Dynagas LNG Partners LP (DLNG): 250% Capacity Upside from Seven Optional Vessels, 150% Adjusted EBITDA Upside from Four Contracted Charters, Strong Distribution Growth Potential
Dynagas LNG Partners LP (DLNG; “Dynagas”) was formed in late 2013 as a carveout from parent and sponsor Dynagas Holding Ltd., and went public on November 12, 2013. Its sponsor, Dynagas Holding Ltd., is a marine transportation company based in Greece that was founded in 2004 and offers marine LNG vessels with in-house ship management services, with a focus on operational safety, reliability and best practices. Dynagas Holding Ltd. builds ships at high-quality shipyards, with significant in-house design and development involvement. Additionally, the majority of its fleet is winterized for safe and reliable transport in icy and sub-zero conditions.
Stable Minimum Quarterly Distributions with Significant Distribution Growth Potential
For its quarter ended 3/31/2014, Dynagas LNG Partners (“Dynagas”) plans to pay the minimum quarterly distribution of $0.365 per unit ($1.46 per unit annualized) on May 12, 2014 to unitholders of record on May 5, 2014.
With shares at $22.74 (closing price on 5/9/2013), the company offers a distribution yield of 6.70%, a price-to-earnings ratio of 11.1x and a price-to-book ratio of 2.6x. Dynagas has a market capitalization of $680.7 million. Shares currently undervalue the significant upside potential from about 250% growth in carrying capacity through options on seven additional vessels.
Arctic Aurora Acquisition – The Upside Play Begins; Distribution to Rise 7%
The Arctic Aurora is the first of seven optional vessels that Dynagas plans to acquire from its sponsor. The Arctic Aurora is a 155,000 cbm, 2013-built ice-class LNG carrier that is currently on a 5-year charter with Statoil through July 2018 (more than four years remaining on charter).
Dynagas plans to acquire the vessel for $235 million, with funds from a secondary offering of public units and borrowings under a new $340 million credit facility. To this end, the company filed a secondary offering registration statement with the SEC on April 24, 2014.
Dynagas plans to acquire the Arctis Aurora effective May 30, 2014. This will be an accretive transaction which will generate contracted gross revenue of $117.2 million and annual net operating cash of about $21.7 million during its initial charter period with Statoil.
Subsequently, management expects to boost distributions by $0.0225 to $0.0275 per unit per quarter, or about $0.09 to $0.11 per unit annually, an increase of about 7% over the current distribution level. The higher dividend will be paid for the quarter ending June 30, 2014, on a pro rated basis.
Stable Cash Flow from Multi-Year Charters with Quality Companies
Dynagas is a growth-oriented master limited partnership that focuses on owning and operating marine LNG carriers under multi-year charters (2+ years) with high credit-quality energy companies. The company currently has three LNG vessels and the option to acquire seven more ice-classed 1A FS winterized carriers from its sponsor (of the seven, four vessels are on 5+ year charters).
Its current fleet is chartered with Britain’s BG Group and Russia’s Gazprom, with firm charters through mid-2017 on Clean Energy and Ob River, and through mid-2016 on Clean Force, with $270 million in total contracted revenue over the 3.2 year average remaining contract duration.
New 13-Year Charter for Clean Force – from BG Group to Gazprom
For its Clean Force vessel, which is an ice-class, fully winterized 149,700 bm LNG carrier, Dynagas entered into a new 13-year time-charter with Gazprom, effective July 2015, and amended the ship’s existing charter with BG Group (at no additional cost) to July 2015 from Q3 2016.
This increases the current fleet’s average charter term from about 3 years to almost 7 years. In addition, the new higher rate charter increases average day rates from $76,150 to $78,200 per day per vessel for the three vessels.
The vessel’s name will be changed to Amur River before delivery to Gazprom.
Significant Growth Upside from Seven-Vessel Dropdown Fleet
In addition to its existing three-vessel fleet, Dynagas has the option to acquire any of seven additional vessels within two years of delivery – with the potential to increase capacity 250% from 449,100 cubic meters (cbm) to 1,562,100 cbm, and plans to acquire the Arctic Aurora first.
Of these optional vessels, three are in service on 5-year contract terms with Gazprom and Statoil, and four will be delivered beginning Q2 2014 and could potentially be contracted by leading natural gas producers such as Qatargas and Shell. These optional vessels are highly capable and versatile LNG carriers.
With four contracted optional vessels, EBITDA could rise almost 150% from $64.7 million currently to $159.8 million, with 99% utilization rates. This would significantly boost available cash for distribution and distributions per common unit… and this upside is not fully reflected in shares.
Favorable Industry Dynamics
With fracking and clean fuel demand on the rise, and with geo-political tensions increasing, demand for inter-country natural gas is on the rise.
New LNG export production is expected to increase by about 110 million tons per year from 2013 through 2020, up 47%. Of this increase, 30 million tons could come from U.S. exports from new LNG liquefaction terminals (Sabine Pass, Freeport LNG, Lake Charles and Cove Point). In addition, arctic LNG production in Russia will require ice-class winterized tonnage from 2017 onwards.
As a result, the shipping market is expected to remain tight over the long run, with high utilization levels and charter rates. As new liquefaction plants become operational, analysts predict a sharp imbalance between demand and supply, with significant shortage of LNG vessels in the 2017/2018 period. In anticipation, leading companies will likely sign long-term contracts at higher charter rates over the next two years to make sure their trade is not affected, and to receive better rates than when demand/supply imbalances peak.
Steady History of Revenue, Adjusted EBITDA and Available Cash Gains
As the graph below shows, Dynagas’ initial fleet has steadily increased revenue over the past three years. The company has grown adjusted EBITDA and available cash (for distribution) steadily, with $48.2 million available for distributions in 2014, up from $46.8 million in 2013 and enough to support minimum quarterly distributions of $0.365 per unit.
MLP Holding Structure
Dynagas Holding Ltd. owns or controls 58.3% of Dynagas LNG Partners, and public unitholders have a 41.7% stake. Dynagas Holding owns 100% of the general partner, which holds 100% of all IDRs. In addition, Dynagas Holding also owns about 15 million subordinated units which will convert to common units about three years after the November 2013 IPO date.
Management Led by Industry Veteran George Prokopiou
Dynagas is managed by George Prokopiou who serves as Chairman of the Board, CEO Tony Lauritzen and CFO Michael Grigos. Prokopiou entered the shipping business in 1974 and founded Synagas Ltd. He has overseen the construction of 93 vessels and is an industry insider and veteran. Tony Lauritzen earlier served as commercial manager of the sponsor’s LNG activities and has extensive LNG shipping experience. He is married to the founder’s daughter. Michael Grigos joined the company in November 2013 and earlier served with affiliate Dynacom Tankers Management.
Q4 Financials Show 25% Income Growth, 10.5% Increase in Distributable Cash
For its fourth quarter ended December 31, 2013, Dynagas LNG Partners reported operating income of $14 million and net income (attributable to unitholders) of $11 million, with adjusted EBITDA of $17.4 million and distributable cash flow of $12.9 million.
Quarterly revenues were up 3.5% to $21.7 million and operating income gained 23.4% to $14 million on significantly lower voyage and vessel operating expenses due to no dry-docking in the quarter. Operational gains were partly offset by higher interest and finance costs on higher commitment fees, non-cash write-offs and amortization of deferred finance costs. Looking ahead, G&A costs are expected to rise due to public company reporting and investor relations expenses.
As a result net income was up 25% (compared to the year-ago quarter) to $11 million, with earnings per diluted common unit up 27.5% to $0.51per diluted common unit.
Dynagas ended the quarter with total cash of $27.7 million (including $22 million in restricted cash), vessels valued at $453.2 million, $214.1 million in long-term debt and $257.7 million in partners’ equity.
Its debt has an average interest margin of 2.85% and a net debt-to-adjusted EBITDA ratio of 2.7x. The company also has $48 million available for drawdown through a credit facility.
In the quarter, Dynagas had adjusted EBITDA of $17.4 million (up 18%) and distributable cash of $12.9 million that was up 10.5% on an annualized basis.
Dynagas LNG Partners LP offers a stable 6.7% distribution yield with 7% distribution growth in the coming quarter from its acquisition of Arctic Aurora, the first of seven optional vessels it can acquire from its sponsor. In addition, Dynagas recently announced a new 13-year time-charter with Gazprom at higher day rates which increases its average fleet contract term to almost seven years. These positive developments led management to increase distributions by about 7% in the coming quarter. The $235 million Arctic Aurora acquisition is accretive to earnings, and is only the first step towards the significant upside that shares offer.