Even as broad markets surge higher, there are certain stocks or investment themes that have been laggards. One MLP has declined by 18% year to date but is attractive for the next 12 to 24 months.
Dynagas LNG Partners LP (DLNG, Financial) is an MLP that is focused on owning and operating high specification LNG carriers that are on multiyear contracts with major energy companies globally.
As of the second quarter, Dynagas had a fleet of six LNG carriers with an average fleet age of 7.1 years. Further, five of the six LNG carriers have ice class specification.
Dynagas provides cash distribution of $1.69 per unit, and that translates into a distribution yield of 12.9%. This healthy distribution is sustainable, and the article will elaborate on the reasons for the same.
Credit metrics to remain strong
When discussing the sustainability of high cash dividends, it is important to discuss the MLP's credit health. The following points suggest Dynagas LNG Partners is likely to have decent credit metrics in the foreseeable future:
- As of June 30, the MLP reported net debt to LTM EBITDA of 5.3. This might seem like high leverage, but with EBITDA interest coverage of 2.2 based on annualized numbers, I expect smooth debt servicing.
- Dynagas has an extended debt maturity profile with major debt maturity of $250 million coming in 2023 followed by debt maturity of $451 million in 2023. With no immediate debt refinancing pressure, the MLP is well positioned.
- As of June 30, Dynagas reported gross debt of $730 million and net book value of vessels of $993 million. With loan to value of 74%, the MLP has buffer for leveraging.
- As of June 30, Dynagas had remaining order backlog of $1.49 billion with average term of 10.2 years. With 84% contracted fleet for fiscal 2017 and 75% contracted fleet for fiscal 2018 and fiscal 2019, the MLP is well positioned for clear cash visibility for cash distribution and debt servicing.
- The average day hire per LNG carrier declined to $66,900 in the second quarter from $81,300 in second-quarter 2016. LNG trade is likely to increase by 50% from current levels by 2021, and this implies sustained demand for LNG carriers. As hire rates trend up in the next 12 to 24 months, I expect credit metrics to improve and provide Dynagas with higher cash distribution flexibility.
Growth visibility from dropdowns
Dynagas has clear revenue visibility for the next few years, and it comes from strong counterparties. While declining day rates is a near-term concern, I don’t see that as a sustained worry for Dynagas or any other LNG player in the industry.
From a growth perspective, Dynagas is well positioned with dropdown opportunities from the sponsor company. As the chart below shows, Dynagas Holding has carriers with long-term contracts and the total contract backlog for the sponsor company is $8.1 billion.
With Dynagas having purchase option for five LNG carriers and with two of the five carriers already employed on five-year contracts, I expect dropdowns in the next 12 to 24 months and that will improve the backlog and cash flow visibility.
Importantly, if hire rates start trending higher, I expect growth in cash distribution on dropdowns. This can additionally trigger unit price upside.
Favorable industry dynamics
Company-specific factors are positive for Dynagas, and industry tailwinds also support the bullish thesis.
Just to put things into perspective, LNG exports have increased from 242mt in 2011 to 264mt in 2016. According to the company’s latest presentation, LNG exports are likely to be 407mt by 2021. This implies an increase of 51% from current levels and if this holds true, the demand for LNG carriers is likely to be robust.
From a demand perspective, a majority of the volume is likely to flow into Europe and the Asia Pacific region that includes high-growth countries such as China and India. While China’s GDP growth might stabilize around 7%, India has the potential to touch double-digit GDP growth in the coming years, and this will ensure strong demand coupled with long distance LNG trade.
The U.S. is likely to remain a key exporter in the coming years, and this factor will trigger strong demand for LNG carriers. While Mexico is the key export destination for U.S. LNG, China and India also find a place among top importers from the U.S., and it’s likely to increase in the next three to five years.
Conclusion
There is no doubt that the LNG carriers face near-term headwinds, and that’s reflected in decline in hire rates for Dynagas' fleet. This has translated into lower EBITDA and unit price decline.
Long-term industry dynamics are robust and near-term correction in the MLP unit can be used for gradual accumulation and long-term exposure. In the next 12 to 24 months, I expect the unit price to trend higher along with potential increase in cash distribution.
Disclosure: No positions in the stocks discussed.
