The quiet period following the November 12 IPO of liquefied natural gas carrier operator Dynagas LNG Partners LP (NYSE:DLNG) will come to an end on December 7, 2013, 25 days after the completion of the offering.
The expiration of the quiet period will permit the IPO underwriter to publicly release detailed research reports on DLNG, likely leading to a temporary rise in the price of DLNG shares. DLNG's IPO priced at $18 per share, below its expected price range of $19-$21 per share, and has made little progress since, fluctuating between $16.75 and $18.67 per share; the stock closed at $18.60 on November 27th. See our prior article.
Upon completion of the IPO, DLNG adopted 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 7.8% based on the current share price of $18.60, if the firm ends up having the sufficient amount of cash available for distribution.
The firm's many underwriters, include Credit Suisse Securities LLC, BofA Merrill Lynch, ABN AMRO Securities, Deutsche Bank Securities, Barclays Capital, Credit Agricole Securities, and Morgan Stanley & Co, will try to liven the stock with releases of positive information into the market as the quiet period comes to a close
The past two years of our research and actual trading have empirically evidenced a correlation between the quality and number of firms underwriting an IPO and the corresponding increase in share prices at the expiration of the quiet period. Several academic studies also support our thesis.
Studies by Professor Bradley for example have shown that:
"Initiated firms experience a five-day abnormal return of 4.1% for firms with coverage. The abnormal returns are concentrated in the days just before the quiet period expires". See this link for full study.
This effect typically emerges a few days before the quiet period expires as attentive investors buy up shares in anticipation of the expiration. These investors understand that the underwriters are highly unlikely to release anything but positive information on a firm that they underwrote. These early purchases increase the perception of demand for the stock and lead to increased prices.
DLNG is an owner and operator of a small fleet of liquified natural gas carriers. The firm received its initial fleet of three Hyundai Heavy Industries carriers in late October, which it keeps in utilization via multi-year charters with energy firms including Gazprom and BG Group.
Its fleet is of an average age of 6.3 years and is under charter for an average of 3.5 years. There are currently a total of similarly sized carriers worldwide. DLNG competes with other LNG carriers, including Chevron (NYSE:CVX), Mitsui OSK Lines Ltd, Golar LNG Ltd (NASDAQ:GLNG), GasLog Limited (NYSE:GLOG), and Teekay LNG Partners LP.
Tony Lauritzen has been the CEO of DLNG since the firm's inception. He had previously served as a project manager for Bernhard Schulte Shipmanagement Ltd. He holds an M.A. in Business and Finance from Heriot Watt University and M.S. in Shipping Trade and Finance from Cass Business School.
We view the expiration of the DLNG quiet period as a good short-term buying opportunity for aggressive investors.
The firm's primary draw at the time of its IPO was an annualized yield of 7.8%, but the firm's poor IPO and the direction of 34% of the IPO proceeds to insiders lowers the likelihood that the firm will have sufficient cash available to pay its planned distributions.
The flood of energy IPOs seems to have exhausted the market's interest in the near term, even for firms offering relatively strong yields, and we see little reason to believe that the long-term prospects of the stock will improve significantly as a result of underwriter research.
Disclosure: I am long DLNG. 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.