This week, we revisit a leading shipping company in the transport of LNG (liquid natural gas) through routes in ice-bound areas. Dynagas LNG Partners has targeted a specific niche in the shipping industry, transporting LNG from ice-bound Arctic ports. Dynagas is the only fleet that regularly ships LNG using the North Sea Route. This ability will prove increasingly valuable, especially as a major Arctic LNG project, the Yamal Project, is slated to begin LNG production in 2017. Dynagas’ sponsor, Dynagas Limited, has recently signed an agreement to provide nine LNG carriers to transport Yamal LNG. The company has recorded continued outstanding growth in Q1 and Q2 this year, with adjusted EBITDA increasing a whopping 66.2%. The company’s multi-year contracts with large energy companies such as Gazaprom and Statoil, have resulted in an impressive revenue backlog of $596.3 million. These relatively short, 4 year bonds, currently selling at a sizeable discount of about 87 and yielding an remarkably high 10.25%, should be a welcomed diversification for investors looking to add exposure to the energy sector to their portfolios. We have marked these bonds for additional weighting in both our FX1 and FX2 managed income portfolios.
About the Issuer
Dynagas LNG Partners is a growth-oriented limited partnership focused on owning and operating high specification and versatile LNG carriers that are employed on multi-year contracts with international energy companies. Its largest equity owner is its sponsor, Dynagas Limited, headquartered in Monaco, France, who owns 44% of Dynagas Partners. Through the use of multi-year contracts (two years or more), the company has been able to achieve stable cash flows and high utilization rates.
The current fleet of Dynagas Partners consists of five LNG (liquid natural gas) carriers employed on multi-year charters. Two of these carriers were acquired in 2014, one on June 26, 2014 and the other on September 25, 2014. These two carriers increased Dynagas’ carrying capacity by 69%. Dynagas’ fleet of carriers not only have the ability to handle conventional LNG shipping – several carriers carry the Ice Class 1A FS notation and are winterized which enables trade in subzero and ice bound conditions. Presently, the carriers represent an aggregate carrying capacity of approximately 759,100 cubic meters. To date, Dynagas Partners is the only company able to transit the North Sea Route due to the Ice Class ratings on its LNG carriers.
In addition to the current LNG Carrier fleet owned by DLNG, it has purchase options on 5 LNG Carriers from its sponsor, Dynagas Holding Ltd.. Two of these five LNG Carriers are already employed on multi-year contracts with an initial term of 5 years in duration. All such optional vessels are ice classed 1A FS or equivalent and winterized.
Recent updates on Dynagas LNG Partners and Dynagas Limited
Recent exciting news was announced in June 2015 regarding one of Dynagas Partner’s LNG carriers, the Amur River. In June 2015, this carrier commenced employment under its new 13-year time charter with Gazaprom Global LNG Ltd., which represents an estimated revenue backlog of approximately $307.4 million.
Another outstanding development for Dynagas Limited (Dynagas LNG Partners sponsor and major shareholder) is the recent announcement of that it has entered into long term time charter agreements for five ARC7 and four ARC4 liquefied natural gas carriers for the Yamal LNG Project, which is located on the Yamal Peninsula in Northern Russia.
Our last review of Dynagas LNG Partners earlier this year highlighted the Yamal project, one of the largest LNG developments within the Arctic Circle. Yamal LNG is a joint venture between NOVATEK (60 percent), TOTAL (20 percent) and China National Oil & Gas Exploration and Development Corporation (CNODC) (20 percent). The project consists of three LNG trains with a total capacity of approximately 16.5 million metric tons of LNG per annum. The Yamal project is estimated to begin LNG production in 2017.
Increasing Fleet Size
Dynagas recently issued preferred units in July 2015. The proceeds from this issue are intended to help finance the drop down of an additional LNG carrier from its sponsor, Dynagas Limited.
In addition to this, the recent announcement of Dynagas Limited’s agreement to supply LNG carriers for the Yamal project will provide additional carriers for drop down to Dynagas LNG Partners. With the continued demand in the Far East countries of China and Japan, more capacity for Dynagas Partners will easily translate to increased revenues and profits. In its most recent conference call on Q2 results, Tony Lauritzen, CEO of Dynagas Partners, stated, “Based on feasibility, we believe we may increase the partnerships fleet to 15 vessels by 2019.” This would represent a 200% increase in the number of vessels operated by the partnership.
The most impressive financial statistic regarding Dynagas is the large revenue backlog due to the company’s many long-term, multi-year contracts. As of 8/25/15, total contract backlog is valued at $596.3 million with an average remaining contract duration of 4.5 years.
At our last review of Dynagas Partners in May 2015, the company had registered solid financial results for 2014, growing adjusted EBITDA by 30.9% over 2013, and increasing operating income by 16.7% over 2013. The company continues to post excellent growth over Q1 and Q2 2015. For the six months ended 6/30/2015, adjusted EBITDA was $55.6 million versus $33.5 million for the same period in 2014 representing an impressive increase of 66.2%.
Net income also showed healthy growth over 2014. For the six months ended 6/30/15, net income grew by 37.3% over the same period for 2014 ($29.2 million vs $21.2 million).
Voyage revenues for the six months ended 6/30/15 were $71.2 million versus 41.9 million in 2014, mainly due to Dynagas’ acquisition of 2 additional LNG (Liquid Natural Gas) carriers in June and Sept of 2014. These acquisitions increased Available Days to 905 from the previous level of 550 days.
Dynagas registered a solid interest coverage ratio for Q1 and Q2. For the six months ended 6/30/15, Dynagas had operating income of $43.014 million and interest and finance costs of $13.814 million for an interest coverage of 3.11x. Dynagas’ liquidity as of June 30, 2015 totaled $66.5 million ($36.5 million in cash and $30 million revolving credit facility with their sponsor).
The default risk is Dynagas LNG Partners ability to perform. The company continues to post impressive growth and its revenue backlog of $596.3 million is outstanding. In addition, its carriers continue to be 100% contracted through the end of 2016, and 80% contracted for 2017. In light of these facts, the default risk for these bonds is extremely low.
Some might feel that one of the risks for Dynagas is the market price or spot price for liquid natural gas, specifically in the Far East markets as these make up the majority of LNG imports. However, Dynagas leases their carriers to transport LNG and has no direct exposure to LNG prices. Far East countries, like Japan and China, will continue to use LNG for power even if the price continues to drop. A significant price drop could cause producers to curtail production and sales until the price recovers. In turn, this might cause a temporary slow-down in the leasing of Dynagas carriers, but this would most likely be short-lived.
Dynagas and its sponsor (Dynagas Limited) had previously been headquartered in Greece. In light of the recent economic instability, many investors may have been wary of investing with a company with ties to the economically challenged country. Since our last review of Dynagas, the company has relocated its headquarters from Greece to Monte Carlo.
Dynagas LNG Partners 2019 bonds may have similar risks, yields and/or durations to other US dollar bonds previously reviewed on Bond-Yields.com, such as 9.15% Vanguard Natural Resources, 8.1% Japfa Comfeed and 10.6% Fortescue Metals Group.
Summary and Conclusion
Dynagas continues to perform well. Since our last review, the company has posted impressive growth and has taken steps to increase its fleet once again. It is also encouraging to see new multi-year contracts being signed such as the recent new 13-year time charter with Gazaprom Global. Additionally, the company’s rich revenue backlog translates to steady cash flow immune to LNG commodity prices. Dynagas remains the go-to for client companies needing to transport liquid natural gas within the Arctic region. The outstanding 10.25% yield on these 48-month bonds provide investors with diversification within the energy sector without the exposure to commodity volatility. We have marked these excellent yielding bonds for additional weighting in our FX1 and FX2 portfolios.
Issuer: Dynagas LNG Partners LP
Yield to Maturity: ~10.25%
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Disclosure: Durig Capital and certain clients may have positions in Dynagas LNG 2019 bonds.
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