Earnings Call: Q3 2019

Nov 22, 2019

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Q3 2019 Financial Results. We have with us Mr. Tony Lauritzen, 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 the conference is being recorded today. And at this time, I would like to read the Safe Harbor statement. The 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. Vestas 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 pass the floor to Mr. Lauritzen. Please go ahead, sir. Good morning, everyone, and thank you for joining us in our Q3 ended 30 September 2019 earnings conference call. I'm joined today by our CFO, Gregos. We have issued a press release announcing our results for the said period. Certain non GAAP measures will be discussed for this call. Have provided a discussion 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 to review the quarter and subsequent highlights. Our underlying charter business remains healthy with our fleet of 6 7 gs carriers all contracted on charters to international gas producers with an estimated average remaining contract term of about 8.9 years. The operational performance of the fleet was good and reported utilization was 99%. The partnership reported a net loss of $4,700,000 for the quarter after accounting for a $7,500,000 one time non cash write off from the accelerated amortization of deferred fees due to the early prepayment of the Term Loan B. Adjusted net income and adjusted EBITDA for the quarter were reported at $2,800,000 23,800,000 respectively and a distributable cash flow of $7,000,000 Total cash was recorded at $317,600,000 and available liquidity of $47,600,000 each as of September 30, 2019, which the latter includes the $30,000,000 revolving credit facility provided by our sponsor. On September 25, 2019, the partnership successfully closed and funded a syndicated 5 year $675,000,000 senior secured term loan with leading international banks, which together with cash on hand was used to refinance all of the partnership's existing indebtedness under the Term Loan B and the unsecured notes. The full amount of this credit facility was drawn on 25th September 2019 and the partnership's senior secured term loan B was repaid in full on the same day. And subsequent to the quarter, the $250,000,000 aggregate principal amount of the 16 quarter unsecured notes was repaid in full on its maturity on October 30, 2019. We paid in November a quarterly cash distribution of $0.5625 per Series 8 preferred unit for the period from August 12, 2019 to November 11, 2019 and the quarterly cash distribution of $0.54 $11.16 per Series B preferred unit for the period from August 22, 2019 to November 21, 2019. As a result of the partnership's new financial profile with a significant increase in amortizing debt, we expect to reduce debt over time and further expect that the partnership will be better positioned for future growth initiatives as we expect global LNG markets to continue to grow. I will now turn the presentation over to Michael, who will provide you with further comments to the financial results. Thank you, Tony. Moving to the financial results on slide 4. As shown on slide 4, our revenue for the 3rd quarter of 2019 increased by $3,000,000 to $34,300,000 compared to $31,300,000 Q3 of 2018. The increase was mainly due to the delivery of the Lena River on her 15 year contract to Yamal on July 1, following which this is the 1st calendar quarter that all of our LNG carriers have entered their long term contracts. Adjusted EBITDA for the Q3 of 2019 was $23,800,000 in line with our previous estimate that once all of our vessels entered their long term contracts, our expected annual EBITDA would amount to about $95,000,000 dollars Average daily hire per vessel for the quarter was about $62,000 per day and we expect this to be our run rate gross cash time charter rate per vessel until Q3 2021, which is when the Arctic Aurora is expected to be redelivered to us unless the charter Equinor exercises the first of the 2 1 year optional periods. For the quarter, we experienced an increase in vessel daily operating expenses to $13,500 per day per vessel from $11,600 per day per vessel in Q3 2018, primarily because of higher scheduled maintenance expenses and higher crew wages for certain of our LNG carriers. We also believe that operating expenses, which were abnormally low last year due to the fact the vessels had freshly passed their 5 year mandatory special surveys and dry docks will revert to the historical averages, which were about $12,000 per day per vessel for the steam turbine vessels and around $13,000 per day for the Arctic Aurora. The remaining 2 LNG carriers are contracted on an operating cost pass through basis, meaning the charters pay for actual operating expenses reasonably incurred. With all of our vessels having passed our dry docks in 20 17 2018, we expect all of our vessels barring on scheduled off hire days to be generating revenue on an uninterrupted basis until their next dry docks in 20222023. Moving on to Slide 5, we are extremely pleased with the closing of our 6 $75,000,000 senior secured term loan, which along with cash on hand refinanced the remaining balance of $470,000,000 under our senior secured term loan B at the 33% reduced interest cost and our $250,000,000 unsecured notes, which were repaid on the maturity date of October 30. Today, our total debt outstanding stands at $675,000,000 a reduction of $45,000,000 compared to the prior quarter. We believe this global refinancing with an international syndicate of 1st class commercial banks is a testament to the quality of our expected long term cash flow and operational and reputational excellence. Following this refinancing, we have increased our annual debt amortization to 7% of total debt outstanding from less than 1% of total debt prior to this refinancing. We believe this aggressive delevering of the balance sheet is expected to create equity value to common unitholders over time, and we expect that they will provide the partnership with greater financial flexibilities. To put things in perspective, on the extent of deleveraging, our debt will be amortizing by $48,000,000 per year, whereas our current equity market capitalization amounts to $74,000,000 In addition, on a steady state basis, we expect to reduce our financial leverage based on our current run rate EBITDA of $95,000,000 from 7.1 times currently to 5.5 times in 2022 and assuming the partnership maintains the current run rate EBITDA through that period and in particular when the Arctic Aurora is re contracted as early as 2021. This refinancing is also expected to generate significant cash savings through our interest expense, which we estimate indicatively from close to $50,000,000 per year pre refinancing to about $32,000,000 per annum post refinancing basis current LIBOR levels. Moving to Slide 6, I will briefly discuss key balance sheet data as of September 30. Long term debt was 9 $1,000,000 including the $250,000,000 unsecured notes, which were repaid in full on October 30. We had total cash of $317,000,000 out of which $250,000,000 was utilized to repay in full the partnership's unsecured notes at their maturity on October 30 and $50,000,000 was restricted cash pursuant to the terms and conditions of the new EUR 675,000,000 term loan. Our net debt to book capitalization is 51%. Moreover, we have no debt maturities until the Q3 of 2024. To conclude, even though we usually do not comment on our valuation, we do find it noteworthy to mention that according to current consensus estimates for 2020, it appears we are trading at about 4 times forward earnings. That wraps it up from my side. I will pass the presentation over to Tony. Thank you, Michael. Let's move on to slide 7. Our fleet currently counts 6 LNG carriers with an average age of about 9.3 years. We have a diversified customer base with substantial energy companies, namely Equinor, Gazprom and Yamal LNG, which the latter is an international joint venture between Total, CNPC, Novatek and the Silk Road Fund. Our contracted backlog is about $1,290,000,000 equivalent to an average backlog of about $215,000,000 per vessel. And our average remaining charter period is about 8.9 years, which compares very well versus our peers. Moving on to slide 8. With the Lena River being delivered into our multiyear charter on 1st July 2019 with Yamal LNG, each of our 6 LNG carriers are now fully delivered and operating under their respective term charters. Our fleet of LNG carriers are fixed on time charters with key energy companies. We believe that drivers for our charters were the characteristics of the fleet, including its ice class notations and our organizations and operational performance track record. All of the vessels are employed on time charter contracts, under which the charter pays all major voyage related variable costs, such as fuel, canal fees and terminal costs. Our counterparties are mainly asset strong LNG producers, but are typically able to forward program the vessel 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 2019, 100% availability is the Arctic Aurora, which will be available in 2020 availability is the Arctic Aurora, which will be available in 2021 provided that Equinor does not exercise erosion 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. Let's move on to Slide 9. 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 LNG shipping as well as operating nice bound and subzero areas. The initial capital expenditure for an I Class vessel is more expensive than conventional carriers. However, we estimate the operating cost between our I Class type carriers and conventional carriers to be similar. To our knowledge, the company together with our sponsor has a market share of about 82% for vessels with Ice Class 1A or equivalent Ice Class notation. To our knowledge, there are only 2 other LNG carriers in the world with the equivalent notation, which are charter 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 along the Northern Sea routes. To our knowledge, Yamal LNG is producing at close to full capacity at their mega projects and we also expect further projects to be developed in that region such as Arctic LNG 2. 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 10. We are a premier LNG shipping company renowned as a reliable service provider able to operate in extremely harsh environment. Our fleet is relatively young compared with the world average and provides for trading versatility. The new financial profile of the company is simple and provides us with a competitive cost of debt with a clear path towards gradual deleveraging through a significant annual debt amortization. The partnership has in place long term charter contracts with international energy companies, generating cash flows that we expect to be channeled to with the amortization requirement of the financing facility, which we believe will result in building equity value over time and beyond this position the company for future growth. We have now reached the end of the presentation and I now open the floor for questions. We'll now take our first question from the line of Randy Giveans. Please go ahead. Hi, guys. This is Chris Robertson on for Randy. Thanks for taking our call. Hi. So, yes, once again, congratulations on the refinancing. I know that was a big deal that you guys were working hard towards for a while. But now that the term loan and the notes have been repaid and kind of the fleet's locked in on unemployment at least through 2021, What's next besides the repayment of the current borrowings? Can you pursue some additional drop downs under the terms of the new debt covenant? Yes. Hi. Well, listen, I think at this particular stage, we're going to use our secured cash flow, pay down our debt. Our capital structure will improve. And eventually, we believe that these actions will lead to an improvement in our unit price. I mean, as I mentioned earlier, we're trading at basically 4 times consensus estimates for our 2020 earnings. We are deleveraging. Deleveraging is a big part of the story. It's very important. And at this particular stage, we do have the sponsor fleet that is there, but we are mindful of the employments and the leverage characteristics of these vessels. So we would prefer to wait a while as these vessels deleverage. So if there's any drop down take place, it will actually reduce our leverage rather than increase it. Okay. That makes sense. Kind of along the same lines, are there any allowances for the repurchase of preferred equity? Is that something that you would consider? Or should we just think about this like you said as a deleveraging story? Well, right now, we don't have the capital to repurchase the preferred equity. I mean, it would be nice to have it, but we don't. So we have to be realistic on what can be done and what cannot be done. So at this particular stage, this is not on the cards. Okay. And then maybe a couple of modeling questions from us. So in terms of the vessel OpEx expense, I know that you had mentioned some maintenance costs were a little bit higher compared to last year. As we look towards next quarter, should we expect 3Q to be kind of the norm in terms of a run rate? Or is it going to be lower in 4Q? Yes. No, I think what we were saying is that last year's expense were abnormally low because we had just passed the dry docks and there was not that much to be done from a maintenance perspective. I think going forward, if you look at our historical operating expenses, I think we will revert to that historical average, which is $12,000 per day about for the 3 steam turbine vessels. And for the Arctic Aurora, around $13,000 a day. Now the other two vessels, it's the charter that pays for the operating expenses reasonably incurred. So those are less of an issue there. Okay. And one last kind of modeling question. How should we think about the new weighted average interest rate going forward? And can you provide any interest expense guidance for 4Q? Yes. I mean, the margin on the loan is 3% and LIBOR is currently in cost should be around 4.9%. Okay. I think that does it for us. Thank you. Thank you. Thank you. Thank you. There are no more questions at the moment. No, no questions have come through. So I'd like to hand the floor back to your speaker, Mr. Lauritzen. Well, 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. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.