Capital Clean Energy Carriers Corp (CCEC) 2014 Q1 法說會逐字稿

Thank you for standing by and welcome to the Capital Product Partners first-quarter 2014 financial results conference call. With us we have Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the partnership. (Operator Instructions).

I must advise you the call is being recorded today, Wednesday, the 30th of April, 2014.

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 2013 and 2014; and expectations regarding our quarterly distribution may be forward-looking statements as such as defined in section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in our views, or expectations to conform to actual results or otherwise. We assume no responsibility to the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units.

I would now like to turn the conference over to your speaker today, Mr. Lazaridis. Please go ahead, sir.

Thank you, Steve, and thank you all for participating today. With me is Jerry Kalogiratos, Finance Director of Capital Maritime & Trading, our sponsor.

As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation.

On April 23, 2014, our Board of Directors declared a cash distribution of $0.2325 per common unit for the first quarter of 2014, in line with the management's annual distribution guidance. The first-quarter, common unit net cash distribution will be paid on May 15 to unitholders of record on May 7.

The Partnership's operating surplus for the quarter amounted to $31.2 million, which is $8.6 million higher than the $22.6 million in the first quarter of 2013. Common unit coverage for the first quarter stood at 1.3 times, one of the highest on record.

We are pleased to announce that the medium-range product tanker, Ayrton, Assos, and Atrotos have been fixed at attractive time charter rates. As a result, as of the end of the first quarter 2014 the average remaining charter duration of our charters stood at 8.7 years with approximate charter coverage of 88% for the remainder of 2014 and 55% for 2015.

Turning to slide 2, revenues for the first quarter of 2014 were $47.4 million compared to $40 million in the first quarter of 2013. The increase is mainly the result of the Partnership's increased fleet size and improving employment day rates for seven of the Partnership's vessels.

Total expenses for the first quarter were at $31.6 million compared to $28.9 million in the first quarter of 2013. The increase is mainly a result of the increased fleet size of the Partnership.

General and administrative expenses for the first quarter amounted to $1.3 million compared to $2.6 million in the first quarter of 2013, a decrease resulting from the Partnership's Omnibus Incentive Compensation Plan, vesting fully in the third quarter of 2013.

Total other expenses net for the first quarter of 2014 amounted to $4.6 million compared to $3.5 million for the first quarter of last year. The increase due to the increased investments of the Partnership compared to the first quarter of 2013.

The Partnership's net income for the first quarter was $11.2 million, or $0.08 per unit after taking into account the preferred interest in net income attributable to the Class B unitholders.

Moving on to slide 3, you can see the difference of our operating surplus calculations for the payment of distributions to our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure which is defined fully in our press releases.

Adding certain noncash items back to net income, we have generated approximately $31.2 million in cash from operations before accounting for the Class B preferred units distribution. After adjusting for the Class B units distribution, the adjusted operating surplus amounted to $27.2 million which translates into 1.3 times common unit coverage.

On slide 4 you can see the details of our balance sheet. As of March 31, the Partners' capital amounted to $767.7 million, which $13.7 million lower than the Partners' capital as of December 31, 2013. This decrease primarily reflects the payment of $35 million in distributions since December 31. Overall, our balance sheet remains strong with a net debt to capitalization of 37.2% and with Partners' capital representing 55.5% of our total assets.

Turning to slide 5, we are pleased to have chartered the motor tanker Ayrton for 18 months at $15,350 to Engen Petroleum, the South African oil company. Previously the vessel was employed under a time charter to BP at a gross rate of $15,000 per day.

In addition, the motor tankers Assos and Atrotos were re-delivered to us by Bluemarine cargo as their respective bareboat charters were [finally] expired. Both vessels have been fixed to Capital Maritime & Trading for a period of 12 plus 12 month at $14,750 gross per day with an optional 12 months at $15,250 gross per day. Both charges are expected to commence during May 2014.

Both charters were unanimously approved by the [conference] committee of the Partnership.

Turning to slide 6, you can see our fleet profile. The Partnership's fleet is built in first-tier yards and at high specification and is comprised of 18 product tankers; 7 post-panamax container vessels; 4 Suezmaxes tankers; and one Capesize bulk carrier and has more than doubled in size since our IPO in 2007.

The average fleet age stands at 6.0 years compared to 9.6 years for the industry average.

Turning to slide 7, and taking into account the new charters for Ayrton, Assos, and Atrotos, the others remaining charter duration is 8.7 years.

We have 5 product tankers and 3 Suezmaxes that will see their charters expire over the remainder of the year. We expect to take advantage of the attractive fundamentals of the product tanker sector; the increased activity in terms of period fixtures as well as the solid period rates to secure favorable employment for a number of these vessels.

As you know, Capital Maritime & Trading, our sponsor is one of our more important charterers and as a courtesy has provided us with certain balance sheet information to help investors assess its financial profile.

Capital Maritime is a private, profitable, diversified shipping company that owns five tanker vessels of which 3 are VLCCs; 1 Suezmax; and 1 a Handy product tanker and they are all trading in the spot market.

Capital Maritime has also presence in the drybulk and container markets through the ownership of two Handy bulk carriers and two 1,700 TEU containers. The average age of its fleet is approximately five years. It boasts a very strong balance sheet with low leverage. At the end of 2013 total assets amounted to approximately $830 million and the total stockholders equity stood at approximately 75% of the total assets. Its current net debt as a percent of the market value of its vessels is approximately 20%.

Capital Maritime is in the midst of a substantial rebuilding program with most deliveries expected in the coming two years. During 2015 it will take delivery of three latest eco-type design, wide-beam 9,100 TEU container vessels at Daewoo Heavy Industries with increased reefer capacity, high specifications, and optimized for slow steaming.

In addition, Capital Maritime will take delivery of eight high-specification eco [10-mile] product tankers during the period of 2015 to early 2017 built by Samsung.

Capital Maritime is also building three high-specification eco type VLCCs with deliveries from 2014 to 2016.

On the operating side, all vessels' main design has been enhanced with a number of operational extras to give the vessels and their future charters maximum trading flexibility.

Turning to slide 8, we will review the product tanker market developments in the first quarter. Spot earnings for the first quarter declined compared to the previous quarter dropping to the lowest levels since the third quarter of 2012. The market in the US Gulf explains the biggest decline in rates as adverse weather conditions limited chartering activity. In particular, the extreme cold weather that swept across the US pushed up the prices of heating oil, tapping arbitrage economics, and caused operational problems at regional refineries. Refinery maintenance in the region further limited production and exports from the US Gulf, reducing demand for product tankers. For 2014, analysts have revised upwards their expectations for product tanker demand growth and they expect growth of 4.7%.

The product tanker period market experienced solid activity in the first quarter, following record activity in 2013 while period rates remain at robust levels. We expect that in the medium to long [land] the product tankard time charter market will further improve on the back of stronger oil demand, arriving exports on the US Gulf, and favorable changes in the refinery landscape.

On the supply side, net fleet growth for product tankers for 2014 is forecasted to [come] below demand growth of 3.9%. The MR order book seems to have stabilized as ordering activity for product tankers declined sharply during the quarter with most quality shipyards having now exhausted their capacity through 2015. Only 20 orders were placed during the quarter versus 62 newbuilding orders on average per quarter in 2013. We believe that the current product tanker order book at approximately 19% of the total fleet in combination with strong demand fundamentals should positively affect the spot and period charter rates going forward.

Turning to slide 9, Suezmax spot earnings rose during the first quarter of 2014 to the highest level since the second quarter of 2010. Most of the gains were registered in the first half of the quarter due to strong Chinese crude oil demand following low cost of building which resulted in increased local exports from West Africa to the Far East. In addition, long delays in the Turkish straits further contributed to the upward pressure on rates.

As the quarter progressed, rates retreated following slower Chinese demand while reduced weather disruptions resulted in increased Suezmax tonnage availability. The Suezmax period charter rates, despite the small improvements in the quarter as well as the number of period fixtures, remain at historically low levels and we expect that to recover going forward.

Global oil demand for 2014 is expected to increase by 1.3 million barrels per day as the macroeconomic backdrop improves according to the IEA.

Suezmax tanker deadweight demand is expected to grow by a solid 5.2% for the full-year 2014, driven by increased crude shipments from the Atlantic basin to the Far East as Asian charterers diversify their crude sources well Suezmaxes continue increasing their market share of traditional Aframax routes on the back of economies of scale.

On the supply side, analysts expect 2014 net fleet growth of 1.5% to be below Suezmax demand growth.

Finally, given the market backdrop very few new Suezmax orders have been placed over the last few months, which should help improve the demand/supply picture going forward. The total Suezmax order book now stands at 7.3%, the lowest in percentage terms since 1996.

In conclusion, we are very pleased to see the improved operating surplus of the partnership for the first quarter 2014 which is primarily the result of the steps we have taken during 2013 to grow the Partnership by increasing our fleet size by a total of five container vessels, each with long-term period coverage.

I would like to reiterate our commitment to the $0.92 per unit annual distribution guidance going forward and to the continued enhancement of our financial visibility and distribution coverage. We believe that the improved distribution coverage, the better tanker market fundamentals, and potential growth opportunities provides a solid base for the potential upward revision of our annual distribution guidance in the future.

And with that, I'm happy to answer any questions you may have.

(Operator Instructions)

Jon Chappell, Evercore.

Ioannis and maybe Jerry, as you think about the rechartering of the vessels that come up later this year, just wondering as more and more newbuilds hit the market and have an impact on chartering activity, has a two-tiered market developed where you are seeing a different rate profile for the 2006/2007 build ships in your fleet as opposed to maybe 2014 delivered vessels?

Certainly so far -- and I will answer the first part of the question and then I will pass over to Jerry, Jon.

Certainly so far the rates that we have seen and the chartering activity we have seen in the first quarter has been quite robust. Certainly we are coming from a very high level in terms of the number of fixtures. And I think that we have seen a certain slow down, but over all the numbers of fixtures at 58 in the first quarter are close to record highs. At the same time, we have seen rates staying at the high levels.

Jon, this is Jerry. With regards to the second part of the question and I guess as far as the differential between eco and standard MRs is concerned, I think there is a two-tiered market in the sense that you will see that charters will pay out a certain premium for eco-ships which from the fixtures we have seen is between $1000 to $1500 per ship. But we haven't seen standard MRs, non-eco-MRs being penalized. We have actually seen that a number of the fixtures of the 58 fixtures we have seen in the first quarter have been predominately for normal MRs. So I think that is a very live market right now.

And in that regard then, when you think about the strength of your balance sheet and hopefully we're coming out of the multi-year trough in the market and potential fleet renewal, did newbuilds make more sense to you? Or do you think that that market has run a little bit too much and there's more value to be had in ships similar to those you have on the water today.

Well, Jon, as you know, the Partnership does not order vessels. It is a sponsor that has ordered a number of product tankers. As I mentioned earlier, the sponsor has eight newbuilding orders with Samsung with deliveries in 2015, 2016. And these are at very high specifications and at [high market] prices. And we expect subject to their attrition to be dropped down to the Partnership over the coming years.

Okay. And then finally, Ioannis, if you can just speak of little bit to the timing of the management transition and how that may or may not impact the operating strategy, whether that is chartering or new vessel deliveries going forward?

I think as I mentioned to the press release that came out last week, I will continue as CEO and CFO until a successor is in place. And I do not expect the Partnership or its operations to be affected at all by my transition.

Okay. Thank you, Ioannis. Thanks, Jerry.

Taylor Mulherin, Deutsche Bank.

I wanted to ask a question about the prospective distribution increases at some point. It seems like you have got a few potential drop-down opportunities for delivering around 2015 that could be a catalyst, but you pointed to that time period in the past as a time where a distribution increase could occur. But to my question is basically, do those two things necessarily need to be related to one another just based on your significant distribution coverage right now? What's the catalyst? What needs to happen?

I think that we have mentioned in the past that there is no change to date. That when it comes to distribution growth that the transactions that we have discussed that potentially can take place between Capital Maritime and Capital Product will certainly be fundamental to any potential distribution growth.

So the way that we will structure that will determine a lots of future path of distributions. But as we have said, we will communicate that separately at a given time in the future.

When it comes to overall distribution growth strategy, that depends also on the duration of the charters of the product, the tankers and Suezmaxes that we have. And we have said in the past that ideally we would like to have a bit longer product tanker fixtures compared to today, especially as the market continues to recover.

So these things, along with the distribution coverage being in excess of 1.1 times will be necessary for us to increase our distribution growth in a way that the market will be sustainable.

Sure. That makes sense. And then just to stay on the growth opportunity side of things, clearly there's some opportunities in both MRs and containerships at Capital Maritime.

And just wanted to ask about the crude sector for a second. The Suezmax market specifically seems to be showing some signs of improvement and wanted to get a sense of how you are seeing the opportunities there.

And then also just wanted to see what your thoughts were about moving beyond the Suezmax market in the crude sector to either VLCCs or Aframaxes.

The main criteria for us to add to tonnage is the accretive nature of the transaction. And if you look at our rates are today among containers, products, and crude vessels, you may find that the first two offer better [activity] opportunities at this point.

Sure. Okay, thanks for your time.

Ben Nolan, Stifel.

First of all, Ioannis, congratulations. Best wishes for things going forward.

Thank you very much, Ben.

Getting back to the dropdowns and having gone over the new building list over at Capital Maritime, the sponsor, did notice there at least one of the VLCCs is scheduled for delivery in 2014.

First of all, would you consider that to be a drop-down candidate? And then maybe along with that, and certainly also some of the longer dated assets, but first of all, is there a long-term time charter on it? And then if not, would you guys maybe consider taking a drop-down of an asset, be it a VLCC or maybe next year, an MR, that would not have a long-term attached time charter contract on it?

I will start from the latter part of the question. Certainly we would like any acquisition we make to have a long-term charter attached. So that is an important criteria in us deciding whether to acquire a vessel.

And secondly, it has to be accretive. And as I mentioned [together] if you look at the period market both at the VLCCs and the Suezmaxes today, they are at quite low levels. So it is difficult to see today an accretive transaction.

Okay, that's helpful. And then secondly, and this gets a little bit more into 2015 and looking at the containership fleet, was curious what the employment is on those assets. The vessels that have been ordered, are they already all fixed on long-term time charters or are there a portion of them fixed?

I guess the question is, are there any pre-May drop-down candidates that already have employment?

We have said, I already mentioned in the previous question that we will communicate the dropdown strategies separately when it comes to the containers and the amounts. And we expect to do that in the near future. But at this point, I would prefer to defer to a later point when we will be able to give you much more information on that.

Okay, that's fine. Well, that does it for me. Thanks for the time. And again, best wishes.

Thank you very much, Ben. Thank you.

Sameed Musvee, Wells Fargo.

I am actually on Mike's team. Thanks for taking my question. I guess mine is more along the lines of potential distribution growth, as well. As you look at the fleet at Capital Maritime, which we talked about earlier in the call, it is pretty substantial in the amount of dropdowns over there. So if you think about potential distribution growth, could you just give me all your thoughts on the timing of that?

Well, the timing certainly, we cannot talk to you about now. But I mentioned to you earlier that the ingredients, the main factors are the billing terms, the drop-down story, as well as any potential distribution growth will depend on the [attrition]; will depend on the period fixtures that we will achieve for our vessels that are operating up and ideally, we will be able to fix them at higher levels for longer. And the distribution coverage will [have other time].

So these will be the factors against which we will judge the timing and the magnitude of any distribution growth. But as we said we would like to combine that in a way that we will show the market that any distribution increase is the first step of many.

Got it. That is helpful.

And diving a little deeper into the potential dropdowns -- I know you didn't want to talk too much about it at this time, but just in terms of historical information, you guys acquired three containerships from Capital Maritime for about $195 million in September of last year, which was financed by both a secured credit facility and an equity issuance.

As we think about the potential accretion of the assets currently at Capital Maritime, how should we think about the potential breakdown of equity and debt financing as we think about how accretive those assets could be to the Company?

The vessels that we acquired last year were a [part of] the TEU vessels and the vessels that now that Capital Maritime is building is 9,100 TEU vessels, so certainly bigger.

And as we said before, we have a third facility in place to finance up to 50% of the value of the assets that we will acquire so I guess the rest will be some form of equity.

Okay, that's all I had in mind. Thanks for taking my questions.

Matthew Phillips, Clarkson.

A general question about the container market. It is one of the last ones that really still be stuck in the doldrums from the downturn. Are you still seeing some second-hand opportunities out there? And would you expect to act on any of those, or do you think of the new building runway you have from the sponsors is sufficient for the time being?

This is Jerry. We have been focusing mainly on the post-panamax segment over the last few years as you have seen from both of the dropdowns as well as orders that we have placed.

At the level of Capital Maritime, this is on the back of certain attractive [famous] 3 fundamentals that we see for post-panamax eco-vessels as well as discussions we have had with charterers. So that has been our main focus and less, the second-hand markets.

Okay, thank you.

Regarding the newbuildings, the newer set of the 9,400 TEU ships, you had mentioned before you're not ready to delineate the drop-down strategy, but do these ships have charters attached? Would they be candidates at all for dropdown at this time?

The 9,100 vessels certainly will be candidates. And we will discuss those, as I mentioned, at a given time in the future along with a charter [sense].

Did you say the 9,400 or the 9,100s?

There are no 9,400s; they are 9,100s.

Okay. All right, thank you.

(Operator Instructions)

Shawn Collins, Bank of America.

Ioannis, turning to the order book, can you comment on what you think is driving the large percentage of slippage: 35% for product tankers; 54% for Suezmaxes? What do you think is driving those rates, pushing those out so much?

This is Jerry. On the MR side, the slippage has been substantial over the last few years. Of course, now that we have seen seven new orders being placed, it has been reduced closer to 30% to 35%.

But usually the reasons behind a slippage, it is what we term cancellations or non-deliveries, have these are to do with owners not being able to finance acquisitions either of the equity on the debt side. And this is been a major factor in the past, especially as credit was more scarce.

We have seen certain shipyards failing and a couple of yards in China as well as one in Korea, as well as in certain cases we have the owners choosing to convert from one type of vessel to another given the industry fundamentals.

As product tanker markets fundamentals improve, you will see less slippage while on the Suezmax segment, as the market has been at historical lows now for a couple of years, we have seen slippage increase as we have had both owners walking away from orders that were placed at very high levels. Or simply because we had a couple of sizable yards in China failing altogether and owners being able to cancel these orders and get a refund.

So it's a rationalization of the order book, if you want, that results in the slippage that you see in the respective order books.

That is great. That is helpful. Thank you, Jerry.

And a second question: on the product tanker side, I know in the first quarter we had a lot of maintenance being done at refineries and that slowed down trade. Can you comment on where you think the process is [this month] on maintenance for refineries in the US?

Well, we do not necessarily follow the refinery maintenance and output on the monthly level. I think the reason behind the softness that you might have seen in the spot market has more to do with arbitrage economics not working due to the cold weather and less necessarily with refinery maintenance and outages which are fairly seasonal.

Okay, that's helpful. Great. Well, thank you for the insights. And I will turn it over. Thanks, guys.

Thank you very much. There are no further questions at this stage. Please continue.

If there are no other questions, thank you, everybody for finding the time to participate in our call. Thank you.

Thank you very much. That does conclude the conference today. Thank you for participating. You may all disconnect.

Bye-bye. Thank you, bye.