Capital Product Partners L.P.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Thank you for standing by. Welcome to the Capital Product Partners' Third Quarter 2017 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer and Chief Financial Officer of the company. At this time, all participants are in a 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, the 27th of October 2017. The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, future debt levels and repayment, assumed net book value, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, future earnings, our expectations regarding employment of our vessels, redelivery dates and charter rates, fleet growth, market and charter rate expectations, may be 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 hand the conference over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

[Jerry Kalogiratos:]

Thank you, Sophie, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our Web site as we go through today's presentation. On October 19, our Board of Directors declared a cash distribution of $0.08 per common unit. The third quarter common unit cash distribution will be paid on November 13 to common unitholders of record on November 3. In addition, our Board of Directors declared a cash distribution of $0.21375 per Class B Unit for the third quarter of 2017. The third quarter Class B cash distribution will be paid on November 10 to Class B unitholders of record on November 2. The Partnership's net income for the quarter stood at 9.7 million compared to 9.8 million in the previous quarter and 11.8 million in the third quarter of 2016. The Partnership’s operating surplus for the quarter prior to Class B Units distributions and the capital reserve amounted to 30.3 million compared to 30.5 million for the second quarter of 2017 and 31.7 million from the third quarter of 2016, that is before the 29.7 million in proceeds from the sale of CRs in HMM that we received in connection with our financial restructuring. Common unit coverage for the third quarter stood at a solid 1.2x. We are delighted that we successfully concluded in early October the refinancing of substantially all of our debt with total prepayments amounting to 116.2 million and the proceeds from a new 460 million senior secured term loan facility led by HSH Nordbank and ING. The new facility matures in the fourth quarter of 2023 practically addressing all of the Partnership’s near-term bullet payments. Finally, since our last quarterly call, we secured time charter employment for four of our vessels. As a result, the remaining charter duration of our charters stood at 5.3 years as of quarter end. Turning to Slide 3. Revenues for the third quarter of 2017 increased by 4% compared to the third quarter of '16. The increase was primarily a result of the expansion of our fleet and the lower number of off hire days experienced by our vessels during the quarter, partly offset by the lower charter rates earned by certain of our vessels compared to the third quarter of '16. Total expenses for the third quarter were 45.8 million compared to 42.4 million in the third quarter of 2016. Total vessel operating expenses for the quarter increased by 12% compared to third quarter of '16. The increase primarily reflects the expansion of our fleet and the increase in the number of vessels in our fleet incurring operating expenses, following the redelivery of the Atlantas II, Aktoras and Aiolos from the previous 10-year bareboat employment with BP Shipping. The Aktoras and Aiolos traded in voyage or short-time charters during the most part of the third quarter before commencing the renewed time charter employment with our sponsor Capital Maritime in mid-September. In addition, the Amadeus and Amore Mio II also traded for a large part of the quarter in voyage charters as it was being repositioned to commence its announced charter with Repsol at the end of October. The Partnership’s net income for the third quarter of 2017 was 9.7 million compared to 11.8 million in the third quarter of '16. Turning to Slide 4, you can see the details of our operating surplus calculations that determined the distributions to 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 30.3 million in cash from operations before accounting for the Class B units and the capital reserve of 14.6 million. After adjusting for the reserve and the Class B units, the adjusting operating surplus amounted to $12.9 million, which translates into 1.2x common unit coverage. Going forward and subject with the decision of our Board for the next quarter, we expect to reduce the amount held back in the form of capital reserve to match the quarterly amortization of the new facility which should translate to a corresponding contribution to our adjusted operating surplus. On Slide 5, you can see the details of our balance sheet. As of the end of the third quarter, the Partners’ capital amounted to 936.8 million. Total debt decreased by 13 million to 592 million compared to 605 million as of year-end 2016, due to scheduled loan principal payments during the first nine months of 2017. Total cash as of quarter end amounted to 176.2 million. Overall, our balance sheet as of the end of the quarter was strong with net debt to cap of 27.2% and with Partners’ Capital representing 59.1% of our total assets. Moving to Slide 6, we are very pleased that we have successfully closed the new 460 million senior secured term loan facility with HSH Nordbank and ING Bank as mandated lead arrangers and bookrunners and BNP Paribas and National Bank of Greece as arrangers. As discussed in the previous quarter, in spite of the overall challenging ship finance environment, the facility was over 1.1x oversubscribed which highlights the strength of our balance sheet and excellent track record we have established over the years with our banks to whom we are thankful for their support in putting this facility together. On October 2, we repaid 14 million outstanding under the 2011 credit facility. And on October 4, we drew the full amount of 460 million available under the new facility and together with available cash of approximately 102.2 million, we refinanced 562.2 million out of that 578 million debt outstanding. The only remaining facility in addition to the new facility is the small ING facility of 15.8 million which has minimal amortization for the next five years. The new facility, as previously discussed, is structured in two tranches with a collateral pool of a total of 35 vessels and has a six-year maturity from drawdown that is in the fourth quarter of 2023. The loans drawn under the new facility will bear interest at LIBOR plus a margin of three and a quarter compared to the weighted average margin of 3.18% for the four facilities that we refinanced. The combined annual amortization of the new facility under the two tranches amounted to 52.8 million with 143 million balloon under tranche A. Our financial covenants under the new facility are effectively the same with the covenants of our refinanced credit facilities and do not contain any restrictions on distributions to our unitholders in the absence of an event of default. In Slide 7, we compare our debt maturity profile before and after the completion of our refinancing. As is clear from the chart on this slide, the new facility addresses all the heavy 2018 amortization payments and the balloon payments of 2019 and 2020, but were due under the refinanced facilities thus giving our unitholders enhanced visibility on our financial position. Moving to Slide 8, you can see our debt outstanding after the refinancing. Our total debt is approximately 475.8 million. And in addition to the significant extension of the debt maturities, the favorable re-profiling of our debt and the streamlined debt structure, the Partnership will also benefit from the lower amortization payments when compared to money we allocate to the capital reserve today. In particular, the annual amortization of our total debt after the small ING facility starts amortizing will be 4.5 million lower compared to our current capital reserve. Furthermore, the Partnership will benefit from interest cost savings from our reduced debt outstanding after the repayment. The savings will become substantial as time goes by as the annual amortization reduces our debt balances. Following the refinancing, our pro forma debt to book value amounts to approximately 36.2% and the new amortization profile will ensure significant deleveraging until maturity which would imply assuming depreciation and amortization in line with our accounting policies and no write-offs at debt to book value ratio of just above 20.8% by 2022. That addresses, in our opinion, any further issues regarding the maturity and refinancing of our debt in the future as the outstanding debt amounts upon maturity will become very manageable. Turning to Slide 9. We are pleased to have secured time charter employment for four of our tankers. As previously announced, the Amadeus was fixed to Repsol for one year at a gross daily rate of $14,500 with the charter having the option to extend the charter for an additional year at an increased gross daily rate of $14,750. The new charter commenced in late October. In addition, Capital Maritime charter Aktoras and Aiolos for 10 to 12 months and $11,000 gross per day plus 50-50 profit share on actual earnings settled every six months. The vessels have been trading on voyage or short-time charters following the expiry of their employment with BP Shipping at the end of the first quarter of '17. And the new charters began in September 2017. Finally, Capital Maritime fixed Suezmax tanker Miltadis M II for a period of 10 to 12 months at a gross daily rate of $18,000 with 50-50 profit sharing on actual earnings above $22,000 per day. The new charter also commenced in late October. We are pleased with the continuous support of our sponsor in providing charter coverage for our vessels and importantly with profit sharing arrangements which can allow us to capitalize on a potential market recovery. Moving to Slide 10 and taking into account the new charters, the average remaining charter duration is 5.3 years. We have three product tankers and one Suezmax tanker that we’ll need to re-charter until year end. This includes the Active which is currently employing [ph] other short-time charter with Cargill and is expected to be redelivered to us at the very end of this month. And the Amore Mio II, the 2000 built Suezmax currently trading on voyage charters. We will remain opportunistic and continue to trade here in the spot market until we find appropriate longer-term employment. We expect to have more updates on the re-chartering front over the coming months. As Capital Maritime remains one of our most important charters with nine of our vessels fixed to Capital Maritime and as a courtesy, our sponsor has provided us with a certain balance sheet information for the six months ended June 30 to help investors assess financial profile. Capital Maritime is a diversified profitable shipping company which owns 25 ships with 3.4 million deadweight capacity and comprising six VLCCs, one Suezmax, two are from crude tankers, six MR product tankers, five Neo Panamax containers, one Cape, two handy bulk carriers, and two feeder container vessels. The average age of its fleet rated by deadweight is approximately 5.4 years. It boasts of a strong balance sheet with a net debt to cap as of the end of the first half of 2017 of around 31%. At the end of the first half of this year, total assets amounted to 1.3 billion and the stockholders’ equity stood at approximately 62% of total assets. In terms of newbuilding commitments, Capital Maritime has no committed growth CapEx as it completed its newbuilding program in the first quarter of 2017 following the successful delivery of two eco-Aframax crude tankers which have been fixed on a five-year charter and one eco-MR product tanker. On Slide 11, we’ll review the product tanker market developments in the third quarter of '17. MR product tankers’ spot rates modestly improved during the quarter but rates on average remain at the relatively low levels. The market was driven higher by firm oil demand, higher chartering activities of Suez as well as by solid U.S. product exports particularly to Latin America where demand remains strong. Importantly, Hurricane Harvey had a positive impact on activity levels for MR product tankers in September as it caused significant disruptions to the U.S. oil sector leading to the closure of around a quarter of the U.S. refinery capacity in numerous ports. The disruptions led to increased demand from key importers for alternate supplies. MR rates along the Europe-U.S. Coast routes suffered as a result. However, this was only short lived as refineries bounced back sooner than expected. The impact was slightly more sustainable east of the Suez Canal, as the reduced availability resulting from vessels being diverted to ship oil products to the U.S. and Mexico applied upwards pressure on rates. Despite the aforementioned developments, the market was not able to register more sizable gains as high oil inventories and limited arbitrage opportunities weighed on demand. However, over the last few months, we have seen a decrease in OECD oil product stocks which might on the one hand negatively affect the product tanker market in the short run but bodes well for demand in the medium to long run. In the U.S. in particular, gasoline stocks declined in September to their lowest levels since November 2015 at approximately 219 million barrels. On the supply side, product tanker net fleet growth at the end of the quarter was 5% year-on-year. In the period, market rates for MR product tankers were mostly flat during the quarter with the bulk of fixtures currently being short term as owners remain reluctant to fix longer periods on the back of expectations for an improving market in the coming months. Despite the current weakness in the markets, supply and demand fundamentals are gradually improving. On the supply side, the MR product tanker order book stands at 7.2% as a percent of the fleet close to the lowest figure on record despite a rise of the contracting activity here to-date, while slippage remains high at approximately 34% of the expected newbuilds were not delivered on schedule in the first nine months of this year. In addition, shipyard capacity has shrunk over the last few years thus limiting the amount of new vessels that can be ordered in the short to medium term. In particular, MR product tankers shipbuilding capacity has been hit the hardest as a number of specialized Korean shipbuilders have either closed down, reduced capacity or are targeting larger, more profitable vessel types. Given the robust demand fundamentals on the back of the continued refinery capacity expansion needs of Suez and the strong U.S. product exports as well as increasingly more favorable supply picture, we expect the product tanker market will see a sustained recovery in the medium to long run, and we are well positioned to take advantage of this recovery as it is where most of our re-chartering exposure lies over the coming years. Moving to Slide 12. The Suezmax crude tanker market remained under pressure during the third quarter of '17. Newbuilding vessels continued entering the market during the three-month period as 14 new vessels hit the water on top of the 35 units delivered in the first half of 2017. At the same time, demand was seasonally weaker with crude oil imports to China in particular dropping to an eight-month low in August but recovering sharply in September. The relatively low turn of demand was exacerbated by the existing agreement between OPEC and non-OPEC oil producers to cut oil production. On the positive side, Nigeria and Libya, which are exempt from the oil production cut agreement saw continued recovery in their oil production in the third quarter, therefore increasing employment opportunities for Suezmaxes. But most importantly, the market has seen increased flows of crude oil on long-haul voyages from the Atlantic to the east. Data from the EIA show that the U.S. crude exports hiked to a new record level of nearly 2 million barrels at the end of September of 2017. U.S. exports are increasingly destined to Europe and Asia with India set to emerge as another key market for American crude exports in coming months. In the period market, we saw limited demand for Suezmax tankers during the quarter and period rates remained at low levels. Despite the current weakness, fundamentals for crude oil demand remain strong. The IEA expects solid world oil demand growth of 1.6 million barrels per day for this year and 1.4 million barrels per day for next year. In addition, Chinese and Indian seaborne crude imports are projected to see robust growth in 2017, while U.S. crude oil exports could become increasingly significant to the crude oil tanker trade. Looking at the supply side, the Suezmax tanker order book has decreased to 11% with only 12 vessels ordered year-to-date. It is also important to stress that 2017 is a big year in terms of new deliveries, as a number of expected deliveries decreases sharply from 2018 onwards. Slippage for the first nine months of 2017 decreased compared to the previous quarter to 16%. Importantly, however, we have seen nine Suezmaxes sold to the demolition market this year compared to none in the same period last year. Overall, demolition across tanker segments has amounted to 7.1 million deadweight in the first nine months of 2017 compared to 1.5 million deadweight for the same period last year, which is an important ingredient needed for crude tanker markets to balance going forward. Turning to Slide 13, I would like to reiterate that we are very pleased to have concluded the refinancing of effectively all of our debt which we believe will benefit the Partnership in a number of ways. Firstly, by enhancing visibility on our financial position and our level of debt and at the same time extending debt maturities to the end of 2023. Secondly, by strengthening our balance sheet with our pro forma debt to cap ratio amounting to 33.7% compared to 38.7% as of the end of the third quarter. Thirdly, by mitigating refinancing risk, the dual tranche structure of our new facility provides for full repayment of the debt associated with two-thirds of our fleet. And finally, it is worth highlighting that the full annual amortization of our debt is approximately 4.5 million lower than our existing capital reserve of 58.6 million per year before taking to account an interest cost savings that’s increased our distributable cash flow. As a result, we believe that this transaction further strengthens our balance sheet and is an important cornerstone as we turn our attention to growth. To that end, as you can see in slides 14 and 15, the Partnership has access to a number of assets that could be potential dropdown candidates. On Slide 14, you will find vessels controlled by our sponsor that have either charters in place, as of example the two Aframaxes are one VLCC but have long-term employment or the five eco-MRs on which we continue to hold the right of first refusal. Four of these vessels have debt financing available as they are financed under the same ING credit facility with the Amore, the last acquisition we made back in October 2016, which allows us to not wait the respective tranche for each vessel at the 50% advance ratio provided the vessel has one year of employment or longer and provides for two years non-amortizing period. On Slide 15, you can find other container and VLCC assets that subject to the right conditions can be dropped down to the Partnership. We aim, subject to market conditions, the availability of financing, to further increase the long-term distributable cash flow of the Partnership by pursuing accretive transactions including a number of acquisition opportunities from our sponsor. 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]. The first question is from the line of Jon Chappell from Evercore. Please ask your question.

[Jon Chappell:]

Thank you. Good afternoon, Jerry.

[Jerry Kalogiratos:]

Hi, Jon.

[Jon Chappell:]

So the first thing I wanted to ask was about the operating surplus, the 4.5 million your saving now with the anticipated new capital reserves starting early next year. It doesn’t sound like a lot of money, but it’s about $0.01 a quarter I think. So is the growth of the distribution that you’re aiming for completely dependent upon fleet growth or could the first stages of a renewal distribution growth come from the new kind of capital reserve run rate?

[Jerry Kalogiratos:]

That’s a great question, Jon. As you say, the common unit coverage is said to improve now going forward as the annual amortization of the facility will be 5.8 million less compared to what we reserve today. And then you have also the amortization of the small facility that really starts amortizing at the very end of 2018. But in addition to those savings, you have interest cost savings from the 160 million paid in prepayments and of course decreasing interest cost going forward on the back of the new credit facility amortization schedule. So just to give you an example, the interest cost savings from the prepayments alone and that we’re always assuming a flat LIBOR rate and that you’ll probably have your own interest rate assumptions going forward would be in excess of 5 million plus another 2.3 million per year from the decreasing outstanding debt. But to answer your question with regard to distribution growth, the distribution growth will be tied, as we have said in the past, to asset growth. Now that the refinancing has taken place and our financial needs going forward are well established, we will focus on resuming growth by completing accretive transactions. Now on the last couple of pages on the presentation you saw a number of assets that could fuel this growth going forward, of course in addition to opportunities in the second-hand market that we could potentially source. The vessels with employment or the ones we have a right of first offer which are included on Slide 14 amount to more than 330 million in charter free value while the other additional modern assets that we have access to from our sponsor, included on Slide 15, amount to more than 470. So the combined value of the potential dropdown from one sponsor is 800 million or 60% of the book value of our existing fleet. But I guess then your next question will be how do we finance this growth so that we can also revisit the distribution growth going forward. Now as far as the debt is concerned, for many of these vessels as we have discussed in the past, we have debt in place that can be simply innovated to CPLP. There is only a swap of guarantors. So that’s the relatively easy part. And for the vessels who’s got current ready facilities do not have that optionality. I am confident that we will be able to line other required debts as needed given the strength of the balance sheet and our banking relationships. So on the equity side of the equation for these acquisitions, we will look into different sources of capital. So internally generated cash flow, especially after the reduction of the capital reserve that you just mentioned means that there will be additional cash to be used for vessel acquisitions. If our underlying markets, for example, and especially the product tanker market where we have most of our short-term charter expirations see a more sustained recovery, this could also result in a higher distribution coverage and additional cash generated that can be used to fund acquisitions. And finally, we are on the lookout for external capital that can help us either complement or fully finance the equity aside of these acquisitions. And in the end, the main criteria will be acquisition to long-term distributable cash flow going forward. So the answer is no, in the sense that there will be no immediate distribution increase on the back of refinancing. But given that more money is now freed up to be put aside for acquisitions either from internally generated cash flows or for us being able to source third-party capital, we are quite optimistic that we should be able to now execute on the growth side.

[Jon Chappell:]

All right, incredibly thorough answer and in anticipating for my follow-up question. Let me just ask one super quick one. I don’t recall seeing, how much is left on the ATM as it relates to some of the new capital that you were just talking about?

[Jerry Kalogiratos:]

Correct. So our ATM filing you might recall was for up to 50 million and that is for three years, so for a period commencing in September 2016. Now since the ATM was put in place in September 2016 until today, we have issued approximately 6.6 million units bringing in about 22.3 million in net proceeds. This is less than 4% of the volume traded in the stocks since inception of the ATM program. We continue to use the ATM opportunities to clear any particular – and in a prudent manner for sure, and the net proceeds can be used for obviously general publishing purposes but including the acquisition of vessels or rather to potentially complement internally generated cash flows in order to complete an acquisition. But if I’m probably to guess your next question with regard to where did those proceeds go, the 22 million from the ATM and I think that’s also why the ATM has been useful so far. I think we have been very prudent in how we have used this tool and this is the way that we’re going to think about it in the future. As we have said in the past, we do not think that the current unit price is the unit price that we necessarily want to be issuing a lot of equity at. But if you look at our pro forma cash position after the – the refinancing is about 60 million. And don’t forget we repaid about 116 million in order to complete this refinancing transaction within 2017. As far as the capital reserve is concerned, after the amount has been paid out for scheduled amortization, what was left is 72 million. So really the refinancing we were able to complete the refinancing sooner than later and give visibility to unitholders with regard to the balance sheet and allow us to think about growth. By using some of the proceeds from the ATM as well as some of the proceeds that we got in from the HMM arrangement.

[Jon Chappell:]

Okay. Once again very thorough. I appreciate it. Thanks, Jerry.

[Jerry Kalogiratos:]

Thank you, Jon.

[Operator:]

Your next question is from the line of Ben Nolan from Stifel. Your line is now open.

[Ben Nolan:]

Great. I’m glad I got it early, Jerry. You’re not leaving much on the table for us here. Just a couple of quick ones as it relates to sort of the growth and you laid out some of the dropdown opportunities, the Amore and the crude tankers at the sponsor. When you’re sort of high-grading opportunities like that, how much of a preference is there for the vessels that already have long-term employment as opposed to just taking something with short-term employment that you might have to look to fix on long-term employment into the future? Does that weigh into the calculus at all or how do you think of it?

[Jerry Kalogiratos:]

For sure and that’s a great question, Ben. For example, the two Aframaxes that have long-term employment in place would be good dropdown candidates from that perspective and for sure, because they give us and unitholders longer-term visibility, the accretion is easier to determine. But also in the end assets like the eco-MR product tankers for which we have right of first refusal, again this is a natural space for us and long-term employment can be secured as we have done in the past from third parties or by Capital Maritime before dropping those in.

[Ben Nolan:]

Okay. Am I reading it right, you prefer long-term contracts but looking at them I suppose it all rolls around the returns that you can generate on the assets given the prices that [indiscernible]?

[Jerry Kalogiratos:]

Correct. In the end, the main criteria needs to be accretion and what long-term contracts gives you is more visibility with regard to that accretion. So from that point of view I think the Aframaxes are attractive but also the MRs as we have done in the past with a time charter in place that makes sense could be also looked at. But if you have a choice, I think longer term charters are more helpful.

[Ben Nolan:]

Okay. So to that end and this is my second question, when looking through sort of your suite of opportunities, obviously you laid out the ones from the sponsor, but how aggressively are you also looking at opportunities like for instance maybe doing say leaseback transactions with liner companies in the container space or things from unaffiliated third parties as opposed to being targeted towards this sponsor fleet?

[Jerry Kalogiratos:]

The sponsor fleet gives us the comfort of time and the ability to look at assets with charters, as you say, because it’s not easy to go out there and find assets with a charter in the first place and a good charter that is. The second-hand market is very – it’s predominately for charter free assets or assets with shorter time charters. And then secondly, in order for you to line up the finance, get Board approvals and go through all the process that you need, so if you are to do a deal on subjects, as we say, on the S&P market, you have to pay through the nose for that. So, so far being able to grow through our sponsor has been, if you want a big advantage because the sponsor is well incentivized to see the Partnership grow. It can give us the time to line up the finance to get our approvals done without necessarily having to pay up. And importantly it does provide charters with assets which as I said are not very easy to find.

[Ben Nolan:]

Okay. So more than likely that’s going to be that source of growth is through the sponsor I guess, right?

[Jerry Kalogiratos:]

Don’t get me wrong, we are very active in the S&P market, including me personally and we look at a number of opportunities. But if you look at our transactions in the past, we have grown from eight ships to 36 and I think all but one were acquisitions from the sponsor.

[Ben Nolan:]

Right. Okay. That does it for me. I’ll turn it over and see if anybody else can figure out any questions to ask. Thanks, Jerry.

[Jerry Kalogiratos:]

Thank you, Ben.

[Operator:]

The next question is from the line of Amit Mehrotra from Deutsche Bank. Your line is now open.

[Amit Mehrotra:]

Hi, Jerry. How are you doing?

[Jerry Kalogiratos:]

Hi, Amit. How are you?

[Amit Mehrotra:]

I have an amazing question, okay, so here it is. I just had a quick question on the coverage ratio, because obviously that’s a big factor as well in addition to I guess growth and increases in the available cash balance. But I guess obviously the tanker market is not really I guess on fire, a poor choice of words, but it’s not on fire right now. But I guess that’s also impacting the average duration of the partnership charters. I think the duration is down about 10% since this time last year. Just thinking about how bad impacts you’re thinking around the coverage ratio because that obviously impacts what can actually accrue to the common unitholder in terms of the increases in the cash balance? Thanks.

[Jerry Kalogiratos:]

That’s a great question, Amit. The longer term period market tends to be increasingly liquid as the market is weaker and that has been the case predominately on the crude side. Nowadays you see very little in terms of longer term fixtures, although as you saw from the dropdown list, our sponsor did fix five years bareboat for one of their VLCCs. But as a general point, you are right. But there’s also another reason for that. It’s also owners that will tend to avoid longer term charters at this point as they know that they will be locking in at very low rates. So for example on the MRs, right now it’s a standoff. You have a number of charters trying to find longer-term charters say for an eco-MR between 15 to 15.5 for three years, but there is very little bids. That’s what we ask, because charters don’t want to lock in at these kind of rates. So it works both ways. And we are I guess among them because we don’t really want to be locking in at least for the majority of our fleet very low rates if we can avoid it, as the fundamentals point out to a market recovery. But to your point, Amit, I think it’s easy to talk about the market recovery if you don’t see it. But in the end the way that we have now structured the partnership with the distribution of $0.08 per unit. You see we don’t need much in terms of charter renewals to deliver a good distribution coverage. Just to give you an idea we have four eco-MRs coming off charter over the next 12 months which are fixed, another is at $14,000 while the market today is – the one year market is between $14,750 to $15,000. If we’re to fix longer, it will be even higher. So there is upside for example from those ships. Then on the non-eco-MRs, they are fixed on average at $14,900 with a market being today at $13,500, $13,750. So if the market remains at this – as you said depressed levels, the drop is only very, very small. And to the Suezmaxes, we have more or less re-charted half of the Suezmaxes already at low levels. So the current coverage reflects that except for two where you might see a drop. Aias [ph] and the Amore Mio will be expired in the second and third quarter of 2018 and they will come from another charter of $24,500. And if the market persists like it is today, we will fix at 17, 18. While on the other hand, the Archimidis and Agamemnon, the two containers that are coming off charter in April, they have a fixed a date when the market has recovered for containers to 15 to 20. So what I’m trying to say is that already the current charter coverage reflects fairly depressed levels. Maybe there is a little downside, maybe there’s also some upside depending on how the different markets move. But that’s at fairly depressed levels. If things move up, then you can easily see distribution coverage of 1.4x, 1.5x and we don’t need much; $2,000, $3,000 on the MRs that’s what it’s going to be a big move from the distribution coverage.

[Amit Mehrotra:]

Right. I guess the point is, is that this was more probably of an issue 18 months ago when some of the re-chartering were more dilutive, but to your point the current charters were done in a pretty weak market anyway. So in some cases it could be neutral, at worst or even accretive in some cases. So that makes a lot of sense. One quick one for me and then I’ll hop off is you talk about debt to book value a lot in the presentation and I get that. I just wanted to understand if you could just help us and just overall the people listening on this call where the net leverage is now relative to sort of the fair value of the assets? I guess just how the banks look at it, because it seems like it’s still pretty low and I just wanted to make sure that that point was communicated just from a risk profile to company. Thank you.

[Jerry Kalogiratos:]

Thank you, Amit. We don’t disclose the NAV of our – the fair market value or the NAV of our fleet simply because we think that for a MLP like us it might misguide people as to how this is looked at, because NAVs typically are charter free NAV while there are a number of charters that we have in place. But I have seen from various third party analysts, our net leverage being estimated in the very low 40s on a charter free basis that is which is probably around the right levels. But then if you do the exercise and you also add the value of our charters, it could be potentially even lower.

[Amit Mehrotra:]

Okay. Thanks for taking my questions, Jerry. Have a great weekend. I appreciate it.

[Jerry Kalogiratos:]

Thanks, Amit. You too.

[Operator:]

Your next question is from the line of Spiro Dounis from UBS Securities. Your line is now open.

[Spiro Dounis:]

Hi, Jerry. How are you?

[Jerry Kalogiratos:]

Hi, Spiro, very well. Yourself?

[Spiro Dounis:]

Good. Just want to follow up on some of the previous questions, first one just sort of going back to the funding model going forward. It sounds like – and I don’t want to put words in your mouth, but it sounds like this internal funding or self funding might be the sort of base case outside of capital markets opening up. So I guess if that is the case, how are you thinking about the timing around that? You’ve got a pretty decent cash balance here on a pro forma basis and it seems like you can build that a few million a quarter at this pace without the product market really ramping up from here. So as you think about the timing of a next dropdown or when you commence that growth, how should we think about that?

[Jerry Kalogiratos:]

Spiro, I think you put it very well. As you say internally generated cash flow is a base case and there’s upside also from third party capital assuming that we can find capital that – with which we can compete accretive transactions. So look, as we just completed the refinancing, we are on the lookout to see what we can raise in terms of new capital, if any. As you say the cash balance is not bad. Of course, we don’t want to go a cash balance between 40 to 60 subject to our working capital requirements and other requirements should be maintained. And given where we are and what we expect to put aside going forward, we should be able to start dropdowns earlier than later. Traditionally we have done larger transactions. So to the extent that we can do that, we will deliver on larger transactions. But again, I think it’s best to get going sooner than later. So even a small transaction to begin with can be expected in the short term and I think that’s as much light I can throw into this question.

[Spiro Dounis:]

Okay. That’s fair. And just sort of along those lines you mentioned potentially third party capital. Just remind us again maybe what the sponsor’s appetite is to participate in a future equity raise and maybe historically what they’ve done on that front?

[Jerry Kalogiratos:]

Well, the sponsor has participated I think in all but one equity offering one way or another. So the sponsor has always been very supportive of the Partnership sometimes also taking stock at a higher price than the trading price of the unit at the time. You saw that, for example, with the Amore dropdown back in September of last year. So overall, the sponsor has been supportive and that’s all I can say I guess at this point.

[Spiro Dounis:]

Okay. Last one for me, just want to get a follow up to a prior question. You mentioned that potentially going out to the third party, second-hand market to buy a vessel but of course your huddle there is that that’s mostly – that was what was on the spot market. And so I guess my question is why not buy it on the spot market here? It seems like your risk to the downside is limited from a spot basis. It can only go up and why not charter that yourself to a third party or even pre-negotiate a charter with Capital Maritime to get a deal done?

[Jerry Kalogiratos:]

Correct. That could be done as well. Of course, we still have the transactional issues because CPLP cannot necessarily pull a deal without having the approvals in place, the finance in place not as easy as Capital Maritime can do, for example, which is a more speculative vehicle. But in theory, yes, that could work. We’re definitely not adverse to such thinking.

[Spiro Dounis:]

Got it, awesome. I appreciate it, Jerry. Thank you.

[Jerry Kalogiratos:]

Thank you, Spiro.

[Operator:]

Your next question is from the line of Ben Brownlow from Raymond James. Your line is now open.

[Ben Brownlow:]

Hi, Jerry.

[Jerry Kalogiratos:]

Hi, Ben.

[Ben Brownlow:]

Thanks for taking my question. I’m pretty much – you’ve answered everything but just one for me on the profit sharing with the Miltiadis, that 50-50 profit sharing. Can you just talk about the general methodology and approach in determining that 22,000 a day threshold?

[Jerry Kalogiratos:]

Right. So effectively and what this means is that every six months the charter Capital Maritime will close their books and see what the time charter equivalent has been for this six months period from the various voyage or time charters, whatever employment they have provided for the vessels. So if that TCE, the time charter equivalent is above 22,000, so call it – let’s say for example it’s 25, $1,500 per day for this six months period will go to us and the other $1,500 will remain with the charter.

[Ben Brownlow:]

Understood. But why not 21,000, 23,000? I’m just trying to better understand how that threshold is?

[Jerry Kalogiratos:]

Okay, I see. It’s a negotiation. In the end it’s a negotiation between the conflicts committee and Capital Maritime. But what I can tell you is that if you look at the brokers’ estimates today, you’ll find that their one year estimate – one year time charter estimate for Suezmax is between $17,000 to $18,000 flat. So effectively here the Capital Maritime is giving an upside that it’s not really in the market. It has to be supportive of the Partnership. But because the market is so depressed, the only ask was that this profit share will start a little higher than the floor rate. But in reality this kind of charter would be very difficult to procure in the normal market from a third party. And for us I think what it does is that in case the market really picks up. So for example, seasonal spikes and so on and so forth, we at least get part of that rather than just getting the floor rate. So I think it’s situations where the market is so depressed, it’s good to have some profit share element to that to at least ensure that we don’t lose out if things pick up.

[Ben Brownlow:]

Great. That’s helpful. Thank you.

[Jerry Kalogiratos:]

Thank you, Ben.

[Operator:]

[Operator Instructions]. Your next question is from the line of Mike Gyure from Janney & Co. Your line is now open.

[Mike Gyure:]

Thanks. Jerry, real quick on the cost side of things. I guess are you seeing anything unusual on the operating expense side? And then maybe what are you looking for as far as drydocks in the next couple of quarters?

[Jerry Kalogiratos:]

Sure. The operating expenses on average have been flat but you have to take into account that as we highlighted in our press release that compared to last year, we have three more ships incurring operating expenses that were previously on bareboat. So that makes a difference in absolute numbers. But in terms of average OpEx, overall I would say they are relatively flat compared to the last few quarters with some volatility which is natural from quarter-to-quarter. In terms of drydocks, we have if I recall correctly four drydocks this year and it’s two Suezmaxes and two MRs.

[Mike Gyure:]

Great. Thanks very much.

[Operator:]

We’ve got no further questions at this time. Please continue.

[Jerry Kalogiratos:]

Thank you all for joining us today.

[Operator:]

That does conclude your conference for today. Thanks for participating. You may now disconnect.