Dynagas LNG Partners' (DLNG) CEO Tony Lauritzen on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Dynagas LNG (DLNG)

Start Time: 10:00

End Time: 10:35

Dynagas LNG Partners LP (NYSE:DLNG)

Q2 2014 Earnings Conference Call

August 06, 2014, 10:00 AM ET

Executives

Tony Lauritzen - CEO

Michael Gregos - CFO

Analysts

Benjamin Nolan - Stifel Nicolaus & Company

Fotis Giannakoulis - Morgan Stanley

Shawn Collins - Bank of America Merrill Lynch

Mathew Phillips - Clarkson Capital Markets

Operator

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners Conference Call on the Second Quarter 2014 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. (Operator Instructions). I must advise you the conference is being recorded today, Wednesday, August 6, 2014.

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.

Now I pass the floor to Mr. Lauritzen. Please go ahead, sir.

Tony Lauritzen

Good morning, everyone, and thank you for joining us in our second quarter 2014 earnings conference call. I’m joined today by our CFO, Mike Gregos. Turning to Slide 3 of the presentation, I will review some recent highlights for our fleet of four LNG carriers. Earlier today, we issued a press release announcing our full quarterly results. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures as well as the discussion of why we believe this information to be useful in our press release.

We are pleased with the results for the second quarter of 2014. As you know, we acquired the 2013 built 155,000 cubic meter ice class LNG carrier named Arctic Aurora on June 23 this year. So our second quarter financial results reflect the operation of this fourth vessel only for seven days. Our financial performance for the second quarter of 2014 reflects an excellent operational performance with 100% utilization for another quarter.

For the second quarter of 2014, the partnership reported distributable cash flow of 4.6 million, adjusted EBITDA of 16.7 million and net income attributable to unitholders of 10.2 million. Included in the three and six-month period ended June 30 was a 900,000 nonrecurring, noncash TC amortization charge. Excluding such charge, we would have recorded net income for the three and six-month period ended June 30 of 11.1 million and 22.1 million, respectively.

Let’s turn to Slide 4 for our recent achievements. During the second quarter, we successfully completed a follow-on equity offering and utilized 120.6 million from the net proceeds to partially finance the acquisition of the Arctic Aurora. In addition, we entered into a new 304 million senior secured revolving credit facility with Credit Suisse in order to refinance all our debt as well as finance the remaining portion of the Arctic Aurora acquisition which was completed on June 23.

For the second quarter of 2014, we declared a cash distribution of $0.365 per unit which will be paid on or about August 12 to record holders on August 5. Our Board has approved management’s recommendation to increase the quarterly cash distribution to all unitholders to $0.39 per quarter or equivalent to $1.56 on an annualized basis with respect to the third quarter 2014 operations.

This represents a distribution per unit increase on an annualized basis of 6.8% since our IPO in November 2013 and provides for an effective yield of about 6.9% based on yesterday’s closing price. We expect the increased cash distribution to be paid in November of this year.

Now I’ll turn over the presentation to Michael to provide you with a financial update.

Michael Gregos

Thank you, Tony. I’ll start on Slide 5. The income statement reflects our first class operational performance. We reported net income for the second quarter and six months ended June 30 of 10.2 million and 21.2 million, respectively. I would like to note that our results include a one-off non-cash time charter amortization expense of 900,000.

For the six months ended, our operating expenses for LNG carrier amounted to $11,950 per day in line with our expectations, while our increase in general and administrative expenses reflect our operation as a public company since November 2013. Following our equity offering, we have 35.5 million units outstanding.

Going on to Slide 6, our balance sheet is in excellent shape. As our June 30, 2014, we had 335 million in debt outstanding and average debt of about 84 million for LNG carrier, which we consider to be very modest. Since we have not swapped any portion of our debt, we are continuing to take advantage of low floating interest rates and as a result, our weighted average interest rate is approximately 3.1% for the six months ended June 30. However, we are continuously reviewing our interest rate strategy.

As mentioned before, in June we raised 120 million net proceeds in our follow-on equity offering in order to partially finance the Arctic Aurora with the remainder being financed from our senior secured revolving facility.

Going on to Slide 7, as a summary of the financial performance, we highlight the stability of our revenues which are underpinned by multiyear time charters and first class operational performance. As of June 30, the partnership has total available liquidity of 73.6 million comprised of 43.6 million in cash including minimum cash liquidity requirements imposed by our lenders and 30 million of borrowing capacity under our interest free sponsored facility.

Under our new senior secured revolving credit facility, we paid 20 million per annum in principal payments until the first quarter of 2021. We believe our modest leverage gives us financial flexibility for future growth opportunities as we evaluate future dropdowns. This gives us the flexibility to consider raising debt capital to fund our next dropdown.

Turning to Slide 8. Here we present the brief economics of the Arctic Aurora acquisition which we acquired for 235 million with a time charter attached to Statoil until 2018 and which is expected to generate approximately 21.7 million in annualized EBITDA.

Following this dropdown, the Board of Directors has approved management’s recommendation for an annualized distribution increase of about 6.8% to $1.56 per unit from $1.46 per unit per annum.

I will now turn over the presentation to Tony to provide you with the fleet and industry update.

Tony Lauritzen

Thank you, Michael. Let’s move to Slide 9. After the Arctic Aurora acquisition, the average age of our four LNG carriers is about 5.5 years and our contract backlog has increased to 625 million. Also, the acquisition of the Arctic Aurora broadens our customer base with yet another first class counterparty which gives our clients the flexibility to utilize its ice class capabilities. Our average remaining charter term is now about six years.

Let’s move to Slide 10. Our fleet currently consists of four LNG carriers, three of which have ice class 1A notation. Currently our fleet has 100% contract coverage for the calendar date in 2014, 2015 and 2016 with first class counterparties and 75% contract coverage for our calendar date in 2017, a time we expect the LNG shipping market to be very strong. Our multiyear fleet employment profile, diversified first class customer base and the staggered maturity of our charters provide solid cash flow visibility going forward.

Let’s move to Slide 11 for an update on the LNG shipping market outlook. So, let’s move to Slide 11. As you know, we have the right to purchase from our sponsor a further six optional vessels, so we have a large sponsor asset base and substantial dropdown growth potential. Three of those vessels are already on the water and trading and the remaining three are under construction with delivery in 2014 and 2015.

All optional vessels are high specification, ice class, winterized and extremely versatile. These optional vessels include three vessels already chartered to first class customers with an average five years employment. Of the three chartered vessels, two are chartered to our existing charter Gazprom and one is chartered to Cheniere.

So now let’s move to Slide 13. From a supply point of view, it is conservatively expected that about 120 million tons of new LNG will come to the market between now and 2020. This represents an astounding total increase of 50% compared to 2013 production. The source of this incremental commodity is primarily from North America, Australia, Russia and Africa. We continue to believe that the Far East will remain the largest buyers going forward meaning that the LNG carrier ton-mile requirements are expected to remain high.

The production figures are conservative and increased production in existing projects has not been included. U.S. production included in these projections has been estimated to 30 million tons coming from Sabine Pass, Freeport, Lake Charles and Cove Point. We believe that the total production from such projects may turn out to be higher and additional U.S. projects may well be granted licenses and add to export volumes.

When we compare LNG supply to LNG carrier shipping capacity available from now until 2020, we remain confident that the market for shipping will remain tight. From 2018 onwards, we’ll expect the prospects with LNG shipping to be in particular strong leading to higher charter rates. Part of our competition going forward are vessels that come off charter. Such vessels are an average of substantial older age than our fleet and therefore also much smaller in size as vessels used to be build to smaller sizes in the past.

Vessels that come off charter in the years 2017 and 2018 are on average about 144,000 cubic and 145,000 cubic meters. The average size of vessels coming off charter between now and 2020 are about 135,000 cubic meters which should give a relative strong preference to our fleet, which is on average just about 151,000 cubic meters and extremely versatile. The potential re-chartering possibilities of our fleet will be in 2017 and beyond which we expect to be a period of high total fleet utilization. This will be further supported by Arctic LNG coming on stream and requiring ice class vessels.

We have now reached the end of our second quarter presentation and I now open the floor for questions.

Question-and-Answer Session

Operator

Thank you very much indeed. (Operator Instructions). From Stifel, your first question comes from the line of Ben Nolan. Your line is now open.

Benjamin Nolan - Stifel Nicolaus & Company

Good morning, and thanks guys for taking the time to answer the questions. I guess I’m sort of trying to think about how you guys are considering the timetable for the dropdown of the other three assets the sponsor currently has that are already contracted, in the water. Could you maybe outline at least what you guys are thinking in conjunction with the sponsor as to the timetable when you would expect those to come to the market or be dropped down?

Tony Lauritzen

Well, nothing has really changed. I mean we would like to dropdown our next vessel as soon as possible. When we have something to announce, obviously we’ll announce it. So I don’t have anything new to tell you.

Benjamin Nolan - Stifel Nicolaus & Company

Okay. And then – so the first one and then – I don't know, were you thinking maybe like every six months or is that kind of a fair reference point to use?

Tony Lauritzen

It’s a case-by-case basis. I mean if you look at the whole fleet which is left to be dropped down, six months as an average would be reasonable. Some could be shorter than that.

Benjamin Nolan - Stifel Nicolaus & Company

Okay, that’s helpful. And then as it relates to sort of what the sponsor has going on with respect to the other vessels that have yet to be delivered but should be soon, and then also as it relates to sort of the strategy going forward to add more vessels. Could you maybe frame out for me what the appetite is at the moment among charters to put assets on long-term charters today? I mean, do you think that there’s a high likelihood those vessels will be chartered for a long duration in the near term or is it probably more likely that they’ll just be on short-term charters for the shorter term until rates were to improve?

Tony Lauritzen

Yes, let’s address the first question first as it relates to the vessels that are coming from the yard and how the charters’ appetite is. We do see a lot of appetite actually in the market but some of it is with term commencements but more of it is with commencements a little bit further out. So what we would seek to do in order to find the right customer or the right profile with the right terms of the agreement, on a sponsor level we would use the short-term market to facilitate the deal that we want until that is in place. And when we look a little bit at the big picture, there is – as we mentioned earlier, we’re looking at a potential 50% increase in production from now until 2020 which is really not a long period of time. So we see that as very likely that on a sponsor level we will expand further.

Benjamin Nolan - Stifel Nicolaus & Company

Okay. And the sponsor is actively participating in tenders as they come up and that sort of thing? That’s fair to assume, correct?

Tony Lauritzen

Yes, that is fair to assume. We participate in all tenders that we feel that is good for our company and also on a sponsor level we’re looking at several non-tender basis projects.

Benjamin Nolan - Stifel Nicolaus & Company

Okay. And then my last question, it relates to the OpEx. It was a little bit higher this quarter than what it had been. Is that a good run rate to use – what’s it 12,300 or so or was there something in the quarter that maybe taking delivery of the vessel pushed it a little higher, something like that?

Tony Lauritzen

No. I mean if you look at it on a six-month basis, we’re pretty much in line with what we had communicated with our IPO which is close to $12,000 a day which I think is a reasonable assumption.

Benjamin Nolan - Stifel Nicolaus & Company

Okay. Perfect. All right, well, that is very helpful and thanks for taking the time.

Tony Lauritzen

Thank you.

Operator

Thank you very much, sir. Now from Morgan Stanley, your next question comes from the line of Fotis Giannakoulis. Your line is open, sir.

Fotis Giannakoulis - Morgan Stanley

Yes. Hi. I’ve been struggling what to ask because everything is so predictable in your company, but what I want to see is how the market looks like right now? I have been hearing from other operators that they have more open vessels that they are struggling to find any contract, even if this contract is a very short-term contract. Are there any discussions about chartering the open vessels that your sponsor owns? If I remember well, there are three vessels that they will come in 2016 and onwards that they are still un-contracted. And if there are any discussions, at what levels do you think that these vessels can be chartered?

Tony Lauritzen

Yes, thank you for the question. There is actually quite – when we look at the short-term market right now and is been going on for a couple of weeks already, there is really a lot of activity. We see pretty much all modern tonnage being transferred out, some for shorter periods. And that just underpins the need in the market for the tonnage and the charters preference for a good size, et cetera. So we feel confident with the way that the market is going. We do think that the market will strengthen between now and to the end of the year, I mean in particular into 2015. That has to do with incremental volumes coming and also we see that charters are relying on good, modern tonnage which they get used to and they want to extend the relationships with. So I think that we’ve seen [as it looks] (ph), the bottom of the curve, so to say, when it comes to short-term fixing. That is our take on it. Going forward, yes, we think it’s very likely that the three uncommitted vessels that are held on a sponsor level which the partnership do not have exposure to, we think it’s very likely that they will be fixed on time charters and we think that the rate of hire for those time charters will be in line with what we have already concluded on an average basis. We don’t see that the term market has moved substantially up or down.

Fotis Giannakoulis - Morgan Stanley

And you mentioned about the projects that they are going to come online in a year and a half or two years. Usually, how soon these projects they will need to secure vessels? And which are the projects that are coming sooner that still do not have vessels?

Tony Lauritzen

Okay. When you look at the fixing of vessels in advance of a project commencement, it’s always difficult to say when the incremental employment of vessels will take place, because as you indirectly point out, the large projects currently have committed on a term basis the base length that they need in their shipping portfolio. But what we normally see is that projects on average, because it’s costly at the time of budgeting to secure and oversupply a vessel, they go for the worst case and we see that after startup or before startup when they really feel that is available in the market against what their actual needs are, then they start to conclude more charters. So when we look at, for example, Papua New Guinea that started up very successful this summer which is an excellent project, actually a few years in advance they committed – well in advance they committed the base shipping needs that they had and then I think it was probably about a year and a half, two years before the project startup they committed another two vessels and when they were quite close to the commencement then they went in the market and they committed to that substantial shipping capacity for their project. So I think that we’ll see a combination of this going forward as well. So what we have coming on stream going forward is that we have – well, first of all we have the incremental production in Angola that we’re all waiting for that hopefully they will fix the production problem that they’ve had there for quite some time. Then we have BG’s Australian which we expect that will come towards the end of this year. As far as we hear, everything is going according to schedule. Once we step into 2015 then we have Sabine Pass and the commencement of the startup of the U.S. exports as it unfolds.

Fotis Giannakoulis - Morgan Stanley

Thank you very much, Tony, for this color. I have one last question about the dropdowns. We saw that the first dropdown was at 235 million. First of all, I want to ask you I saw that your EBITDA estimate for this vessel is slightly lower than what I have been calculating based on your – the data that we had from the IPO prospectus. Have you assumed some utilization factor that brings this number about $1 million lower? And my – the second part of my question is that I understand that the vessels, the three vessels that you have in your dropdown pipeline, they have slightly higher rate than this vessel, the Aurora. How are you going to think the dropdown price, is it going to be a multiple of EBITDA, similar multiple of EBITDA or it’s going to be the same price approximately as the Aurora?

Michael Gregos

The next vessels, the next potential candidates, they have a higher charter rate so – I mean obviously there’s no linear relationship here and each case is obviously looked at, at its own merits. So in terms of the multiple, again, we reiterate what we previously said that the multiple would be around 10 to 11 times. Now where within that range I don’t know where it’s going to be. Now regarding your estimates, I’m not quite sure what you were referring to because nothing has really changed from our perspective. I mean we assume a 99% utilization, so maybe we can catch up offline about what your assumptions are, but there haven’t been any change from our perspective in terms of utilization or the figures that we have already communicated.

Fotis Giannakoulis - Morgan Stanley

Thank you very much, Michael. That’s all I had.

Michael Gregos

Okay.

Operator

Thank you very much, sir. Now from Bank of America, you have a question from the line of Shawn Collins. Your line is open, sir.

Shawn Collins - Bank of America Merrill Lynch

Great. Thank you. Hi, Tony. Hi, Michael.

Tony Lauritzen

Hi.

Michael Gregos

Hi.

Shawn Collins - Bank of America Merrill Lynch

So in the U.S., Freeport seemingly got final approval yesterday, which is positive. I’m less familiar with Australia. Can you comment on the terminal activity that you’re seeing in Australia and what you expect over the next couple of years?

Michael Gregos

Yes. First of all, we concur that the FERC approval of Freeport was – it was expected but it was very good news. We think that will translate into – I mean it will definitely translate into more requirement which is good and likely we’ll see very long haul coming out as a result of this. So we think that’s all positive. When it comes to Australia, it is expected that going forward, Australia will be a substantial – it is a large producer of LNG today but going forward it is expected that it will be a substantial producer. In our estimate we have seen that we’ll see within 2020, I believe it is, we have estimated about 80 million tons or so of incremental production coming from Australia, maybe beyond a little bit 2020, but basically we see Australia as a big producer going forward.

Shawn Collins - Bank of America Merrill Lynch

Great. Thank you very much. And then just thinking about demand for LNG in the Far East, I think spot prices have recently dropped below $15 towards a low point. Can you just comment on what you are seeing for demand in the Far East? And I’m assuming that it has recently started to firm or kind of bounce off of the bottom, but if you could just comment on what you’re seeing there, that might be helpful.

Tony Lauritzen

Thank you. Now we’re in a summer period, so I think it’s expected that once we go through the winter that Far Eastern prices will increase from its current level. What we do see in the short-term market is that several trading organizations also expect the LNG prices in the Far East to increase. So we see that they are starting to take positions in vessels for storage to try to materialize on the contango in the market that is presently. So I do concur with you that we – and it seems that there is a consensus in the market also for LNG prices to increase in the Fast East going forward and it’s important to keep in mind that if you take Japan, China and Korea together, that is 60% of the world’s import markets of LNG. So it’s very, very important.

Shawn Collins - Bank of America Merrill Lynch

Got you. That’s great. That’s helpful. Thank you. Just a modeling question. I know on page three of the presentation, average daily hire gross is 77,200 per carrier. I have a daily rate in my model of more like 80,000 or 81,000, so I'm just kind of confirming that it sounds like I'm high and I need to adjust downwards a bit. Is that right?

Michael Gregos

Yes, correct, although we’ll get the full – because we only had the fourth vessel traded for just a couple of days in the quarter. So I think next quarter, we’ll get the full idea. But the number is around there.

Shawn Collins - Bank of America Merrill Lynch

Okay. That makes sense. And actually just following up on that. Yes, I’ve got in my model that you had the Arctic Aurora for 30 days in the second quarter but it sounds like that’s not the case, it was really only a couple of days. And then second, what is the daily rate for the Arctic Aurora if you’re disclosing that?

Michael Gregos

Yes, the Arctic Aurora we actually owned for seven days in the quarter and the daily rate is around 77,500.

Shawn Collins - Bank of America Merrill Lynch

Understand. Okay, that’s great. Okay. Well, thank you very much for the time and the insight, Tony and Michael. I appreciate it very much.

Tony Lauritzen

You’re welcome.

Michael Gregos

Thank you.

Operator

Thank you, sir. (Operator Instructions). From Clarkson, you have a question from the line of Mathew Phillips. Your line is open, sir.

Mathew Phillips - Clarkson Capital Markets

Hi, guys. A quick question on the TCE rate reported in the quarter. It ticked down from 1Q. You mentioned the amortization charge you had during the quarter. Was it completely due to that and do you expect that to be recurring at all going forward?

Michael Gregos

No, it’s a nonrecurring charge. That’s explains primarily the difference and also the fact that we had one additional vessel for seven days in the quarter.

Mathew Phillips - Clarkson Capital Markets

Okay. That’s all I had. Thank you.

Michael Gregos

Thank you.

Operator

Thank you very much. As there are no further questions at this point, I shall pass the call back to you for closing remarks.

Tony Lauritzen

Thank you everybody for participating. We appreciate your time. If you do have any questions or you need anything from us, just give us a call. Thank you very much.

Operator

And with many thanks to all our speakers today, that does conclude the conference. Thank you all for participating. You may now disconnect. Thank you, gentlemen.

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