Capital Clean Energy Carriers Corp (CCEC) 2012 Q1 法說會逐字稿

Welcome to the Capital Product Partners first-quarter 2012 financial results conference call. We have with us Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the partnership. 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 this conference is being recorded today, Wednesday, May 2, 2012.

The statements in today's conference call that are not historical facts, including our expectations regarding developments in the market, re-delivery dates and charter rates, our expected charter coverage ratio for 2012 and 2013, and expectations regarding our quarterly and annual distribution may be forward-looking statements, as such are defined in section 21e of the Securities Exchange Act of 1934 as amended.

These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise.

We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common unit. I would now like to hand the conference over to your speaker today, Mr. Lazaridis. Please go ahead, sir.

Thank you. 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 first quarter of 2012 and the first quarter of 2011 as this is the most meaningful analogy in our business. On April 24 our Board of Directors declared a cash distribution of $0.2325 per unit for the first quarter of 2012. The first-quarter cash distribution will be paid on May 16, 2012 to unit holders of record on May 8, 2012.

The partnership's operating surplus and net income for the first quarter of 2012 were $17.5 million and $3.2 million respectively which is $0.8 million higher compared to the partnership's net income of $2.4 million in the first quarter of 2011. [And expanding] into partnership units for the first quarter of 2012 were equal to $0.05 which is $0.01 lower than the $0.06 per unit in the first quarter of 2011.

The first-quarter 2012 results for the partnership when compared to the fourth-quarter of 2011 results reflect the increased operating income derived from the time charter employment for certain of our crude vessels that were acquired as part of the acquisition of Crude Carriers Corp. which was completed in September 2011.

With the recently announced time charter employment of our remaining Spot Suezmax tanker vessel for 12 months to our sponsor, Capital Maritime & Trading Corp., we have completely eliminated our current exposure to the crude spot market.

In addition, as seven of our crude tanker charters commenced during the first quarter of 2012, we expect to see the full impact of their period employment on our operating income going forward from the second quarter of 2012.

We have also recently announced the employment of motor tanker Amore Mio II to BP Singapore for a maximum period of two years at a net daily rate of $18,325 per day until December 2012, which includes compensation from Capital Maritime for early re-delivery.

In addition, we have recently announced the sale of motor tanker Aristofanis and motor tanker Attikos to unrelated third parties, in line with our decision of the time of the Crude merger to concentrate on larger product and crude tanker vessels going forward. The proceeds were used to repay debt and each transaction resulted to a gain for the partnership.

As of the end of the first quarter the average remaining charter duration of the partnership starts at five years with 83% of the remaining 2012 total fleet days having secured charter coverage.

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.

Turning to slide 2, total revenues for the quarter were $39.8 million compared to $27.7 million in the first quarter of 2011. The partnership's revenues reflect the increased fleet size following the acquisition of Crude Carriers.

Total expenses for the first quarter of 2012 were $28.6 million compared to $17.2 million in the first quarter of 2011 primarily due to the higher operating expenses as a result of the higher number of vessels in the fleet following the acquisition of Crude Carriers.

The operating expenses for the first quarter of 2012 amounted to $12.1 million including a $7.3 million charge by a subsidiary of our sponsor, Capital Maritime, for the commercial and technical management of our fleet under the terms of our management agreement compared to $7 million in the first quarter of 2011.

The operating expenses for the first quarter of 2012 also consist of $12.2 million in depreciation compared to $8.1 million in the first quarter of 2011 and a $1 million gain related to the sale of motor tanker Attikos to unrelated third parties.

General and administrative expenses for the quarter amounted to $2.3 billion which includes a $1 million non-cash charge related to the partnership Omnibus Incentive Compensation Plan.

Total other expense net of the first quarter of 2012 amounted to $8 million compared to $8.1 million for the first quarter of '11. Total other expense net for the first quarter 2012 reflected a $0.6 million gain on the partnership's interest rate swap agreement as a result of the change in the fair value of certain of these agreements.

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 fully defined in our press release. Adding certain non-cash items back to net income we have generated approximately $17.5 million in cash from operations during the first quarter of 2012. Total unit coverage for the quarter stood at 1.1 times.

On slide 4 you can see the details of our balance sheet. As of March 31, 2012 the partnership's total debt had decreased by $10 million to $623.6 million compared to long-term debt of $633.6 million as of December 31, 2011. The decrease in long-term debt reflects the repayment of debt funded with proceeds from the sale of motor tanker Attikos and with available cash.

Turning to slide 5 you can see our fleet list. The partnership average fleet age stands at 4.1 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 [oil major] qualifications for long-term employment of our sponsor, have 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 during the previous quarter, and in line with our business model of providing full period coverage for our fleet, we have secured long-term fixed-rate employment for all our crude tanker vessels. Four out of the five vessels we acquired from Crude Carriers include profit share arrangements that settle biannually and can benefit the partnership as we will share on a 50-50 basis any surplus between the actual results of these vessels and the fixed charter rates we have announced.

Our loss spot rate in Suezmax tankers, the motor tanker Miltiadis M. II, was fixed at a gross daily charter rate of $18,250 to Capital Maritime for 12 months. The charter commenced in March 2012. The [conference] committee of the partnership unanimously approved the charter.

In addition, we recently announced that the Motor Tanker Amore Mio was chartered to BP Singapore for a minimum charter term of one year and a maximum charter term of up to two years commencing on March 5, 2012. The vessel had been under charter with our sponsor as of December 2011 for 11 to 14 months at a net daily charter rate of $18,022.

The vessel's actual earnings under the new charter are $18,325 net a day until December 2012 as the new net daily charter rate includes a compensation that Capital Maritime will pay to the partnership for the vessel's early delivery in accordance with the terms of the charter party agreement with Capital Maritime. BP Singapore has the option to extend the charter for a second year at a higher rate.

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 83% with a remaining average charter duration of five years.

During 2012 we will have the opportunity to re-charter seven of our product tankers, a period in which we believe product tanker charter rates will firm, reflecting a more positive market environment and fundamentals. The current prevailing market rates for one to three years at overall higher levels than the rates at which the vessels to be rechartered are currently fixed.

Turning to slide 8, we review the product tanker market developments in the first quarter 2012. The average spot earnings for the first quarter of 2012 softened slightly when compared to the previous quarter for product tankers as the weaker spot market east of Suez and above average temperatures in the Northern Hemisphere translated into softer demand for product tankers.

Despite softer spot earnings the period charter market remained robust with increased activity in both shorter- and longer-term employment with a number of traders and operators seeking longer-term charter coverage. As a result the number of period charter fixtures in the first quarter of 2012 for employment longer than six months on MR, medium-range, tankers and handy product tankers increased by approximately 90% and were at generally higher rates when compared to the fourth quarter of 2011.

We expect that ton-mile demand growth for product tankers will be enhanced in 2012 and beyond by favorable shifts in global refining capacity that analysts have been observing over the last few years and have accelerated over the last couple of quarters due to the announced or expected closures of approximately 1.3 million barrels per day of refinery capacity in Europe and the US.

The oil product deficit resulting from these closures is expected to be partly addressed by the additional refining capacity plant east of Suez. Currently 12 million barrels per day of new refinery capacity is expected to be added until 2015 with certain of these new refineries, especially in the subcontinent, focusing on exports.

As a result demand for product tankers is expected to increase by at least 3.4% for 2012 at a time when net fleet tanker growth is expected to remain below 2% given the consistently high order book slippage observed over the last couple of years. Slippage remained high for the first quarter of 2012 reaching 73% with only 27% of the expected order book being delivered on time. Net fleet growth for 2012 is expected to be the lowest since 2003.

Turning to the next slide, the VLCC and Suezmax tanker spot (inaudible) market saw market improvement in average earnings as we experienced the highest average since the second quarter of 2010 and fourth quarter of 2010 respectively. Demand for VLCCs and to a lesser extent for Suezmaxes sits on the back of solid crude tanker demand and longer trading distances.

In addition, the tighter sanctions on Iranian crude were a major factor to the crude tanker market in the first quarter. In particular, Chinese crude oil imports reached record levels and were sourced on average from longer distances compared to the previous quarter as geopolitical concerns in the Middle East favored increased imports from the Atlantic basin.

Increased US oil imports out of the Middle Eastern Gulf also played an important role in driving spot rates higher than during the quarter and for most of April. The crude tanker period market saw more activity when compared to the second half of 2011 as the improving spot market encouraged certain oil majors and traders to take vessels on period slightly higher rates. However, overall period rates remain close to historically low levels and the longer-term period market remains illiquid as charterers are reluctant to fix for longer than 12 months.

Global oil demand as projected by the IEA is estimated to reach 89.9 million barrels per day for 2012, or a 0.9% increase year on year, as a result of the lower economic recovery. Industry analysts estimate that 2012 demand for crude tankers to grow by 2% at least led by increasing crude oil imports in the East led by China whose crude oil imports are expected to grow by 10% for 2012.

The crude tanker order book experienced substantial slippage during 2011 as approximately 31% of the expected crude tanker newbuilding deliveries for the year have not materialized. Slippage as of the end of March 2012 has been on the increase with an estimated 42% of the expected deliveries not taking place.

Industry analysts expect the crude tanker order book slippage and cancellations to increase going forward due to the historically weak spot market, the soft shipping finance environment and downward pressure on asset values. Moreover, vessel supply is expected to be further constrained by increased demolition with more crude tankers below 20 years of age forced to the scrap yards as well as consolidation through poor participation and slow steaming.

In summary, during the first quarter we continued to enjoy a solid environment for the period charter market and product tankers which is the focus of our commercial activity. We are confident with the opportunity to fix seven of our product tankers throughout the remainder of 2012 in an improved charter rate environment.

The improved supply/demand balance in the product tanker market due to the expected low number of newbuilding product tanker deliveries in 2012 and robust ton-mile demand, as well as a healthy number of period fixtures observed, make us increasingly optimistic about the medium-term outlook of our customers.

We are pleased to have completely eliminated the partnership's current exposure to the crude tanker spot charter market by fixing the remaining crude tanker on a nine-year time charter to our sponsor. Given all of these factors we take this opportunity to reiterate our commitment to our annual distribution guidance of $0.93 per unit. Thank you and, operator, please go ahead with any questions. Thank you.

(Operator Instructions). Jon Chappell.

Just a couple quick questions for you. First, on the debt amortization and the hopeful extension of the amortization schedule. Has there been any progress with the banks as we approach the September 2012 beginning of the amortization on the first facility?

John, we're actively working with our banks to address the future non-amortization payments in a comprehensive manner which allows us -- and allows the distribution to be sustained and in a way that provides a platform for future growth of this distribution. So we're working on it and we will make the announcements when we can.

And just to be clear. You've reached the threshold as far as financial leverage is concerned; now it's just a function of coming to an agreement with the banks?

Correct.

And then also on the capital structure side, correct me if I'm wrong, but you have some pretty significant fixed swaps on your debt that are rolling off in the second half of the year. So the interest expense, as we're modeling it, falls significantly starting in the third quarter, is that correct?

That is correct. Maybe I can give you a few numbers on this.

Please.

Currently we have a total indebtedness of approximately $624 million -- actually this number has dropped a little bit as you understand following the sale of Aristofanis in April. But as of the end of March the debt was $624 million. Of that $474 million is swapped. Of this $474 million which is swapped, approximately $366 million of the swaps expire at the end of June 2012; i.e. in a few weeks time.

The average cost of these swaps was in excess of 6% because we have fixed the LIBOR portion of these swaps at a rate closer to 5% or 4.5%. Which means as this fixed element will go and it will be replaced by a floating element and the current one to three months US LIBOR is approximately between 25 bps and 40 bps, you can understand there is going to be a dramatic drop in our interest costs.

For the remainder, the $107 million, these swaps expire at the end of March 2013, the average cost there is about 5.5% to 6%, but again, the dynamics are the same as a significant portion of the fixed will be replaced by a much lower floating rate.

Perfect, very helpful. One last modeling question. The G&A run rate inclusive of the omnibus agreement has been over $2 million the last couple quarters. Should we assume that's the right to run rate to use now that you've fully absorbed the Crude Carriers business?

Look, we have said that the underlying, excluding the Omnibus agreement, should be at around $5.5 million. The omnibus agreement is approximately -- and that depends a little bit on the where the unit price is -- it's approximately $1 million per quarter. So that's what you -- the $5.5 million is on an annual basis and then, based on the current unit price, you should expect about $1 million in quarter as the non-cash on top of that.

Great, very helpful. Thanks a lot, Ioannis.

Michael Webber.

I just wanted to follow up on Jon's questions on the swaps. I mean, is it fair to assume that once those roll off you guys would look to probably fix those again at a lower rate down here or how should we think about that going forward?

As I mentioned to Jon earlier, our intent at this point is to keep it on floating as the floating is about 25 bps to 40 bps and depending if it's for one or more three months. And if you look at the forward curve of the floating rate, it's going to stay below 1% throughout 2015. So if you look -- I think it's better to stay in floating as the savings will be higher for our unit holders.

Got you, okay, that makes sense. Ioannis, you've got some -- the VLCC charters on the capital, if I'm looking at these right, I know they're one-year charters with options held towards the back end. Clearly the charters serve to protect the dividends, but I guess technically you could let those expire and then try to charter them out and kind of diversify your counterparty base.

How should we think about those as they start to roll off towards the back half of this year? And when do you think you would maybe make an announcement in terms of extending those or exercising those options or having capital continue to charter those assets? Actually we'd be thinking about those towards the back half of the year.

It's a good question, but I think if you look at the first VL or Suezmax charters that are fixed to Maritime, they have at least six to nine months to go. So there is plenty of time between now and then. As I mentioned to you earlier, we have seen some signs of an improvement in the VL and Suezmax period market, but yet the rates are below compared to where the Maritime rates are. So we'll have to revisit this after the summer.

I think what is more important about these fixtures with Capital Maritime is the profit-sharing element. And as you have seen recently, the spot market included, has jumped quite a lot especially when compared to the rates that we have in the first year with Maritime. So as these profit-sharing elements settle from the second quarter onwards, I think it's fair to say that there's going to be an element -- if things go well, there's going to be an element of profit share coming through these agreements in our favor.

That makes sense. If I kind of move -- just move down your fleet list and start looking at some of the MR exposure you guys have towards the middle part -- kind of the back half of the year in 2013, how should we be thinking about that in terms of contract tenor and what are you guys seeing?

I mean, you gave some color in your prepared remarks in terms of that market, but how should we be thinking about the terms of -- the length of contract you guys are going to be looking for on those MRs and when do you think -- how forward-looking do you think you'll be in terms of trying to charter those early?

As I mentioned earlier, we have seven MRs that are up for renewal. Three of them are during the second quarter and four of them during the second half of the year, all of them are between $13,000 and $14,000 and the one year market today is about $14,000 or a little more. So overall I think that the opportunities for us is to re-charter those at better levels compared to what they are today.

I think if you look at what we did last year and what we did earlier this year, we have entered into a couple of deal swaps with Petrobras and one with BP where the second year in BP was $15,000 in Petrobras we had a three-year rate of $14,750 last year. So I think that if we see the current trend continuing, i.e., a better market for longer period, then we will not -- we will certainly consider some of these vessels subject to rate if this rate is closer to $15,000 or more to be fixed for more than a year.

Otherwise, as I mentioned to you earlier, the combination of the very low deliveries, I mean actually if you look at the net fleet developments, since the end of the year the net additions in the product tanker fleet is a handful of vessels.

I think that given how the slippage is developing, given how the actual deliveries are developing and given that demand is more likely to be upgraded, especially if the Eastern US Gulf refineries closed down, I think that our strategy to date is that we fix the vessels that are opened up for short period has paid off. So certainly we will keep a number of our vessels on short period as well.

All right, that makes sense. I guess maybe just one more question and I'll turn it over, just kind of high-level. I mean obviously the earlier question on your credit facilities and extending the grace period on the amortization is the biggest variable for the Company and the stock going forward.

But maybe if we kind of look beyond that and think about how you guys intend to grow the distribution outside of any sort of incremental pricing upside, if we just think about fleet growth, you're seeing more slippage in MRs and I think the general consensus is that market is going to be a bit firmer near term than crude.

But from a cheap asset perspective I think the crude tanker market might look a little bit more attractive. How do you think about growing the distribution beyond once you kind of get your amortization schedule worked out in terms of the more accretive projects that are coming across your desk? How should we think about your fleet growth over the next three to five years product versus crude?

Thank you. That is a very good question and it's -- I will try to give you an overall answer. As I mentioned, when it comes to our credit facilities we try to address this in a way that is comprehensive and it allows for the sustainability of the current distribution and provides the platform for future growth.

If you look, as you mentioned, the current product tanker fundamentals are improving. We have a fleet of 25 vessels of which approximately 11 product tankers will open between now and the end of '14. The difference between the five-year rate and the current rate, the five-year rate is close to $17,800, our average time charter rates of these vessels is approximately $13,900, so it's approximately a $4,000 difference.

You can do the math, but it's easy to understand that the cash flow impact of this difference between the five-year rate and our current rate is almost between $0.20 and $0.25 per unit. And on top of that we have two Suezmaxes on one-year contracts and, again, subject to where the market can be, that can be potentially an additional income to the partnership.

Already in this environment our distribution coverage is back onto 1.1 times. And as I mentioned earlier, the full impact of the crude charters will be apparent from the second quarter onwards. So I think that business as is -- it has a lot of potential as rates normalize to see the distribution coverage improving and also start thinking about potential rate increases subject to what we do with the amortization.

On top of that I think that it's very important to appreciate that the market, by improving in terms of rates, it gives us the opportunity to do more accretive acquisitions. And to remind you, back in 2007 we had a fleet of eight vessels and a total capacity of 775,000 tons; today we have a fleet of 35 vessels and total capacity of 2.2 million tons.

So certainly we look for deals and I believe that there are deals in the market, especially given the current finance environment. So our intent is to grow and I think we want to grow in an accretive manner. So certainly I believe the dynamic for distribution growth, especially as we address the loan amortization, will be much more visible to everybody.

That's very helpful. I appreciate it, Ioannis. That's all I've got. Thanks for the time.

Urs Dur.

Forgive me, I'm pretty stumped. The interest issue and amortization issue has been addressed and you've really touched on the product tanker market, so thanks for your time; I don't have any questions.

Thank you very much.

Thank you.

Ken Hoexter.

Can you -- you kind of just addressed the reliance here on Capital Maritime obviously being a private entity. You've increased your ship commitment to them given the Crude Carrier acquisition. Can you kind of just provide us an update on the health?

Obviously you talk about the crude -- the product market improving going forward and that's encouraging seeing those rates are higher than what the contracts are going to come off at. But you've increased the commitment of your larger vessels to Capital. So maybe you can kind of walk us through that a little bit?

Capital is a financially healthy entity with more cash than debt and it has benefited a lot over the years from selling a number of vessels. We do not disclose the financials of Capital Maritime, but certainly it doesn't have anywhere near the commitments that will prove to be an obstacle to its chartering activities with Capital products.

Capital Maritime is an established business in the crude and product tanker space, it has constant business and I think that it has been able to trade these vessels profitably for itself while offering good visibility to the CPLP unit holders following the charter that I announced.

I think also taking a lead from an earlier question that someone asked me, the intent of Capital Maritime, especially vis-a-vis the crude charters was to first offer attractive rates at a time that the market was not there. To offer rates that potentially can be at a step-up close and to offer also the opportunity to share on a 50-50 basis between Maritime and products any results that were above the base rate.

I think that was a good deal for the unit holders. The market, as you can see, over the past few months it has -- the spot market has strengthened quite a lot. So to that end also Maritime is making money. So I think it's very important for Maritime to be able to make money on this, but it's also very important that someone comes in and provides good visibility to the CPLP unit holders.

As the market recovers, and as opportunities arise, in the same way we did with Amore Mio recently, when a Maritime charter was replaced with a BP Singapore charter, if the market is there certainly you will see Maritime doing less.

Why were those smaller product tankers written off as non-core? Is that just the size or relative to the Crude Carriers you were taking on or is that saying I don't want to be at the smallest end of the product spectrum? Just wondering why those were eliminated.

When we agreed the merger with Crude, one of the agreements was a non-compete, but what we said then was that the partnership will concentrate on vessels above 30,000 tons, that's where their expertise is, that's where they fundamentals for the product tanker space are better.

When we talk about all these things about the refineries and the fleet growth we refer to the vessels that are above 30,000 tons; the smaller vessels do not benefit in the same way by the trades as they will develop in the future. So at the time of the acquisition of Crude we decided that it's better that the 12,000 tonners do not form part of our core area of commercial concentration.

At the same time, these two vessels, as you remember, they were spot -- the period market there was rather weak with no signs of a pick-up. And there were -- all the vessels approaching seven years of age. So we got a good price, we paid down a little bit of debt, so I think it was a good trade for everybody.

My last question is just on these -- on the charters that are expiring, the seven that are coming off this year. If rates now are above their current charter rate is there any desire to go ahead and start chartering those now and lock that in just given the volatility in the market so you don't -- maybe you missed an opportunity on some of them and have you started discussions with the existing carriers to (multiple speakers)?

Some of the discussions with existing carriers in any case, some of them are a few months away, so I think it's a little bit premature. But as I mentioned to you earlier, period vessels -- period fixtures in Q1 were up by 90% or more compared to the fourth quarter with a very good also spread amongst traders and oil majors and the trades that also in certain cases have a much higher second or third year step-up compared to the first.

So I think that their optimism in the market, there is demand for quality tonnage, through our sponsor we benefit on its qualifications to do business with most of the main oil majors. So I think that our intent is to, as before, to wait as the market fundamentals improve. And as I mentioned earlier, if there is a longer duration charter at a rate at around $15,000, then we will be -- also we'll be looking for longer than a year fixtures and we'll discuss about all this with potential charterers.

Appreciate the time, Ioannis, thank you.

(Operator Instructions). Joshua Katzeff.

Just one quick question, I know it's been a long call. You spoke a bit about restructuring the debt and potential for increasing the distribution over the longer term. Can you maybe provide or some sort of reserve estimates that you would -- that the Board would kind of use when looking at future distributions? I guess this kind of bounced around recently, but is there a long-term target?

That's a good question. Certainly we would like to operate at distribution coverage ratios above 1.1 times before we -- sustainably before we consider distribution increases.

Got it. Okay, that's all I had, thank you.

(Operator Instructions).

Operator, I'm not sure if there is any other questions.

There are no further questions, Mr. Lazaridis. Please continue, sir.

I want to thank everyone for taking the time to participate in this call. Thank you. Bye-bye.

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