Executive Summary / Key Takeaways

• Strategic Deleveraging and Financial Flexibility: Dynagas LNG Partners LP has successfully executed a multi-year deleveraging strategy, culminating in a significant refinancing that reduced total debt to $345 million and left two of its six LNG carriers debt-free. This has substantially improved financial flexibility, removed distribution restrictions, and positioned the partnership for its "next phase."
• Robust Contract Backlog and Stable Cash Flows: The company boasts a strong contracted backlog of approximately $1.04 billion as of September 10, 2024, with an average remaining charter period of 6.4 years and no contractual vessel availability until 2028. This long-term chartering strategy ensures stable and predictable revenue streams.
• Positive Long-Term Market Outlook: Despite potential short-term oversupply in LNG shipping capacity, the long-term demand for LNG is projected to remain robust, driven by global electrification, its favorable emission profile, and expanding liquefaction capacity, which is expected to absorb the current newbuild order book.
• Capital Allocation at a Crossroads: With enhanced financial health and projected free cash flow to common equity of approximately $8 million per quarter, the Board of Directors is poised to announce its capital allocation strategy, potentially including increased distributions or growth initiatives.
• Competitive Niche and Operational Efficiency: DLNG leverages its ice-class LNG vessels for specialized routes, offering a niche advantage. Its operational focus and consistent fleet utilization underpin its competitive standing, though an aging fleet presents a long-term consideration for technological parity.

The Foundation: A Specialized Role in Global Energy Transport

Dynagas LNG Partners LP, incorporated in 2013 and headquartered in Athens, Greece, operates as a vital link in the global energy supply chain, owning and operating a fleet of six liquefied natural gas (LNG) carriers. The partnership's core business model revolves around securing long-term charters with esteemed international gas companies, a strategy designed to generate stable and predictable revenue streams. This approach has been foundational to its operational consistency and financial resilience.

The global LNG shipping industry is characterized by high capital intensity and the critical need for reliable, specialized vessels. DLNG distinguishes itself with a fleet that includes ice-class LNG carriers, providing a niche advantage in accessing specific, often more challenging, trade routes. While specific quantifiable metrics for superior energy yield or degradation rates are not publicly detailed, the strategic benefit of ice-class vessels lies in their enhanced operational flexibility and ability to serve specialized projects or routes that might be inaccessible to conventional LNG carriers. This capability can command premium charter rates and secure long-term contracts in strategic regions, contributing directly to the partnership's competitive moat and revenue stability. During scheduled dry docks, such as those completed in Q3 2023 for the Yenisei River, Lena River, and Arctic Aurora, the company also invests in essential operational upgrades like the installation of ballast water treatment equipment, ensuring compliance and operational integrity.

The broader industry landscape is shaped by robust long-term demand for LNG. This demand is fueled by several key factors: LNG's lower emissions profile compared to traditional fossil fuels, the increasing global demand for electrification, the efficiency of natural gas-powered combined cycle plants, and the well-established global infrastructure for LNG production and distribution. Current liquefaction capacity stands at approximately 471-473 million metric tons per annum, with an additional 40-46% of new capacity already sanctioned and under construction for start-up before 2030. This expansion, primarily driven by projects in the U.S., Canada, Mexico, and Qatar, underscores the sustained need for efficient LNG transportation. While a significant new-building order book, representing about 50% of the existing fleet, is scheduled for delivery by 2028, a majority of these orders are already committed to specific charters. Management anticipates that this order book will be absorbed in the medium to long term through the replacement of aging vessels—notably, around 18% of the current fleet consists of smaller, older steam-powered vessels—and the increasing global demand for LNG transport.

A Journey of Deleveraging and Financial Transformation

Dynagas LNG Partners has undergone a profound financial transformation, marked by a sustained and strategic deleveraging path. The partnership's outstanding debt, which stood at $675 million in September 2019, has been systematically reduced. A significant milestone in this journey was the successful implementation of an interest rate swap program in September 2020, which proved highly effective, generating cumulative realized gains of $42 million by Q2 2024, with an additional $5 million expected at its maturity on September 18, 2024.

The culmination of this deleveraging strategy was the proactive refinancing of its senior secured credit facility. In Q4 2023, the partnership signed a term sheet for a new lease financing agreement of up to $345 million for four of its LNG carriers. This financing, secured with China Development Bank Financial Leasing, was successfully concluded in Q1 2024. By June 27, 2024, the previous $408.6 million credit facility was fully repaid, ahead of its September 2024 maturity, utilizing the new financing and $63.7 million from existing cash reserves. This strategic maneuver reduced total debt to $345 million and, crucially, left two of the partnership's six LNG carriers debt-free.

This financial repositioning has dramatically improved the partnership's leverage metrics. The financial leverage, measured as adjusted net debt divided by last 12 months adjusted EBITDA, has decreased from 6.6 times at year-end 2018 to a significantly healthier 2.9 times by June 2024. The new financing arrangements are characterized by lower leverage, increased flexibility, and longer tenors, with no financial covenants or restrictions on distributions to common unitholders. Annual debt amortization is now expected to be $44 million, $4 million less than the prior facility, with a weighted average spread of 2.18%. The nearest debt maturities are now in June 2029 for three vessels and June 2034 for the remaining vessel, providing substantial long-term financial stability.

Performance and Outlook: Stability with Future Potential

Dynagas LNG Partners continues to demonstrate stable operational and financial performance, underpinned by its long-term charter strategy. For the second quarter of 2025, the partnership reported net income of $13.7 million, or $0.23 per unit, and Adjusted EBITDA of $27.7 million, with a fleet utilization of 99.4%. Voyage revenues increased by 2.7% year-over-year to $38.6 million, and the average daily hire rate per vessel was $70,730. In the preceding quarter (Q1 2025), net income was $13.6 million, adjusted net income $14.3 million, and adjusted EBITDA $27.1 million, with 100% fleet utilization.

Looking back to Q2 2024, net income stood at $10.7 million, with adjusted net income of $12.4 million and adjusted EBITDA of $28.6 million. Revenue for Q2 2024 was $37.6 million, with an average Time Charter Equivalent (TCE) rate of $67,300 per day. The average cash break-even cost per vessel per day for Q2 2024 was $44,881, yielding a surplus of $22,450 per day. However, with the interest rate swap maturing on September 18, 2024, the partnership now has full exposure to floating interest rates. This is anticipated to increase interest expenses, with the fourth quarterly debt service per day projected to rise by about $5,200, resulting in a pro-forma cash break-even of approximately $50,000 per day for Q4 2024. Management expects to benefit from lower interest rates over time.

The partnership's contracted backlog remains robust, standing at approximately $1.04 billion as of September 10, 2024, translating to an average of about $173 million per vessel. The fleet enjoys an average remaining charter period of approximately 6.4 years. Crucially, DLNG has no contractual vessel availability until 2028, with the Clean Energy, Ob, and Amur River becoming available then. The Arctic Aurora is chartered until 2033, and the Yenisei and Lena River until 2034, assuming no charter extension options are exercised. This long-term visibility shields the partnership from short-term market volatility, a significant advantage given that shipping capacity may exceed demand in the short to medium term due to the large newbuild order book.

With newfound financial flexibility, the Board of Directors is expected to evaluate and announce its capital allocation strategy in the quarter following June 30, 2024. Management projects free cash flow to common equity, after preferred unitholder distributions, to be approximately $8 million per quarter, contingent on current SOFR rates, utilization, and operating expenses. This substantial cash flow provides options for growth initiatives, further debt reduction, or increased distributions to common unitholders. The partnership has already initiated a common unit repurchase program, buying back 216,185 common units for $0.8 million at an average price of $3.62 per unit during Q1 2025.

Competitive Landscape and Strategic Positioning

Dynagas LNG Partners operates within a competitive global LNG shipping market, contending with both direct and indirect rivals. Direct competitors include established players like Teekay LNG Partners, which offers a diversified fleet and extensive operational experience, and Flex LNG (FLNG), known for its modern, technologically advanced vessels. Excelerate Energy (EE), with its integrated LNG transportation and regasification services, also presents a competitive dynamic.

DLNG's strategic positioning emphasizes operational consistency and reliability, particularly through its long-term chartering model. While Teekay LNG Partners might offer broader diversification, DLNG's focused approach to LNG transport can lead to streamlined operations and potentially lower overhead costs. Against Flex LNG, which prioritizes technological innovation and eco-friendly designs, DLNG's fleet, with an average age of 14.1 years and some steam-powered vessels, may face challenges in areas like environmental compliance or securing premium contracts for the latest technology. However, DLNG's ice-class vessels provide a niche advantage, allowing access to specialized routes that can differentiate its service offering. Compared to Excelerate Energy's integrated solutions, DLNG's pure-play shipping model might be less comprehensive but offers specialized expertise in core transportation.

The industry benefits from high barriers to entry, primarily due to the immense capital requirements for fleet acquisition and stringent regulatory hurdles for international operations. These barriers protect established players like DLNG, supporting its market position and financial performance. However, they also favor technologically advanced competitors who can leverage these barriers to secure premium contracts.

Recent industry trends, such as the growing energy demands from AI-driven data centers and global electrification, are significant tailwinds for LNG demand. While these trends present opportunities for all LNG transporters, companies with integrated services or the most efficient fleets might be better positioned to capitalize fully. DLNG's long-term contracted backlog strategically mitigates exposure to short-term market fluctuations, allowing it to benefit from the anticipated medium to long-term absorption of newbuilds and increased liquefaction capacity.

Risks and Considerations

Despite its strengthened financial position and stable outlook, Dynagas LNG Partners faces several pertinent risks. Geopolitical events, particularly the ongoing war between Russia and Ukraine and conflicts in the Middle East, introduce uncertainties. While the partnership has not experienced a material impact to date, potential consequences include counterparties being limited by sanctions from performing agreements and a general deterioration of the Russian economy. The partnership also acknowledges the risk of greater difficulties in raising capital in the future due to these events.

The maturity of the interest rate swap on September 18, 2024, exposes DLNG to full floating interest rates, which is expected to increase interest expenses in the near term. While management anticipates benefiting from lower SOFR rates over time, this introduces interest rate volatility into its cost structure. Furthermore, the fleet's average age of approximately 14.1 years, with some vessels nearing 20 years and being steam-powered, could pose a long-term competitive disadvantage against newer, more efficient vessels entering the market. This may necessitate future capital expenditures for fleet modernization or replacement to maintain competitive parity. Finally, while the Rio Grande LNG terminal project is progressing, any unforeseen delays in liquefaction projects could create short-term challenges in the charter market as vessel deliveries outpace demand.

Conclusion

Dynagas LNG Partners LP has meticulously executed a strategic deleveraging plan, transforming its balance sheet and securing a flexible financing structure that underpins its stability. With a robust contracted backlog extending until 2028 and beyond, the partnership is well-insulated from short-term market vagaries, positioning it to capitalize on the compelling long-term demand drivers for LNG. The impending decision on capital allocation, fueled by substantial free cash flow, marks a pivotal moment for common unitholders, potentially unlocking further value through distributions or strategic growth initiatives.

While geopolitical risks and exposure to floating interest rates warrant careful monitoring, DLNG's operational focus, niche advantage with ice-class vessels, and commitment to long-term charters provide a solid foundation. The partnership's ability to navigate an evolving competitive landscape, potentially through strategic fleet upgrades or continued operational excellence, will be key to sustaining its competitive edge and realizing its full potential in the expanding global LNG shipping market.