Capital Product Partners' earnings call offers some insight (Part 3 of 4)
CPLP is behind on asset acquisitions
Capital Product Partners LP’s (CPLP) higher diluted earnings per share were largely driven by increased fleet size and higher rates for some of its vessels. Apart from the three container ships the company had purchased from Hyundai, management upgraded one of CPLP’s product tankers by acquiring a recently built eco medium-range tanker and selling a 2008-built medium-range product tanker. This contrasts with Scorpio (STNG) and Navios Maritime Acquisition (NNA), which have aggressively purchased new ships.
Capital Maritime & Trading Corp.
CPLP’s sponsor, Capital Maritime & Trading Corp., however—which owns more than 50% of CPLP and has historically sold vessels to CPLP—has a pretty significant new build program. It expects to take delivery of three eco-type wide-beam 9,100 TEU container vessels as well as six high-specification eco medium-range chemical product tankers in 2015 and 2016. So if fundamentals do improve, CPLP can end up buying those vessels.
Rates for product tankers rise
According to management, product tanker rates for the third quarter were higher than the same period last year. Rates out of the U.S. Gulf were on average stronger, largely driven by increased oil production, while rates for moving refined oil across the Atlantic were weaker due to lower European refinery utilization, lack of arbitrage opportunities, and seasonally weaker gasoline imports to the United States.
Charterers expect an improving spot market
On expectations of an improving spot market, charterers (borrowers) continued to take advantage of higher period rates. Spot markets are used when charterers want to pay a one-time fee for transporting a specific amount of goods, while period rates are used when charterers want to pay the shipping company a specific amount a day for using the ship.
Demand expected to grow higher
Analysts currently expect overall demand for product tankers to increase 4.8% for 2014, which is higher than the estimated 4.1% growth this year (2013). Higher exports from the U.S. Gulf, which is said to also increase the distance that tankers have to travel, are reasons for the higher growth. Latin America, West Africa, and Europe are expected to be the major destinations for shipments of gasoline and distillates out of the United States due to growing population, gasoline subsidies, and a lack of investments in refining.
Demand to outpace supply
This is higher than the forecasted supply growth of 3.5% for 2014. With MR product tanker orderbook (the number of ships under construction and placed for construction) at 14% of total fleet, management expects spot and period charter rates to improve. One way investors can get a sense of whether rates are expected to rise is to see if companies are engaging in shorter- or longer-term contracts. If rates are expected to rise, then management will often engage in shorter contracts so that they don’t miss out on earnings and cash flow gain when rates rise. Conversely, if they see that rates are expected to fall or collapse, like several dry bulk shippers did in 2007 and 2008, they tend to engage in longer-term charters that last as long as three to five years.
Watch for contract duration
CPLP’s outperformance over the past three years can be largely attributed to its practice of engaging in longer-term contracts. In a bear market when rates are falling, it helps shareholders by maintaining cash flow, but investors may lose out when rates do rise. As of the earnings call, the average remaining charter duration was at 8.9 years. But there are 11 vessels that will see charters expire within a year, and nine of them are product tankers. This is another reason to be optimistic about the future of product tankers. The Guggenheim Shipping ETF (SEA) should also benefit if product tankers do well.
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