sep 4, 2020

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Q2 2020 Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer and Mr. Michael Gregos, Chief Financial Officer of the company. At this point, 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 now I will pass the floor to Mr. Lauritzen. Please go ahead, sir. Good morning, everyone, and thank you for joining us in our 3 6 months ended 30 June 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. We are pleased to report the results for the 3 months 6 months ended 30 June 2020. Each of our 6 LNG carriers are operating under their respective term charters. For the Q2 of 2020, we reported net income of CHF 6,400,000 and earnings per common unit of CHF 0.10 after accounting for CHF 3,400,000 in non cash mark to market interest rate swap losses. Adjusted net income and adjusted EBITDA were reported at $9,900,000 and about $24,100,000 respectively, and adjusted earnings were reported at DKK0.20 per common unit, excluding non cash mark to market interest rate losses. This improvement performance is attributable to an increase in voyage revenues and a decrease in interest and finance costs compared to the corresponding period of 2019, coupled with stable vessel operating costs during this period. 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 Q2 of 2020. The ongoing impact of COVID-nineteen has been operationally manageable due to our manager's COVID-nineteen response plan, which has been implemented with the support of our seafarers, employees and charterers for which we are grateful. In August 2020, we entered into an aftermarket offering program pursuant to which the partnership may offer and sell common units having an aggregate offering price up to SEK 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 EUR 400,000 under this ATM program. Going forward, we intend to continue our strategy of using our cash flow generation to delever our balance sheet, reinforce our liquidity and generate cash so as to build equity over time, which will enhance our ability to pursue future growth initiatives. We paid in May 2020 a quarterly cash distribution of 0 point 5 $6.25 per Series 8 preferred units for the period from February 12, 2020 to May 11, 2020, and a quarterly cash distribution of 0.54 dollars.1116 for Series B Preferred Unit for the period from February 22, 2020 to May 21, 2020. Subsequent to the quarter, we also paid in August 2020 a quarterly cash distribution of $0.5625 for Series 8 preferred unit for the period from May 12, 2020 to August 11, 2020 and a quarterly cash distribution of 0 point 5 $4.1116 per Series B preferred unit for the period from May 22, 2020, to August 21, 2020. 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 2nd quarter results. Net income for the quarter increased by close to 611 percent to 6,400,000 dollars over the Q2 of 2019. Net income includes a non cash unrealized mark to market loss of 3 point $4,000,000 on our interest rate swap, which if excluded, along with other minor non cash items, results in adjusted net income of $9,900,000 up 39% over the prior quarter and up 11 times over our Q2 2019 adjusted net income. Our adjusted EBITDA increased by 15% to $24,000,000 compared to the Q2 of 2019. Moving to Slide 5, the improvement in our financial performance compared with the same period last year is attributable firstly to all of our vessels having been delivered and trading without downtime under their long term contracts at an average daily gross rate of about $62,200 per day per vessel compared to $55,100 per day per vessel for the corresponding period in 2019 and secondly, due to reduced financing costs. Our weighted average interest expense was reduced from 6.73% in the Q2 of 2019 to 3 point 4 9% in the Q2 of 2020, resulting in cash interest savings of about $6,400,000 for the quarter. This was attributable to lower LIBOR interest rates for this quarter compared to the Q2 of 2019. The reduction in the margin we are paying on our new $675,000,000 credit facility compared to our prior debt instruments and a decrease in our weighted average indebtedness from $722,000,000 in the Q2 of 2019 to $651,000,000 in the Q2 of 2020. Full utilization and stable operating expenses have also contributed. And as a result, our profitability has been on a positive trajectory the last couple of quarters due to the aforementioned reasons with an improvement from an adjusted loss of $0.06 per common unit in Q2 2019 to an adjusted earnings per common unit of 0 point excluding working capital changes, we were cash positive as the cash flow from our long term contracts was utilized to service our amortizing debt and pay distributions to preferred unitholders. For the quarter, we generated $8,100,000 in operating cash flow compared to $7,000,000 in Q2 2019 and after debt service and distributions to preferred unitholders, we generated $3,500,000 for the quarter excluding working capital changes. From 29th June of this year, our 3.41 percent including the margin interest rate swap became effective, which translates to quarterly cash interest expense of approximately $5,500,000 $22,000,000 annualized. And to put this number in perspective, for the full year of 2019, our cash interest expense amounted to $46,000,000 with these savings giving us the ability to amortize debt and reduce our leverage. Moving on to Slide 7. This slide shows our balance sheet metrics as of the end of Q2 and our scheduled debt repayments over the next years. We do not have any debt maturities until September 2024, giving us the time to consider our strategy going forward and how to maximize shareholder value on a sustainable basis. We ended the 2nd quarter with a net debt to total book capitalization of 60% and total cash of 63,000,000 This amount includes $50,000,000 of restricted cash related to our $675,000,000 credit facility. The partnership's credit profile continues to improve with net debt to trailing 12 month adjusted EBITDA of 6 times. Our debt figures and our cash breakeven levels have and will continue to improve and same time next year, we expect our net debt to last 12 months EBITDA to come down to 5.5 times as we continue to repay $48,000,000 per annum in principal payments. Moving on to 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. Despite the significant reallocation of cash flow towards debt reduction, our lower cost of financing results in attractive cash breakeven rates of below $50,000 per day per vessel versus our $61,000 per day per vessel time charter equivalent. To put this reallocation of cash flow in perspective, in Q2 2019, our total debt service per day was $24,500 per vessel, out of which $22,300 per day was the cash interest expense, whereas in Q2 of 2020, our per vessel debt service was about $32,500 per day, out of which debt repayments are about $22,000 per day and cash interest expense is about $10,500 per day. 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 10.1 years. We have a diversified customer base with substantial gas producers, namely Equinor, Gazprom and Yamal LNG. The fleet's contract backlog is about €1,180,000,000 equivalent to an average backlog of about €197,000,000 per vessel and the fleet's average remaining charter period per vessel is about 8.1 years. We have a unique and versatile fleet. 5 out of the 6 vessels in our fleet are assigned with ICE Class 1A notation. Therefore, the fleet can handle conventional energy shipping as well as operate in ice bound 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 10. All the vessels are employed on time charter contracts under which the charter pays all major voyage related variable costs, such as fuel, penalties and terminal costs. 2 of the vessels are under OPEC's cost pass through contract and in general provides for protection for inflation in operating expenses. Our counterparties are mainly after strong LNG producers that are typically able to forward program the vessels for periods of time, which gives us a certain degree of planning ability and cost control. 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. So far, the vessel has served Equinor with good feedback and results. The next available vessel after the Arctic Aurora may be the Clean Energy, which contract expires in the year 2026. Based on current charter coverage and bar any unforeseen events and not taking into account scheduled drydockings, the fleet is estimated to be 100% contract in 2020, 92% in 2021 83% in 2022, which remains unchanged until 2026. Although the charter market for LNG carriers has been challenging, in particular due to the global COVID 19 situation, which has contributed to decreased LNG demand, we have seen some improvements in the current LNG shipping spot market, driven by a decline in cancellations of U. S. Cargoes, improved gas pricing and potentially moving closer towards the winter season when gas is typically used for heating. We are monitoring how and if this improvement will affect the long term market going forward. Although our revenue had 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 testing positive to COVID-nineteen, which we thank all involved for their adherence, patience and diligence. Let's move to Slide 11. We are and have been focused on securing long term charter contracts in order to benefit from stable income, high utilization and minimizing working capital requirements with regards to bunkering costs. In Q4, twenty thirteen, our average remaining charter period was 3.2 years, which peaked in Q3, 2016 at 11 years and which is currently standing at 8.1 years. Compared to employing our fleet on the spot market, our strategy has by far outperformed in terms of income and although not shown in the graph, utilization. We also believe the strategy to employ the vessels on term contract has minimized our working capital requirements as under the spot market, the fuel remaining on board, completion of a charter typically has to be repurchased by the owner. Given the results, we will continue to pursue our strategy of operational excellence that puts us in a position to pursue term charters as first priority. Moving on to Slide 12. Our operating expenses have been relatively stable from inception of the partnership, highlighting our focus on managing our cost base while preserving a safe and effective fleet. Our utilization since inception has stood at levels above 95%. The combination of high utilization rates and competitive operating expenses gives evidence of a well performing manager and enables the partnership to maximize the available income and profit margins available from the charter contracts. Let's move to Slide 13. We are an established and experienced LNG shipping company known as a reliable service provider able to operate in particularly harsh environments. Our fleet is unique and provides for trading versatility. Our focus has always been and continues to be on operational performance, which translates into high utilization, cost control and stable income. Our vessels are concluded on term contracts whose cash flow can and is largely utilized to organically reduce debt. At the current, we're 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 CHF 1,800,000,000 and significantly reduced interest expense will allow us to start building up cash organically. All of these factors we believe will allow us to delever our balance sheet, reinforce our liquidity and generate cash so as to build up equity value over time, which will enhance our ability to pursue future growth initiatives and navigate through a market with potentially competitive gas pricing. We have now reached the end of the presentation, and I now open the floor for questions. Thank you, ladies and The first question comes from the line of Randy Giveans from Jefferies. Please ask your question. Randy, your line is open. Please ask your question. Howdy, gentlemen. How's it going? Hi, very good. Thank you. Excellent, excellent. All right. Two questions for me. I guess, first on the ATM program. Do we have plans for that in terms of timing or expected use of proceeds? And with that, could that be used to maybe offset or repurchase some of the preferreds, which are trading at a relatively steep discount? Or would that only be to build the balance sheet for additional dropdowns? Yes. No, that's a great question, Randy. Well, I think the ATM program, it's going to be used very opportunistically and selectively. I mean, we've already had it 1st July. We haven't raised that much money. We are very mindful of the price at which we're going to raise the money and dilution. So I think the intent of the ATM is give us the opportunity to raise the capital opportunistically when we believe the timing and the pricing is reasonable. Now you're absolutely right. I think the money that will be raised, probably right now, the best use of proceeds is the buyback of the preferred. So we do expect that that would be a very good use of proceeds. Now as far as timing is concerned, as I said, we don't know. It depends and depends on where the share price is and how we feel if it's the right time to issue shares. Got it. Okay. And then I guess second question, for the Arctic Aurora, when does that option have to be declared or rejected? Kind of expected rate in the recharter market if that option is not exercised? Yes. Thank you, Randy. These are good questions. When it comes to the exact timing of the option, I don't think we have communicated what it is for the reason that potentially there will be competition for the extension. That being said, options are typically declarable, let's say, 3 to 9 months prior to the expiration of the firm period. So it won't be too long until we have to start thinking about what to do. When it comes to the rate expectations, this is also too early for us to think about. We have seen a Q2 of this year, which was pretty bad when it comes to charter rates. This obviously was driven partly by a lot of LNG around and disruption on the demand side due to COVID. So that being said, what we've seen now in the last few weeks, I think it started in kind of August onwards, is an improvement in the spot chartering market. That is driven by a decline in cancellations, improved gas pricing and higher demand. So we've seen a pretty significant improvement on the spot side. I cannot say that we have seen this affecting the term market yet, and I don't think it's been tested so much. So we're going to wait until the end of the year or well into next year before we start marketing the vessel. Got it. Okay. Well, I will check-in later then. Thanks for the time. Thank you. Thank you. Thank you. Next question comes from the line of Ben Nolan from Stifel. Please ask your question. Hey, good morning guys. So I have a couple. One I wanted to follow on to Randy's question as it relates to the potential of buying back to preferreds or using the ATM proceeds to be able to do that. I'm curious if there are any restrictions in the in your covenants of your loan agreement that prohibit cash being used for preferred buybacks or are you available to do that with cash flow in excess of your minimum required liquidity? Well, we're permitted to use proceeds of the ATM to buy back the preferreds. We cannot buy back the preferred with existing cash on hand. So yes. Okay. No, that's very clear and helpful. Appreciate that, Michael. My next question is sort of bigger, longer term, big picture. Obviously, the sponsor still has quite a lot of LNG exposure and I don't know what sort of the future aspirations are there to grow it or not. But from a big picture perspective, how do you think the partnership here sort of fits into that broader portfolio of LNG? Is it still sort of an integral part of the big long term plan? And are there future longer term aspirations, obviously not in the moment, but longer term aspirations of continuing to drop down assets? Or do you think that maybe those are taking different paths, the sponsor and the partnership? Thank you, Ben. So as we've communicated, we've made a very conscious decision putting the company on a path towards reducing debt and building equity value over a period of time. And so far that strategy seems to be working well. We do not have the means at present to acquire a vessel or a significant fractional one from the parent. That is why we are focused on reducing our debt going forward. So as an alternative to that and it's exactly as we said, it could be to utilize the ATM selectively and opportunistic. And from the proceeds of that, to potentially buy back some preferreds and thereby reducing our cost of capital. So look, our strategy may be a bit maybe appear a bit boring at present. However, conscious and steady building of equity value over time is very restrictive of what we're doing. Right. And I appreciate that. And I guess the question is less about sort of now. And I think it's pretty clear that you're limited in your options at the moment. But maybe Tony, if you could talk to the aspirations of Dynacom, the parent, to continue to grow and to build on the LNG side, if that is the aspiration. And longer term, is it still the focus of the group to eventually after the balance sheet is sorted out, to eventually incorporate Dynagas partners into that growth strategy? Yes, right. Thank you, Ben. Look, on the parent side, there is still very much an interest to continue to grow in the LNG sector. And as you know, some time ago, some new buildings were placed in Hyundai for some larger vessels. So I think that underpins the ambition to continue to grow in the market. I mean, of course, for the partnership, at some point, we have to grow, too. That is just a question of time. But yes, of course, the aspiration is to grow over time. Okay. All right. I appreciate it. Thanks, guys. Thank you. You. There don't appear to be any further questions. If I can hand the conference back to the CEO, Tony Lauritzen. Please go ahead. Yes. Thank you to everyone for listening in on our earnings call. We look forward to speak to you again on our next call. And in the meantime, stay safe. Thank you very much. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.