Earnings Call: Q1 2020

Jun 5, 2020

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Q1 2020 Financial Results. We have with us Mr. Tomorenza, Chief Executive Officer and Mr. Michael 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, Friday, June 5, 2020. Please be reminded that the company announced its results At this time, I would like to remind everyone that in today's presentation and conference call, Vainagaz LNG Partners will be making forward looking statements. These statements are within the meaning of the federal securities laws. 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. The statements in today's conference call that are not historical facts, including among other things, the expected financial performance of Dynagas LNG Partners Business. Dynagas Partners LNG ability to pursue growth opportunities Dynagas Partner LNG expectations or objectives regarding future and market charter rate expectations and in particular the effects of COVID-nineteen on the financial condition and operation of Dyno Gas Partners LNG and the LNG industry in general, maybe forward looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended. Matters discussed may be forward looking statements, which are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to Slide 2 of the webcast presentation, which has a full forward looking statement, and the same statement was also included in the press release. Please take a note a moment to go through the whole statement and read it. And now I'll pass the floor to Mr. Lorenzen. Please go ahead, sir. Good morning, everyone, and thank you for joining us in Q1 ended 31st March 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. Let's move on to Slide 3. We are pleased to report the results for the 3 months ended March 31, 2020. Each of our fixed LNG carriers are operating under their respective term charters with an average remaining contract term of 8.3 years. Despite the operational challenges the industry is facing with respect to the COVID-nineteen outbreak, we are pleased to report that all of our employees onshore as well as offshore are well and healthy. We are fortunate enough that the impact of the COVID-nineteen outbreak has been operationally manageable due to our managers' effective COVID-nineteen response plan, which has been successfully implemented with the support of our seafarers, charterers, employees and to all, we are grateful to. For the Q1 of 2020, we reported net income of EUR 7,000,000 and adjusted EBITDA of about EUR 23,800,000. The latter, which is in line with our previous estimate of an annualized EBITDA of approximately EUR 95,000,000 and which assume that all of our vessels had been delivered pursuant to their respective long term charters. Our revenues for the quarter were in line with the Q4 of 2019. However, net income increased by 26%, primarily as a result of lower interest expense. As we seek predictability going forward and also pursuant to our general objective to manage cost of debt and reduce debt over time, we have made use of the current historically low interest rate environment and entered into a floating to fixed interest rate swap transaction effective from June 29, 2020, until the existing EUR 675,000,000 credit facility expires in 2024. The swap provides for a fixed 3 month LIBOR rate of 0.41 percent and effective interest rate cost of 3.41 percent, including margin applicable for our outstanding debt. This is a key development in the execution of our strategic plan as it derisks our exposure to interest rates volatility while securing a low cost of debt until 2024. Going forward, we intend to continue to reduce our debt, build equity over time, strengthen our balance sheet and our position for future growth initiatives. We paid in February a quarterly cash distribution of 0 point 5 $6.25 per Series 8 preferred unit for the period from November 12, 2019 to February 11, 2020 and a quarterly cash distribution of 0 point 5 $4.1116 per Series B Preferred Unit for the period from November 22, 2019 to February 21, 2020. Subsequent to the quarter, we also paid in May 2020 a quarterly cash distribution of $0.5625 per Series A preferred unit for the period from February 12, 2020, to May 11, 2020 and a quarterly cash distribution of $0.54 $0.1116 per Series B preferred unit for the period from February 22, 2020, to May 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. Moving on to Slide 4. We are pleased with the Q1 results with our vessels having achieved 99% utilization under their charter contracts. Net income for the quarter increased by 268 percent to €7,100,000 over the Q1 of 2019 and was up 26% over the Q4 of 2019. Our adjusted EBITDA increased by 9% to CHF203,900,000 compared to the Q1 of 2019. The increase is attributed two factors. Firstly, all of our vessels are delivered and trading under their long term contracts at an average daily gross rate of about $63,100 per day per vessel compared to $57,700 per day per vessel for the corresponding period in 2019 in which the Llanowever was trading under a short term contract prior to her delivery to Yamal in July of last year. Secondly, our weighted average interest expense was reduced from 6.74% in the Q1 of 2019 to 4.89% in the Q1 of 2020, resulting in savings of about DKK 4,000,000 in loan interest for the quarter. This was attributable to lower LIBOR interest rates for this quarter compared to the Q1 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 DKK 723,000,000 in the Q1 of 2019 to DKK662,000,000 in the Q1 of 2020. For the quarter, we were marginally cash positive as the cash flow from our long term contracts was utilized to service our amortizing debt and pay distributions to preferred unitholders. Moving on to Slide 5. This slide shows our balance sheet metrics as of the end of Q1 and our scheduled debt repayments over the next years. In light of the current environment, we are extremely pleased we do not have any debt maturities until September 2024. We ended the Q1 with net debt to total book capitalization of 60% and total liquidity of €70,000,000 This amount includes CHF 50,000,000 of restricted cash related to our CHF 675,000,000 syndicated loan. The partnership's credit profile continues to improve with net debt to trailing 12 month adjusted EBITDA of 6.3 times. Our debt figures have and will continue to improve following our global refinancing in which we replaced high interest with low amortization debt with low interest amortizing debt. As previously advised, balance sheet protection is our top priority. Given that we are paying $48,000,000 per annum in principal payments, which is 1.5x our vessel book depreciation and 0.74x our market cap as of yesterday's close, we expect to build equity and balance sheet capacity over time, and we expect our leverage metrics to gradually improve on a steady state basis, improving our breakeven rates. Moving on to Slide 6. This slide provides you with the magnitude of cash savings from lower interest expense as a result of our refinancing in September 2019 and the general decline in LIBOR rates, which culminated with the fixing of all our floating interest rate exposure with an interest rate swap. Just to put things in perspective, prior to our global refinancing, for the Q1 of 2019, we had a weighted average debt balance of BRL 723,000,000 comprising mainly of lower amortizing debt, for which we paid interest expense of $12,200,000 For the Q1 of 2020, we had a weighted average debt balance of 6 $62,000,000 and interest expense of $8,200,000 a reduction of 33% in interest expenses. We have seen a gradual reduction in our interest costs from about 7% in Q1 2019 to 4.89% in the first quarter of this year due to the general reduction of LIBOR rates. Subsequent to the end of the Q1, interest rates fell even further, and we took advantage of a significant drop in swap rates and added it to an interest rate swap transaction for all of our outstanding debt starting from June 29 until our credit facility matures in September 2024, providing for a fixed 3 month LIBOR rate of 0.41 percent, resulting in a fixed effective interest rate cost of 3.41 percent, including the margin, a 50% reduction from the Q1 of last year. For the moment, we have not acquired insurance in case LIBOR rates turn negative, meaning we would have to continue making payments under the interest rate swap if LIBOR rates turn negative, whereas under our credit agreements, we will not be getting the benefit of the negative LIBOR rates. Once the interest rate swap kicks in on June 29, we expect interest expense to amount to around $5,500,000 per quarter compared to $8,000,000 in the first quarter of this year and €12,000,000 1 year ago. Moving on to Slide 7. In this slide, we show our fleet wide cash flow breakeven per day per vessel versus our contracted time charter rates. For presentation purposes, we are utilizing Q1 figures for all metrics except for our interest costs, which we estimate versus the interest expect we expect once our interest rate swap commences on June 29. After payment of debt service, we expect a gradual buildup of cash over time, barring unforeseen events, giving us the opportunity to consider our next steps forward. That wraps it up for me. I will pass over the presentation to Tony. Thank you, Michael. Let's move on to Slide 8. Our fleet currently counts 6 7 gs carriers with an average age of about 9.8 years. We have a diversified customer base with substantial energy companies named Equinor, Gazprom and Yamal LNG, which to latter is a joint venture between Total, CNPC, Novatek and the Silk Road Fund. Our contract backlog is about EUR 1,210,000,000, equivalent to an average backlog of about EUR 202,000,000 per vessel. And our average remaining charter period is about 8.3 years, which compares well versus our peers. Moving on to Slide 9. With Elena Reba delivered into her multi year charter on 1st July 2019 with Yamal LNG, each of our fixed LNG carriers are fully delivered and operating under the respective term charters. Our fleet of LNG carriers are fixed on time charters with key energy companies. Our charters were the characteristics of the fleet, including its ice class notations and our organization's track record. All of the vessels are employed on time charter contracts under which the chase all major voyage related variable costs, such as fuel, canal fees and terminal costs. Our counterparties are mainly asset strong LNG producers that are typically able to forward program the vessels for a period of time, which gives us a certain degree of planning ability and cost control. We estimate our fleet to be 100% contracted in 2020, 92% in 2021 and 83% in 2022. Our earliest potential availability is the Arctic LoRa, which will be available in second half 2021 provided that Equinor does not exercise eruption 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 2026. The current charter market for LNG carriers is challenging, in particular due to the global COVID-nineteen virus situation, which is contributing to decreased LNG demand. We believe the current LNG shipping market may improve going forward, driven by increased industrial outputs and the move toward the winter season when gas is used for heating. Although our revenue have not been affected by COVID-nineteen situation as all of 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 which we thank all people involved for their adherence and diligence. Let's move on to Slide 10. We have a unique and versatile fleet. 5 out of the 6 vessels in our fleet are assigned with Eisbach 1A notation. Therefore, the fleet can handle conventional LNG shipping as well as operate in ice bound and subzero areas. The initial capital expenditure for an ice class vessel is more expensive than conventional carriers. However, we estimate that the operating cost between our ice class type carriers and conventional carriers to be very similar. To our knowledge, the company, together with our sponsor, has a market share of about 82% for vessels with Art IV or equivalent ice glass notation. To our knowledge, there are only 2 other LNG carriers in the world with the equivalent notation, which are charted out in the long term. We view the ability to trade in ice bound areas as an important advantage due to the increased production of LNG in such areas and in particular along the Northern Sea routes. In general, we view the ability to perform conventional and niche operations as an important driver in securing attractive long term charters. Furthermore, our fleet is optimized for terminal compatibility, which we believe is of value to our charters, and the fleet consists of groups of sister vessels that provides for overall better economics, operations, preventive maintenance and redundancy. Let's move to Slide 11. We are a premier LNG shipping company. We're known as a reliable service provider able to operate in harsh environments. Our fleet is relatively young compared with the world average and provides for trading versatility. We are now in the fortunate position of having a fleet of LNG carriers on term contracts whose cash flow can be utilized to organically reduce debt and without any debt maturities until 2024. Given that there is visibility on the earnings for the coming year, barring any unscheduled events, we expect earnings per common unit to be to amount to EUR 0.63 per unit, which equates to a forward PE ratio of 3x based on yesterday's closing price. Based on the same closing price, our current market cap is less than the cash on our balance sheet, which we find noteworthy. We expect that our solid contract revenue backlog and significantly reduced interest rate expense will allow us to slowly start building up cash organically in the tune of about EUR 3,000,000 per quarter. All these factors, we believe, will position the partnership to be stronger in the future, allowing us to consider future growth. We have now reached the end of the presentation, and I now open the floor for questions. Your first question comes from Randy Giveans from Jefferies. Great, great. So you mentioned briefly you're getting paid on all your contracts, 100% utilization, revenue is flat, that's clear. Have there been any changes in fleet functionality, right, with all the production shut ins, some of the high inventory levels in Asia and Europe? Are there more vessels ballasting for longer? Just kind of asking about the operations of the vessels. Yes. Thank you, Ryan. That's a good question. I would say, earlier in the early part of the COVID situation, I would say that there were more interruptions than today. There was a period where we saw many cargoes going into China or originally, they were going to China, were redirected. And it could cause some waiting time until we knew where the discharge port would be, etcetera. Also, there were interruptions in terms of if you had discharged in China, then you couldn't the vessel couldn't call another port until at least 14 days have passed. So clearly, there are disruptions as a result of this epidemic. This will probably continue for a while. But we are seeing that the logistical change is going more smoothly now than what it was previously. And then clearly, the spot market has been pretty volatile, pretty weak now in recent months. How has the market for maybe 3, 5 or up to 7 year time charters responded to that? And then secondly, how will the Qatar order of, I think, those 100 LNG carriers, how do you see that impacting the market in the coming years? Yes. Thank you. Look, definitely, the spot market has been challenging with unhealthy charter rates, to put it that way. What we see now is that although charter rates are low, volume the volume and the activity is quite good. So we don't have any spot vessels in the market. So we don't see day to day exactly what the situation is. Obviously, what we're doing is to prepare going forward for the Arctic Aurora, which potentially comes open second half of next year. That's what we're focused on. So I think that this low LNG charter rates that we see in the spot now, it's also driven by a very low gas pricing environment. When we look at the forward gas prices into the winter when normally there's more gas demand, they are richer and they're better. So we think that the market is going to improve with that. And when it comes to your question, how do we see the 3, 5 7 year markets, I think that also there is some activity picking up. There was a period that, I guess, there was no demand for it. And now we see that there are some discussions. We have not entered into any of these discussions ourselves, but we are starting to hear that there is potentially some long term buying interest again in gas, although we have to caution and say this is still early days. When it comes to the question of the Qatari order, I think that we view that in a positive way. We would potentially have seen projects that would push things out or maybe don't go for FIDs. So I think that what we're seeing now on the Qatari order, important for them to build market share. And that means more product. Of course, they will order ships against this expansion. But at the same time, I don't think that we'll see a lot of speculative orders going forward. I think now that if we look back at the last wave of LNG orders, I think it was almost an all time high in speculative orders. And I mean, there's no reason why projects wouldn't pick those available vessels going forward to their project. Yes. Okay. And then I guess one quick question for you specifically. Slide 6 for Dynagas. I think it looks like there's a $6,000,000 guidance for the Q2. Is this down from the $8,700,000 in the Q1? It's hard to tell the exact numbers on that chart there. Yes, yes. It's down because we fixed at lower rates in the Q1. I mean LIBOR was going down after the Q1 was completed. Yes. So yes, we expect a lower interest expense in the Q2 compared to the Q1. Okay. Because I know the 3,400,000,000 that doesn't start till end of the quarter, right, June 29? Right. Yes. But I mean, we're going to get the benefit of that essentially after June 30, yes. Got it. Yes. All right. Well, hey, thanks, and congrats on that deal. Thank you. Your next question comes from the line of Ben Nolan with Stifel. Hey, thanks. Michael, Tony, hope you guys are well. I wanted to follow-up a little bit on hedge or really the interest rate expense. It looks like subsequent to the hedge taking effect, you guys are going to save, I don't know, somewhere around $10,000,000 a year. First of all, Is that correct relative to where we are now? And then secondly or in conjunction with that, how does that cash savings, which should increase the rate of leverage reduction, how does that change or does it change sort of the timeline as to when you guys can be a little bit more active, looking at maybe growth opportunities or just the pace at which you don't have to be as laser focused on debt reduction? Yes. No, you're right. I mean, listen, I mean, if you look at our Q1 interest, it's around $8,000,000 And then once a swap arrives per quarter, once the swap starts, it's going to be around $5,000,000 $5,500,000 per quarter. So there are some savings there. I mean, the situation is that we're going to build up some free liquidity over our restricted cash, €15,000,000 But it's a slow process. I mean, we are in an environment where we are insulated to a certain extent, we do want to retain some free liquidity as a protection in case there's an operational issue or something unexpected occurs. So how we're doing what we're going to do, it also depends on our valuation. As I said, we have a focus on organically deleveraging. And it's a little too early to discuss the prospects for fleet expansion, given that fleet expansion is going to require an equity component. And this is subject to specific use of proceeds and what our valuation looks like. But we are thinking about what are we going to do with this free liquidity and how we could utilize it to increase unithold value. Okay. Is there any capacity does this hasten your ability to refinance that debt, would you think? Listen, I think this is the probably the cheapest debt that we see public shipping NOPs having, I mean, having a 3.41 percent total cost of debt is something I don't think that is going to be easy to be replicated. So no, we're not looking to refinance our debt because I don't think we're going to be able to get anything cheaper. Yes. I would tend to agree with that. Just to make sure, you said 1st quarter interest was around $8,000,000 So there's, what, dollars 0.75 million or so of other fees that we should model those to continue as well going forward, correct? Yes, yes. Okay. All right. All right, good. And I guess, to that end, while you're a little bit limited in terms of your ability to do anything and sort of longer term, that excess cash flow goes grows but grows slowly. Is there any ability to maybe do a little partial, let's say, buy onefour of a ship from the parent company or something like that? Or is that also still sort of off the table? I think that's it goes back to what we were discussing earlier. Listen, we're our market cap is below $100,000,000 So even a quarter of an LNG tariff, which is a very high value asset. It's something extremely material given where our equity value is being put placed on by the market. So it's a bit of a I can't really respond to you. It is a bit too early to discuss these type of things. We have to see, first of all, where we end up in terms of what the market thinks our equity is worth because that's a crucial component of this discussion. We just can't do all of them as we see it any further. Sure. No, I understand. Well, Michael, hats off to you. I think that is the best interest rate hedge that I have seen. And also, Tony hats off to you that those Gazprom contract renegotiations from a few years ago are looking better and better all the time. So that does it. Thanks a lot, guys. Thank you very much. Thank you. Your next question comes from Liam Burke from B. Riley. Yes. Thank you. You published the cash breakeven rate of the fleet at roughly a little over $50,000 a day. Obviously, you've got a floor or pretty close to a floor in your interest or cash interest expense. Are there any operational benefits that you can read going forward to move that number down? Not really. I mean, there could be a slight variation up or down, but I don't think it's going to have a material effect. Okay. And I just want to verify, you have no dry docking until 2022? Yes, correct. Yes. So from until 2022, you have no meaningful CapEx to bounce off your operating cash flow from operations. Is that right? Yes, correct. Okay, great. Thank you. All right. Thank you very much. I will now turn the call back over to Mr. Tono Larrizanet. Okay. If there are no further questions, then 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.