Capital Product Partners L.P.
Q3 2014 Earnings Call Transcript

Published: 2 Nov 2014

[Operator:]

Thank you for standing by and welcome to the Capital Product Partners Third Quarter 2014 Financial Results Conference Call. We have with us Mr. Petros Christodoulou, Chief Executive Officer and Chief Financial Officer of the company, and Mr. Jerry Kalogiratos, Chief Operating Officer. 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, on Thursday, October 30, 2014. The statements in today’s conference call, that are not historical facts, including our expectations regarding developments in the markets, our expected charter coverage ratios for 2014 and 2015 and expectations regarding our quarterly distribution may be forward-looking statements such as 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 to the accuracy and completeness of the forward-looking statements. We make no prediction or statements about the performance of our common units. And I would now like to hand over to one of our speaker today, Mr. Christodoulou. Please go ahead, sir.

[Petros Christodoulou:]

Thank you, Kate, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website, as we go through today’s presentation. On October 23, 2014, our Board of Directors declared a cash distribution of $0.2325 per common unit for the third quarter of 2014, in line with management’s annual distribution guidance. The third quarter common unit cash distribution will be paid on November 14, to unitholders of record on November 7. The Partnership’s operating surplus for the quarter amounted to $29.8 million, which is $4 million higher than the $25.8 million of the third quarter of 2013. Common Unit coverage for the third quarter of 2014 stood at 1.1 times. As previously announced, the Partnership has agreed to acquire from our sponsor Capital Maritime & Trading Corporation, three eco-flex 9,000 TEU container vessels and two eco medium range product tankers for delivery in 2015. The container vessels come with five-year employment to the CMA and the MRs with two-year charters to Capital Maritime. To remind you, the consideration of $311.5 million for this five vessel acquisition was $36.4 million below fair market value as of August 21, 2014, and was agreed in exchange for the resetting of the incentive distribution rights as approved by the Partnership’s AGM on that date. In September 2014, the Partnership raised net proceeds over $173.5 million from the issuance of 17,250,000 common units, which will be used to partially fund the acquisition of these five vessels from Capital Maritime. During the quarter, the Partnership secured or extended the employment for a number of its vessels including the M/T Miltiadis M II to PEMEX until April 2015, at an increased rate by $4,800 per day, the M/T Alkiviadis to Total S.A. and the M/T Avax and M/T Agisilaos to Capital Maritime. As a result and at the end of the third quarter 2014, the average remaining charter duration for all our charters stood at 8.5 years with approximate charter coverage of 98% for the remainder of 2014 and 60% for 2015. As most of our charter expirations in 2015 relate to product, include tankers, we expect to be uniquely positioned that they could find out the improving market fundamentals in these segments. Turning to Slide 2, revenues for the third quarter of 2014 were $48.2 million, compared to $42.7 million in the third quarter of 2013. The increase is mainly a result of the Partnership’s increased fleet size. Total expenses for the third quarter of 2014 were $32.8 million, compared to $30.7 million in the third quarter of 2013. The increase is mainly a result of the increased fleet size of the Partnership. General and administrative expenses for the third quarter of 2014 amounted to $1.9 million, compared to $2.1 million in the third quarter of 2013. The line, total other expense net for the third quarter of 2014 amounted to $4.1 million, compared to $3.6 million for the third quarter of 2013. The increase resulting from the increased indebtedness of the Partnership compared to the third quarter of 2013. The Partnership’s net income for the third quarter of 2014 was $11.3 million or $8.1 million after taking into account the preferred interest in net income attributable to the Class B unitholders and the GP interest. That is $0.09 per common unit. Moving to Slide 3, you can see the details of our operating surplus calculations that determine 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 $29.8 million in cash from operations before accounting for the Class B preferred units distribution. After adjusting for the Class B units distribution, the adjusted operating surplus amounted to $26.8 million, which translates to 1.1 times the common unit coverage after taking to account, the 17.3 million units issued earlier in the quarter. On Slide 4, you can see the details of our balance sheet. As of September 30, the Partners’ capital amounted to $886.6 million, which is $105.2 million higher than the Partners’ capital as of December 31, 2013. This increase primarily reflects five items. First, the issuance of 17.3 million common units in the third quarter of 2014, which raised gross proceeds of approximately $181.6 million. Second, the repurchase and cancellation of 6 million common units from the Partnership’s sponsor Capital Maritime. Third the difference of $36.4 million between the average fair market value of the five vessels that the Partnership has agreed to acquire from Capital Maritime and the agreed price of these vessels. Fourth, the payment of $75.1 million in distribution since December 31, 2013. And five, the net income for the nine months period ended September 30, 2014. As of the end of the third quarter 2014, the Partnership’s total debt has decreased by $4 million to $579.3 million compared to total debt of $583.3 million as of year-end 2013. That’s a result of the loan amortization in one of our credit facilities. Overall, our balance sheet remains strong with a net debt to capitalization of 26.7% and with Partner’s Capital representing 58.8% of our total assets. Let’s now turn to Slide 5. We are pleased to have successfully completed the issuance of 17.3 million common units at a public offering price of $10.53 per unit on September 3rd, including the exercise of the underwriters’ over-allotment option. The net proceeds to the Partnership of $113.5 million will be used to partially fund the $311.5 million, aggregate purchase price of the five vessel fleet that Capital Maritime has committed to contribute to the Partnership and for General Partnership purposes. The Partnership in line with the master vessel acquisition agreement dated July 24, this year, has paid $30 million to Capital Maritime in the form of a refundable advance, which will be deducted from the purchase price of each vessel on delivery to the Partnership. On the table at the lower end of the slide, you will find the expected delivery dates and employment details of each vessel. Let’s move to Slide 6. There you will find the additional growth opportunities of the Partnership transfers from the Capital Maritime. I’d like to remind you that under the Marshall vessel acquisition agreement the Partnership has a right to first refusal over six additional new build Samsung eco medium range product tankers with deliveries starting from September 15 and throughout 2016. In addition, Capital Maritime has recently acquired one eco VLCC crude tanker and has on hold to another two eco VLCCs at Daewoo’s Shipyard in South Korea for delivery in November 2015 and March 2016. Given the improving fundamentals of the crude tanker market, based on potential reform and additional source of growth for the Partnership. Turning to Slide 7, I’d like to reiterate at this point that our sponsor Capital Maritime remains committed to the Partnership and is expected to continue to support CPLP going forward as it enters this new growth phase. The interest of Capital Maritime and our Chairman, Mr. Marinakis and his family are well aligned with those of common unitholders has a control approximately 19.6% of the Partnership’s common units and Capital Maritime has recently converted all of its Class B interest, approximately 4 million Class B units to common units. In addition, after the IDR reset approved on August 21, at the AGM, Capital Maritime announced that it unilaterally waves its right to receive quarterly incentive distributions between $0.2425 and $0.25. Finally, Capital Maritime continues to provide charter coverage at attractive rates for a number of their Partnership’s vessels even under weak market conditions and/or lack of third-party period demand. As Capital Maritime continues to be one of our important charters and as a (indiscernible) it has provided us with certain balance sheet information to help investors assess its financial profile. Capital Maritime is a diversified profitable shipping company, which owns four VLCCs and one Suezmax crude tankers, one handy product tanker, two handy bulk carriers and two 1,700 TEU container vessels. The average age of its fleet weighted by deadweight is approximately 4.2 years. It bodes a very strong balance sheet with low leverage and with a net-debt to market value of its assets today of about 22%. At the end of the first half of 2014, total assets amounted to $880 million and the stockholders equity stood at approximately 71% of the total assets. As I mentioned earlier, Capital Maritime has an extensive new building program in place, which is split into two parts. The first part comprises the three 9,000 TEU eco-flex containers and two eco MR product tankers. These are being committed to CPLP for a total consideration of $311.5 million and CMTC has already received in advance of $30 million to that affect. CPLP has already raised the equity and secured the financing for this acquisition. And the second part of Capital Maritime’s new building program comprises two eco VLCCs and six eco MR product tankers to be delivered between Q4 2015 and Q4 2016 as seen previously on Slide 6. The total contract value of this program amounts to approximately $394 million, of which Capital Maritime has already paid approximately $82 million in CPL advances. Capital Maritime is in the final stages of concluding the financing of the two VLCCs, and as commenced, discussions for the financing of the six MRs. As a result, Capital Maritime has well in advance addressed the debt financing for this new building program with the equity side provided by own cash and complemented by the sale of the 6 million CPLP common units and the $30 million advance payment received from CPLP in September. Turning to Slide 8, we are pleased to have extended the charter of the Miltiadis M II to PEMEX for an additional six months to $28,000 a day, which represents an increase of $4,800 a day compared to its previous employment rate. Moreover and as previously announced, the M/T Alkiviadis was employed with CSSA, a fully owned subsidiary of Total, for 1 year at a gross daily rate of $14,125. CSSA has the option to extend the charter for an additional year at $15,125 gross per day. Previously, the vessel was employed under the time charter to Capital Maritime at a gross rate of $14,250 per day. We are very pleased to have opened a new time charter relationship with Total with the restructure. Finally, the M/T Avax and the M/T Agisilaos were chartered to Capital Maritime for one year at a gross daily rate of $14,750 and $14,250 respectively. Capital Maritime has the option to extend the charter for an additional 12 months at increased rates. Moving to Slide 9, and taking to account the new charters of the Alkiviadis, the Avax, and the Agisilaos, and a charter extension of the Miltiadis M II, the average remaining charter duration is 8.5 years. We have 12 product tankers and 4 Suezmax’s, and we will see the charters expire over the next 12 months. We expect to take advantage of the attractive fundamentals of the product and crude tanker market to secure a favorable period employment for a number of these vessels. On Slide 10, you can see the composition of our fleet, which is built at first year yards and at the high specification and has more than tripled since our IPO in 2007. At the bottom right, you can see the average fleet age, just which stands at 6.5 years compared to 9.6 years for the industry average. Let’s turn now to Slide 11 and review the product tanker market developments in Q3 2014. Product tankers spot earnings modestly improved in our third quarter of 2014, compared to the previous quarter, but remained overall at fairly soft levels. Lack of arbitrage opportunities in the Atlantic kept rates under pressure for most of the quarter. And markets performance in Eastern Hemisphere was more positive throughout the quarter as rates experienced some notable gains on the back of strong Asia naphtha demand, while the addition of new refinery capacity in Saudi Arabia resulted in increase petroleum product exports from the Arabian Gulf. At the end of the third quarter and into the fourth quarter of 2014, the product tanker spot market experienced a strong recovery with spot rates reaching levels not seen since the first quarter of 2013. The surge in spot rates can be attributed to the record high oil product exports out of the U.S. Gulf, increased demand in the continent U.S. (indiscernible) crude and strong product exports out of India and in Middle East to Asia. The product tanker period market remains active during the third quarter of 2014, but rates modestly declined due to the weaker spot market. However, the strong recovery of spot earnings in the fourth quarter is expected to positively affect period rates going forward. We expect that these market drivers, mainly the increased U.S. Gulf product exports and the growing turmoil demand on the back of the new refining capacity being added East of these wells to continue to positively affect product tanker demand going forward. On the supply side, the MR tanker order book has stabilized over the last month. Currently, is standing at 19.6% as a percentage of the fleet as the ordering activity for MR tankers has slowed significantly year-to-date. Most quality shipyards have exhausted their capacity through 2016. Analysts expect that their net fleet growth for product tankers for 2014 will be in the region of 3.9%, while overall demand for product tankers for the year is estimated to grow at 3.8%. Let’s turn now to Slide 12. The Suezmax spot market improved considerably in the third quarter of 2014, as average earnings more than doubled year-on-year from 2013. Negative fleet growth year-to-date in conjunction with increased crude movements from the Atlantic Basin to Europe and Asia have supported spot rates. As a result of the improving spot market compared to a year ago, the Suezmax markets saw more activity and notably increased rates when compared to the same quarter last year. According to the IEA, world oil demand is set to grow by 0.7 million barrels per day in 2014 and 1.1 million barrels per day in 2015. Industry analysts expect this to translate to Suezmax tanker deadweight demand growth of 2.4% for the full year of 2014, driven by increased crude volumes from the Atlantic Basin to Europe and the Far East. Finally, given the market backdrop over the last couple of years, only limited new Suezmax orders have been placed, which should help improve the demand supply picture going forward. The total Suezmax order book now stands at 11.5%, the lowest in percentage terms since 1997. In conclusion, I’d say that we are very pleased to have completed three important transactions for the Partnership over the course of the third quarter of 2014, which will underpin our continued growth. First, a substantial majority of our unitholders approved an amendment to our Partnership Agreement, which reset the thresholds for the Partnership’s incentive distribution rights, thus enabling the Partnership to pursue a continuous growth strategy with the attending agreement to acquire the five vessel fleet. Second, the Partnership secured a right to first refusal over six additional eco MR product tankers currently on order by our sponsor for delivery in 2015 and 2016. Third, the Partnership received $173.5 million in net proceeds from a public offering earlier in the quarter, which after the $60 million used to repurchase common units from the Capital Maritime covered a substantial portion of our funding required for the acquisition of the five vessels from Capital Maritime in 2015. Having agreed and secured finance for these transformative transactions, the Partnership has entered into a new growth phase, which we expect will provide the basis for reviewing the annual distribution guidance with an eye toward an upward revision in the first quarter of 2015, concurrent with the expected timing of the first of five agreed vessel acquisitions from Capital Maritime. And with that, I’m happy to answer any questions you may have. Thank you.

[Operator:]

Thank you, very much. (Operator Instructions) And your first question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.

[Amit Mehrotra:]

Yes, hi. Thank you very much and congrats on a good release and outlook. My first question is on the growth strategy. You just mentioned the phrase, entering a new growth phase and the company has been using that for some time now, and it sounds very good. But may be help us understand, what this could mean in terms of value accruing to the Limited Partners, a new growth phase to me sort of implies double-digit distribution growth for the next several years. Is that in the ballpark of how you are thinking about the evolution of the company, if you can just provide a little bit more tangible framework on what entering a new growth phase means, I think that will be helpful?

[Petros Christodoulou:]

I have been on the job for the past 40 days, and I need slightly more time to be able to quantify the growth. At the same time, we have the five vessel dropdown starting in Q1 2015, and actually before they even start producing, we feel confident to be able to tell from now, two quarters in advance, that we’ll have a distribution growth. Now, the size of that growth will allow me to be able to put more clarity on this when we said we are going to do it, which is in Q1 2015.

[Amit Mehrotra:]

Okay. Okay, that’s fair. If I can just ask a follow-up, it looks like the tankers that are expiring in the next 12 months to 18 months it looks like there is good potential for those re-charters to be significantly accretive, if the recent rate trends continue. If that’s the case that would drive obviously some significant organic growth in the cash flow of the company, but that incremental cash flow in your view essentially all dropped down to the Limited Partners or would you chose to increase the coverage ratio to reinvest the cash down the road for future growth opportunities?

[Jerry Kalogiratos:]

Hi Amit, this is Jerry. We will be definitely wondering the period markets for improvement and for opportunities to charter our ships at the higher rates. Of course, first we have to see sustainable improvement across all segments. And when and if we see numbers that make sense and are closer to the historical averages, we need to fix longer and then define our strategies. So I think as we – over the next couple of quarters and as tanker markets recover, we will be in a better position to see how we will take advantage of this additional cash flow if it comes.

[Amit Mehrotra:]

Right, but just – may be just a follow-up on that, in terms of the coverage ratio though, I mean are you guys happy with the 1.1 times where you’re now or do you see that changing at all over the next, call it year, 18 months?

[Petros Christodoulou:]

No, at the moment we are staying at 1.1 times. And just to underlining what Jerry said, we feel very good about the crude and product market going forward, as we have a very reserved optimism, but optimism with these and we will – we would don’t like to make strong statements before we see things materialize. So we don’t want to overpromise, but we feel about good about it. That’s all we can say at the moment.

[Amit Mehrotra:]

Okay, may be one more housekeeping question. What was the period end common units outstanding in the quarter?

[Petros Christodoulou:]

Okay, the current common units outstanding is 104,079,960.

[Amit Mehrotra:]

Great. Great. Thank you very much.

[Petros Christodoulou:]

The GP is at 2,124,081. So the total common units including the GP is 106,204,041.

[Amit Mehrotra:]

Perfect. Thank you so much.

[Petros Christodoulou:]

Thank you.

[Operator:]

Thank you. And your next question comes from the line of Jon Chappell from Evercore. Please go ahead.

[Jon Chappell:]

Thank you. Good afternoon. Petros, I wanted to ask about the 1Q timeframe around the distribution increase. I think that’s good that you put some clarity around the timing of it based on when these five new vessels are being delivered. Without giving any details around the magnitude of it, how much of a potential dividend distribution increase will be based on just the EBITDA contribution from these five committed vessels versus may be your views on the market outlook? Because over the last few quarters, there has been kind of a theme that a distribution increase would be reliant on an improvement in the product tanker market. It’s finally starting to happen, of course, it’s also a very volatile market. So how much of this will be market versus just visible acquisition strategy?

[Petros Christodoulou:]

We are basing our plan on the increasing our fleet and the five vessel dropdown. At the moment, we are not making any – we feel good about the distribution growth on the base of this, not take into account the rate increase.

[Jon Chappell:]

Okay, good. And then just a follow-up to the six optional MRs, and then also the three potential VLCCs, just a two-part question there. One, is there some type of an omnibus agreement associated with these? I know you have a right of first refusal, but do they need to have certain duration of contract on the back of them, before they could be dropdown or acquired from Capital Maritime? And then two, how do you think of the financing capabilities for these vessels?

[Petros Christodoulou:]

Okay. Now, these are potential dropdowns after we acquire the five vessels, right?

[Jon Chappell:]

Yes.

[Petros Christodoulou:]

Now, you’re – we will be looking at the – we will be taking a look at the market at that time, the state of the modular market, it’s too early to make a call at least what is it now, a year ahead.

[Jon Chappell:]

Okay, but do they require contracts, before they could be dropped down or could you take them speculatively and place them on the spot market for a short period of time?

[Petros Christodoulou:]

No. As you see, we are taking vessels with time charters. We believe this strong market now developing in the products and the crude space will stay, and I think we will be able – even before the end of this year to (indiscernible) some decent strength to manifest it from the time charter market for these vessels.

[Jon Chappell:]

Okay. Thank you very much.

[Petros Christodoulou:]

We are not looking to take any spot.

[Jon Chappell:]

Alright. So reading between the lines, you would expect Capital Maritime to look to employ some of these nine optional vessels on time charters, because of the recent strengthening in the market, and then something that you would look at?

[Petros Christodoulou:]

Ideally, they are looking for long-term charters, and once they have them in place, then we will look at our options here on this end.

[Jon Chappell:]

Okay, great. Thank you for that.

[Petros Christodoulou:]

Yes. And I will pass you – transfer your first part of your question, I will pass it to Jerry.

[Jerry Kalogiratos:]

Hi, Jon. The right of first refusal that’s under the March acquisition agreement provides for a right of first refusal if Capital Maritime decides to sell their ships. So CPLP will have the charters then. But there is also an omnibus agreement with Capital Maritime, so in case those ships that takes for longer than a year, then CPLP will also have the option to acquire them with the charter if accretive. So you have a – if you want a two-fold option there.

[Jon Chappell:]

Got it. Alright, thanks for the clarification Jerry. Thanks Petros.

[Operator:]

Thank you. And your next question comes from the line of Ben Nolan from Stifel. Please go ahead.

[Ben Nolan:]

Yes, thanks. My first question, I have a few, is in relation to the B shares, and I know a portion of those were converted into regular common units in the quarter, but there is still some outstanding. Would you expect the balance of those to be converted or how should we think about where those are positioned from a go-forward basis?

[Petros Christodoulou:]

Well, it’s quite difficult to step into the shoes of the holders and make statement. We shared with you what the GP did, which is to convert. We see at times people coming and converting, we had a small conversion also in early September, not by the GP, by somebody else. But, it’s difficult to get into the (ph) acquisition of the investors to be able to anticipate that. I can make a – I would not even want to risk a guess.

[Ben Nolan:]

Okay.

[Petros Christodoulou:]

I know what I would do if I were them, but I’m doing any, so.

[Ben Nolan:]

Okay, that’s helpful. The – I guess my next question relates to sort of how you’re thinking about the vessels that you do have on charter and you sort of discussed this a little bit, there’s a fair number of both product tankers and Suezmax’s that are rolling off contract currently. A few of those have been re-fixed on to time charter – new time charter contracts. Although lately, specifically in the product tanker market rates had increased somewhat, and to the extent that they continue to do so, it could provide opportunities to re-fix assets at better prices, and it had been the case over the first part of the year. My question is, how are you thinking about at this point duration on those contracts? I mean, if rates gets a little bit better, are you willing to sort of look longer duration instead of 12 months to 24 months, may be looking 3 years to 5 years or do you think that there’s not a – the market is not strong enough yet to go out longer term like that?

[Petros Christodoulou:]

Look, at the moment we have been – as you see, we have been enrolling fixes for a year or 1 plus 1. As we see the market and hopefully the market will continue to strengthen and the period markets were strengthening, we are not going to sort of play although nothing, we will just slowly extend the period charters. And as it trends towards the if you like (indiscernible) revert and close them in, we would need to – we would look to stretch out the period charters.

[Ben Nolan:]

Okay. And then my last question is, obviously you laid out what other potential dropdown candidates would be that are held at Capital Maritime. Should we think of that as sort of the pretty close to the exclusive universal candidates or in other words should we only think at the moment of Capital Maritime as the only logical candidate to provide acquisition targets? Are you guys also out there actively pursuing sale leaseback opportunities or what have you away from the sponsor?

[Petros Christodoulou:]

Well, first of all, it’s very good to have a sponsor that’s very active in the space and provide us with opportunities and options. But needless to say that we are looking number of projects every day. The market as of late is ripening up to show us – to present more opportunities. We are open to look at, beyond the five vessels that we have committed and contracted to acquire from the Capital Maritime. For all the rest we – for other ones we have an option like in the case of the six MRs, otherwise we do have an option, but we will look at them in the case of the crudes, the VLCCs and we are also looking at various other opportunities that we will open up.

[Ben Nolan:]

Okay, alright. That’s it from my questions. I appreciate it. Thank you.

[Petros Christodoulou:]

Thank you.

[Operator:]

Thank you. And your next question comes from the line of Michael Webber from Wells Fargo. Please go ahead.

[Michael Webber:]

Hey, good morning guys. How are you?

[Petros Christodoulou:]

Hi.

[Michael Webber:]

Hi. I just wanted to go back and revisit the growth guidance just one more time to be completely clear. So, in your press release and in your stated comments, where you talked about going back and revisiting your annual guidance in Q1 2015, just so we can think about this the right way, most of your committed vessels and committed growth are delivering at the midpoint of next year. So you have a couple of years’ worth of kind of forward cash flow growth. Should we be thinking about the Q1 2015 vision as a multi-year growth strategy that you guys are going to layout or is this going to be kind of a one-off either Q1 or 2015 distribution book?

[Petros Christodoulou:]

It’s more than Q1 and more than 2015.

[Michael Webber:]

Okay. Okay. That’s helpful. And then I guess looking at the additional growth beyond that, which is just (indiscernible) to have in addition to what you guys have already committed. How do you think about – you mentioned getting third-party counterparties for the Vs and for the MRs and waiting for the market to share off, there are a lot of things that need to go right for that to happen relatively quickly aiming to provide a more visible growth ramps. What’s the thought process behind chartering the Bs or the MRs back to the parent and then using them as dropdown. Are they kind of pushing out the risk associated with securing a counterparty and competing with other owners came out beyond the MLP?

[Petros Christodoulou:]

Yes. As the Capital Maritime has stood by us to support us as I said before at times when there is no period – well not good period rates, all the market was going through a soft spot. We are not – we don’t want to rely on Capital Maritime. We believe that once the market strengthens, we have opportunity to broaden our third-party time charters. We will look to do that. And we will always keep the cushion of Capital Maritime for the rainy days.

[Michael Webber:]

Got you. And one more and I will turn it over. Maybe if I have missed, the thought process behind the $30 million advance from the Partnership reverting around the transaction seems a bit unorthodox. Can you may be talk to the rationale there or am I missing something relatively straight forward?

[Petros Christodoulou:]

Yes. I mean, in terms of these five vessels to be dropped down next year, the Capital Maritime had already made certain advances to the shipyards. And which as it’s customarily we, the CPLP made $30 million advance, which you’ll be seeing in our balance sheet ahead of these dropdowns.

[Michael Webber:]

Okay. So just purely it cover the carrying costs of the parent would have born over the delivery cycle, is it all?

[Petros Christodoulou:]

That is correct. Yeah.

[Michael Webber:]

Okay. Alright, I appreciate the time guys. Thank you.

[Petros Christodoulou:]

Thank you.

[Operator:]

(Operator Instructions) And your next question comes from the line of Shawn Collins from Bank of America. Please go ahead.

[Shawn Collins:]

Great. Hi, Petros. Hi, Jerry. Good afternoon.

[Petros Christodoulou:]

Hello.

[Shawn Collins:]

Hello. Can you just compare your thoughts on the crude market versus the product market, and which one looks more attractive to you in the future? And on Slide 6, you have thoughts around possible product dropdown and also three crude tanks that are dropped down. Could you just talk about that a bit?

[Petros Christodoulou:]

Sure. They are slightly different markets in the sense of where they stand today in terms of the demand and supply picture. But, for both the outlook is quite favorable. On the product tanker side, you have very positive demand fundamentals and quite surely the demand growth because of what we have discussed repeatedly in the past that it’s oil product exporters out of the U.S. Gulf as well as refinery capacity dislocation. These fundamentals if you want, this development will be at their peak next year and in 2016, so we expect growth to be quite strong. On the other hand, on the back of these expectations, we have had a number of orders placed back, over the last couple of years. I think given the solid demand growth, most analysts expect that demand will outpace supply. And the recent spike in spot rates shows that fleet utilizations at those levels that kind of allow for spikes in the earnings would then usually spillover into period rates, which is what we look at. And you already have seen period rates improved by about $500 to $750 for the one-year time charter. On the crude side, it’s slightly different picture, demand is positive, but it’s lower in absolute terms. But because of the very weak rate environment that we have seen in the past, the supply picture is quite favorable. We have a very few orders due for delivery this year and next year, which means that the market has time to balance and demand is now driving rates. So we have seen substantial improvement in spot rates and even more so, on the period side, for example Suezmax rates have recovered one-year rates that is from low $18,000 to $25,000 – $25,500 today, which is a good solid recovery. Of course when you look at historical averages, they are closer to just above 2013 and that’s including a number of very bad years. So I think the remainder of 2014 and 2015 should be also quite favorable for both spot as well as period Suezmax rates.

[Shawn Collins:]

Okay, great. Thank you for that. And then just following up on that, obviously the price of oil is down substantially over the last several months, down 20%, in the low 80s. Long-term or the next year or two if the price of oil were to stay in this lower range, do you expect this will have a material impact one way or the other on the volume of – the volume in amount of business that you will do?

[Petros Christodoulou:]

Well, I guess this has very much to do as to what is driving the fall in the oil price and I think it’s may be too early to say as of yet. Is it the supply glide that you want because of the U.S. Gulf sand oil production or is it demand destruction. It looks more like the former, but I think we have to wait, to see how the main consumers of oil, the ones that are driving demand for oil right now like China and mostly developing countries going forward before we can evaluate the impact of lower oil price on the freight market. But in the short-term to medium-term, it does not seem to affecting volumes at all, if anything is boosting earnings in the spot market because of the lower (indiscernible) prices.

[Shawn Collins:]

Okay, understood. That make sense, it’s helpful. Okay. Thank you very much for the time and the insight. I appreciate it.

[Operator:]

Thank you. (Operator Instructions) There are no further questions coming through at this time gentlemen. I’d now like to hand the conference back to Petros for any closing remarks. Thank you.

[Petros Christodoulou:]

Thank you all for participating in this call. We are looking forward to talking to you whenever you feel you have more questions to ask. You have the contact details of the team here. And all details we have on the website, feel free to contact us. And with this, I’d thank you for taking the time in your morning and look forward to talking to you soon again. All the best.

[Operator:]

Thank you very much. Ladies and gentlemen that does conclude our conference for today. Thank you all for participating and you may now disconnect.