Capital Product Partners L.P.
Q4 2018 Earnings Call Transcript

Published: 31 Jan 2019

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Capital Product Partners’ on the Fourth Quarter 2018 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, January 31, 2019. The statements in today’s conference call that are not historical facts, including our expectations regarding cash generation, future debt levels and repayments, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, and our expectations regarding employment of our vessels, redelivery dates and charter rates, fleet growth, and market and charter rates maybe forward-looking statements as such defined in Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

[Jerry Kalogiratos:]

Thank you, Laura. And thank you all for joining us today. As a reminder, we will be referring to the supporting slides available in our website as we go through today’s presentation. As announced on November 27, the partnership entered into an agreement with DSS Holdings L.P., one of the world’s largest owners and operators of medium-range product and Suezmax crude tankers, pursuant to which CPLP with the spin off its crude and product tanker business separate publicly listed the company, which will merge with Diamond S businesses and operations in a share-for-share transaction. Total, the new company Diamond S will be a highly scaled the tanker company with 68 vessels, combined NAV of approximately $700 million estimated as of the end of the third quarter of 2018. Merger was negotiated on an NAV for NAV basis. However, facilitating the public listing of merger CPLP unitholders will receive closed on 11% premium. This transaction, our Board of Directors has decided to set the common unit distribution at $0.18 per annum or $4.05 per quarter at a level that we believe is highly sustainable through a wide variety of market conditions. Fourth quarter common unit cash distribution will be paid on February 14th to common unitholders of record on February 5th. In addition, our Board of Directors declared a cash distribution of $0.21375 per Class B unit for the fourth quarter of 2018. Fourth quarter Class B cash distribution will be paid on February 8th to Class B unitholders of record on February 1st. The partnership’s net income for the fourth quarter improved to $13.2 million compared to $6.8 million in the fourth quarter of 2017. Common unit coverage for the fourth quarter 2018 stood at 2.9 times, the partnership’s operating surplus for the quarter prior to the capital reserve on the Class B unit distributions amounted to $33.4 million, compared to $30.3 million for the fourth quarter of 2017, and $27.4 million for the third quarter of 2018. Turning to Slide 3, revenues for the quarter increased by 16.7% to $74.8 million compared to the fourth quarter of 2017. This was primarily due to the increase in the number of days our vessels were employed under voyage charters in the fourth quarter of 2018 and to the increase in the average charter rates earned by certain of our vessels compared to the same period in 2017. Moving on, total expenses for the quarter were $54.9 million, compared to $51.4 million in the fourth quarter of 2017. Voyage expenses for the fourth quarter of 2018 were $15.2 million, compared to $5.1 million in the same period in 2017. The increase was mainly attributable to the increase in the number of days our vessels were employed under voyage charters in the fourth quarter of 2018 compared to the same period in 2017. Total vessel operating expenses during the quarter amounted to $22.9 million and still in line with operating expenses of $23 million during the fourth quarter of 2017. The impact of operating expenses from the increase in the number of vessels in carrying OpEx following the redelivery of three vessels previously under bareboat charters was offset by the improvement in the operating performance of our fleet during the fourth quarter of 2018. Total expenses for the fourth quarter also include vessel depreciation and amortization of $17.5 million, compared to $18.4 million in the fourth quarter of 2017. General and administrative expenses for the fourth quarter of 2018 amounted to $1.2 million compared to $1.7 million in the fourth quarter of 2017. Partnership recorded a net income for the fourth quarter of 2018 of $13.2 million compared with net income of $6.8 million for the fourth quarter of 2017. Turning to Slide 4, you can see the details of our operating surplus calculations that determined the distributions of our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately $33.4 million in cash from operations before accounting for the Class B preferred unit distributions and the capital reserve. We allocated $15.6 million to the capital reserve, inline with the previous quarter. After adjusting for the reserve and the Class B unit distributions, the adjusted operating surplus amounted to $17 million, which translates into approximately 2.9 times common unit coverage. On Slide 5, you can see the details of our balance sheet. End of the fourth quarter, the partner’s capital amounted to $881.3 million. Total debt decreased by $29.9 million to $445.9 compared to $475.8 million as of year-end 2017. Total cash as of quarter end amounted to $48.2 million. Overall, our balance sheet as of the end of the quarter remains strong with a net debt to capitalization of 30% and with Partners Capital representing 63.6% of our total assets. Moving to Slide 6, the average remaining charter duration of our fleet is 4.6 years, of 11 for the tankers and three Suezmax tankers of the currently trading spot on short time charters, which we will continue to trade in the spot market or short thesis in view of the transaction with Diamond S. On Slide 7, [indiscernible] earnings for product tankers on the benchmark transatlantic trade and the U.S. Gulf reaching three-year highs. The surge in crude tanker rates has undoubtedly has a positive knock on effect on product tankers. Particular, the higher freight rates for Aframax is incentivized a high number of LR2 vessels to shift from clean to the dirty trade, effectively reducing tonnage availability in the product market. In addition, the stronger crude market significantly reduced cargo poaching by newbuilding crude tankers on clean routes. Aside from the positive spillover effects from the crude market inquiry was boosted by refinery outages in Brazil and Mexico, which require substantial volumes and we moved with product tankers meeting demand. For the Chinese government release of additional product quarters for exports increase activity rates. In the period market the number of new fixtures reported was are the low, but period rates moved higher in tandem with spot market. We believe that the recovering product tanker age, we’ll continue to the rest of 2019, as favorable demand and supply dynamics are expected to support the market going forward. According to the IEA global oil refining capacity set to increase at the fastest pace on record this year, like 2.6 million barrels per day. In addition to preparation and implementation of the IMO 2020 regulation is expected to close a major dislocation for tankers, including shorter term and longer term storage as heavy fuel oil tanks are emptied moving major quantities on middle distillates and other additives needed for complying fuels, the larger tankers being of higher prescribed the retrofits and potentially slow steaming and/or scrapping of older inefficient vessels. On the supply side the MR product tanker orderbooks close to 8% as a percentage of the fleet. In addition slippage remained high as approximately 34% of the expected new builds were not delivered on schedule during 2018. Finally, ship rate capacity for product tankers has strong over the last few years, that’s limiting the number of new vessels, it can be ordering the short to medium term. Overall, analysts estimate that product tanker deadweight demand will grow about 3.2% in 2019, compared to supply growth of 2.6%. Moving to Slide 8, the Suezmax crude tanker market experienced significantly higher earnings in the fourth quarter, seasonally stronger demand and increased oil production for multiple in the first two months of the quarter, both about their eyes and the number of cargos in the market. Also underpinning the positive sentiment in a fourth quarter, China is imports crude oil with fresh monthly high November, on handed buying from private refineries and trial starts of new mega-refineries. The period market which already recovering from the historical lows previously observed and some liquidity retaining to the market. Looking at the supply side, the Suezmax tanker order book stands at 11.3% as a percentage of the fleet, while 20 Suezmaxes were reported sold in the demolition market in 2018 on top of the 13 ships scrapped in 2017. Currently the IEA expect solid world oil demand growth of 1.4 million barrels for 2019. Additions, I need an Indian seaborne crude imports are projected to see robust growth in 2019, while U.S. crude oil exports are becoming increasingly significant to the crude oil tanker trade. Altogether, Suezmax deadweight demand is expected to grow by 2% in 2019, marginally outstripping supply growth of 1.9% that is without taking to account impact of the IMO 2020 regulation. Overall, the industry fundamentals make us particularly excited that the spin-off and merger of our tanker fleet with Diamond S is second place of an inflection point for both product as well as crude tanker markets. As we expect Diamond S to be predominantly focused on the spot market and able to take better standards of the dynamic we see in the tanker market for 2019 and 2020. Moving to Slide 10, as previously announced the partnership has entered into a transformative and strategic transaction with DSS Holdings that will see CPLP’s crude and product tanker business spun-off and merge DSS business to form one of the largest publicly traded tanker companies. New company will be called Diamond S Shipping Inc. and it will be a market leader in the crude and product tanker markets, benefiting from a balanced and large scale portfolio vessels, strong management leadership, and a cost efficient commercial platform. That portfolio will consist of the combined product and crude tanker fleet of CPLP and Diamond S, totaling 68 high quality tankers with a combined NAV of approximately $700 million as of September 30, 2018. The merger was negotiated on the NAV for NAV Basis. However, facilitating the public listing and mergers, CPLP unitholders will receive closed on 11% premium, CPLP contributed NAV of $23 million, which gives our unitholders an approximate 33% ownership of the new company for $236 million in NAV value. CPLP will continue as an MLP with modern container and dry bulk assets employed under medium to long-term charters of over five years over the remaining charter duration, creating a much more suitable asset base and cash flows for the MLP model. The unit distribution guidance of $0.18 per annum or $0.045 per quarter or the intended to reverse split is well supported by the cash flow generated by the charters already in place. And we expect it to allow for both strong common unit distribution of coverage going forward as well as an opportunity to increase the distribution or use retained cash flows for growth. Importantly the transaction requires only regulatory approvals. Thus giving investors increased transaction certainty as does not require unitholder vote. Getting to the close of the transaction, we intend to enter into reverse split to bring the unit price more in line with our peers. Please note that the close of the transaction has been delayed due to the federal government shutdown. The U.S. government reopening as of earlier this week and subject to timely review of the required regulatory filings by the SEC we expect the transaction to close towards the end of the first quarter of 2019. Turning to Slide 11, we believe that in addition to the value we expect to generate for unitholders in excess of the current market value of CPLP, there are numerous additional advantages for CPLP in this transaction, especially CPLP after the transaction will own more MLP suitable, modern assets and their medium to long-term charters that provide longer term cash flow stability and visibility. Moreover as you know, that partnership has access to numerous dropdown opportunities from our sponsors, so various vessels dives with longer-term charters, the lower cost of capital, and the hands free cash flow CPLP should be able to grow again from a very stable distribution base. Third, CPLP unitholders will receive a significant premium as part of this transaction, as among the highest paid in shipping M&A between third parties. Fourth CPLP unitholders maintain their exposure and potential upside to the tanker market, through their ownership of Diamond S, which has significant scale and is well positioned to capture growth opportunities with their strong balance sheets relative to peers. This management has a track record of returning value to shareholders. Finally the partnership is divesting through this creative value generating transaction in a number of tanker assets, the average age is approximately 10 years with a majority employed under short-term or spot charters. These vessels will find it increasingly more difficult to secure longer-term employment as they age. That said we expect this vessels produce significant spot based revenues and strong returns in their new tanker platform. Moving to Slide 12, the stake of our CPLP unitholders in Diamond S post transaction is estimated approximately $256 million subject to closing adjustments or approximately a $1.82 per CPLP unit at NAV measured as of September 30. At the same time CPLP intends to distribute a $0.10 per year per common unit or approximately $23.3 million in distributions annually backed by charters with remaining duration of 5.3 years The new CPLP pro forma EBITDA for the last 12 months is approximately $77 million. And that only partly reflects the rechartering of our two 8,000 TEU containers at higher rates concluded in the second quarter of 2018. Assuming that the new CPLP continues to be valued predominantly on yield and the new Diamond S, on an NAV basis and assuming mid-rate valuation given where peers are currently trading I – a conservative 10% yield valuation of CPLP NAV for Diamond S, that implies approximately $1.79 per unit for the new CPLP and approximately $1.82 per CPLP unit for CPLP’s unitholders share of the new Diamond S. In other words the total of approximately $3.60 per CPLP unit compared to the unit price today of close to $2.20. This would imply a negative value creation of approximately $180 million. In other words, if the transaction was completed today and Diamond S to trade at NAV the new CPLP would only need to have an equity valuation of approximately $50 million or just above two times the new annual distribution cash outlay to surpass the equity of CPLP today. As such I would like to conclude by reiterating that we’re very pleased with our agreements with DSS and we’re looking forward to consummating the transformative transaction in order to unlock and generate long-term value for unitholders. As far as CPLP fleet is concerned, we aim to grow our asset base again with modern vessels employed under medium to long-term chapters with a view to growing a long-term distributable cash flow. And with that I’m happy to answer any questions you may have.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Thank you. We will now take our first question. Please go ahead. Your line is now open.

[Greg Tuttle:]

Hi, there. This is Greg Tuttle on for Randy Giveans. Thank you, operator, and good morning.

[Jerry Kalogiratos:]

Hi, Greg.

[Greg Tuttle:]

Hey. I just wanted to first figure out what do you want the company to look like post the DSSI spin off? Do you wanted to be a pure play containership company? Do you want to add drybulk? Or do you want to take LNG dropdown from the parent company? What does that look like to you guys?

[Jerry Kalogiratos:]

That’s a great question, Greg. So this transaction with DSS was a one-off as you won an opportunistic transaction as we wanted to unlock value for CPLP unitholders and especially with some of our older assets and at same time realigned the partnership with more modern assets with longer-term charters attached, which are more suitable for our business model. In the process, we have generated significant premium for CPLP unitholders. And I think we are also merging our tanker assets into larger platform with proven management. So I think that’s good and it should work workout well for that part of the business. Now, but your question, we aimed to rebuild and grow CPLP by acquiring assets with medium to long-term chapters and cash flow visibility, accretion and duration of contract are going to be the main criteria. So as we used to be in the past, we will continue to be a little asset agnostic, although this does not mean that we do not have a view with regards to different markets, but we are going to grow with assets that fulfill this criteria. Now, having said that, larger containers tends to command longer term employment. And as a result, we will continue to look for accretive transactions with that segment. But it’s not the only segment that will be open to look at. As we said, tankers potentially drybulk, but I don’t see many opportunities there. And importantly also LNG is on our radar and subject to availability of capital, we will continue to grow in a disciplined manner and always taking into account a long-term accretion to our distributable cash flow. So at the same time if you look…

[Greg Tuttle:]

Got you.

[Jerry Kalogiratos:]

But if you look at what we have let’s say at the sponsor level, we see that there’s quite a bit. I mean we have in excess of $800 million in value of assets that have long-term charters with VLCCs with 5% a year bareboat charters and large containers with three to five year charters and other assets that could be a good fit for CPLP. And in addition to that an affiliate of our sponsor has ordered a number of XDF LNG carriers at once. We all consider a very exciting turn for the LNG market. Of course these vessels are due for delivery late in 2020 and early 2021, so it is very early to discuss those assets. But there is no lack if you want of drop down opportunities. The question is how do we put together accretive transactions and how we fare after the transaction is completed.

[Greg Tuttle:]

Okay, that makes a whole sense. So I have one more question that’s unrelated. But just looking forward to IMO 2020, on the last conference call we had talked about these smaller containerships and how much fuel they burn. But we were curious as to what the fuel burn is for the 9,000 plus to EU ships. And also maybe any thoughts you have around the LSFO and HSFO spreads?

[Jerry Kalogiratos:]

So as far as containers are concerned, if we are – let’s say just stick to that part of the fleet 11 part, the trade is a relatively high speed trade compared to others. So you’ll find that all containers and especially the bigger ones have large intentions and consumption in comparison to say dry bulk and tankers. So a small carrier vessel might have a similar main engine to a Capesize and VLCCs output might be less than a panamax container. I can give you our top line the statistics with regard to what consumption are 9,000 TEU ships have logged. But in a way that we think about things that is being at a peered market and wanting to fix long-term charters, it’s not so much what our view is in terms of the other spread. It’s more what the charters are willing to pay. So, nowadays when it comes to liners picking up containers with scrubbers, say 9,000 to 11,000 – 8,000 to 11,000 TEU ships, let’s say, you will see that the spread is between $4,000 to $5,000 per day and mostly for three-year deals, sometimes even longer. So you get – let’s say, an idea as to what charters are willing to pay for the savings of a scrubber over the duration of a charter. So this is also what we are aiming at as we have discussed the plan is to install scrubbers on all our 11 ships and we expect that we will retrofit five to six ships in 2019 and the rest in 2020 and one in early 2021. But also the plan is to continue the discussions and throughout 2019 mostly to try to logging longer term charters against fitting the scrubbers. So we are – we don’t necessarily want to take a bet on what the spread is going to be from one day to the next.

[Greg Tuttle:]

Okay, okay. That’s totally fair. And then last question from me and then I’ll hop off the line here. So with shares trading at such a deep discount to NAV, as well as what is accretive transaction with DSSI, kind of what’s the thought process or maybe doing share buybacks?

[Jerry Kalogiratos:]

I think we want to – that’s a great question actually. I think we want to see the transaction completed and how the respective fair trade after that. But if CPLP does not trade in a satisfactory manner, we will of course need to discuss our board the best use of the cash that we have build up and we were building up on the back of the new distribution guidance including unit buybacks. But let us see where we are in a few months.

[Greg Tuttle:]

Okay, sounds good. Well, I’ll hop off the line and let others take the line here.

[Jerry Kalogiratos:]

Thanks Greg.

[Greg Tuttle:]

Thanks.

[Operator:]

Thank you. We will now take our next question. Please go ahead. Your line is now open.

[Hillary Cacanando:]

Hello.

[Jerry Kalogiratos:]

Hello?

[Hillary Cacanando:]

Hi, I wasn’t sure if my line was open. This is Hillary from Wells Fargo. Could you talk about why there’s a divergence between rates for larger container vessels which are showing signs of strength versus rates for some of the smaller container vessels. What’s driving that and you see that trend going forward – to continue going forward?

[Jerry Kalogiratos:]

Yes, that’s actually quite interesting. So as you know, towards the end of the year, there’s always seasonal weakness for FR containers, it comes to the same certainty, comes also for tankers. And you always see fleet utilization during the – towards the end of the third quarter and in the fourth quarter then started picking up really from the end of the first quarter onwards. So we have the same effect this year, but as you say, it was interesting that as – towards the end of the year we saw larger post-panamax access 8,000 TEU and higher showed signs of strength with our rates moving from the mid-low things to the mid-high things in a very unseasonal pattern. So we think that there might be many reasons for that. The one reason might be that the liners are securing tolerance of higher expected as a number of these liners have chosen with different degrees of, let’s say, weapons, will adopt the scrubbers. So, in this annum, we expect between 1%, 1.5% of the fleet to be of higher during 2019 and the same in 2020. And if you see, for example, as you might have seen, has decided to install scrubbers on the majority of its larger vessels. Others have chosen to install scrubbers in certain of their ships. But all in all the impact is expected to quite high and it seems these are larger vessels. The liners according to the market gradually to pick up the slack in order to replace the tonnage. So I think that’s one effect and probably we will see that coming even stronger over the next few months and we continue to see rates increasing right now for, let’s say, 8,000 TEU or above. And at the same time, I think there might have been also stock filing ahead of the potential increased tariffs as we saw quite a bit of activity on the Transpacific trade. And it’s certainly or how much it was caused by the increased tariffs and how much it was increased by simply – but there was definitely a little unseasonal trading there. So I think this has driven the strength of the larger post-panamax ships and if anything we expect this to continue going forward.

[Hillary Cacanando:]

Okay, thank you. And help us with the new CPLP entity, the containership your counterparty – your containership counterparties. Are they all signing to install scrubbers, I guess regulate for your CMA, the larger containers and how about for some of the small ones that you have on your fleet?

[Jerry Kalogiratos:]

So, for the smallest ships that we have in our fleet are the 5,000 TEU ships, which we have announced last quarter that we will install scrubbers and we will pay a rate of $4,900 per day from the moment that we install scrubbers or January 1, 2020 whichever is later until charter expires at the very end of 2024 and 2025. So for smaller ships it’s already secured and done. For the 8,000 TEU, 9,000 TEU ships, we will be in discussions throughout this year. It doesn’t have to be necessarily the same charters. We will have the same charters that we had with others and we will see what we can do and what is an offer in terms of extending employment against installing scrubbers and premium weight.

[Hillary Cacanando:]

Okay, great. Thanks, Jerry. That’s it from me.

[Jerry Kalogiratos:]

Thanks, Hillary.

[Operator:]

Thank you. [Operator Instructions] We have no further questions at this time. Please continue.

[Jerry Kalogiratos:]

Thank you, Lara. And of course, thank you all for listening in today.

[Operator:]

That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.