This week, we review a shipping company that has established a leading position in the shipping of LNG (liquid natural gas) in areas or through routes that are located in sub-zero or ice bound areas. Dynagas LNG Partners (DLNG) has targeted a specific niche in the shipping industry, one that has significant lead time and barriers to entry for competitors, and the majority of its fleet of LNG carriers are capable of shipping LNG from ice-bound Arctic ports. The Arctic is rich in natural gas resources, and Dynagas is the only fleet that regularly ships LNG via the North Sea Route. Its LNG carriers are employed on multi-year contracts to some of the world’s largest gas companies, such as Gazprom and Statoil, and with the mounting environmental pushback on oil and coal power, natural gas is emerging as the environmentally superior, cleanest and guaranteed source of power. DLNG’s’ multi-year contracts have proven extremely lucrative, and the company currently boasts an outstanding contracted revenue backlog of $670.9 Million, with an average remaining contract duration of five years. The company’s fleet of LNG carriers is fully contracted through 2016 and is 80% contracted for 2017. Dynagas has shown solid growth the past few years, as noted below, and the company issued this 6.25% couponed debt as a means to finance the the acquisition of additional carriers. The currently discounted price of about 92.5 gives this lessor known and unrated issue a very attractive 8.25% yield to maturity, in about 4½ years. Considering the solid financial results that Dynagas has achieved over the last few years, its respectable revenue backlog, and its superior position as the leading Arctic LNG shipping source, we see these relatively short term US dollars bonds as a remarkably sound addition to our high yield global Fixed Income-1 and Fixed Income-2 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. This provides the benefits of stable cash flows and high utilization rates. A multi-year contract is defined as charters of two years or more.
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.
In addition to the current LNG Carrier fleet owned by DLNG, it has purchase options on 5 LNG Carriers from 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.
The Liquid Natural Gas (LNG) Market
Global demand for natural gas is estimated to have grown by about 2.7% per year since 2000; however, global demand for LNG has risen by an estimated 7.6% per year over the same period, almost three times faster. It is estimated that in 2014, 241 million tons of LNG was produced, and a conservative forecast is that 156 million new tons of LNG will be added to the market between now and 2020, representing a 65% increase as compared to 2014.
After 2020, demand growth is expected to continue at a slightly slower pace as markets mature. By 2030, global LNG demand could be almost double that of the estimated 2014 level of approximately 250 million tons. Japan, South Korea and Taiwan have driven and will continue to drive growth in the global LNG market, with China and India expected to be the biggest sources of additional LNG demand.
Multi-Year Contracts Provide Stable Cash Flow
Dynagas has secured multi-year contracts for all of its LNG carriers with some of the world’s largest oil and gas companies, such as BG Group (recently acquired by Royal Dutch Shell), Statoil and Gazprom. As of February 2015, Dynagas’ contracted revenue backlog was an astounding $670.9 million USD, with its average remaining contract duration of 5.0 years. These contracts easily outlast the duration of this bond issue.
In addition, Dynagas’ fleet is fully contracted through the end of 2016, and is currently 80% contracted for 2017. With the continued increasing demand from Asian countries for imported liquid natural gas, Dynagas’ LNG transport services will be essential to providing these countries a key element of their energy mix.
Dynagas Unique Advantage
While Dynagas is able to provide conventional LNG shipping services, perhaps the one area where this shipping partnership shines is in its ability to provide services in the subzero, ice-bound conditions, mainly found in Arctic and sub-Arctic locations.
Two notable natural gas developments in the Arctic region are Statoil’s Snohvit project and Total’s Yamal LNG project. Both are both located in a region where ice flows can significantly impact the transport of LNG. Snohvit has been producing LNG since 2007.
The Yamal LNG project, one of the largest industrial undertakings in the Arctic, will eventually involve the drilling of more than 200 wells, the construction of 3 LNG trains, and a vast gas terminal. France’s Total is leading the project as part of a strategic alliance with Novatek, Russia’s second-largest independent natural gas producer.
Currently, Dynagas is the only company in the world performing North Sea Route voyages with its LNG carriers on a regular basis. Oil and gas companies already producing in the area have LNG to be shipped to customers and Dynagas is filling that need. As Arctic LNG developments continue to come online, this will increase the need to transport LNG, and Dynagas is positioned as the natural beneficiary of this growth.
Dynagas has posted excellent growth in its financials over the past few years. Adjusted EBITDA increased from USD $64.7 M in 2013 to $84.8 M in 2014, an impressive 30.9% increase. Also for 2014, operating income was USD $64.7 M, up from $55.4 M in 2013, an increase of 16.7%
With 2014 operating income of $64.7 M and 2014 net sales of $107.1 M, the company also boasts a very healthy operating margin of 60.4%.
Net income for 2014 (after depreciation and interest / finance costs) was USD $50.6 M. The interest cost for this USD $250 M bond issue at 6.25% will be $15.625 M per year. This gives a very healthy interest coverage ratio of over 3x.
As of December 31, 2014, Dynagas had total liquidity, including cash on hand and revolving credit facility, of USD $65.9 M.
The default risk is Dynagas’ ability to perform. The company presently has a revenue backlog of USD $670.9 M with an average contract life of five years, which goes beyond the term of this bond issue. In addition, its carriers are 100% contracted through the end of 2016, as well as 80% contracted for 2017. In light of these two facts, we feel the default risk for this issue 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) are both headquartered in Greece. Greece has seen some level of economic instability recently, which might make some investors nervous. However, Dynagas is a private company, and as such, would only be indirectly affected by changes in the Greek government.
Dynagas LNG Partners 2019 bonds may have similar risks, yields and/or durations to other US dollar bonds previously reviewed on our Bond-Yields.com blog, such as 9.15% Vanguard Natural Resources, 8.1% Japfa Comfeed and 10.6% Fortescue Metals Group.
Summary and Conclusion
Dynagas LNG Partners has identified a relatively untapped market in Arctic LNG shipping. They have strategically planned the growth of their fleet and executed extremely well. Barriers to entry for Arctic LNG shipping are high, making Dynagas the go-to solution for Arctic LNG. The company has also done a fantastic job securing multi-year contracts for its LNG carrier fleet. Its revenue backlog of nearly USD $671 million, and an average remaining contract duration of five years will continue to bring stable cash flows. Having its fleet fully contracted for the next two years (and 80% contracted in 2017) ensures high fleet utilization which translates to revenue generation. These 6.25% couponed, relatively short-term bonds, with an excellent current yield of over 8.25%, are a solid addition for income investors seeking further diversification, and as such we have marked them for addition to our FX1 and FX2 High Yield Global Income portfolios.
Issuer: Dynagas LNG Partners LP
Yield to Maturity: ~8.25%
Disclosure: Durig Capital and certain clients may have positions in Dynagas LNG 2019 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
To know more about this DynaGas bond call our fixed income specialist at 971-327-8847