Dynagas LNG Partners - Q4 2023

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners' conference call on the fourth quarter 2023 financial results. We have with us today Mr. Tony Lauritzen, Chief Executive Officer, and Mr. Michael Gregos, Chief Financial Officer of the company. At this time, all participants are on the listen-only mode. There will be a presentation followed by a question-and-answer session, at which time if you wish to ask a question please press star one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today. Please be reminded that the company announces its results with a press release that has been publicly distributed. At this time, I'd like to remind everyone that in today's presentation and conference call, Dynagas 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 are not historical facts. That are not historical facts including, among other things, the expected financial performance of Dynagas LNG Partners' business, Dynagas LNG Partners' ability to pursue growth opportunities, Dynagas LNG Partners' expectations or objectives regarding future and market charter rate expectations, and in particular the effects of COVID-19 on the financial condition and operations of Dynagas LNG Partners and the LNG industry in general may be forward-looking statements as such as defined in Section 21(e) 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 risk and uncertainties that may result in such expectations not being realized. I kindly draw your attention to slide two of the webcast presentation which has the full forward-looking statement, and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it. And now I pass the floor to Mr. Lauritzen. Please go ahead, sir.

Tony Lauritzen (CEO)

Good evening, everyone, and thank you for joining us on our fourth quarter and year ended December 31, 2023 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, and 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 get started and move to slide three of the presentation. We today present the results for the full year and three-month period ending on December 31, 2023. We are pleased to announce that all six LNG carriers in our fleet were operating on the long-term charters with the strategic international gas companies.

For the fourth quarter of 2023, we report a net income of $10.5 million and Earnings per Common Unit of $0.21. Our Adjusted Net Income stood at $10.3 million, translating to Adjusted Earnings per Common Unit of $0.20. Furthermore, our Adjusted EBITDA for the same period reached $27.4 million. For the full year 2023, we report a net income of $35.9 million and Earnings per Common Unit of $0.66. Our Adjusted Net Income stood at $25.8 million, translating to Adjusted Earnings per Common Unit of $0.39. Furthermore, our Adjusted EBITDA for the full period reached $94.4 million. We are pleased to share that subsequent to the quarter, the partnership had signed a term sheet with a major leasing company in Asia for the lease financing of four of our six LNG carriers in an amount of up to $345 million.

The financing has received credit approval and is subject to signing of documentation and customary closing conditions. The transaction is expected to close in the second quarter of 2024. The partnership intends to combine proceeds from this new financing with other sources of liquidity to fully repay the partnership's debt maturing in September 2024. I will now turn the presentation over to Michael, who will provide you with further comments to the financial results. Go ahead, Michael.

Michael Gregos (CFO)

Thank you, Tony. Turning to slide four, net income for the full year amounted to $35.9 million or $0.66 per common unit, Adjusted Net Income amounted to $25.8 million or $0.39 per common unit, and Adjusted EBITDA for the year was $94.4 million. In the fourth quarter, net income saw a slight decrease of 9.5% to $10.5 million compared to the same quarter last year. This reduction is primarily linked to a decrease in unrealized gain on our Interest Rate Swap of $3.2 million and the absence of a $2.1 million gain on debt extinguishment that we recognized in the previous year.

However, this was partially mitigated by an uptick in voyage revenues of $3.9 million as a result of a higher charter rate on the Arctic Aurora, which entered the charter with Equinor in September 2023, as well as by the $2.9 million of other income recognized in the fourth quarter of 2023, which represents income from insurance claims. Adjusted Net Income for the quarter is reported at $10.3 million, a noteworthy increase from $7 million last year driven mainly by the voyage revenue growth previously mentioned. This was counterbalanced by increased operating expenses by $0.6 million and finance costs by $0.4 million due to higher interest expenses under the floating leg of our credit facility.

For consistency, we've excluded cash receipts and unrealized gains on our Interest Rate Swap from Adjusted Net Income, which, if included, brings our Adjusted Net Income and Earnings Per Common Unit to $16.7 million and $0.37, respectively. The Time Charter Equivalent rate per day for the fourth quarter stood at $65,700, with operating expenses at $15,172 per day, leading to a Cash Break-Even level of $46,300 per day. Turning to slide five, our Net Debt to last 12 months' EBITDA ratio has improved to 3.7x, indicative of a solid balance sheet and prudent capital management, culminating in a Book Equity Value of $448 million and a net debt-to-total-book capitalization ratio of 40%. Our consistent emphasis on using organic cash flow for debt reduction without diluting shareholder value has proven to be a prudent strategy, as can be seen by the consistent increase in Book Equity Value per common unit.

Moving to slide six, we concluded the quarter with a strong cash position of $73.8 million, operating cash flow of $20.2 million, and after accounting for the capital expenditures like the installation of ballast water treatment systems on our steam LNG carriers, free cash flow of $17.4 million. For the full year, our operating cash flow amounted to $64.4 million and our free cash flow was $60.2 million. We are pleased to announce that we have signed a term sheet with a prominent Asian leasing company for the lease financing of four out of our six LNG carriers to address our September debt maturity. This financing will provide us with up to $345 million in funding. We're happy to report that this financing plan has already been granted credit approval and is contingent upon the completion of definitive documentation and the satisfaction of customary closing conditions.

We plan to utilize the proceeds from this financing in conjunction with other sources of liquidity to completely repay the partnership's debt that comes due in September 2024. We expect to close this transaction within the second quarter of 2024. Over the past few years, we've been strategically reducing our leverage in an organic manner, and by addressing the upcoming maturity of our debt, we're setting a solid foundation for financial stability. That wraps it up from my side. I will pass over the presentation to Tony.

Tony Lauritzen (CEO)

Thank you, Michael. Let's move on to slide seven of the presentation. At present, our fleet consists of six LNG carriers with an average age of approximately 30.6 years. Our current charters include gas companies such as Equinor of Norway, SEFE and Yamal Trade of Singapore, as well as Rio Grande LNG, LLC, a subsidiary of NextDecade for the forward chartered vessels Clean Energy and Arctic Aurora. As of 28 March 2024, the fleet's contracted backlog amounts to approximately $1.11 billion, equating to an average backlog of about $185 million per vessel. Furthermore, the fleet enjoys an average remaining charter period of approximately 6.9 years. We are confident that our charter profile is strong and positions our partnership for stable income in years to come. Let's move on to slide eight of the presentation. Our commercial strategy is securing long-term charters with gas companies.

We have built up a solid contracted backlog and by no unforeseen events, we have no contractual vessel availability until 2028 when the Clean Energy, Ob River, and Amur River will be available. The next availability after this is the Arctic Aurora, which will come off our Rio Grande LNG contract in 2033, followed by Yenisey River and Lena River in 2034, provided that charters' extension options are not extended. The global fleet of LNG carriers currently comprises approximately 670 large vessels exhibiting a diverse range of sizes and propulsion systems. The newbuilding order book accounts for roughly 53% of the existing fleet, mainly scheduled for delivery between now and 2028. The majority of these orders are already committed to specific charters, leaving only 28 carriers without dedicated employment. The main objectives of the global order book are twofold: to replace aging vessels and to accommodate the growing energy production capacity.

Notably, around 18% of the existing fleet comprises steam-powered vessels below approximately 140,000 cubic meters in capacity with an average age well above 20 years, rendering them undersized and inefficient in today's operational environment. Current liquefaction capacity stands at approximately 471 million metric tons, with an additional 46% of new liquefaction capacity already FID'd and at various stages of construction for startup before 2030. The expansion is primarily driven by projects in the U.S., Canada, and Mexico region, representing about 46%, followed by Qatar at 30% with additional contributions from various other regions, including Russia, Africa, Australia, and Malaysia. In the medium to long term, we anticipate the order book being absorbed through the replacement of older vessels and the transportation of additional energy production. However, in the shorter term, the charter market may face short-term challenges as vessel deliveries are front-loaded compared to the multi-year growth in energy production.

Given these factors, we believe our portfolio is well-structured with contractual availability only in 2028. Nevertheless, global demand for LNG remains robust. Questions have been raised regarding the impact of Chinese economic growth on LNG demand. Beijing has maintained its growth target of 5% for 2024, mirroring the figure set for 2023, and recent data from Poten suggest a notable increase in China's energy imports during Q1 2024 compared to 2023. European energy import volumes reached historical highs in 2023 and are expected to continue increasing in the medium term up to 2026, projected to rise from approximately 120 million tons in 2023 to 140 million tons in 2026. In general, we anticipate that the long-term demand for LNG will remain robust due to several factors.

These include its favorable emission profile compared to traditional fossil fuels, the growing global demand for electrification, the efficiency of the combined cycle power plants fueled by LNG, the existing global infrastructure of energy production and distribution, and the absence of a superior alternative on a comparable scale. At the vessel level, our current charters are performing and fulfilling their obligations with the vessels actively trading. While President Biden's temporary reports on pending permits for new energy projects have been announced, it is not targeted to impact already permitted brownfield or expansion projects. Our agreements with U.S. energy exporter NextDecade for the Clean Energy and the Arctic Aurora are proceeding as planned, earmarked for phase I, Trains 1, 2, and 3, which are fully permitted.

According to NextDecade, construction of the Rio Grande LNG Facility is progressing in line with schedule, with overall completion for Trains 1 and 2 at approximately 14% and 4.4% for Train 3. Let's move to slide nine. The partnership has demonstrated its commitment to its debt reduction strategy. Since December 2019 until 28 March 2024, it successfully repaid $254.4 million in debt, significantly lowering its net leverage from 6.6x-3.7x. Additionally, the partnership has increased its book equity value by 44%, standing at $448 million as of 31 December 2023. Looking ahead, we are confident that the partnership's ongoing efforts to reduce debt would further augment equity value through stable long-term cash flow visibility. We firmly believe that energy plays a pivotal role in building a future with reduced emissions.

The demand for energy is projected to continue as the world progressively shifts away from coal and other polluting fossil fuels in favor of cleaner energy sources. Natural gas has a relatively low emission profile when combusted, and other key drivers of natural gas are its ability to generate power swiftly and effectively as and when needed, and the existence of a well-developed global infrastructure facilitating its production, transportation, storage, and consumption. Thank you all for your attention. We now have concluded the presentation and invite you to ask any questions you may have. Operator, you can now open the floor for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Ben Nolan with Stifel. Please proceed with your question.

Ben Nolan (MD and Senior Equity Research Analyst)

Yeah. Hi. Good morning. Congrats on getting some term sheet for the refinancing. I was curious, Michael, if you could give a little color on what the cash outflows would look like on a quarterly basis or the interest and amortization. Any thoughts as to sort of what that would look like?

Michael Gregos (CFO)

Yeah. Sure. I mean, let's say, on average, this will cover, let's say, a profile of about eight years. So on an age-adjusted basis, it's about 23 years. And the margin on this financing is quite below where we are today. But let's not forget that in September, our swap expires, so we will be, let's say our debt will be under floating interest. So that's what we can provide at this stage. But I am pleased to say that the margin is quite below where we are today.

Ben Nolan (MD and Senior Equity Research Analyst)

Right. So I guess what I'm trying to get to is, relative to your cash flows coming in, how much is going out or would you anticipate going out onto the debt service? What's the margin?

Michael Gregos (CFO)

Well, let's say, on aggregate, I mean, depending on where interest rate let's say the amort element would be about close to $45 million, and the interest element would be, let's say, somewhere slightly south of the $20 million. So post-debt amort, there is a cash buildup.

Ben Nolan (MD and Senior Equity Research Analyst)

Okay. Are there any restrictions on what you can do with the excess cash after amort and interest?

Michael Gregos (CFO)

No. No. There's no restrictions. There's no dividend restriction either, yeah, on the comment.

Ben Nolan (MD and Senior Equity Research Analyst)

Okay. Okay. Perfect. And just since you mentioned it, any thoughts as to what you might do with the excess cash flow after debt service?

Michael Gregos (CFO)

I think it's a bit too early to say. Our next step is just to close this financing, and I think it's a bit too early to say what the next step will be on how to utilize this excess cash.

Ben Nolan (MD and Senior Equity Research Analyst)

Okay. Yeah. I appreciate that. I just thought I'd ask. All right. Well, again, it's important news, so I appreciate the feedback there.

Michael Gregos (CFO)

Okay. Thank you, Ben.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. There are no further questions at this time. At this point, I'd like to turn the call back over to Tony Lauritzen for closing comments.

Tony Lauritzen (CEO)

Okay. Well, thank you, Joel. We appreciate your time and attentiveness. Thank you for your participation, and look forward to connecting with you again on our next call. Take care. Goodbye.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.