Dynagas LNG IPO May Not Have Much Gas

| About: Dynagas LNG (DLNG)

Dynagas LNG Partners LP (NYSE:DLNG), an owner and operator of liquefied natural gas carriers with principal offices in Glyfada, Greece, plans to raise $250.00 million in its upcoming IPO. The firm will offer 12.5 million shares (including 34% insider shares) at an expected price range of $19-$21 per share. If the IPO can find the midpoint of that range at $20 per share, DLNG will command a market value of $600 million. (Form F-1)

Prospective investors need to focus on the Risk Factors outlined on 39 pages (!) in the F-1. This huge potpourri of risk items which are described in great detail by the company on pages 39 to 60 are very interesting.

DLNG filed on October 10, 2013.
Lead Underwriter: Credit Suisse Securities
Underwriters: ABN AMRO Securities, Barclays Capital Inc., BofA Merrill Lynch, Credit Agricole Securities, Deutsche Bank Securities, and Morgan Stanley

Summary
DLNG is a limited partnership that owns and operates liquefied natural gas carrier vessels. The firm generates stable cash flows and keeps its vessels in regular operation through multi-year charters with energy companies like BG Group and Gazprom. DLNG acquired an initial fleet of three LNG carriers constructed by Hyundai Heavy Industries on October 29, 2013; the three vessels, which were initially ordered in 2004 and completed in 2007 and 2008, have an average age of 6.3 years and are all under charter for an average of 3.5 remaining years.

There are currently only 39 LNG carriers of comparable carrying capacity (medium-large) in operation worldwide. The firm may acquire further vessels from its sponsor in the future, although there is no guarantee that this will occur; in any case, DLNG intends to use external financing for any future additions to its fleet, allowing it to continue to make distributions to unitholders.

Valuation
DLNG offers the following figures in its F-1 balance sheet for the six months ending June 30, 2013:

Revenue: $42,444,000
Net Income: $22,728,000
Total Assets: $468,332,000
Total Liabilities: $370,429,000
Stockholders' Equity: $97,903,000

Upon completion of the IPO, DLNG will adopt a cash distribution policy that will provide a quarterly yield of $0.365 per unit, which works out to $1.46 per unit - a reasonable annual return of 7.3%, if the firm ends up having the sufficient amount of cash available for distribution.

Business
DLNG faces competition from other LNG carrier firms, mostly on the basis of the experience of crews and perceived quality of vessels. Competitors include GasLog Limited (NYSE:GLOG), Golar LNG Ltd (NASDAQ:GLNG), Teekay LNG Partners LP, Mitsui OSK Lines Ltd, Chevron (NYSE:CVX), and Höegh LNG. Several of these firms have significantly larger fleets and better capitalization than DLNG.

Management
CEO Tony Lauritzen has served as CEO since the inception of the firm, joining the company at the time of the first DLNG vessel's delivery in 2007. He previously worked for ship-owner and ship manager Bernhard Schulte Shipmanagement Ltd. as a project manager with a focus on the gas shipping segment. He holds a Master of Science in Shipping Trade and Finance from Cass Business School and a Master of Arts in Business and Finance from Heriot Watt University.

Conclusion
In light of the poor response to last week's IPO for Midcoast Energy Partners (NYSE:MEP), another natural gas liquids-centric firm which priced at $18 well below the proposed range of $19 to $21 and is currently trading under $18, we don't think DLNG is a good risk at $20 a share. If the company and their Credit Suisse underwriters decide to price this IPO at $17 or lower, we would reconsider this company's IPO primarily for income-oriented investors.

Though the market for natural gas liquids certainly is expanding and likely to continue to expand for the foreseeable future, investors in general simply do not seem to believe in natural gas yet, and continue to see it as a lesser option compared to the dominant oil energy firms and even as having less potential than the renewable energy market.

The prospect of 34% of the revenue from this IPO heading to insiders rather than to the firm itself is also a big negative for us as investors. We would like to see these wealthy insiders wait to bail out until the firm has been trading for six months.

Finally, if the firm prices its IPO well below the range resulting in raising less cash from the IPO, it might inhibit DLNG's ability to pay those high yields in the near future because it would have less cash on its balance sheet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.