In the past, my focus has been on stocks that have underperformed year to date, and I continue my analysis with Dynagas LNG Partners LP (DLNG, Financial).
While broad markets have moved higher, Dynagas LNG has remained sideways year to date, and this partnership unit has upside in the next 12 to 24 months. It is important to mention that Dynagas LNG currently offers distribution yield of 11.2%, and this factor makes it worth considering.
Improved balance sheet profile
In a leverage-neutral transaction, Dynagas LNG secured debt of $480 million with May 2023 maturity, and the company used this debt to repay $184.4 million term loan facility and $280 million senior secured credit facility. As a result of this transaction, Dynagas LNG has minimal debt repayment for 2017 and 2018 with $255 million in debt maturity coming in 2019. The next major debt maturity comes in 2023. With an extended debt maturity profile, the company’s balance sheet looks healthier.
The second important point to mention here is that as of March the company’s vessel book value was $1.0 billion and with total debt of $714 million, the loan-to-value comes to 71%. This, coupled with the fact that the debt to capitalization is 55%, gives Dynagas LNG ample financial flexibility.
Investors will point out that the partnership unit has net debt to LTM EBITDA of 4.7 as of March. I don’t see that as a concern, and I will elaborate on my reasons when I discuss the company’s order backlog.
I must mention, though, that for the quarter ended in March Dynagas LNG reported EBITDA of $31.2 million; for the same period, the company’s net interest and finance cost was $8.4 million. This translates into EBITDA interest coverage of approximately 4.0 and backs my point that leverage is not an issue since debt servicing is smooth.
Strong order backlog
The second important reason to be bullish on Dynagas LNG is the fact that the company has a robust order backlog, which also explains why current distribution is likely to sustain.
For the six LNG carriers in the company’s profile, the total order backlog stands at $1.52 billion with average remaining charter duration of 10.5 years. This provides clear cash flow visibility for the coming years and ensures debt servicing remains smooth along with steady cash distribution. Just to put things into perspective, 86% of the fleet is contracted for 2017 with 75% fleet contracted for 2018 and 2019.
With Statoil (STO, Financial), Yamal and Gazprom (MIC:GAZP, Financial)(LSE:OGZD)(ARCA:GAZ, Financial)(OGZPY, Financial) being clients, there is minimal counterparty risk, and this is another reason to be relatively confident in the company’s cash distribution.
While the existing fleet provides clear revenue and cash flow visibility, Dynagas LNG has the option for dropdown from parent company Dynagas Holding. All the dropdown opportunities are fully financed and are on long-term charter with Yamal LNG. Therefore, there is growth opportunity for Dynagas LNG in the next 12 to 24 months, and I expect an increase in distribution during this period.
Strong industry outlook
Purely from an LP-specific perspective, I have discussed the financials and the order backlog that will provide cash flow visibility. I want to shift focus to the industry outlook as positive industry sentiments will ensure that positive growth momentum sustains for Dynagas LNG in the next three to five years.
According to the company’s latest presentation, LNG exports are likely to reach 410mt by 2021, an increase of 55% as compared to 2016. While supply will remain steady, the biggest demand drivers will be Europe and the Asia-Pacific region that includes countries like China, India and Pakistan.
With LNG being relatively environment friendly, I expect demand growth to remain steady and with low per capita consumption in China and India, the long-term outlook is robust. It is important to note that the U.S. is emerging as a key exporter, and this implies long distance trade to China and India. This will ensure that vessel utilization also remains high.
Conclusion
Dynagas LNG is among the most attractive partnership units with strong fundamentals and a high cash distribution. Considering the factors discussed in the article, the LP unit is worth buying with sideways movement.
As decent quarterly numbers continue to flow and dropdowns happen over the next 12 to 24 months, the LP unit will trend higher.
Disclosure: No positions in the stock.
