Capital Clean Energy Carriers Corp (CCEC) 2011 Q3 法說會逐字稿

Welcome to the Capital Product Partners third-quarter 2011 financial results conference call. We have with us Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer, and Jerry Calla Corrado's Jerry Kalogiratos, Finance Director of Capital Maritime.

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, Monday, October 31, 2011.

The statements in today's conference call that are not historical facts, including our expectations regarding developments in the markets, our expected charter coverage ratio for 2011, and expectations regarding our quarterly distribution may be forward-looking statements as such term is defined in section 21a 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 them to actual results or otherwise.

We assume no responsibility for the accuracy and completeness as to 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, Jenny, 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, [meaning] the third quarter of 2011 and the third quarter of 2010 as this is the most meaningful analogy in our business.

The third-quarter results of the partnership do not reflect any of the Crude Carriers results for the third quarter as the measure was completed on September 30. Only the balance sheet is of the combined entity. The Partnership's net income for the third quarter of 2011 was $68.5 million or equal to $1.50 earnings per unit compared with $3.6 million in the third quarter of last year.

The Partnership's reported net income for the quarter includes a $65.9 million gain from bargain purchase related to the excess of the fair value of the Crude Carriers' net assets acquired over the purchase price under the definitive merger agreement between Crude Carriers and the Partnership announced on May 5 and completed on September 30.

In addition, we incurred $1.8 million in general and administrative expenses related to the merger with Crude Carriers Corp. The third-quarter 2011 earnings per unit excluding these one-time items were equal to $0.10 per unit.

The Partnership's net income for the quarter also reflects the off-hire related to the scheduled dry docking of M/T Arionas. The Partnership announced on September 30, 2011 that it has completed the acquisition of Crude Carriers in a unit for share transaction whereby Crude Carriers became a wholly-owned subsidiary of CPLP.

The acquisition of Crude Carriers solidifies CPLP's position as the leader in the product and crude tanker sectors with a large ultramodern high specification fleet of 37 vessels with an average age of 3.6 years.

Early an October we announced the period employment of one VLCC and two Suezmaxes to our sponsor for up to three years with 50-50 profit share arrangements. And we continue to look for opportunities to fix on period the remaining two crude vessels in order to eliminate any spot market exposure in line up with the Partnership's business model.

Following the commencement of the above charters the Partnership's charter coverage of total fleet days is estimated at 64% for 2012 with an average remaining duration of charters of 5.3 years. On October 36 (sic) our Board of Directors declared a cash distribution of $0.2325 per unit for the third quarter of 2011. The third-quarter cash distribution will be paid on November 15, 2011 to unitholders of record on November 7, 2011.

At this point I would like to take the opportunity to reiterate the Partnership's strong commitment to the annual distribution guidance of $0.93 per unit. Finally with our recently filed on Form F-3 for $500 million following the expiration of the previous shelf.

Turning to slide 2, total revenues for the quarter were approximately $30.9 million, up from $30.3 million in the second quarter of 2010 as a result of the increased fleet size and the off-hire of the Arionas during its scheduled dry-docking.

Total vessel expenses and G&A cost for the period were $21.4 million which is $3 million more than a year ago as a result of the larger fleet size and they include $1.8 million in G&A expenses related to the merger with Crude Carriers. Please note that we include in the G&A costs of the third quarter of 2011 a non-cash charge of $0.5 million related to the Omnibus Incentive Compensation Plan for the period.

With respect to a vessel operating expenses, looking ahead we expect that as the fixed rate commercial and technical management agreement with our manager expires for our time charter vessels we will enter into a new fee structure based on actual expenses whereby the manager will be reimbursed for its actual expenses instead of a fixed [rate].

In the opinion of the both the [complex] committee and the Board of Directors the new structure will be to the benefit of the unitholders and will ensure only a gradual increase in the operating expenses ahead. I remind you that the fixed fee management agreement for our vessels is scheduled to expire on approximately the fifth anniversary following its vessel's upcoming dry-dock all expenses of which are covered under the fixed fee arrangement.

Of the vessels currently in our fleet the M/T Arionas has been under the actual expenses arrangement since August 2011 and the M/T Agisilaos is expected to enter into such an arrangement following completion of its scheduled dry-dock in the fourth quarter of 2011.

In 2012 we have six vessels that will transition to the actual expenses fee structure. Of these three are expected to make the change to the actual fee structure in the first half and the rest in the second half of the year. Please note that all the bareboat vessels will stay under the fixed arrangement. Lastly on that topic, I would like to add that the five crude vessels and the Cape Agamemnon are under the actual expenses and agreement already.

The net interest expense for the third quarter 2011 amounted to $6.8 million compared to $8.3 million for the third quarter of 2010. Net interest expense for the quarter reflects a $1.3 million gain on the Partnership's interest rate swap agreements as a result of the changing fair value of seven of our [sub] arrangements.

Moving on 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.

Adding certain non-cash items back to net income we have generated approximately $10.3 million in cash from operations during the third quarter of 2011. The Partnership's operating surplus for the quarter reflects that $1.8 million in general and administrative expenses related to the merger.

The reduction of the recommended reserves is also the result of the timing of the acquisition of Crude Carriers and the issuance of 25 million units to Crude Carriers' shareholders on September 30, 2011 in a unit for share transaction. Without these one-time items unit coverage would have stood at 1.1 times for the third quarter.

After setting aside $3.2 million for replacement capital expenditures we will pay $16.5 million to our unitholders for this quarter or $0.2325 per unit. The cash distribution for the quarter is payable on November 15 to unitholders of record on November [7].

On slide 4 you can see the details of our balance sheet. As of September 30, 2011 the Partnership's long-term debt has increased by $150.4 million to $624.4 million compared to long-term debt of $474 million as of December 31, 2010.

The increase in long-term debt reflects the addition of Crude Carriers' $134.6 million of outstanding indebtedness which was refinanced under the Partnership's $350 million revolving credit facility which is not amortizing until June 2013 and $25 million indebtedness incurred in relation to the acquisition of the Cape Agamemnon in June 2011 and, again, is non-amortizing until June 2013.

The current portion of the Partnership's long-term debt stands at $9.2 million as a $370 million revolving credit facility becomes amortizing in September 2012. The Partnership has the option to extend the non-amortizing period of any outstanding debt under this facility or its $350 million facility by up to three years subject to the consent of the banks and compliance with the facilities covenants.

The Partner's capital stood at $527.3 million which is $287.6 million higher compared to the Partner's capital as of December 31, following the issuance of 7.1 million units for the acquisition of the Cape Agamemnon and 25 million units for the merger with Crude Carriers.

The Partnership's total outstanding units after the merger with Crude Carriers amount to 70.787 million units including 1.416 million general partner units. The combined ownership of Capital Maritime that's controlled by our Chairman, either directly or indirectly, amounts to 22.7 million units or 32.1% of the Partnership's total outstanding units.

Turning to slide 5 you will find our revised fleet list. Following the merger with Crude Carriers the Partnership's average fleet age is 3.6 years which is among the youngest fleets of this size and type in the industry. The young age and high specifications of our fleet, as well as the qualifications of our manager, are distinct competitive advantages for the Partnership especially in today's market with increased focus on safety, security and efficiency.

Turning to slide 6, as announced on the 20th of October and in line with our business model of providing full period coverage for our fleet, with our secured long-term fixed rate employment with profit share for one of our VLCCs and two of our Suezmaxes which we acquired from Crude Carriers and we are previously trading in the spot market.

In particular M/T Alexander The Great, M/T Amoureux and M/T Aias have all secured employment with the Partnership sponsor, Capital Maritime & Trading, for a maximum charter term of up to three years.

The M/T Alexander The Great will be earning a gross daily charter of $28,000 per day, $27,650 net, plus 50-50 profit share on actual earnings settled every six months for the first 12 months of its time charter to CMTC. CMTC has the option to extend the time charter employment for a second year at a gross rate of $34,000 per day and for a third year of $38,000 a day gross with the same profit share arrangements.

The M/T Aias and Amoureux will each be earning a gross daily charter rate of $20,000 per day gross, or $19,750 net, plus 50-50 profit share on actual earnings settled every six months for the first 12 months of their time charter with Capital Maritime. Capital Maritime has the option to extend the time charter employment for each vessel for a second year at $24,000 per day gross and for a third year at $28,000 per day gross with the same profit share arrangements.

All three vessels are expected to be delivered to Capital Maritime under the respective time charter employment in early November 2011. We believe that the period rate achieved for these vessels as well as the profit-sharing arrangements which would allow us to capitalize on a potential crude tanker market recovery constitute an attractive deal to our unitholders and demonstrate our sponsors' continuous commitment to the Partnership.

On slide 7 you can see that our fleet continues to enjoy high charter coverage for the medium term. The Partnership's fleet charter coverage for 2012 is 64% with a remaining other charter duration of 5.3 years. We intend to fix our remaining two crude tanker vessels in the coming months as opportunities arise in order to eliminate the Partnership's remaining crude spot market exposure.

During 2012 we will have the opportunity to charter out a number of product tankers, a period in which we expect charter rates to firm reflecting a more positive product tanker market environment and fundamentals.

Turning to slide 8 and the market overview, the IEA revised down its oil demand outlook for both 2011 and 2012 to 89.2 million barrels per day and 90.5 million barrels per day respectively in view of lower than expected demand in non-OECD countries and downward adjustment to global GDP growth.

OECD industry oil stocks fell counter seasonally in August by 3.4 barrels to 58.4 days of forward cover. Preliminary data suggests a further 12.7 million barrels declined in OECD industry stocks and a drop in short-term floating storage. OECD stocks since July fell below the five-year average for the first time since June 2008.

Overall in the third quarter 2011 the product tanker spot market remained soft relative to the second quarter as lack of arbitrage in the Atlantic basin for most of the quarter and reduced US gasoline imports put pressure on spot rates. From mid-September onwards spot rates experienced a mild improvement due to an increased influx of cargo in the Atlantic.

The third quarter saw further refinery consolidation in the US and Europe as refineries with primary distillation capacity of 1 million barrels per day announced extended shutdowns including the ConocoPhillips and Sonoco US East Coast refineries. This is expected to create additional ton-mile demand for product tankers in the medium to long run as a large share of the product imports needed to make up for the lost refinery capacity is expected to come from the new refineries coming online in India and the Middle East.

In view of the perceived strong fundamentals of the product tanker market period inquiry remained robust especially for long-term charter coverage as Charterers continue to seek period cover for up to three years.

On the crude side the spot market remained at multi-year lows throughout the quarter mainly due to the weaker US crude oil imports and increased tonnage supply in most areas. Towards the end of the quarter the Suezmax market in the Mediterranean saw a market improvement as refinery utilization in Europe increased and congestion at the Bosphorus Straits increased waiting time.

The long-term period market for crude vessels remained very illiquid with very few fixtures taking place as owners remain unwilling to commit at depressed rates for longer periods and charters are reluctant to take more exposure to the weak spot market.

Asset prices on the crude side saw a market softening for vintage tonnage but no transactions have been recorded for modern, high specification tonnage in the VLCC and Suezmax segments. Product tanker asset prices remain robust for quality modern tonnage and are well supported by numerous transactions having taken place at these levels.

Turning to slide 9, the nominal product tanker order book at approximately 14% is the lowest we have seen since 2003 when the previous upward rate cycle commenced. If we were to take into account the substantial product tanker order book slippage that has been running between 40% to 50% over the last two to three years, demand could outpace supply from 2012 onwards.

The crude fleet supply picture weighs negative on the crude tanker market as net fleet growth for VLCCs and Suezmaxes amounted to between 5% and 7% year-to-date and the existing order book is close to a quarter of the existing fleet.

However, we expect that the prolonged spot market weakness, softening asset prices compared to new building contract prices, and the overall lack of shipping finance, it will result to increased slippage and cancellations going forward which are already running close to 30%. In addition, accelerated vessel scrapping for first generation double-hull tankers, slow steaming and layups could further restrict crude tanker supply going forward.

Turning to slide 10, we are pleased to have completed the merger with Crude Carriers in September 2011 which has strengthened the Partnership's balance sheet thereby increasing our financial flexibility and laying a solid basis for future distribution growth going forward.

Moreover, following our recent announcement of the period fixes for three of the five crude tanker vessels operating in the spot market at the time of the completion of the merger the long-term charter coverage of our fleet has improved.

We believe that these features provide increased cash flow visibility and, together with our existing product fleet charters, generate more in terms of distributable cash flow than needed to cover the quarterly distribution of $16.5 million. In addition, the cash on our balance sheet at the end of the quarter amounts to approximately $61 million.

In line with our stated commitment to employ all our vessels in the period charter market, thus offering cash flow visibility to our investors, we intend to fix the remaining two crude tanker vessels currently operating in the spot market in the coming months as opportunities arise in order to eliminate the Partnership's remaining crude tanker spot exposure.

In addition to our [features] of the three Crude Carriers we will have the opportunity to charter out a number of product tankers in the upcoming year, a period in which we expect charter rates to firm reflecting a more positive product tanker market environment and fundamentals.

Given all of the above, we take this opportunity to reiterate our commitment to our annual distribution guidance of $0.93 per unit. And with that, Jenny, I would like to pass the floor to you.

(Operator Instructions). Evercore Partners, Jon Chappell.

I just wanted to follow up on a couple topics that you brought up in your presentation. First just on the operating expense agreement; I understand the timing as you laid out, but I was just curious, based on current market rates for operating expenses how far above the current fixed-rate agreement should we be looking at for the operating expense increases?

If you look for the current agreement, the current agreement was struck approximately four or five years ago in the beginning of 2007. At the time the level of OpEx was much lower than it is today. And that agreement included the expenses of the first dry-dock. As I said, all the vessels that will transition to the actual expenses will have the dry-dock completed first, which means a major expenditure would have been made under the fixed rate regime.

So at least for the first year my expectation at this point is that the increase will be in the high-single-digits and that's what we have seen so far. I believe that had we moved to another fixed-rate agreement that would have been detrimental because as the vessels get older and as the next five years have two dry-docks, then the increase would have been a much bigger one and that would have been to the detriment of the unitholders.

Okay, understood. Also with the five new vessels now in your fleet, what's a new maintenance CapEx run rate we should be looking for?

As I mentioned to you earlier, these results do not include and the operating surplus does not reflect the results of the crude vessels. We have not determined yet the number for the new method of capital expenditure; we will do that when we announce the results of the full year. But as I have mentioned already, we over provide as asset valuations has changed since we have last reviewed the numbers for our method capital expenditures for the existing (technical difficulty).

All right. And then finally on the credit facilities, you mentioned the opportunity potentially to extend that debt amortization subject to discussions with your banks. How close are you going to get to the beginning of the amortization, which I guess would be September 2012? And have you had any preliminary conversations with the banks yet? And then finally, what's your confidence in your ability to get those extensions?

As I mentioned, the Partnership has the option to extend the non-amortizing period of any outstanding debt under the $370 million or the $350 million facility by up to three years subject to the consent of the bank and compliance with the facility covenants. Today following the merger with crude we are in compliance of those covenants. We have started some very preliminary discussions, but I think this will complete with the beginning or let's say the second quarter of next year?

Okay. And are you confident in your abilities to get those extensions based on your track records with the banks and your current balance sheet liquidity situation?

So far we have been able to work with the banks and achieve what we have wanted. So we're hopeful that we will work with the banks again to achieve what we need to achieve.

Okay, thanks so much, Ioannis.

Deutsche Bank, Justin Yagerman.

A couple quick questions. The two vessels you left open on the crude side, I'm assuming that there was a reluctance to sign those as well with the sponsor. And so I guess I'm just trying to understand how you guys think about the level of exposure that you want in your portfolio to Capital Maritime from a charter counterparty standpoint?

And then I guess also, if you were to go out into the open market and look for contracts do you think that you'd be able to achieve similar type of contracts to what you got on the VLs and the Suezmaxes?

If I start with the last point, Justin, certainly as I have mentioned earlier, we believe that these charter arrangements constitute attractive deals to the Partnership. And certainly the profit share element is a very important one because it allows unitholders in the coming three years as and when the crude market recovers to capitalize from that recovery.

Capital Maritime is a financially strong established private company that can afford to take vessels on. But also we certainly have to strike the best deal for our unitholders. We have been actively looking for other counterparties where we can get attractive deals. And, as I said, when opportunities arise our commitment remains very strong to eliminate any spot market exposure.

But importantly, I would like to add that if you look at the fixed revenues that we have today from the product vessels, and the fixed revenues from these three announced crude vessels, you will see that we generate more in terms of distributable cash flow than we need to cover the quarterly distribution of $16.5 million per quarter.

The charters were very attractive, so I thought that was -- and obviously now having the unit coverage is excellent. When I look at your comments and how you're lined up right now, just curious how you're thinking about growing the fleet from here. Obviously now you've got a crude avenue to think about as well as products. It sounds like you're pretty bullish on the product outlook for next year and you have a shelf filed.

So maybe if you could talk about if you're looking at acquisitions and if you'd prefer crude versus product. And then I guess what kind of timing we should think about that from an opportunistic standpoint?

Regarding the shelf, that was purely a housekeeping exercise following the expiration of the previous shelf. We have done the homework regarding the proxy statement that we had filed with the SEC, so we believe that we can, let's say, finish all housekeeping items at the same time. So that was the reason for the shelf.

Regarding acquisitions, I think first we have to convince our unitholders and the market about the success we can make out of the crude. And we believe that long-term we will be able to have a very successful merger because of the potential that we will have in the earnings and distribution paying power of the Partnership. I think it's important to fix our vessels -- all our vessels some period, but we continuously look for opportunities.

I think the period market in products offers more deals today that can allow us to have an accretive transaction. But I think also the merger with Crude Carriers effectively will bring in very young assets which allow us to cover distribution even in this weak environment. So I think first is to fix the remaining vessels on period and then to look for more opportunities as long as they're accretive.

Fair enough. Last question and I'll turn it over to somebody else. On US East Coast refineries shutting down, obviously you called out the expectation for some benefit. When you think about that and how past events similar to this have translated into spot rates and market rates, it's obviously something that's known to some extent right now.

Where do you think we are in terms of seeing maybe a combination of that and seasonal affects? What do you think rates potentially have to go to on the product side here as we head into the winter months?

Justin, this is Jerry. As you know, Sonoco and Conoco have announced their decision to divest from these [outfits], but on the other hand this is to be -- to take place over the next 12 months, so we don't expect any immediate impact on the product tanker rates. This will be probably a more medium to long run impact on products.

However, if you were to look at the spot rates over the last few quarters you'll find that they have been starting from a higher base almost every time. So effectively implying how your fleet utilization, which means that whenever there's marginal demand you see more spikes.

With regard to seasonal demand that you mentioned, we expect a mild improvement on current rates. Even as we speak the product tanker market in the Atlantic has improved compared to a week or two ago. So we expect this trend to continue.

Great. Thanks so much, guys, appreciate the time.

Merrill Lynch, Ken Hoexter.

It's a Scott Weber in for Ken. Can you just talk a little more about the decision to shift to a floating OpEx fee structure rather than renegotiating a new fixed contract and, again, why you think that's a better structure for the Partnership?

I briefly mentioned that the main point is that the previous fixed arrangement had a duration of five years. So a new fixed arrangement would have been for five years from today as the vessels get older and in the next five years they have two dry-docks on average [age].

So to set the day and number, a fixed number that will carry us for between now and 2016 or '17 on average would have been a big jump in the average OpEx, especially as the average agreement that expires today is at $5,500.

So we thought it's to the benefit of the unitholders if such a shift becomes much more gradual and especially as the big item, the dry-dock is already expensed under the fixed fee agreement. And as I mentioned, at least for the first year the increase will be on average, and that is today only an estimate, in the single digits. So that would be much to the benefit of the unitholders.

This is not a big item because it affects only two vessels for part of the year, one in August and one from November. And next year six vessels, three in the first half, three in the second half. So overall the numbers will not be materially all very much affected. Had we moved, however, to a fixed fee agreement that impact would have been higher.

Okay, and is this new floating agreement set for a specific period of time as well?

Five years.

Five years.

The framework is exactly the same as we have done with the Cape Agamemnon and similar to the ones that we have with Crude Carriers. As you know, Capital Maritime, our sponsor, is an efficient low cost and reputable counterparty that if you also look from the Crude Carriers results in the past for the crude vessels, the actual costs that we had were, relative to peers, on the low side.

Then I just -- I know a lot of these issues have been resolved and didn't relate specifically to you, but I'm wondering if you had any issues with the Agamemnon counterparty or requests for renegotiation at all during the past quarter, and if all the payments on that vessel are still up to date?

In relation to that, all payments have been up to date and according to the charter party we're owed nothing.

Okay. And then lastly, Jerry, if you could just talk for a second about the market again generally and remind us a little bit about the seasonality of the product trade specifically and seasonally when you'd expect to see some tightening in that market?

As we just discussed, as we turn in to the high demand period, and we can see that you already had a cold spell in the Western Hemisphere on the US East Coast, we expect increased demand. Already refineries have been increasing their throughput and we have seen increased refinery utilization. So we expect that it will be increased rate in the Atlantic. And as a result we expect that there will be a seasonal uptick when it comes to spot rates.

With regard to period rates, they have been fairly stable over the last six months, a lot of liquidity and a number of transactions for anything between one to three years. And we have seen that interest coming from oil majors, traders and operators, which in a way confirms the positive fundamentals for product tankers.

Thanks a lot, guys.

Clarkson Capital, Michael Pak.

A lot of my questions have been answered. So good luck the rest of the year. Thank you very much.

(Operator Instructions). As there are no further questions, we now pass the floor back to Mr. Ioannis Lazaridis for closing remarks.

Thank you, Jenny, and thank you, everybody, for taking the time to participate in this call. Thank you.

Thank you very much, sir, many thanks to our speakers today. That does conclude our conference. Thank you for participating, you may now disconnect. Thank you, Mr. Lazaridis.

Thank you.

Thank you. Bye-bye, sir.