Dynagas Partners: Preferred shares now yield 9.8% (NYSE: DLNG)

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Introduction

Dynagas LNG Partners (NYSE: DLNG) is a shipping company operating six LNG carriers. This class of vessel is currently in high demand due to the energy crisis in Western Europe, but as DLNG has deployed all his vessels under long-term charter contracts at a fixed daily rate, he does not see the advantage of higher spot rates and one-year charter rates. This could change in the third quarter of 2023 when the first LNG carrier will be delivered again after its charter period with Equinor (EQNR) ends and if this vessel could be redeployed at a strong charter rate, Dynagas should see its bottom line and free cash flow increase quite nicely. In previous articles I was focus on preferred stocksand I still think these stocks offer an attractive risk/reward ratio.

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Data by YCharts

The second quarter and the first half were robust

Dynagas’ business model is quite simple. It owns six LNG carriers chartered to three different counterparties.

Logbook of ships

Dynagas Investor Relations

When the war between Ukraine and Russia broke out, there was a lot of uncertainty about the impact of sanctions on LNG carriers. The Yamal LNG project is Russian and three of the vessels were chartered by Gazprom Singapore. Gazprom Singapore was actually a subsidiary of Gazprom Germany, and the German state actually took over the reins of Gazprom Germany, renaming the company SEFE: “Securing Energy For Europe”. And during the September conference call, DLNG management made it clear that the company was in compliance with all regulations.

In addition, the partnership counterparties perform their obligations under their respective charters on time in accordance with applicable US and EU rules and regulations. Our vessels named Clean Energy, Ob River and Amur River are chartered by the former Gazprom Marketing and Trading of Singapore, which was renamed Securing Energy for Europe Marketing and Trading and which we will now call SEFE. SEFE was placed under the control of the German government. SEFE’s parent company has received a loan commitment of around €9.8 billion from the German government. So, effectively, Clean Energy, Ob River and Amur River trade on routes under SEFE guidelines and are no longer sub-chartered by SEFE to Sakhalin Energy.

This article is based on the “as is” situation – assuming that there will be no impact of additional sanctions on Dynagas.

As the charter rates are quite fixed, Dynagas’ financial results are actually quite stable as well and the only variable is the total interest expense, which is increasing under the impetus of rising interest rates in the markets. financial.

Total revenue for the second quarter of the fiscal year was $33.4 million, resulting in net profit of $11.1 million. After deducting preferred dividends, net income attributable to DLNG shareholders was $0.22 (note: this includes a $4.85M gain on derivatives).

income statement

Dynagas Investor Relations

In the image above you can also see that interest charges have started to rise. Q2 interest expense rose around 10% despite a continued effort to reduce gross debt and net debt by hoarding the vast majority of free cash flow to pay down debt.

A very important element in determining whether Dynagas is attractive or not right now is free cash flow. As these LNG carriers have a useful life of several decades, depreciation expense weighs on the reported net income, but is not expected to have a material impact on the free cash flow result as capital expenditure maintenance are quite low (note: Dynagas spent approximately $2.8 million in dry-docking costs).

This is clearly visible in the cash flow statement. Reported cash flow from operations was $8.2 million, but adjusting for changes in working capital position, adjusted cash flow from operations was $17.5 million. dollars. And after deducting capital expenditures of $0.5 million, the free cash flow result was approximately $17 million.

Cash flow statement

Dynagas Investor Relations

The total amount of preferred dividend payments is $2.9 million per quarter, which means that the underlying free cash flow attributable to common shareholders was approximately $14 million. The inflows of cash were fully utilized to reduce net debt and strengthen Dynagas’ balance sheet.

At the end of June, the balance sheet contained $100.2 million in cash and total long-term debt of $539 million for net debt of approximately $439 million. This is just over 50% of the book value of the vessels and I think this book value is quite realistic given that a new LNG vessel currently costs around $240 million.

Balance sheet

Dynagas Investor Relations

The balance sheet is strengthening month by month thanks to the policy of maintaining cash on the balance sheet. It also makes preferred stocks safer: at the end of June, about $280 million in equity was rated below the $130 million in preferred equity. This means that even if Dynagas were to apply a 30% discount to the book value of its vessels (highly unlikely, given the current prices for new vessels, the market value of the vessels is probably a bit higher than the book value) , the shareholders could still be compensated.

Preferred shares are still attractive

In September 2021, I definitely preferred the Series A preferred stock because it offers a fixed preferred dividend of 9% ($2.25 per share, payable in four equal quarterly installments of $0.5625 per share). Series B was attractive but did not offer as much protection as these B shares will soon offer a floating preferred dividend. From November 2023, the quarterly preferential dividend will be set at 3M LIBOR + 5.593%. LIBOR will no longer be used and the quarterly preferential dividend will likely use SOFR 3M as a benchmark.

With the 3M SOFR currently at around 4.20%, the preferred dividend yield could actually be closer to 10%. And in other words: as long as the 3M SOFT exceeds 3.16%, the preferred dividends on Series B will be equal to or greater than the current payouts.

This indeed makes Series B preferred shares more attractive than a year ago. Add to that the fact that 9% yield preferred shares are trading almost 10% below par and the choice becomes a little more difficult. Basically, it boils down to the fact that investors who believe in an even higher 3M SOFR rate should buy Series B. Those who want additional visibility should buy Series A of the preferred shares, trading with (NYSE:DLNG.PA) as a stock symbol.

Investment thesis

While I’m still not interested in initiating a long position in Dynagas common stock, preferred stock is still very attractive. Perhaps even more interesting than a year ago as Dynagas’ balance sheet has become much stronger meaning preferred stocks are now ‘safer’ as there are more common stocks ranking below preferred stock.

Series B of preferred shares will provide an attractive option for speculating on short-term interest rates, but I still prefer the higher-yielding but fixed-rate Series A with a current preferred dividend yield of nearly 10%.

I have no position in Dynagas at the moment, but I like the Series A preferred stock.

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