This week, we revisit a liquid natural gas (LNG) shipping company who has a virtual monopoly in its ability to transit and service the Artic Regions via the North Sea Route. We have reviewed Dynagas LNG Partners on two previous occasions, in May 2015 and November 2015. The company continues to perform well, with revenues and profits increasing even as oil and gas prices have seen an unprecedented decline the last 18 months.
For 2015, Dynagas recorded excellent gains, with voyage revenues up 35.5%, and adjusted EBITDA up 33.6%.
The company continues to maintain an outstanding contract backlog, valued at $607.7 million, with its average remaining contract duration currently at 3.8 years.
In both of our previous reviews, the Monaco-based owner of LNG shipping vessels, maintained excellent interest coverage at or above 3x, which we find is still the case.
With its most recent LNG carrier acquisition completed in December 2015, Dynagas has minimal capital requirements going forward, which should translate to continued healthy cash flow.
The company has been and continues paying unitholders quarterly distributions, which have increased 15.8% since their inception in February 2014. In fact, the company has recently considered a 4-6% distribution increase- something that should reassure bondholders as to the level of distributable cash Dynagas is currently generating.
While Dynagas serves the liquid natural gas industry, their revenues are not directly tied to commodity prices. On the contrary, the company has continued to increase their revenue and profit even as oil and gas prices have experienced steep declines. In the wake of the financial crisis in Greece, the company smartly relocated its corporate offices to Monaco, where the company continues to thrive. Currently selling at a significant discount, these 3 ½ year bonds, with an outstanding 14.32% yield, provide an excellent portfolio addition for our managed income portfolios, FX1 and FX2.
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.
Dynagas recently completed its acquisition of the Lena River, an ice-class LNG carrier, from its sponsor Dyangas Ltd. This acquisition brings the number of LNG carriers in the Dynagas fleet to six, five of which carry the Ice Class 1A FS rating. This rating makes Dynagas Partners the only company presently able to transit the North Sea Route, an important advantage due to the ongoing development of LNG production along this route. Also, the Lena River is currently operating under a contract for Gazaprom Global LNG which will expire in October 2018. Dynagas estimates that the Lena River will generate approximately $86.6 million of incremental revenues over its remaining charter terms, and approximately $24.8 million of estimated net cash flow from operations for the first 12 months after acquisition.
In addition to the current LNG Carrier fleet owned by DLNG, it has purchase options on 4 LNG carriers from its sponsor, Dynagas Holding Ltd.. Two of these five LNG Carriers are already employed on multi-year contracts with Cheniere Energy and Gazaprom (a Russian natural gas company). All such optional vessels are ice classed 1A FS or equivalent and winterized. These four additional LNG carriers are also contracted to be employed under long-term charters for the Yamal LNG Project from 2019 onward.
Minimal Capital Expenditures and Free Cash Flow
Dynagas has significant value in its LNG carriers. With that said, its business model for generating income is fairly straightforward in that it leases its partnership-owned LNG carriers under multi-year contracts to energy companies. These energy companies not only pay the charter rates, but also pay many of the variable costs for the LNG carriers, such as fuel. With minimal capital requirements moving forward, this provides significant free cash flow to the company, which is not indexed to oil or gas prices.
Updates on Dynagas LNG Partners and Dynagas Limited
With the acquisition of the Lena River and in view of the partnership’s growth strategy, Dynagas LNG Partners management plans on recommending to its Board, a further increase to its quarterly cash distribution (for the current quarter) between 4% and 6%. These distributions have shown healthy growth since the first distribution was paid in February 2014, increasing by 15.8% since that time. The fact that the company not only has the cash to maintain this distribution, but is considering an increase, should provide a measure of assurance to bondholders as these distributions could be redirected to make interest payments if cash flow decreased significantly.
As we reported in both of our previous reviews, Dynagas has an outstanding contract backlog. This company’s latest estimates value this backlog at an outstanding $607.7 M. In addition, Dynagas’ fleet is fully committed for 2016 and 83% committed for 2017. Its average remaining contract duration is 3.8 years.
There have also been recent encouraging developments for Dynagas LNG Partners sponsor, Dynagas Limited. In August 2015, Dynagas Limited entered into contracts for the construction of five ARC7 LNG carriers to be used for the Yamal LNG projects (which we discussed in our May 2015 Dyangas review). These vessels will be built under a joint venture ownership with Sinotrans LNG Shipping and China LNG Shipping each owning 25.5% of the carriers. Two of these carriers are scheduled to be delivered in Q4 2017 and the remaining three will be delivered in Q1 2019. What is most exciting about this new development is that all of these vessels are contracted to be employed under long terms charters to the Yamal LNG Project until the end of 2045. Dynagas Partners will most likely have the option to purchase its sponsor’s share in these carriers once they are delivered.
The State of the LNG Shipping Market
According to Dynagas, LNG cargo production capacity is expected to grow faster than shipping capacity. It is conservatively forecasted that about 140 million tons of new annual incremental LNG will come to market between now and 2020. This represents a total increase of 57% compared to 2015. When comparing LNG supply to LNG shipping capacity from now until 2020, supply is projected to increase by 57%, while LNG shipping capacity is expected to increase by 32% over the same period. The company believes that LNG shipping will tighten in 2017, and in 2018 onwards, there will be a shortfall of shipping. It is this imbalance that will drive rate increases and will make Dynagas’ vessels so desirable going forward.
Dynagas continues to have good interest coverage. In both our previous reviews in May 2015 and November 2015, the company had maintained interest coverage above 3x (3x and 3.11x respectively). The company continues to show solid interest coverage for both Q4 2015 and full year 2015. For Q4 2015, Dynagas recorded operating income of $22.068 M and interest expense of $7.201 M for an interest coverage of 3.06x. For the full year 2015, the company had operating income of $88.092 M and interest expense of $27.939 M for a full-year interest coverage ratio of 3.15x. With the addition of the estimated net cash ($24.8 M) from its newest LNG carrier, the Lena River, interest coverage should be at or near 4x by the end of the year.
Dynagas posted solid results for its twelve-month period ending December 31, 2015. The company recorded adjusted EBITDA of $113.2 M as compared to 2014 adjusted EBITDA of $84.8 M, an increase of 33.6%. Voyage revenues also showed an impressive 35.5% increase, growing to $145.2 million from $107.1 M in 2014.
As of December 31, 2015, Dynagas had a total liquidity of $79.3 M, with $49.3 M in cash and an additional $30 M of available credit from its sponsor, Dynagas Ltd.
The default risk is Dynagas’ ability to perform. Dynagas has done a fantastic job of growing its fleet, it revenues and its profitability. It has built a unique niche in the LNG shipping market – the only LNG shipping company capable to transiting the North Sea Route and servicing the LNG projects coming online within the Arctic regions. It would take a great deal of time and money for a new, or even experienced shipping company, to break into this market. With the cost of a new, ice-classed LNG carrier coming in around $250,000, the barrier to entry in this market is cost prohibitive for many companies. Also, the company has continued to post solid financial results, including its regular dividend payments to unitholders.
Since mid-2014, oil and gas prices have seen an unprecedented decline. At its lowest point, oil prices were roughly one-third of what they were at their peak in the summer of 2014. Natural gas prices have also largely decreased during this same time period. And while some might feel that these decreases in oil and gas might have an effect on Dynagas’ business, their revenues are based on multi-year, fixed rate contracts, not on commodity prices. The fact that Dynagas has continued to grow and increase its profits during this time should reassure bondholders and investors alike.
These 3 ½ year bonds, currently yielding over 14.3%, have similar yields and durations to other bond issues we have reviewed on Bond-Yields.com, such as 17.4% TransGlobe Energy, maturing March 2017 and 12% PHI, maturing March 2019.
Summary and Conclusion
With our third look at Dynagas, the company has continued to post impressive growth in revenues and profits. It continues to pay its unitholders a healthy distribution, and most impressively, the company’s niche in navigating the North Sea Route for LNG shipping continues to give it a competitive edge over other LNG shipping companies. Its outstanding contract backlog, increasing revenues, and stable interest coverage all point to a company that is ideally positioned for continued growth. These relatively short-term bonds provide the savvy investor with diversification that is independent of the volatility associated with commodity prices. With very high 14.32% yields, these bonds will make an excellent overwieght position in both our Fixed-Income1.com and Fixed-Income2.com global high yield income portfolios.
Issuer: Dynagas LNG Partners LP
Yield to Maturity: ~14.32%
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Disclosure: Durig Capital and certain clients may have positions in Dynagas LNG 2019 bonds.
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