Capital Clean Energy Carriers Corp (CCEC) 2022 Q3 法說會逐字稿

Thank you for standing by and welcome to the Capital Product Partners' Third Quarter 2020 Financial Results Conference Call. We have with us Mr. Jerry Padoapls, Chief Executive Officer of the company. (Operator Instructions) There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a nameless your questions. I must advise you this conference is being recorded today.

The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution division amounts capital reserve amounts, distribution coverage, future earnings, capital allocation as well as our expectations regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates, 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 those 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 predictions or statements about the performance of our common units.

I would now like to hand over to your speaker today, Mr. Kalogiratos. please go ahead, sir.

Good afternoon 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. Since the end of the second quarter of 2022, we have completed a number of significant transactions for the partnership, including the successful issuance of a EUR 100 million senior unsecured bond, the completion of the sale of 2 of our older container vessels, as well as the acquisition of the first of 4 newbuilding vessels we have agreed to acquire with long-term employment in place.

Now turning to the partnership's financial performance. Net income for the third quarter of 2022 was $58.7 million compared with the net income of $11.9 million for the third quarter of 2021. Our Board of Directors has declared a cash distribution of $0.15 per common unit for this quarter. And the third quarter cash distribution will be paid on November 10 to common unitholders of record on November 2. The partnership's operating surplus for the third quarter was $37.6 million, or $7.8 million after the quarterly allocation to the capital reserve.

During the third quarter of 2022, we repurchased 102,085 of the partnership's company units under unit buyback program at an average cost of $14.63 per unit. As of yesterday and since inception of our capital program, we have acquired a total of 708,575 units at an average unit price of $13.36. Finally, the partnership's charter coverage for 2022 and 2023 stands at 95% and 92%, respectively, with the remaining charter duration corresponding to 7 years, that is including the 4 newbuild vessels we have agreed to acquire.

Now turning to Slide 3. Revenue for the quarter was $71.9 million compared to $43.1 million during the third quarter of 2021. The increase was primarily attributable to the net increase in the average number of vessels in our fleet by 17%, following the delivery of 4 LNG carriers during the fourth quarter of 2021, partly offset by the sale of the Adonis in December 2021 and over 280,000 TEU container vessels in July of this year.

Total expense for the quarter were $40.4 million compared to $27.8 million in the third quarter of 2021. Voyage expenses for the quarter increased to $4.4 million compared to $3 million in the third quarter of 2021, primarily due to the increase in the average size of our fleet and the increase in the voyage expenses incurred by one of the vessels in our fleet employed under voyage charters.

Total vessel operating expenses during the quarter amounted to $17 million compared to $11.3 million during the third quarter of 2021. The increase in vessel operating expenses was mainly due to the net increase in the average size of our fleet. Total expenses for the third quarter of 2022 also includes vessel depreciation and amortization of $16.2 million compared to $11 million in the third quarter of last year. The increase in depreciation and amortization was mainly attributable to the net increase in the size of our fleet, offset by lower amortization of deferred drydocking costs.

General and administrative expenses for the quarter increased to $2.8 million compared to $2.6 million in the third quarter of 2021, mainly due to the increase in the amortization associated with our equity incentive plan. Interest expense and finance costs increased to $14.9 million from $3.6 million in the third quarter of 2021. The increase in interest expense and finance cost is attributable to the increase in the LIBOR weighted average interest rate compared to the third quarter of 2021 and the increase in our total outstanding debt following the issue of the 2 bonds and the debt assumed following the acquisition of the 4 LNG carriers during the fourth quarter of 2021, partly offset by the scheduled principal payments during the period, debt prepayments relating to the vessel sales, and the full prepayment of 2 of our credit facilities of a total amount of $95.7 million during the third quarter of 2022.

The partnership recorded net income of $58.7 million for the quarter compared with net income of $11.9 million for the third quarter of last year. Net income for the quarter includes a gain of $47.3 million from the sale of 2 of our vessels and the net loss of $5.2 million presented under other expenses relating to the cross-currency swap agreements associated with the issuance of our euro-denominated bonds and unrealized foreign exchange loss. Net income per common unit, excluding the gain of sale and the loss related to the impact of the FX and swap agreements was $0.83 for the third quarter of 2022 compared to $0.62 in the third quarter of last year.

On Slide 4, you can see the details of our operating surplus calculations that determine the distributions for unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately $37.6 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $29.7 million to the capital reserve, a decrease of $1.4 million compared to the previous quarter due to the decreased debt amortization resulting after the debt repayments and the inclusion in the capital reserve of $3.5 million corresponding to an additional reserve for the bonds issued in July 2022.

After deducting the capital reserve, the adjusted operating surplus amounted to $7.8 million. This is approximately $6.3 million less compared to the previous quarter as a result of loss of revenue associated with the sale of 2 of our container vessels early in the quarter, the increased interest cost as the weighted average interest cost for the quarter was 4.38% compared to 3.46% in the previous quarter, and due to the increased debt outstanding during the quarter between the issue of the bond in July and the prepayment of the 2 facilities in August, and 31 days unscheduled off-hire associated with the Cape Agamemnon.

Now on Slide 5 you can see the details of our balance sheet. As of the end of the third quarter, the partner's capital amounted to $615 million, an increase of $88.3 million compared to $525.5 million as of the end of 2021. The increase reflects net income for the 9 months and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in a total amount of $9.1 million, the repurchase of the partnership's common units for an aggregate amount of $4.4 million and other comprehensive loss of $4.7 million.

Total debt decreased by $126.5 million to $1.19 billion compared to $1.32 billion as of year-end 2021. The decrease is attributable to the scheduled principal payments during the period of $77.6 million, debt repayments of $28 million relating to the sale of Archimidis and Agamemnon, the repayment in full of our 2017 and 2020 credit facilities of a total amount of $95.7 million, and a $26.5 million decrease in the U.S. dollar equivalent of the euro-denominated bonds as of September 30, partly offset by the issuance of EUR 100 million in bonds in July 2022.

It is important to note here that following the repayment in full of our 2017 and 2020 credit facilities, 7 of our vessels in our fleet are unencumbered, which can be significant liquidity lever for the partnership in the future. Total cash as of the end of the quarter amounted to $104.2 million, including restricted cash of $9.7 million, which represents a minimum liquidity requirement under financing arrangements.

On Slide 6, we review the delivery of the Manzanillo Express, the first of 3 13,000 TEU eco container vessels, which we have agreed to acquire together with one latest technology LNG carrier. The vessel was successfully delivered from Hyundai on October 12 and commenced a 10-year charter with Hapag-Lloyd. The acquisition was funded through a combination of cash, approximately 505,200 common units with aggregate value of $7.5 million, and $105 million drawn under a new loan facility. The new loan facility will be paid in 24 equal consecutive quarterly installments of $1.3 million and the balloon payment of $73.1 million payable together with final quarterly installment in October 2028. The facility bears interest at SOFR plus a margin of 2.15%.

Moving to Slide 7. And after the agreement with Cheniere to extend the employment of 2 of our LNG vessels to 2031 at an increased rate. The partnership's contracted revenue backlog now stands at $1.95 billion, with over 63% of contracted revenue coming from LNG assets. Moreover, our customer base is well diversified across 7 charters with more than 83% of our revenues stemming from investment-grade counterparties. Turning to Slide 8. The partnership's remaining charter duration amounts approximately 7 years, while charter coverage remains high throughout 2025, thus providing our unitholders with increased cash flow visibility.

Turning to Slide 9. You can see our debt maturities by year. As you can see, we have eliminated all maturities through 2025 and do not have any significant maturities before 2026 when our first $150 million euro bond becomes due. At the end of the first -- at the end of the quarter, floating rate debt accounted for 67% of the total. Basis current discussions with our lenders with regard to the financing of the newbuilding vessels we have agreed to acquire, we expect fixed rate debt to account for more than 30% to 40% of our debt by the time we complete our acquisition program in the second quarter of 2022.

Turning to Slide 10. The LNG carrier charter market continues from strength to strength with spot rates rising sharply in December -- sorry, in September. Major factor for the very strong freight market is the record high floating storage as regasification slots are scarce and traders are trying to position themselves for the winter cargos.

Despite initial estimates of 2.1% tonne-mile demand growth for the year against LNG fleet capacity growth of 4.6%, the LNG carrier charter market has proved very resilient, supported by record gas prices and the push towards energy security. Term charter rates have moved continuously upwards throughout the third quarter with the 1-year term charter rates for a 2-stroke vessel increasing to $260,000 per day at the start of the quarter to $230,000 per day by the end of the quarter. The same trend was seen for TFDE vessels. However, the increase for steam turbine vessels was less marked as term fixing of older, less efficient vessels is less attractive given next year's high forecasted LNG price and upcoming environmental regulations.

The LNG fleet order book stands at 42% of the total fleet with 15 new orders placed within the first quarter of 2022. 30 of the 50 orders are for the Qatar North Field Expansion Project. At the same time, the prices for newbuilding vessel has reached $245 million. The positive market sentiment seen this year, driven by energy security concerns, especially in Europe, is expected to continue at least until the new wave of liquefaction plants become operational in 2026.

On Slide 11, we review the container market. Container rates have decreased amid demand headwinds while leasing congestion and market sentiment have put pressure on freight and charter rates. Clarksons Time Charter Rate Index decreased by 20% compared to the previous quarter, whereas Shanghai Containerized Freight Index fell by 22% in the same period. Despite both freight and charter rates easing somewhat, they still stand higher than the 2021 year-on-year average. Freight is now expected to fall by 0.3% in 2022 compared to 4% growth forecast in the beginning of the year. Meanwhile, with supply side growth expected to accelerate and congestion expected to continue to gradually unwind, markets should continue to soften, approaching more normalized levels next year.

The container vessel order book stands at 27% of the total fleet, down 0.7% from the previous quarter. For the first time in years, the number of fully cellular container vessels scrapped in the first 9 months of 2022 is 0, with the exception of 2 small units recorded as sold for recycling. Recent market trends, combined with the upcoming environmental regulations and policies are expected to have moderating effects on future supply, speed adjustments, energy saving devices, retrofit time, and increased recycling should affect all the vessels. Slippage, including cancellations of newbuilding container vessels is expected to be at 6% in 2022.

Now turning to Slide 12. As previously discussed, we have now exercised our right of first offer to acquire 4 vessels, 1 of which has been already delivered to the partnership earlier in October. We still retain the right of first offer in 2 more LNG carriers currently under construction in Hyundai Heavy in South Korea and delivering in late 2023. In addition, Capital Maritime has contracted an additional 5 LNG carriers from Hyundai Heavy with delivery set for 2024 and 2026. As these find employment in a currently strong charter market and subject to our ability to acquire these vessels, CPLP could be uniquely positioned to control a fleet of up to 14 latest-generation LNG carriers with a unique portfolio of charters.

Given the positive LNG market fundamentals ahead, we anticipate the 2-stroke latest-generation LNG carriers like the ones we own and its potential drop-down candidates will constitute very attractive assets. With increased financial flexibility after the issuance of our second bond, the sale process of our 2 oldest container vessels, 7 unencumbered vessels, and with a strong cash flow generation that we expect from our fleet and acquisitions, we believe that CPLP is strategically positioned to take advantage of such growth opportunities while continuing to return capital to unitholders through distributions and unit buybacks.

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

(Operator Instructions) Our first question comes from the line of Omar Nokta with Jefferies.

Yes. Just wanted to ask, as you're split now basically between the container ship and LNG shipping segments, you've been able to secure long-term contracts really across both in having vessels on hand and then them with contracts. Just in terms of opportunities that are out there, whether from the ability to secure charters or maybe the ability to acquire ships with attractive -- or at a track price levels. Where are you spending more of your time currently? And where do you see the opportunity? Is it in LNG? Obviously, you've outlined on Slide 12, the dropdown opportunities. Are the opportunities in LNG, but then also, how about in containers given the pullback in asset values, how do those look?

I think as far as containers are concerned, the market seems to have stabilized as of the last couple of weeks, and we have seen now increased activity. It feels like, in terms of charter rates at least, we have seen a floor. It remains to be seen whether this is temporary or not. But I think this is a market that is very much still in flux. Overall, and when it comes to long-term fundamentals, as I outlined in my prepared remarks, I think there is a very positive story for the LNG carriers that goes much beyond, of course, the current energy crisis in Europe. That was never the main story in the first place. The story really was increased demand for LNG, LNG also being a transition fuel, the increased liquefaction capacity that is predominantly coming online from 2026 onwards, the increased demand that we were seeing, especially from the Far East as China was moving away from coal, and of course, we have now the added, if you want, ingredient of energy security, which is a new but very important element in this.

So when you look at the LNG market, it's also well suited for a business model. You have long-term fixtures, high-quality counterparties, you can typically fix forward as LNG carriers are fixed in relation to projects mostly. So I think that it's a good fit, and not to say the least, it is also a good fit in the sense that we think it's -- these vessels, the latest-technology LNG carriers are more future-proof. Of course, also, as you know, we have been divesting off the older container vessels and investing in new ships. So this has been a very persistent, if you want, thread of our policy. But I think at this point, the LNG fundamentals and business structure looks more attractive to us. Containers, I think we still have to see where prices and rates stabilize.

That makes sense. And speaking of LNG, we have seen the reports that Capital Maritime was able to secure a 3-year contract on one of their newbuildings at a very attractive, very high rate. And just in terms of how -- where CPLP stands, do you see the potential of acquiring say that 1 particular ship that was fixed for 3 years, does that do you think look attractive to make its way into the structure, or do you prefer to have a bit more longer-term contract before that happened?

I think that's an interesting discussion to be had. I don't think we are ready to have this discussion. We still have another 3 vessels to acquire until May 2023, and this vessel that has been reported in the press fixed for 3 years, does not -- is not delivered before October 2023. So there is a lot of things that can happen between now and then. 3 years, typically, I would say, is on the lower end that you would expect when you're looking at a brand new LNG vessel and the CapEx that comes with it, but it's also -- what was reported in the press is also quite high rate.

Let us see where we are over the next couple of quarters, whether there will be an add-on fixture on the back of this. And of course, it all depends on what will be the price on offer. So I think we still have some way to go. But if you ask me, sure, I think this is definitely, let's say, the direction that we want to be growing with these type of assets in the LNG segment.

Okay. Makes sense. And yes, you still have plenty of time and you still have a few ships to bring on as well. Great. I'll turn it over.

Our next question comes from the line of Liam Burke with B. Riley.

You've got multiple uses of your capital, and you're effectively managing the addition of assets, buying back shares and then maintaining the unit payout. Do you see any shift in that strategy as you go forward, or as you take deliveries? Is there any thought process you're giving on how to adjust your allocation strategy?

I think as we have communicated in the past, once we complete the dropdowns and we increase our distributable cash flow, you should also expect that we will continue to increase the capital return to unitholders through unit buybacks and/or quarterly distributions. As I said before, I think we want to see the acquisitions completed as well as having a little more stable outlook with regard to interest rates before we revisit our capital allocation policy. But you should expect more news from us on this front, I think, next year.

But overall, let's say, and subject to the decision of our Board, we continue to intend to return to our unitholders about 1/5 to 1/4 of our free cash flow. That will be in the form of quarterly distributions as well as unit buybacks. So I think, in that we can achieve balanced and solid total returns for our long-term unitholders, while effectively we continue to boost our earnings per unit and ensure the long-term viability and cash flow generation capacity of the partnership. I think that's really the way that we see things.

So to your point, let us wait closer to the transaction completion, and I think we will, again, look at the capital allocation policy.

Great. And on your fleet renewal program, you've been rather deft in increasing the value of the assets as well as reducing the average age of the fleet, increasing contracted cash flows. Are there any assets that you're looking at that may provide a source of cash for the renewal program? Or you're happy with what you have now?

I think the one that stands out mostly is the 1 dry bulk vessel that we have, the Cape Agamemnon. So that vessel still trades spot. The dry bulk market, as you know, has been quite volatile and especially in the Capesize market. But we remain opportunistic about it. If we see a good exit point, that will be, I guess, the prime candidate. But also on the container assets in general, especially the older assets, but opportunistically also on the more modern ones, as we have done in the past, if we see something that makes sense or looks like better returns compared to what we can do in the charter market, especially given the use of capital we have -- the different use of capital that we have, we will look at it. But the priority, I think, is more the Capesize vessel.

Our next question comes from the line of Benjamin Nolan with Stifel.

This is Macalla, on for Ben. We just had a quick one. The sponsor has been a leader in ordering new LNG vessels. And given the order book is pretty large at this point, could you provide any color on what gets them comfortable in ordering at this point? Is it maybe a need for slow-speed 2-stroke vessels or any other insights could be helpful?

No, overall, the -- that's actually a very good question. First of all, as we highlighted also in our prepared remarks, while there is a fairly large order book, most of these vessels are committed on long-term projects. Very few of these vessels that you see currently in the order book are -- do not have an existing commitment. So when you look, let's say, over the next couple of years, we're talking about a dozen ships that do not have employment currently. So that's one. Don't forget that a lot of the big driver of this order book is just 1 chapter, Qatargas, on the back of their own expansion.

Now the other main driver is, of course, the technology shift in propulsion and containment systems we have seen on the LNG side. And this is, if anything, has been amplified by the higher commodity price. Nowadays, that delta between, let's say, 2-stroke ships, TFDE ships, and steamships has been ever increasing as commodity price has been increasing due to the, of course, lower boil-off that the 2-stroke units can offer, the lower bunkers bill, but also the larger sites. So the unit freight economics of 2-stroke ships compared to older technologies really create effectively a 3-tier market. Depending on the price of the commodity, you can -- the real differential in terms of unit freight costs can be more than EUR 500,000 per day.

Finally, there is the regulatory impact and the environmental impact. If you want, the regulatory impact, the more strict regulatory impact means that with the EEXI and CII, the older technologies, and especially steamships, will be impaired potentially with speed reductions and won't be able to compete. But also the carbon footprint of many of those ships is going to be a huge impairment going forward, especially if there is an introduction of market-based measures like the ones that are being discussed in Europe for the ETS or the IMO. And of course, there's also the methane slip, which can be quite important and can further impair some of these older vessels.

So all in all, when you look at the demand fundamentals, which I mentioned earlier, that is new liquefaction capacity coming online where the demand for LNG is located compared to the supply, of course, the new concerns about energy security, and now Europe being a major importer of LNG and so on and so forth, compared to the order book that is already committed for many of these projects, but definitely not for all, and of course, the technology shifts and what it means going forward, I think this is what makes us as well as the sponsor quite bullish. And I think the proof is in the pudding, the rates and returns that are being achieved. I think Omar referred to what was reported in the press for a 3-year deal. These are record high numbers, and we expect the market to remain quite strong going forward.

(Operator Instructions) We have reached the end of our question-and-answer session. Therefore, I will turn the call back over to Mr. Jerry Kalogiratos for closing remarks.

Thank you. Thank you, all, for joining us today.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you and have a good day.