Capital Clean Energy Carriers Corp (CCEC) 2010 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Capital Product Partners conference call on the fourth-quarter 2010 financial results. We have with us Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the Company.

At the time, all participants are in a listen-only mode. (Operator Instructions).

I must advise you that this conference is being recorded today, Monday, 31 January, 2011.

The statements in today's conference call that are not historical facts, including our expectations regarding developments in the markets, are expected charter coverage ratio for 2011, and expectations regarding our quarterly distribution, may be forward-looking statements as such term is 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 expectation to confirm them 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. We now pass the floor to your speaker today, Mr. Lazaridis. Please go ahead, sir.

Thank you, Heidi, 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.

Starting with slide 1, I'm going to make some comparisons on today's call between the fourth quarter of 2010 and the fourth quarter of 2009 as this is the most meaningful analogy in our business.

The partnership's net income for the fourth quarter of 2010 was $2.4 million compared with $5.3 million in the fourth quarter of last year.

Earnings per limited partnership unit were at $0.06 in the fourth quarter this year compared to $0.21 per unit achieved in the fourth quarter of 2009. The lower earnings compared to the same quarter last year reflects primarily the lower charter rates at which we have rechartered a number of the partnership's vessels whose original charters expired during the previous quarters.

Our operating surplus amounted to $9 million for the quarter, $0.5 million lower than the $9.5 million for the third quarter of 2010, and $1.2 million lower than the $10.2 million from the fourth quarter of 2009.

On January 21, our Board of Directors declared a cash distribution of $0.2325 for the fourth quarter of 2010, in line with the annual distribution guidance of $0.93 per unit as discussed in our second-quarter 2010 earnings release.

At current levels, our annualized yield stands at approximately 9.5%. We continue to believe that the current distribution guidance of $0.93 remains at a sustainable level.

After the expiration of the Amore Mio II time charter with BP earlier this month, we are pleased to announce that we have now employed a vessel under a one-year time charter to our sponsor, Capital Maritime and Trading Corp., at $25,000 net a day. As a result, our period charter coverage for 2011 now stands at 69%.

Turning to slide 2, total revenues for the quarter were approximately $29 million, down from $32.5 million in the fourth quarter of 2009 as a result of the lower charter rates at which we haven't chartered a number of the partnership's vessels whose original charters expired during the previous quarters.

Total vessel expenses and G&A costs for the period were at $10.4 million and changed compared to a year ago. Please note that we include in the G&A costs of the fourth quarter 2010 a noncash charge of $0.6 million accounting for the Omnibus Incentive Compensation Plan for the period.

Net interest expense and finance costs was $8.12 million, down from $8.2 million for the same period last year. Our interest expense includes a cost of $0.4 million, which is due to the increased funding costs of the bank incurred in accordance with the terms of our loan agreements. The funding costs for the first quarter 2011 is estimated at approximately $0.5 million.

Moving on to slide 3, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure which is defined fully in our press release.

Adding certain non-cash items back to net income, we have generated approximately $12 million in cash from operations during the fourth quarter of 2010. After setting aside $3 million for replacement capital expenditures, we will pay $9 million to our unit holders for this quarter, or $0.2325 per unit. The cash distribution for the fourth quarter is payable on February 15 to unit holders of record of February 4.

On slide 4, you can see the details of our balance sheet. Our Partners' capital stands at $239.8 million compared to $157.1 million following the issuance of additional common units in February and August of 2010.

I would like to remind you that we have no purchase or newbuilding commitments.

Turning to slide 5, during the fourth quarter of 2010, the clean product tanker market experienced an improvement compared to the previous quarter of seasonal demand due to the cold weather prevailing in the Northern Hemisphere in China becoming a net importer of gas oil due to the closure of certain qualified power stations helped rates move upwards.

Overall, 2010 saw an improvement of circa 30% in total tanker spot earnings, albeit from the historical lows reached in 2009.

Longer period charter rates remained robust relative to the product tanker spot market, reflecting owners' and charters' ultimate expectations for the product tanker demand going forward. Product tanker period rates for the fourth quarter remained at similar levels compared to the third quarter and approximately 15% higher than the levels a year ago.

The three-year rate remains above the one-year rate as charter expectations for rising rates in the future remain. The suezmax spot market rates remained low during the fourth due to increased vessel supply, which adversely affected spot and time charter rates.

The long-term product tanker supply picture has been steadily improving at the product tanker total gross order book stands currently at approximately 16% of the existing fleet on the back of steady cancellations and newbuilding order slippage over the last three years. This is amongst the smallest order books in the shipping industry and does not take into account scrapping and further slippage.

The latest data regarding newbuilding deliveries for 2010 even using conservative estimates saw slippage close to 30%.

Demand-wise, the IEA revises upwards once more global oil demand for 2010 and 2011 by 0.3 million barrels per day on average to 87.7 million and 89.1 million, respectively, on the back of new data showing much stronger than expected fourth-quarter readings, reflecting buoyant global economic growth and persistent cold weather. Yearly growth is now estimated at 2.7 million barrels in 2010, and 1.4 million barrels in 2011.

Given the favorable demand backdrop and the more limited supply of newbuilding product tankers ahead, we expect a more balanced supply-demand picture going forward, which should have a further positive effect on spot and period product tanker rates in the medium to long run.

Turning to slide 6, we are pleased to announce that our soul crude tanker vessel, the suezmax Amore Mio II, was fixed to our sponsor, Capital Maritime and trading, for a 12-month time charter in direct continuation of its previous charter to BP. The net daily rate is $25,000, which compares well to the current prevailing market rates and demonstrates our sponsors' ongoing commitment to the partnership.

The 12-month duration of the charter positions us well to capture the potential future market recovery in the crude tanker segment.

On slide 7, you will find our revised fleet list. The partnership's fleet average remaining charter duration is approximately 4.6 years with an average fleet age of 4.6 years. The young age and high specifications of our fleet, as well as the oil major qualifications of our manager, are distinct competitive advantages for the Partnership, especially in today's markets with increased focus on safety, security, and efficiency.

On slide 8, you can see that our fleet continues to enjoy high charter coverage for the medium term. The Partnership's fleet charter coverage taking into account the new employment of the Amore Mio II stands currently at 69% for 2011.

Lastly, on slide 9, we would like to look back briefly into 2010. Importantly, during 2010, we paid total distribution of $1.09 in the quarter, which qualifies fully as return of capital for our US-based unit holders according to our bankers. During the year, we expanded our fleet further, completing 3X the acquisitions. We financed this with two equity offerings, raising approximately $105 million in cash, plus cash from our balance sheet. Following these acquisitions and an improved product tanker market, we lifted our annual distribution guidance to $0.93 from $0.90, effective the third quarter 2010.

We continue to closely monitor key industry factors in order to assess a further market recovery in 2011. These factors include changes in oil product demand, oil refinery utilization rates; implementation of the single hull tanker phaseout; the availability of shipping finance; as well as further delays and cancellations that could reduce the number of new tanker vessel deliveries. We will continue to monitor market developments and explore further accretive transactions, and as a result, we will revisit our annual distribution guidance.

And with that, I would like to open the call to any questions you may have. Heidi?

(Operator Instructions). Michael Webber, Wells Fargo.

Just a couple quick company-specific questions and then kind of a higher-level question. With your charter for the Amore Mio II, I see a pretty big deal considering the potential of revenue that that vessel makes up. And the charter looks pretty solid now, about 30% above today's market.

Can you give a little bit more color around the charter? And how much of it was the sponsor really kind of stepping up to support the MLP in a difficult crude tanker environment? Or was it really something that was backed by say a specific cargo commitment and it just kind of happened to work out that the capital was able to take on the vessel?

Like a year ago, Capital Maritime continues to demonstrate its commitment towards the Partnership.

The relative short duration of the charter allows us to capitalize for the potential upturn in the crude market in early 2012. And, that is when the vessel opens up again. We will remain positive in the crude tanker market fundamentals. But I think the charter of 35,000 net compares well with the current period charter for crude vessels of that size today.

Sure, sure. No, that makes sense. In terms of in the right for your fleet and the product tankers, you guys have some near term exposure in doing a proving environment. How do you think about chartering those vessels and do you think more along the lines of one year versus three-year charters continuing the better fundamentals in the product [tanker states]? And then what is volume like in those markets right now, both for one-year charters, three-year charters, and then maybe anything a little bit longer?

Okay. Let's start from your last point. If you look into the period activity in 2010, that was better than 2009. Overall, there were 32 time charter fixtures according to official sources compared to 18 in 2009. So you had a significant improvement. Of course, the unreported number of fixtures is a much higher number. But as we have discussed in previous calls, you have seen more activity.

And as you can see also on the bottom chart of slide 5, you can see that the three-year rate remains at better than the one-year rate, reflecting the expectations of charterers of the market will improve.

As I mentioned to you earlier, we do expect the market to improve. You have better refinery throughputs. You have a better oil demand environment than before. You have a fleet which, in the case of product tankers, is actually more or less the bulk of the deliveries has been completed.

I think when we talk about slippage of 30%, we use very conservative estimates. There are reports that talk about slippage in excess of 50%.

And I think that if you take the overall product tanker market with supply more or less one of the smallest in the shipping industry, or if you take how demand for ton miles is expected between 3% and 3.5% going ahead, I think that we're talking about a much better balanced market than before. That bodes well for both spot and period rates, and I think period rate activity will continue as I think the demand for quality tonnage remains.

I think we are well positioned for that. We're looking both on one year and three year. We're in continuous discussions with our charterers,. And we see opportunities at this point to fix our vessels that are opening up at least at 13,500,000 gross for one year, and a higher level for a longer period.

Interesting. Yes, how much of a premium are you looking at? I guess between one and three years; it's at 13,500,000 for one year?

I think the indications, I think for periods longer than two years is in excess of 14,000.

Okay. That's very helpful. And I guess finally, and I'll turn it over, you mentioned better ton mile demands. Can you give a little bit of color around what you guys are hearing and seeing with regards to what's going on in Egypt right now? There is kind of a smaller backhaul trade there, kind of southbound through that canal, about I guess 800 million barrels, excuse me -- about 800,000 barrels a day from the European refineries.

So are you guys see any sort of incremental impact there? And I guess can you just give a little bit of color about what you guys saw over the weekend and then what you are hearing this morning?

It's very early days, Mike, to be able to chat about this, especially as our vessels have all the time charter, they are all-time chartered. So it's very early and I would not like to speculate on what might happen. We all know the possible implications of what might happen, but we haven't seen anything like that yet.

I think more importantly, in terms of our long-term impact of the developments that we see in Asia is the 2012 is a year that many of the refinery projects that are currently getting developed in the Middle East and India are coming on stream. We're talking about a 10% to 12% increase in the refining capacity in the region with the very positive implications that has for ton mile demand, especially given the type of gas oil and gasoline that these refineries -- they will be producing.

So I remain highly optimistic about the ton mile effect. And as I have mentioned before, even in the worst time of the recession in 2009, ton mile demands for product tankers never went negative.

All right, great. Thank you. That's all I've got. Thanks.

Jon Chappell, JPMorgan.

Thank you. Just a couple quick questions for you. If I remember correctly, there's no more shifts left at Capital Maritime to drop down to Capital Products as part of the Omnibus agreement. First of all, is that correct?

And then second of all if it is, just want to hear your thoughts on third-party asset prices right now. There's a lot of optimism about the product taker market. You have it and a lot of people share that same view. I'm wondering if asset prices have held up better than expected and may not actually represent the current returns that you would expect, given the charter rate environment just because of that optimism in the market on this new segment?

Okay, Jonathan. The first -- there is one more vessel left with Maritime, a smaller, 37,000 [10-month] tanker.

When it comes to the asset prices and looking at the end of the fourth quarter, compared to the third, asset prices, they have not really changed materially. So, I think that overall, prices are holding up okay in the product tanker segment.

And, I think if you look where the prices are, I remain optimistic given the period environment that if you look also vis-a-vis history, that the better fundamentals of the product tanker that they described a moment ago, they will help us ][sort] the prices.

I think if you look at the order book, the order book overall at 16%, that's the gross order book at 16% of the fleet. I think it is probably the most attractive in the shipping space. And I think also if you look where the demand comes from, i.e. the West, and from where the supply is lying increasingly in the Middle East and India, I think that will help a lot, the period rates. So I think asset price-wise, especially if you look where we were and where we are vis-a-vis history and the order book, I think that overall that's the upside.

Are you concerned that if the crude and in the dry bulk markets remain terrible and yet even as a container ship market tends to give off a lot of its gains from 2010, that that order book may grow substantially since a lot of people do view the product tanker market as having the best fundamentals over the next two to five years?

If I look at the dry bulk market overall, you will see that the order book is different compared to the tanker market. So that is one differentiating point.

Certainly, in the crude space, you have seen some weakness, but we remain optimistic; we remain optimistic because of the trends towards the long-haul imports of China from the Latin America and West Africa. So I think that whereas there may be some pressure near term in the rates, if you look where the oil price assumptions are, if you look where the shipment and import demands are, I think that what we see today is more or less temporary.

Okay. And then on the financing front, for any deals, whether it's the [one ship loss in] capital or any third-party transactions, I know you have $246 million left on your credit facility, but your stock price has held in exceptionally well, relative to other tank stocks, and you still have the $474 million of outstanding debt, which starts to amortize relatively shortly, I guess not in the very near term.

How do you think about the spread between debt and equity on any future transactions? Would you try to over-equitize those a little bit to keep your balance sheet a little less levered?

To start with, as I mentioned, earlier, we paid last year in excess almost $1.10 in distributions. And we have said that our $0.93 annual guidance is sustainable in this environment. So I think that the fact that our share price has performed also has to do with the distribution that we have paid and we have declared that we will pay. So, that's one.

When it comes to the acquisitions we have made, we have said before that we prefer equity at this point, but we still have facilities available to us, and that is subject to the terms of these facilities. I think that if we do acquisitions, we will still prefer to do an equity deal, but I have to stress that all the acquisitions that we made in the past few months were accretive to our unit holders. And we will continue to make accretive acquisitions.

So we carefully monitor the market. We'll see where the market in the period rates are, what the asset prices are, and accordingly, we will act.

We have nothing in terms of in the near term to drop down a vessel from the sponsors. And you understand we have only one vessel from the sponsor. So if we do a deal, it's more likely going to be from the open market.

And then just real quickly, finally, the $0.6 million non-cash charge to the Omnibus incentive compensation plan, is that truly onetime in nature, or does that happen annually? Is it spread out over four quarters? Do you just put it in the fourth quarter? How should we think about modeling for that going forward?

We have that as well in the third quarter is, it was only smaller because the equity plan was awarded in August. But you should assume that this is going to be every quarter. It's a non-cash charge since this is a plan which is investing over three years and it was awarded, as I mentioned, in August, 2010. But this is going to be occurring. And depends, of course of the share price, the unit price.

Thanks very much for your help.

Ken Hoexter, Merrill Lynch.

Good afternoon. Can you just come back to Egypt just for a quick second? Then I've got some more Company-specific ones. But on the Egypt, have you seen any discussion or threats issued so far on the closing of the canal or anything else for that in the press?

We haven't, no. Only what you read and I read in the newspapers, or [we have not].

Okay. And so spot rates the last couple days, you haven't -- have you seen any shift lately?

In terms of the rates, I think that if you look into the product tanker market, the spot rates over the past few weeks, though are holding up a little bit better. The cold weather I think plays more of a role there. You know?

Okay. So spot rates overall, related to Egypt, but overall, have, despite the significant decline we've seen on the crude side, you haven't felt that lately with the product rates?

As I mentioned earlier, the rates in the fourth quarter, approximately 30% above the fourth quarter of 2009. But we are still at low levels overall. So, it's not like we're talking about levels which are closer to the peak. We're talking about levels closer to the bottom, and the recent improvement in the rates has lots to do, I believe with the weather.

So you're saying you've seen a little bit of a pickup here in January in terms of spot rates?

I will say that I would have seen a little bit of a pickup before Christmas and after Christmas compared to the period before.

Okay. And then, can you talk a bit about counter-party risk here now? You've got five vessels that are charted to Capital Maritime when you think about the $25,000 guarantee on the suezmax when the market is down at $6,000. How do we get I guess comfort that they are -- we're not going to bump up against any I guess financing issue there?

Capital Maritime is a financially strong company. It has a very strong balance sheet, and it is also the biggest shareholder in Capital Products. So, I think that at the same time, its commercial track record is very good.

If you look in this business with the counterparties we paid, we feel very comfortable about the rates that we can achieve in the market. I think that with the chartering of Amore Mio II, Capital Maritime once more demonstrated its commitment. And already the four vessels that this product has with maritime or everything has gone very well.

Okay. And then just a technical question on the Amore Mio. Was it delivered directly to Capital? Or did it spend some time on the spot market?

No, straightaway on 9th of January.

Great. Appreciate the time. Thank you.

Justin Yagerman, Deutsche Bank.

Good afternoon. This is Josh on for Justin. Just going back to I guess liquidity in the time charter market, you talked about the premium and three-year time charters. But is there an active three-year time charter market? Are these charters at the [quoted level] by the way obtainable?

There was a lot of activity in the 14,500,000 range for a while. And I want to remind you that currently [here] in the third quarter, Capital Products fixed one of its vessels with Petrobras for three years at 14,750,000 gross. So I think that there has been, yes.

And when I think about kind of the nearer-term product tanker trade, you mentioned earlier some of the maybe more long-term fundamentals. What are you seeing kind of bright spots in the product tanker market now? Is it US exports going to South America? Or what's been really driving the market I guess in Q1? And what do you expect going into Q2 (technical difficulty)

Let me make two very important qualifications here. First, what we are in, in the period market. Okay? So what happens in the spot market is highly important, but it is a period market that matters to us. So if you look at the period rates, the period rates in the fourth quarter have been very much similar to the third quarter and 15% higher than a year ago.

The spot market on the other hand, it's much more volatile. I think that what matters in the spot market in the near term is the opportunities to albatross what the refining margins are in the two sides of the Atlantic, what are the refining throughputs.

And as I mentioned earlier, the refining margins have more or less stayed unchanged quarter on quarter, and also we see higher refining throughputs up 3% is expected year on year in the first quarter and approximately 0.5% better in the fourth. And also, we have better oil demand fundamentals than before. So there is no reason why we should see in the spot market in the beginning of this year a weaker market. I think we should see a good market, and seasonally, that has been the case in the past.

Appreciate that color. And with the suezmax, with the Amore Mio, I guess now that the vessel has been rechartered for here, is it safe to say that this -- the tankers are really part of the longer-term strategy of CPLP?

If I understand the question, this is one vessel that CPLP has and as long as it remains profitable and as long as we can charter it well, of course it remains part of CPLP. But that is the only tanker -- crude tanker that we have and we're not going to get anymore.

Got it. And I saw in the presentation that the unit coverage costs [plots] a one time from I guess 1.05 in Q3 and I think it was 1.4 in Q2. Are you comfortable with the 1 times level, a target you're looking at going forward in 2011?

We're comfortable after all the dividend costs at $36 million a year. We put aside every year $12 million in replacement capital expenditures. And we have cash, as you can see, at the end of the year in excess of $37.5 million. So I'm pretty comfortable.

Great. Thank you.

Darren Horowitz, Raymond James.

Good afternoon. I just have a quick question. I was hoping you could quantify the impact of further MR order book slippage and cancellations on the medium to long-term rates. You mentioned that your 30% estimation could be conservative and I'm just curious if slippage is really in the range of 30% to 50%, maybe a bit more aggressive than your forecast, what kind of uptick you think in the 47,000 tonnage rates could actually materialize throughout the medium term?

It's a good question. As I mentioned earlier, if you look in the Clarksons reports which we quote in our presentation, they have estimated slippage at approximately 30% for 2010. If you look into the -- some other reports that highlighted the slippage in the fourth quarter alone, were in excess of 55%. So, sometimes the data that you get from the shipyards is not very reliable, so that is why we prefer to err on the side of caution.

But, if you look at the orders that have been put for the 2011 or 2012 deliveries, these are prices close to 20%, 25% above the current sale prices. So I think most owners will decide to walk away. I think also what is more important is that if you look -- as you look back into the MR orderbook in 2008, 2007, you will have seen that 2010 was the big year of deliveries. And the deliveries were coming off significantly in 2011, 2012.

So I think that along with the slippage, I think the worst is over I think in terms of supply. At the same time, if you look at the absolute size of the fleet in products, what is the level of the fleet size of the products today compared to a year ago that has increased by about 3%, 3.5%.

So the increase is quite small given the ton mile demand. That is why I'm talking about a more balanced market. And that is why I think with the ton mile demand improving and certainly with the Indian refineries and the Middle East refineries coming on stream from 2012 onwards, I think that will be important for period rates.

And if you look back, if you look back, if you -- let me see in front of me the date -- the level of rates even in the back years of 2003 for the 47,000 tonners, were in the region of $14,000 to $17,000. So or for the one year, closer to $19,000. So, this is Clarksons data. So I think that and -- it's -- these numbers that we are today, despite the fact that they are 15% higher than a year ago, they are still relatively low compared to history.

Sure. I appreciate the color. Thank you.

Martin Korsvold, Pareto.

I just wondered, do you have a view on what kind of capacity utilization we currently have in the product tank market, also possibly if you have a view on a segment by segment basis?

Martin, I'm afraid that I cannot help you with detailed data on this call. I mean, as you understand, our fleet is fully employed and the charter that we have many cargos. So our utilization is [kind of the same.] So I think that I'm afraid that the main market we're in is in the period market, and your question refers mostly to the spot market.

Okay, fair enough. Secondly, on capacity utilization, do you have the number for 2012 and 2013 also, percentage of cover dates?

I have to come back to you, but in 2012, it's in the region of 50%, give or take.

As you know, that in the past year, we have purposefully decided not to charter for more than a year simply because we believe that the rates at which we were then and at which we are now are historically low. So we don't want to lock the partnership into low rates for too long. So, that is what we say that a percent of the revenues that is not chartered for us is an opportunity as the market improves, we'll be able to charter at better rates. And as I mentioned to you earlier, the rates this year are 15%, or at this point this year, are 15% higher than a year ago. That means that we can recharter the vessels that we chartered for only a year least year at least at 15% better.

Okay, thanks.

(Operator Instructions). Selman Akyol, Stifel Nicolaus.

Thank you. Good afternoon. On the orderbook slippage and cancellations, I'm curious as to it's at 30%; are we seeing more of these orders just get pushed to the right? Or are we talking about customers who put down deposits who are just walking away in the entirety?

I think the data, as I mentioned to you earlier, is not very reliable simply because [Sepia] will not come out and advertise cancellations. But, I think it's more likely to see owners walking away. And if they haven't built the last year, they're not going to build this year. And the prices of their contracts is not changing.

So I think simply either they go and they replace the orders with other types of vessels or simply they forget about the deposits.

I think that if you look into the current environment, as I mentioned earlier, the current prices are about 20% to 25% lower for resale than to build a vessel for delivery in next -- in 2011 or 2012. So simply some individuals, some owners, may decide either to -- not to buy at all or to go and buy at a sale.

All right, thank you. And then last question. On Axios, is there any update on that on how that's going for re-contracting?

On which one?

Axios?

As I mentioned in the vessels that are coming up for renewal, we see opportunities to fix these vessels, at levels around 13,500,000 gross for a year or higher for a longer period, and we're in active discussions with charterers.

Thank you very much.

(Operator Instructions).

Ivy, I don't know if there are any other questions.

There are no further questions at this time.

Thank you, everybody, and I will always be available for further questions if you so wish to call me in private. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.