Capital Product Partners L.P.
Q4 2017 Earnings Call Transcript

Published: 31 Jan 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Capital Product Partners' Conference Call on the Fourth Quarter 2017 Financial Results. 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 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. And I would now hand it over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

[Jerry Kalogiratos:]

Thanks Jennie, and thank you all for joining us today. As a reminder, we'll be referring to the supporting slides available on our website as we go through today's presentations. On January 17th, our Board of Directors declared a cash distribution of $0.08 per common unit. The fourth quarter common unit cash distribution will be paid on February 15th to common unitholders of record of February 2nd. In addition, the Board of Directors declared a cash distribution of $0.21375 per Class B Unit for the fourth quarter of 2017. The fourth quarter Class B cash distribution will be paid on February 9th to Class B unitholders of record on February 2nd. The Partnership's net income for the fourth quarter stood at 6.8 million. Net income for the fourth quarter includes a non-cash impairment charge of 3.3 million from the sale of the MR tanker Aristotelis. The Partnership operating surplus for the quarter prior to Class B unit distributions and the capital reserve amounted to 30.3 million compared to 34 million for the fourth quarter of 2016 and 30.3 million for the third quarter ended September 30th 2017. Common unit coverage for the fourth quarter of 2017 stood at solid 1.4 times. We are pleased we have completed the acquisition of the eco-type Aframax crude tanker Aristaios for a total consideration of 52.5 million. This time charter U.S. oil company Tesoro recently named Andeavor and comes with an attractive charter which has four year remaining duration. Towards the end of the fourth quarter, we took advantage of an opportunity of the second hand market to sell the 2013 build MR tanker Aristotelis to an affiliated third party at an attractive price and replace it with younger vessel the 2016 build eco-type Anikitos including the 30 month time charger to Petrobras. As we have previously stated, early in October 2017, we successfully concluded a refinancing of substantially all of our debt through a new 460 million senior secured team loan facility led by HSS and ING. As discussed in detail during the Partnership's third quarter earnings call, the new facility allowed us to address all the Partnership's near term bullet payment and give our unitholders enhance visibility on our financial position as it only matures in the fourth quarter of 2023. Finally, since our last quarterly call, we'll have secured time charter employment for two of our vessels namely Aktoras and Atlantas II, while Repsol exercise an option to extend the time charter for the Amadeus for an additional year of increase day rate. As a result of this employment updates and the acquisition of Aristaios and Anikitos, the remaining charter duration of our charters stood at 5.1 years as of the end of the quarter with approximate charter coverage of 66% for 2018. Turning to Slide 3. Our revenues for the quarter increased by 2.7% compared to the fourth quarter 2016. The increase was primarily a result of the higher of voyage charters performed by our vessels during the fourth quarter of 2017 and the increase in the number of operating days compared to the same period in 2016, partially offset by lower charter rates and by certain of our vessels during the quarter compared to the same period in 2016. Voyage expenses for the quarter were $5.1 million compared to $2.7 million in the fourth quarter of 2016. The increase was mainly attributable to the increase in the number of voyage charters performed by certain of our vessels in the fourth quarter of 2017 compared to the same period in 2016. Total expenses for the quarter were $51.4 million compared to $43.2 million in the fourth quarter of 2016. Total vessel operating expenses for the fourth quarter increased by 12.7% compared to the same period in 2016. The increase primarily reflects the increase in the number of vessels in our fleet incurring operating expenses, following the redelivery of the Aktoras and Aiolos, from the previous bareboat employment and the acquisition of the Amor in October 2016. On December 22nd of the previous quarter, we entered into an MOA of an agreement for the sale of Aristotelis and in this respect, we recognized a non-cash impairment charge of $3.3 million representing the difference between the carrying amount of the vessel and its net sale price. The Partnership's net income for the quarter was $6.8 million or $10 million net asset for the impairment charge compared to $13.7 million in the fourth quarter of 2016. Turning to Slide 4, you can see the details of our operating surplus calculations, the distribution 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 accounted for the Class B unit distribution and capital reserves. We allocated $13.2 million to the capital reserve in the fourth quarter of 2017 which is 1.4 million less than the previous quarter. The decrease in the quarter allocation to the capital reserve reflects a reduction the overall level of our debt and the amortization payments under our credit facilities following the partial prepayment and successful refinancing of substantially all of the Partnership's debt in the fourth quarter of 2017. After adjusting for the reserve and the Class B unit distributions, the adjusted operating surplus amounted to $14.3 million which translates into a 1.4 common unit coverage. On Slide 5, you can see the details of our balance sheet. As of the end of the fourth quarter, the Partner's capital amounted to $933.4 million. Total debt decreased by $129.2 million to $475.8 million compared to $605 million as of year-end 2016, due to particle prepayment of $116.2 million in connection with refinancing of our debt during the fourth quarter of 2017 and scheduled loan principal payments during the first nine months of 2017. Total cash as of quarter end amounted to $81.3 million. Overall, our balance sheet as of the end of the quarter remained strong with a net debt to capitalization of 28% and with Partner's capital representing 63.7% of our total assets. Moving to Slide 6. We are delighted to resume growth with the acquisition of the eco-type Aframax crude tanker Aristaios from our sponsor for a total consideration of $52.5 million. The vessel is employed with the Tesoro Far East Maritime Company a subsidiary of oil company Andeavor and a Fortune 500 company at 260,400 gross per day. This time charter employment expires at the earliest in November 2021. The transaction was financed with $24.2 cash from our balance sheet and the assumption of $28.3 million term loan under a new credit facility with Credit Agricole. The term loan bears interest of LIBOR plus margin of 2.85 and is payable in twelve consecutive semi-annual instalments of approximately $0.9 million beginning in July 2018, plus a balloon payment payable together with the last semi-annual instalment due in January 2024. The loan is subject to ship finance covenants similar to the covenants applicable under existing facilities. Moving to Slide 7. I am pleased to announce that we took an advantage of an excellent opportunity of the second hand market to sell one of our MR product tankers at an attractive price and thus replace it with a more modern assets with only incremental cash outlay. In particular, we have agreed to sell the MR tanker Aristotelis to an affiliated third party in the price of $29.4 million. The delivery of the vessel to its buyer is expected in March 2018 before the vessel's scheduled special survey which translates into a saving for the partnership in terms of dry-docking cost and off hire days. We expect the net proceeds after the mandatory loan prepayment under the respected credit facility to amount approximately $14.4 million. Conditional upon the successful completion of the sale of the Aristotelis, the Partnership has agreed with Capital Maritime to acquire eco-type MR tanker Anikitos for a price $31.5 million. Through this acquisition, we effectively replaced Aristotelis with a younger second generation eco MR product tanker with long term employment in place. Anikitos is currently employed under a 30 months' time charter to Petrobras at a gross daily rate of 15,300. The charter commenced in January 2018 and can be extended by 18 months at the charters option at the same day rate. We expect to take delivery of Anikitos in March 2018 fall into delivery of Aristotelis to its new owner. We intend to finance the acquisition of the Anikitos with net process from the sale of the Aristotelis after the mandatory debt repayment. The assumption of approximately $15.5 million term loan under a credit facility previously arranged by Capital Maritime with ING Bank and the remaining balance cash from our balance sheet. In total, we expect the net cash outflow the indebted replacement of our Aristotelis and Anikitos to be less than $2 million. The ING term loan is non-amortizing for a period of two years from the anniversary of the dropdown of Anikitos with an expected final maturity in June 2023. The term loan bears interest at LIBOR plus a margin of 2.5 and the subject to ship finance covenants similar to the covenants applicable under existing facilities. Overall, we believe that this opportunistic replacement of Aristotelis and Anikitos represents an excellent rate for the Partnership as we replace the sold vessel without and carrying the scheduled dry-docking cost with younger more sophisticated product tanker with long term employment in place and finance with cheaper debt and less than $2 million cash outflow. Turning to Slide 8. We have secured new time charter contracts and extensions for three of our tankers. The Aktoras has been fixed to sale for one year the gross daily rate of 13,500. The charter has the option to extend the day of charter for an addition year and a gross daily rate of 14,500. The new charter commenced January 2018. The vessel was previously employed with Capital Maritime at a gross daily rate of $11,000 per day plus 50/50 profit share and was expected to expire in August 2018. Capital Maritime agreed to terminate charter before its fund dated to the expiration in order for the Partnership to receive the full benefit of the new charter to sale plus continuing to demonstrate our sponsor's commitment to CPLP. Moreover, we have our rate for the Atlantas II to take over the remaining charter of Aktoras which has another 7 to 9 months run at a gross daily rate of 11,000 plus 50/50 profit share. The new charger commenced January 2018. Finally, Repsol the charter of Amadeus has exercised job option to expand its employment for an additional year commencing in October 2018 and a gross daily rate of 14,750 which represents an increase of $250 per day compared to the current daily rate. As a result, the earliest charter expiration has been extended to October 2019. Moving to Slide 9 and taking to account our latest fleet developments and charters. The average remaining charter duration of our fleet is 5.2 years. We have 14 product tanker, 4 Suezmax and 2 containers that will need to re-charter until year-end. This includes the active, the Alexandros II which was redelivered to us its long term bareboat employment in December 2017 and also the Suezmax tanker Aris which was redelivered to the partnership in late January following the completion of it three year charter with Repsol. We planned to trade both Alexandros II and the Aris in the spot market until the schedule dry-docking in the second quarter of 2018. Moreover, the Amore Mio II a 2001 build Suezmax continues to trade on voyage charters. Given the index of this vessel and the depress date of the Suezmax market, we will remain opportunistic and will trade in the spot market until we find more appropriate longer term employment over the coming months. On Slide 10, we'll review the product tanker market developments in the fourth quarter of 2017. MR product tanker spot rates continued improving during the quarter albeit at a modest pace. East of Suez, demand for a mass increase, the key driver being the found of clean petroleum product, export quotas issued by China in early November. This combined with robust refinery margins, encouraged refineries across China to boost refinery runs and push more products into the export market, therefore stimulating demand for product tankers. Adding to the closely momentum, tighter supplies and firmer LPG prices made enough more attractive chemical producer which as a result increase demand for petroleum product and subsequently for product tankers. In the West, the market was also under upwards pressure, particularly from early November onwards, on the back of U.S. petroleum product exports reaching new record levels. For the quarter, product exports from the U.S. claimed above the 5 million barrels per day mark to average almost 5.2 million barrels per day. The positive developments of the market were partially offset by continued oil vendors destocking and limited arbitrage opportunities. According to VIA, oil stocks declined in the fourth consecutive month in November by 17.9 million barrels with a large fall in middle list recorded. Preliminary data for December suggest the further fall 41.7 million barrels. This decrease in OECD oil product stocks negatively effects the product tanker market in the short run but boards well for demand in the medium to long run. On the supply side, total availability was high during the quarter was also another factors that prevented rates from recording more sizable gains. This estimated that product tanker net fleet growth as of the end of December was 4.4% year-on-year. In the period market, rates and activity increased, reflecting the improvement in the spot market. Putting this into perspective, one year period rates for MR product tankers have increased approximately 10% year-on-year. We believe that this increase reflects the positive outlook for the MR segment as supply and demand for Amadeus continuing improving. On the supply side, the MR product tanker order book stands at 8% as a percent of the fleet close to record low levels despite a rise in contracting activity in 2017, while slippage remains high at approximately 37% of the expected new builds were not delivered on schedule in 2017. In addition, shipyard capacity for product tankers 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 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. Overall, analyst estimate in the net fleet growth for product tankers would slow to 1.6% in 2018, while on the demand side, analyst expect growth of 3.8%. Moving to Slide 11. The Suezmax crude tanker market experienced relatively higher rates compared to the third quarter of 2017 on the back of seasonally stronger demand. The same times and excluding but we're overall strong reaching the second highest level on record in November at approximately 9 million barrels per day, although we did decrease in December. The rise in Suezmax rates was also fueled by increased close of crude oil on long-haul voyages from the Atlantic to the east. Importantly, U.S. exports are increasingly best into Europe and Asia which has a positive impact on ton mile. Despite the improvement, rates remained close historically low levels for this time of the year. Most of their weakness was attributable to high fleet growth as 57 Suezmax entered the market in 2017 which constitutes the highest level on record on an annual basis. Concurrently, delivers in the VLCC and Aframax segments were also high acerbating the supply driven pressure in the Suezmax rates. On top of this, the oil production cut agreement between OPEC and Non-OPEC oil producers resulted in lower cargo volumes entering the market and therefore lower employment opportunities for Suezmaxes. In December, OPEC counter achieved approximately 130% compliance to the production cut agreement. In the period market, we saw very little demand for Suezmax tankers for long term charters of 12 months are longer and period rates remained close historically low levels. Despite the current weakness, fundamentals for crude oil demand remained firm. The IA expects solid demand growth of 1.3 million barrels per day for 2018. In addition, Chinese and Indian seaborne crude imports are projected to see robust growth in 2018, while U.S. crude oil exports could become increasingly significant to the crude oil tankage rates as already been evidence in 2017. Altogether, Suezmax deadweight demand is expect to grow by 4.7% in 2018. Looking at the supply side, the Suezmax tanker order book has decreased to 11.5% with only 19 vessels ordered in full year 2017. It is also important to stress that 2017 was a big year in terms of new deliveries, as a number of expected deliveries decreases from 2018 onwards with 39 and 15 vessels expected to be delivered this year and 2019 respectively. Slippage for 2017 was 22% furthermore, we saw 15 Suezmax sold in the demolition market last year compared to just one in 2016. On aggregates, demolition across tanker segments has amounted to 11.1 million deadweight in 2017 compared to only 2.5 million deadweight for 2016, which is an important ingredient for crude tanker markets to balance going forward. Finally, turning to Slide 12. We believe that our common unit distribution is further supported by the of the accretive acquisitions of the Aristaios and the Aristotelis and Anikitos swap get with long term time charters at attractive rates. Our strong balance sheet with net debt to cap ratio at 28% as of the end of this quarter, further supports our common unit distribution going forward, as well as the solid common unit coverage which amounted to 1.4 times for the full year 2017 after the capital reserve under Class B distributions. In addition, the 66% charter coverage are available days for 2018 as well as the long-term positive tanker fundamentals including the improving supply picture bodes well for our common unit distribution coverage. And of course our modern high specification fleet and our cost efficient manager would enjoy an excellent track record and it's vetted for period business with oil majors, traders, operators and liners worldwide. As the Partnership's distribution yield remains elevated compared to most MLPs, despite the aforementioned factors and from discussions with our investors who believe that there is little benefit increasing the common unit distribution at this stage. As such, we'll continue to focus on building distribution and charter coverage in the short term and retain the flexibility of using the additional cash flow to continue to grow our asset base with a goal of increasing our long term distributable cash flow. As MLP equity and shipping markets recover and more avenues for funding growth open up for the partnership will of course considering increasing the common unit distribution which very much remains our long term goal. As far as growth opportunities are concerned, as you can see on Slide 13 and 14, the partnership has access to a number of assets that could be potential dropdown candidates. On Slide 13, as we have previously discussed, you'll find a number of vessels controlled by our sponsor that have long term employment or debt financing in place as for example there's at least a sister vessel of Aristaios also chartered disorder and with debt financing in place under the same terms of Aristaios. Other assets that could be dropped down candidates include the Atlantas, VLCC with long term bareboat employment in place and of course a number of modern equally marginal which we have a right of first refusal. Finally, on Slide 14, you can find other container and VLCC assets that subject to the right conditions can be dropped down an accretive manner to the partnership. And with that, I'm happy to answer any questions you may have.

[Operator:]

Thank you very much indeed, sir. [Operator Instructions] Your first question from Jefferies comes from the line of Randy Giveans. And your line is now open, sir.

[Chris Robertson:]

Hey, guys. Thanks for taking my call. This is Chris Robertson, calling on behalf of Randy.

[Jerry Kalogiratos:]

Hi, Chris.

[Chris Robertson:]

I was wondering if you could speak to the re-chartering opportunities or environment for the two containerships that have the contracts expiring in 2018, specifically the Archimedes and the Agamemnon?

[Jerry Kalogiratos:]

Of course. Overall demand for container vessels remained very healthy during the fourth quarter, which as you know is a traditionally week period for containers. While the Neo Panamax container vessels of 8,000 to even larger did experience weaker demand. And as a result, we saw a move downwards in terms of charter rates. What was very interesting this year is that the idle fleet increased only marginally from around 1.7% to 2%. Typically this move in this period of the year is much sharper. And as a comparison of the end of 2016, the ideal fleets stood at 7.1%. So overall, the container market saw signs of strong demand even in the say weaker period. And when you look at the demand supply picture, you'll see that most analysts expect demand to outpace supply by 1% to 2% that's points on the back of what you seen as global synchronized growth and a fairly low closer historical lows order book for containers. Now when it comes to add to our vessels recent fixtures as I said have been slightly weaker, so we have seen fixes between $12,000 to $14,000 per day for short at times charter, I'll call it 2 to 3 months. But as our vessels come of charter during the seasonally peak period which is the second quarter and specifically between April to May, we would try to take advantage of this and fix at higher numbers if possible and the current demand supply fixer very much is pointing to that direction. And if we see good numbers that make sense to look in for longer term, we will of course a look at that as well.

[Chris Robertson:]

Thank you. I have one follow-up question I regarding Slide 14 with the other dropdown opportunities. Could you provide just some additional color around that plan for financing the future dropdowns?

[Jerry Kalogiratos:]

Right, when it comes to the growth opportunities as you say there is plenty. I mean between the vessels from Slide 13 and 14, these amount almost $700 million or about 50% of the book value of our existing fleets. Of course, there is a definite preference for vessels with long term charters and that give the customer visibility and the final criterion remains the accretion of any dropdown. With regard to the financing of these assets, the debt side as you can see is resolved for most of this assets. They have credit facilities that have whereby we have the optionality to take over trances as we have done recently with the Aristaios as we will do with Anikitos as have done more in the past and but I think overall very beneficial for the partnership as we don't have to look for new debt in care fees and so on and so forth. But also for the other vessels given our banking relationships and the strength of our benefit, I'm very confident that we can lineup that as required. On the equity side, which is I think the more interesting part, we continue to look into a different source of capital. Internally generated cash flows is of course one source and especially after the reduction of the capital reserves which means that there will be additional cash to be used for vessel acquisition and that definitely help. And if you take into account an improvement in the underlying markets and especially the product under market where we have most of our short term charter expirations. Then these could also result in higher distribution coverage and that additional costs could find its way to fund acquisitions. So of course at the same time, where we're on the lookout for external capital but that can help us compliment or fully finance the equity side of this acquisitions. And accretion to long term distributable cash flow will be the criterion.

[Chris Robertson:]

Right, thank you. That concludes my questions. I appreciate your time.

[Jerry Kalogiratos:]

Thank you, Chris.

[Operator:]

Thank you very much indeed. Now your next question from Evercore comes from the line of Jonathan Chappell. And your line is now open, sir.

[Jonathan Chappell:]

Hi, good afternoon, Gerry.

[Jerry Kalogiratos:]

Hi, Jon.

[Jonathan Chappell:]

So first question on the, what's called the vessel swap, we saw some rumors that you were selling that asset from the appearance of selling a five year old ship seemed quite odd but obviously when you look at the transactions in the back-to-back manner, it makes a lot of sense. So the first question is, are there other opportunities like that available, what's the market like for sort of five year old ships where maybe if you can monetize those or is there another opportunity then to swap out one of the amount of the right of first refusal?

[Jerry Kalogiratos:]

That's an interesting question. I think overall, this was an opportunistic move and we were taking advantage of an arbitrage opportunity in the second hand markets, because if you look at what for example Clarksons will tell you that the value of these vessel is, I think they have it down at the five year old ship at let's say $27 million. So - and then it was a no brainer for the lack of it word or description to just swap the vessels because in the end, you spend only $2 million but the you avoid the special survey and the associated of higher days you get a second generation ship, the special that came with a long term charter which is great. So overall that was that was great. But in the back of my mind, I think that this transaction or rather the five of the other buyer to pay a premium to what is perceived the market. I think does bode well or can support the theory that expectations for an improving tanker market are out there and it's not necessarily easy to find modern assets. So modern tanker assets like these and especially with from delivery like the one that was requested by these buyer. Now, if we see similar transactions will definitely take advantage of them and I think it does big in volumes to the fact that we are very active in the S&P market looking for opportunities to beat on the acquisition side or sell side if we can makes sense of them. We will find more of these. We have done a similar deal if you recall almost three years ago and very similar in terms of the arbitrage but typically they don't come up very often. If they do, I think they're good transactions they help us replenish our fleet and if they come also with good charters attached I think that that's even better.

[Jonathan Chappell:]

Right, that makes sense. And then also and I'm not sure what you can say to this point but the same sources that we'd seen the talk of the sale there is to tell us there also been some smoke about some sale of crude carriers which maybe makes a bit more sense given that it's not a core fleet contribution to you and also some of the poor economics in the crude market right now. Given that those ships some as the Suezmaxes are exposed to an incredibly weak spot market right now your asset value is seemed to hold up pretty well there, would those be ships that you would look to monetize first as opposed to maybe some of the product carriers?

[Jerry Kalogiratos:]

Well, as I said we're always active in S&P market and then that's why you will see remorse left and right and especially there with see brokers there, the rumor never stops. That's I think a valid point in the sense that it's not so much the specific segments the crude, but for example an older vessel like the Amore Mio II, if you want an outlier compared to the rest of our fleet. If we see that we can make sense of a sale and replace it with something that brings in more cash flow that's even better. But we'll definitely monitor opportunities. We're not - we have not made any decisions to sell assets left and right. I think it's going to be very opportunistic and depending on what we see in the S&P market.

[Jonathan Chappell:]

Okay. Final one and I hate to ask in broad industry question especially because you've already covered in the presentation in the press release, but the frustration at least where we said in the investment community on the lack of any type of sustained upturn in the product income market is probably at a peak right now. There has been reasons and maybe even excuses is to why it hasn't happened yet. But if you kind of look out over the next six to twelve months, how confident are you in a sustained recovery that actually translates into a time charter market environment as well?

[Jerry Kalogiratos:]

Well, as we pointed out in the earnings release and in the presentation, period rates have improved by almost 10% in the bottom and this is not a material move, I mean that translates to about a $1,500 per day. I think what has surprised us together with many other players in the industry is that has been more of a gradual move rather than the typical sharp recovery you tend to seen sipping. And I think that supply is still an issue because this was a heavy year in terms of deliveries. We need things to balance out and 2018 should be able to do that as vessel deliveries are expected to be lower than 2017. And of course, I do think that the crude tanker market being as bad as it is today, it does not help. In the end, I think when you look at the medium to long term, it's very difficult to see an exceptionally good product tanker market and a very bad crude market. There is some overlap and spillover and things will tend to work out. So I expect that within the next six or twelve months as the market the balance off, we see the first year of delivery slowing down. We will effectively see more of a recovery in the product tanker side. But I was being active on the period and that's something that tends to be always interesting is that we monitor fixtures, so a long term period fixtures. And you will see that activity has been quite sharp over the last quarter or so which is a very good sign. For the moment, it's still charters that I think share the same expectations for an improvement in the market and they would like to looking current rates which are quite low and typically also with options and that's what we try to avoid on the other hand and so it's a bit of a stalemate. But deals are being done and quite a few of them, traders and oil majors are out there to take ships. If you look on the other hand that the crude tanker market for example the Suezmax tanker market, there is next to nothing when it comes to twelve months charters or more. So I think that overall the market desponding out a recovery. I agree with you it has been a little disappointing, but if you look at the numbers, there has been a recovery, it's just slower than we expected, maybe it will continue along the same pace. But as far as we are concerned, we don't need much as you know, given our cost breakeven, given what the distribution coverage is, we affectively paying a very sizable of distribution yield of what is in 9% today for people to wait out a product tanker recovery which I think worse things could happen.

[Jonathan Chappell:]

Okay. That's really - appreciate your thoughts. Thanks, Jerry.

[Jerry Kalogiratos:]

Thank you, Jon.

[Operator:]

Thank you. Now from Deutsche Bank, your next question comes from the line of Amit Mehrotra. And your line is now open.

[Unidentified Analyst:]

Hi, this is Chris on for Amit.

[Jerry Kalogiratos:]

Hi, Chris.

[Unidentified Analyst:]

So, my first question is on new build ordering, so your product tanker orders were up pretty substantial in 2017 versus 2016, all be at of a very low base. And so could you just provide any commentary on your outlook for new build ordering specifically around giving any incentives to kind of get ordering going industry availability of financing?

[Jerry Kalogiratos:]

On the ordering of product tankers and especially in Mars, the good thing is that it is a very limited space of people that have a track record of delivering ships. So in a reality, the only large yard that can build quality ships today in Mars is Hyundai Mipo, other than Hyundai Mipo in Korea and they are Vietnam facility, you have now CPRs that are either bankrupt or wanted to go into the game or they were trying to get into the MR game and now have decided to exit because that doesn't make sense and they're trying to build larger ships. So there is - we will see how successful some of the new entrants are, but for the moment they lack traction, because as you know one issue that is very dominant in Korea right now is the issuance of refund guarantees and that is the problem for many of the larger yard, imagine how big of a problem it is for smaller yards for new entrants. And in addition to that the other good thing is that the shipyards will tell you that they're at the very end of they are sharpening their pencil. So despite the declining orders especially in 2016 and them wanting to incentivize as you say owners to get in new orders, we have seen almost no CPR are be able to compete or at least establish CPR to compete below the 34-33.5 million mark. So the lack of refund guarantees, the fact that the many shipyards will tell you that even these numbers I mentioned are below cost. The factor is very little existence CPR capacity means that there even if the market spiked, it would be very difficult for people to order ships in volumes in the short to medium term and for or for the yards to start competing at lower prices. So we are quite at peace with the current order book and we don't expect that this will change so dramatically any time soon.

[Unidentified Analyst:]

Okay. Thank you for that. My next question is around the distribution. I know you guys said in the prepared remarks that you don't leaving it as is for the time being. My question just kind of around how we should think about whether it's a target ratio or just kind of how you guys are thinking about what the distribution could be in either 2019 or even looking out further. I'm just because we are seeing our fundamentals get better and it seems like there is some Suez and container repricings was over the next twelve months but those seem like they could maybe hold flat at least with the Suez on a three year time charter. So just any commentary on if you guys are targeting a certain coverage ratio and what you feel comfortable with them? Any of that would be appreciated?

[Jerry Kalogiratos:]

With regard to distribution coverage and the associated level of capital reserves, you probably notice and as we discussed that on the back of the annual amortization, the new facility is 5.7 million less than we used to reserve previously and to repay our debt. We have also adjusted the capital reserve from $14.6 million in the previous quarter to $13.2 million in this quarter. And that of course helps with our common unit distribution coverage. You should expect a slight adjustment of the capital reserve upwards from the next quarter by approximately $0.5 million per quarter or more actually slightly less. Taking to the account of the acquisition of the Aristotelis and the estimated $1 million per year of amortization described facility. But I think before we communicate the distribution coverage and long term distribution coverage target, I think we would want to see more of a long term charter renewals and this year I think it's going to be critical from that point of view. We have a number of product tankers are coming of charters, some of them if they were to be fix today they would fix at higher rates, some of them at lower rates. And then as you say you have Suezmaxes is that they should be fixed overall lower levels but then some of that will be set off by then the containers. But I think it would be good to have cost flow visibility before we can communicate a more longer term distribution coverage. So, I think as we charter our sips, as hopefully also MLP equity markets open up and we see more avenues for growth then we can be more specific with regard to the to a specific common unit distribution coverage and also start increasing the distribution which pretty much remains in our mind.

[Unidentified Analyst:]

Thank you. Very helpful.

[Operator:]

Thank you very much. Now your next question from Janney comes from the line of Michael Gyure. And your line is now open, sir.

[Michael Gyure:]

Yeah. I was wondering if you could talk a little bit about the operating cost side of what vessels look like the cost of up a little bit this quarter and I guess how you see the trend progressing in 2018.

[Jerry Kalogiratos:]

Hi, thank you, Michael. Indeed the operating expenses for the quarter were higher mostly on the back of the increase the number of vessels that were incurring operating expenses, as we had desert in our ships as you know being redelivered from their employment compared to last year. And in addition to that, we had some incremental increased operating expenses for certain of our vessels. As far as the larger number of vessels incurring operating expenses, that's going to be a reality simply because they are redelivered from their bareboat employment. And please note that we had an additional ship being redelivered to us the Alexandros II in towards the end of the fourth quarter which was previously on bareboat to international seaways. And we'll trade that spot for a couple of months until surpasses scheduled special survey.

[Michael Gyure:]

Okay. And then I think you touched on a little bit on your remarks, but dry-dock scheduled for maybe the first half of 2018?

[Jerry Kalogiratos:]

Yes of course. So in this year, we have six vessels that are scheduled for a special survey. One of them is the Aristotelis and we expect that she will be delivered to its new owners before surpasses here at dry-dock, so that's one less. Then we have the two of our Suezmaxes, the Aias and the Amore, and then the Alexandros II, Aristotelis and Aris II in the third quarter. The Aias, Amore, Alexandros II and Aristotelis are expected to pass special in their second quarter. But do note that this is only indicative as we bring we may bring any of these dry-docks forward to later depending on their vessel position. For next year, we only have the Ayrton II and the Amore Mio II for scheduled special surveys.

[Michael Gyure:]

Great, thanks very much.

[Jerry Kalogiratos:]

Thank you.

[Operator:]

Thank you very much, sir. And as there are no further questions, I shall now pass the call back to you for closing remarks, sir.

[Jerry Kalogiratos:]

Thank you and thank you all for joining us today.

[Operator:]

Thank you very much indeed. So with many thanks to our speaker today, that does conclude our conference. Thank you all for participating and you may now disconnect. Thank you Mr. Kalogiratos.

[Jerry Kalogiratos:]

Thank you, Jenny. Thanks.

[Operator:]

All the very best to you. Bye-bye.