The liquefied natural gas (LNG) sector is generally the crème de la crème of the public ocean shipping arena.
Revenues are largely fixed on lucrative multi-year contracts, unlike listed owners of dry bulkers and crude tankers whose revenues are whipsawed by spot rates. LNG ships are extremely expensive (around $185 million per newbuilding) and highly complex to operate, creating a barrier to entry that doesn’t exist in most other vessel categories.
LNG vessel owners boast some of the largest market capitalizations in public shipping. Blue-chip listed names include GasLog Ltd. (NYSE: GLOG) and GasLog Partners (NYSE: GLOP), sponsored by shipping magnate Peter Livanos, and Golar LNG Ltd (NASDAQ: GLNG) and Golar Partners (NASDAQ: GMLP), headed by Norwegian businessman Tor Olav Trøim. Famed Norwegian billionaire John Fredriksen is poised to bring his own LNG shipping company, Flex LNG, to the NYSE in the very near future.
And then, there’s the ‘problem child’ – outlier Dynagas LNG Partners (NYSE: DLNG).
DLNG is a public master limited partnership (MLP) spinoff of the private fleet of Greek ship owner George Prokopiou. It went public in 2013 and currently owns six LNG carriers, all of which are on long-term charter and missed out the boom in LNG spot rates in the second half of 2018.
MLP investors are intensely focused on quarterly dividends supported by long-term contracted revenue streams. The whole rationale for creating an MLP is that if you give your MLP investors sufficient dividends, they’ll support your follow-on offerings to fund growth. For MLPs, losing the dividend has been likened to an existential crisis. An MLP without a dividend is like a sailboat without a sail.
DLNG announced after market close on June 5 that it is contemplating a refinancing deal that will completely erase its already slim dividend. Not surprisingly, the price of the company’s common units plunged by double-digits in after-hours trading.
Prior to last year, DLNG had been issuing dividends of at least $0.365 per unit per quarter, and paid out $0.4225 per unit for the fourth quarter of 2017. On April 18, 2018, it cut its dividend to $0.25 per unit. Then on January 25, 2019, it took dramatic action and slashed its quarterly dividend by 75 percent to $0.065 per unit – a cut Jefferies shipping analyst Randy Giveans described as “much greater than expected.”
Between January 2018, when its common units were trading at around $10, and June 5, 2019, when they closed at $1.96, the partnership’s common equity lost 80 percent of its value (the price had fallen by another 14 percent in after-hours trading to $1.69 per share by 6:30 p.m. on June 5).
As is often the case when a company’s stock loses significant value due to an unforeseen corporate decision, class-action lawyers launched ‘investigations’ with the aim of pursuing fee-generating suits on behalf of shareholders.
Several suits have been announced. The first was officially filed on May 16 in the U.S. Southern District Court of New York, seeking class-action status on behalf of shareholders and alleging DLNG “outright lied” and committed fraud due to its executives’ purportedly false statements on conference calls about the sustainability of its dividend.
DLNG has yet to file its response in court, but the bigger problem for the partnership is not the legal threat, it’s the $250 million in non-amortizing bond debt coming due all at once in October. When DLNG announced its first-quarter 2019 results, the important revelation was not the bottom line, but the refinancing update (for the record, it reported net income of $1.9 million for the first quarter of 2019, down 61 percent year-on-year).
DLNG revealed in its quarterly release, “The partnership is in an advanced stage with potential banks and lending sources for potential financing transactions which, among other things, may provide funding for the payment due on the maturity date of the 2019 notes, and/or the Term B loan [another portion of DLNG’s debt, which matures in 2023], or a combination of the foregoing.
“The terms of the potential financing transaction, as currently contemplated, will require the partnership to eliminate distributions on its common units until the new indebtedness is repaid,” it said, noting that it “has not yet entered into any definitive binding documentation and although it expects to finalize such financing transaction within the next two months, it can provide no assurance that it will be able to do so prior to the maturity of the 2019 notes on terms acceptable to the partnership or at all.”
Regarding what happens if it can’t, its quarterly release referred investors back to the relevant passage of its annual report. That passage states that DLNG’s “ability to continue as a going concern is dependent” on the bond refinancing.
Translation: The consequence of not refinancing is insolvency, and the consequence of successfully refinancing is the death of its dividend, implying that in the best-case scenario, DLNG will not be able to tap MLP investors to fund future fleet growth.