EFTA01098726.pdf

Dynagas LNG Partners I May 17, 2015 Morgan Stanley MORGAN STANLEY RESEARCH MORGAN STANLEY & CO. LLC May 17. 2015 Fobs Giannakoulis Dynagas LNG Partners [email protected] •1 212 761-3026 Matthias Degen Solid Results with Highly Attractive Yield [email protected] • 1 212 761-6218 Sherif Elmaghrabi [email protected] • 1 212 761-8192 Industry View Stock Rating Price Target In-Line Equal-weight $23.00 go Morgan Stanley appreciates your support in the Institutional Investor 2015 All-America Equity Research Team Survey. Request DLNG reported solid 1Q results with distributable cash flow above El your ballot. Dynagas LNG Partners DLNG,N. DLNG US : estimates. DLNG's current annualized distribution of $1.69 offers a Maritime Industries / Marshall Islands generous 8.6% yield with 1.2x coverage ratio. The dropdown of two Stock Rating Equal-weight already contracted vessels, could grow another 9% by year-end Industry View In-Line Price target $23.00 suggesting —9.5% a 1-yr forward yield Shr price, close (May 15, 2015) 520.2: Mkt cap, curr (mm) 5718 DLNG reports solid 1Q. DLNG posted 1Q results in-line with estimates, with 52-Week Range S25 50-13.66 distributable cash flow of $18.0m or $0.51 per unit during the quarter, above our $16.4m ($0.39/sh) estimate. Net revenue of $34.9m was in line with Fiscal Year Ending 12/14 12/15e 12/16e 12/17e ModelWare EPS ($) 1_58 L72 1.93 1_82 consensus' and our estimates. EBITDA of $27.7m was also in line. DLNG Prior ModelWare EPS L77 1.82 L78 maintained its quarterly distribution at $04225, offering an annualized yield of (5) 8.6% at the current price, with 7.8x P/DCF in 2015 (vs. MLP peer group average P/E 10.4 118 103 us Consensus EPS ($)5 154 L75 1.86 L98 5.1% and 18.7x). (See: Exhibit 2) Div yld (96) 9.4 8.7 9.3 9.1 u Alm of enade noted, all metrics ant bawd on Morgan Stant.' ModOlWare framework Highly attractive dividend with high growth. DLNG has grown its fleet S - Contents data .t pro. ded by Thomson Rea tots E gnaws a - Morgan Sunk, R.tn,ch 4StMilikf from 3 vessels at the time of its IPO in 4Q13 to 5 vessels (2 tri-fuel and 3 steam turbine). The current fleet has an average charter duration of 4.8 years, QUARTERLY MODELWARE EPS (S) 2015e 2015e 2016e 2016e with the earliest expiration in 3Q17. DLNG's dropdown pipeline comprises 3 Quarter 2014 Prior Current Prior Current vessels on the water and 2 newbuilds which are expected to be delivered in Q1 0.37 0.43a 0.45 0.49 2015. We expect DLNG to complete its next dropdowns in 2Q and 4Q of this Q2 0.34 0.45 0.38 0.43 0.45 year. However, management plans to finance the dropdowns with 55-60% Q3 0.42 0.46 0.47 0.48 0.51 Q4 0.44 0.47 0.43 0.45 0.48 equity and CEO Tony Lauritzen noted that issuing equity at the current share e • Morgan Sian by Research estonwt, a • ACOMCOMpany /opened data price may not be in shareholder's best interest At its current yield of 8.6%, DLNG trades at a premium to its peers. We see this as an attractive entry point, especially considering management reiterated its commitment to growing the Exhibit 3: Results vs. Estimates (S million) distribution by 10% per annum. LNG shipping outlook remains positive despite near-term market M al Actual MS. % A Consensus. %A Revenue 34.9 35.5 -2% 35.6 -2% weakness. While rates for modern 160k cbm LNG carriers have deteriorated EBITDA 27.7 27.7 0% 27.5 1% to $33kpd (-54% YoY), DLNG's fleets contract coverage keeps the company Net Income 15.2 14.8 13.1 well insulated from the current market weakness. We expect the LNG carrier DCF $0.51 $0.39 market to be much tighter by the time DLNG's charter contracts begin to Sou, “ Company Data. Thomson R u toes, Morgan Stanley Research expire. We estimate —150mtpa of new LNG capacity is scheduled to come online through 2020. As a result we expect that the market will need -70 more newbuilds in addition to the 143 currently on order to serve these Morgan Stanley does and seeks to do business with projects. Our revised $23 PT (from $24) values the company based on a 3-year companies covered in Morgan Stanley Research. As a result investors should be aware that the firm may have a conflict target yield of 8.5% as we expect distribution to grow to -$1.85 by the end of of interest that could affect the objectivity of Morgan the year from the dropdown of the two contracted newbuilds and reach Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their -$1.95 after the remaining 3 vessels held by the sponsor have secured long- investment decision. term contracts. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. EFTA01098726  Dynagas LNG Partners I May 17. 2015 Morgan Stanley MORGAN STANLEY RESEARCH Risk-Reward Snapshot: Dynagas LNG Partners (DLNG, Equal-weight PT: $23) Risk-Reward View: Distribution Growth Driving Valuation Investment Thesis 335 • Growing modern ice class fleet that can achieve a 30 $30 00 (.53%) premium over market rates. • Strong pipeline of dropdowns with vessels already 25 chartered to top CC4Jnterparties. 123.0010M • • Favorable demand fundamentals for LNG as 20 growth in liquefaction capacity additions accelerate after 2015. is $14 03 (le%) ID Key Value Drivers • Modern fleet of ice class LNG carriers that can 5 achieve premium rates and are very flexible in trading 0 aleti3 Nov.13 1/07-14 Moeda Mery-15 N0v-1S Mey.18 • Distribution offering an attractive yield that is set • Pr,* T.0•104•00 . 1•10:0[10 11100 PoWymorap • Ong Soca Ore* to grow with dropdowns. Source: Thomson Reuters. Morgan Stanley Research estimate • Highly experienced management with successful track record in the shipping industry. Price Target $23 Derived from our base case. Potential Catalysts Bull $30 Dropdown pipeline increases as the sponsor finds firm contracts for all the newbuilds. Growing global liquefaction • Dropdowns allow DLNG to increase its distribution. Next 12-month distribution to -51.95 @ 6.5% Yield capacity drives shipping demand and rates higher, as further • Stock gets valued at a lower dividend yield, like its projects are announced. Dropdowns from parent accelerate as larger peers. 3-yr distribution CAGR 5-6% delivered vessels find long-term contracts, while there are further • Additional vessel acquisition and signing of long- 3-year fwd yield 6.5-7% significant acquisition announcements. DLNG builds its capacity term contracts.. and increases it annualized distribution to over 51.90 within 2015. As the dropdown pipeline expands and dividend distribution Risk to Our Price Target growth increases the stock trades at lower yield. • Counterparty risk on long-term charters. Base $23 Dropdown of the remaining contracted vessels owned by the • Distribution growth does not materialize as Next 12-month distribution sponsor proceeds before the end of 2015. DLNG acquires the expected. -41.85 @ 896 Yield vessels owned by its sponsor that have firm long-term charter • Deterioration of the supply-demand balance contracts, expanding its fleet to 7 ships before the end of 2015, increases rechartering risk for DLNG vessels. 3-yr distribution CAGR 3.5% raising its distribution close to $1.85. The long-term outlook for • Vessel oversupply and delayed activation of 3-yr fwd yield: -8.5% LNG shipping remains strong as new LNG supply is expected to liquefaction capacity weigh on market. grow significantly beyond 2016-17, allowing DWG's sponsor to secure profitable contracts for the un-contracted newbuilds. • Small size compared to peers. Bear $14 Significant project delays and growing orderbook drives NAV at 512/sh LNG rates lower and postpones DING growth ambitions. Liquefaction capacity experiences serious delays and regulatory P/NAV: 115% hurdles slow the development of planned projects. LNG vessels continue to be delivered as scheduled, while new vessel orders are placed. LNG rates start dropping as the market faces problems of oversupply. Investors start having concerns about the rechartering of existing vessels at lower levels increase. DLNG's stock drops below the issue price making dropdowns harder. The stock trades at a slight premium to NAV. 2 EFTA01098727  Dynagas LNG Partners May 17. 2015 Morgan Stanley MORGAN STANLEY RESEARCH 1Q15 Earnings Comparison Exhibit 2: 1Q15 Earnings Comparison Achaál vs MW.." AMBO 04444 aa Smet In n. MS Strem 4 in eitiemn) b1.5 Street 1014 4011 ESE Moa 2015 20 15 Sem, 0o0 OoO Ilet TCE ~moe 4% 4% 201 Ni 70% 4% MI Ut 1% 11% Onm ~bs eremen9 omme 41% 0.1) 051 71% 4% (11) maragemen1 bes (3.7) (12) 2) Gmemi and eammenine moeien 0 1111 (061 (0a 1ø00A 0% 1% 14L2 25 4% 27 7 30 3 4% 0% 9% Deonvamen a rimcnamen 133) (11) (53) ERAT IL na 21.3 23.5 limma or frame perse 534 9in .2% (69) PO) Vin OM n0) inimesi omme 9 0°) bias in-line 0.1 0 Nce.commem neme with sommen' Tams and ow Ces 04 04 01 0.4 04 Rei indom. I094, 41..91 152 14.1 13.1 11/ ILT lg 115 1% .2% .3% ~G P 2% miese e Not iname • • • ion C P scrom15.116430.1a • • Nal *vadatde lor t P Maismatm9) 142 14.3 MA JU acomalim a 04A9 Mccmc Oeher nencusi este Pion teten Me Mama, Emilmanan riemen/ce ~A (0/ NET 11103142 144441 14.11 14.1 11.0 Ill3 Total uld• ouistansem (m) 365 423 356 422 Pet en/ data LP ~we Peg uni K.MP1 042 Gal 037 041.3 032 LP Iroame Per um1Cceratem 043 031 OM 0.37 044 (1.11 0.13 Dta1nboist5a ta., flow per t„54 all 5.» 003 OitInbutron va« 0-422 1423 %IN 0423 .1.443 peyout fa n % of clel.balatle ~ba I13% 10" 1I3% Oéstributebit Cash flow Rinoecanaeon EMMA :n til KO al 7/.7 Le 51/e,e51 (7.0) 3.3 ILN Ale 1.55 Marisonce f~hon (n0) 109) DO OM 4241 Mart4uce Capo. 0 7) 04A (47) Otrwt, 94 03 0.4 PLO 14.41 C% M.2 as1 3% tel CØ urmt meneetion <overat la la Lix Lia rond Inas oniributien cenerep Ib 1A Forum-we Potig., Ne1Det1 Sal 544 101 530 Flat Valoe 077 977 551 all 9157 r1 Debl r F 1e41 Vake 54% 55% 5/5 110% 11/11)rbi 0 I III1DA. 4514 tL 4.32 5.13 rw.ta Opname Anten* aow Ram .4. (Modi 75 1Il 715 77 0% OS% Menno Caty OP*. (5441 122 13.3 116 121 1% 133 90% remam 44ty *memmen, lees nl CAM MMO 1.0 0% 1J 35 1% it -02% Moed rc OIA (PMI1 111.0 172 4% 163 159 1% 11.1 it% Awimm 11 or wants to 00 30 50 to keurs*: Company Data, Morgan Stanley Research 3 EFTA01098728  Dynagas LNG Partners I May 17, 2015 Morgan Stanley MORGAN STANLEY RESEARCH Valuation & Dividend Exhibit 3: Valuation Summary Exhibit 4: Dividend Growth Forecast Ogren price per will 519.6 annualised eel ships Yield to Growth $2.00 CiMilend )2 CurTent annualized distributscn $1.69 $114 $1.94 SLIM $1.14 $1.95 %III Next t1=tom distnbutien SIM II 10 3-year diunbutim CAGR 3.5% $1.90 SIDS 2Q 18 fwd AnnuaNzed Distreaution $1.94 $1.85 Target Syr Forward Yield 8.5% $1.80 Price Target $23.0 $1.75 , $ Current yield 8.6% Side SUN I .Teer Forward Yteld 9.6% $I 70 I.Tear Target Yield 8.2% $1.65 Nestle 17.6% $1 60 Total Return 21% I I $1.55 a.d•nd Discoaml uexNl 4(114 1015 4015 4(116 4(117 4Q18 4Q19 4Q10 Current annualized diuntiution $1.69 MR Tr 1.4 IA CAGR Tr 4.9 0.5% Source: Company Data, Morgan Stanley Research Terminal dividend yield 9.0% Average ccomer ratio 1.1x Discount rate 9.0% Terminal Oscan, rate 9.5% Equity value per unit in 121$ months 113.2 vow;(d CMn F.ow (or..y (oreent Ileel Net kr pee unit $13.3 00 value per vessel dal) 202 Price/CCF per unit 1473 Peke Target / IXF per wit 173% EY/CCF value 122% Target CV/C0 value 135% Discounted Cash Flaw including IS OlOpdown wil14.0 Net 00 per will $13.8 OCF value per vessel ISM) 217 Prke/OCF per wilt 141% Peke Target / OCF per wit 166% EY/DCF value 1141 Target EY/IXF value 166% NAV L1qui0atta Value NAY per snit $12.1 Beer Cam 115% of NAY) $14.0 Downside (V/ESITDA EN10A CY/ENTIM Target CV/CINTDA 2015e 125 mix 12.6x 1016e 173 10.6x MN 2017e 202 10.6x 11.6x 2018e 209 10.5x 11.4 Source: Company Data. Morgan Stanley Research Exhibit 5: Distribution Growth & Coverage Ratio 4Q14 1Q15 4Q15 4Q16 4Q17 4Q18 4Q19 4Q20 sh flow per share $2.09 $2.39 $2.59 $2.88 $2.80 $2.82 $2.81 $2.78 terty distribution $1.69 $1.69 $1.77 $1.88 $1.94 $1.94 $1.94 $1.94 YoY growth 4.7% 6.2% 3.2% 0.0% 0.0% 0.0% Dividend Yield 8.6% 8.6% 9.1% 9.6% 9.9% 9.9% 9.9% 9.9% Coverage Ratio 1.2x 1.2x 1.1x 1.2x 1.1x 1.1x 1.1x 1.1x units outstanding 35.5 35.5 46.9 54.6 58.3 58.3 58.3 58.3 YoY growth 32.1% 16.4% 6.9% 0.0% 0.0% 0.0% Not ships 5 5 7 9 10 10 10 10 Source: Company DatasMorg an Stanley Research 4 EFTA01098729  Dynagas LNG Partners I May 17, 2015 Morgan Stanley MORGAN STANLEY RESEARCH Exhibit 6: DCF Valuation De/ falma Din vsua (tol DCF G e 0% lor 11xed dan. 9 0% lor open dan and Li MIN 0157~ I al rena An. Age Avg. Valte Tota 5m Sper dua FSRU - DCF (leet .aue I ,011 28.5 INGurner - Tri.lte 2 1.9 24 495 Len: Refra ring Cape. (0) (0.0) INGcarrler-Steam-turbare 3 7.9 172 $15 Cain Er (Q taleel 14 0.4 DCF Floet Vakre (m) 5 5.5 2/72 1.011 Itiestileted (atti 24 0.7 otner Drent asett 2 0.0 DCF of ~audn; (apex o InatUnerits • Total dat 1461 (15.4) Net eki% / Eltet valne 571 Guffent habilities 1131 10.4) Net dent / Fleet vake • °eposa% 525 DCF Vatuation 471 13.3 of (Ans oss, tratutedi 35.5 DCF per unit $ 13.3 Pnce / DCF 1475 EV / DCf tie« Vake 1225 DEL flat Vetve 919 DCF Elet Veive per venel 202 EV per rassel 244 Source: Company Data. Morgan Stanley Research estimatet Exhibit 7: DLNG's Fleet Value & NAV Estimate anneranausse Flat Vakt* ut0 I cd vensels An. Age Avg. Value Total 5 in $ per dure FSRU - [led vake. 597 27.2 (MG terrier • fri -luet 2 /.9 221 443 Depouts ING urrier. Stam.turtnne 3 7.9 lis 524 Cash tz Cquivatents 14 0.4 Fleet Value (ml 5 5.5 193 947 Restricted Cash 24 0.7 Otrer CUlfeel råen 2 0.0 net delx/Fleet Vane 54 Invesunats • Het dal / fleet Value • Depasits 54 Total dat (NN (15.9) Current 141911(11es (13) (0.41 Non-contretting eneren NAV 421 12.1 I or uflitt ost (dautedi 35.5 NAV per unit $ 12.1 Peke / NAV 16251 EV / Ad). Fleet Value 1255 Ad). Fleet Veive 365 lkarldation Value per anal 1131 EV per rassel 244 Source: Company Data, Morgan Stanley Research 5 EFTA01098730  Dynagas LNG Partners I May 17. 2015 Morgan Stanley MORGAN STANLEY RESEARCH Income Statement Exhibit 8: Dynagas Partners — Income Statement egithetiliil MIEZMIZEMIIISIIENEMZEIDM Itts:ce'tt.; 'thee, 23 20 3 36 35 63 105 35 - hue Dam 114.46.4 35 44 44 II SI 50 59 63 57 6.4 se 21 - 124 221 241 11, Remmie 5 7 II • • 23 56 Ila I so 31 26 34 34 34 11 44 44 II 61 a a 63 It 71 144 14 1641 la 221 244 274 Demi onset memo"; omens* 3" (3) (31 (5) (5) Oh 161 (71 MI 494 61) 00) (10) III) 02) (131 113) 112) 07) 1271 1361 (504 (93) OnrOossog cosi . (1 11) ' (2) ' ' ' ' ' ' ' ' ' ' ' ' ' minagonon 1i.e. 11) 01 1) II) I) 0/ ill 01 (II 111 (21 is) 61 <2/ 82) (3) 13) Is) i1) 151 17I (91 (10) Gee", aftl atimattsbatne •Aposs44 EMI" Decrimeticn 4' a : (31 t. 444 ( 64 II 443) 61 g) (I) 2$ 61 g) (-04 g) (II (10) I 00) 2 ) III/ 2 0 1) 42 112) 4/ 112) g (14) gt 114) (0) 48 1141 : (16) IA 4201 al 173 1411 agl (2) 219 6 11 1541 EIIIT 13 II 17 23 22 11 27 27 31 31 95 M 16 14 41 311 $6 44 941 132 IS 113 rlata$164•6.• al al (3) 17) Eh 174 (71 (61 491 60 110) 1101 01) 02) 01) 10 ) 00) (14) 69) ()SI (461 (50) inegott inCOtnt t • 0 0 0 0 0 0 0 0 0 0 0 0 I I 1 Ore 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (0) 1 2 2 1 2 Esmings before bons 11 It 14 16 16 IS 20 19 23 22 hi 26 16 23 20 27 46 61 60 06 104 104 tat 0 ett • • - • • • - - • . . - MR 9480444 II 10 14 16 16 16 20 19 13 22 20 21 20 13 21 2? 46 II 44 14 104 144 Non Cerartli. tifentil • •