Capital Product Partners L.P., an international shipping partnership, released its financial results for the third quarter ended September 30, 2018 and announced a plan to equip part of its fleet with exhaust gas cleaning systems (“EGCS”) and the sale of the M/T ‘Amore Mio II’.
The Partnership’s net loss for the quarter ended September 30, 2018 was $22.6 million. Net loss for the quarter ended September 30, 2018 includes a non-cash impairment charge of $28.8 million from the sale of the M/T ‘Amore Mio II’ (159,982 dwt, Crude Oil Carrier, built 2001, Daewoo Shipbuilding & Marine Engineering, South Korea) to an unaffiliated third party for the amount of $11.2 million. Excluding the impairment charge, the Partnership’s net income for the quarter ended September 30, 2018 was $6.2 million compared with net income of $9.7 million for the third quarter of 2017 and $4.0 million for the previous quarter ended June 30, 2018. After taking into account the preferred interest in net income attributable to the holders of the 12,983,333 Class B Convertible Preferred Units outstanding as of September 30, 2018 (the “Class B Units”, and such holders the “Class B Unitholders”) and the interest attributable to the general partner, net loss per common unit for the quarter ended September 30, 2018, including the effect of the impairment charge, was $0.20. Excluding the effect of the impairment charge, net income per common unit for the third quarter of 2018 was $0.03, compared to $0.05 for the third quarter of 2017 and $0.01 for the previous quarter ended June 30, 2018.
Operating surplus prior to allocations to our capital reserve and distributions to the Class B Units for the quarter ended September 30, 2018 amounted to $27.4 million, compared to $30.3 million for the third quarter of 2017, and $24.9 million for the previous quarter ended June 30, 2018. For the third quarter of 2018, we allocated $13.6 million to the capital reserve, an increase of $0.4 million compared to the previous quarter. The capital reserve has been increased to better reflect the total amortization payments across all our credit facilities over the next five years. Operating surplus after the quarterly allocation to the capital reserve and distributions to the Class B Unitholders was $11.0 million for the third quarter of 2018. Operating surplus is a non-GAAP financial measure used by certain investors to measure the financial performance of the Partnership and other master limited partnerships. Please refer to “Appendix A” at the end of the press release for a reconciliation of this non-GAAP measure with net income.
Total revenues for the third quarter of 2018 was $73.4 million, corresponding to an increase of 17.1% compared to $62.7 million during the third quarter of 2017. The increase in total revenues was primarily a result of the increase in the average number of vessels in our fleet following the acquisition of the M/T ‘Aristaios’ in January 2018 and the higher number of voyage charters performed by our vessels compared to the third quarter of 2017. The impact of these factors was partially offset by lower average time charter rates earned by certain of our vessels compared to the corresponding period in 2017 and by an increase in off-hire days in connection with certain of our vessels passing special surveys.
Total expenses for the third quarter of 2018 were $89.3 million compared to $45.8 million in the third quarter of 2017. Voyage expenses for the third quarter of 2018 were $14.7 million compared to $4.3 million in the third quarter of 2017. The increase was mainly attributable to the increase in the number of voyage charters performed by certain of our vessels in the third quarter of 2018 compared to the same period in 2017. As a result of the depressed tanker market and the limited liquidity of the tanker period market, we have chosen to trade certain of our vessels in the spot market until we see a more sustained recovery in period tanker rates. Total vessel operating expenses during the third quarter of 2018 amounted to $25.9 million, compared to $21.4 million during the third quarter of 2017. The increase in total vessel operating expenses mainly reflects the increase in the number of vessels in our fleet incurring operating expenses, following the redelivery of three vessels previously employed under bareboat charters and the acquisition of the M/T ‘Aristaios’ in January 2018, as well as increased operating expenses incurred during the third quarter of 2018 in connection with the special surveys of certain of our vessels. Total expenses for the third quarter of 2018 also include vessel depreciation and amortization of $18.6 million, compared to $18.5 million in the third quarter of 2017 and an impairment charge of $28.8 million in connection with the sale of the M/T ‘Amore Mio II’. General and administrative expenses for the third quarter of 2018 amounted to $1.3 million, as compared to $1.6 million in the third quarter of 2017.
Total other expense, net for the third quarter of 2018 was $6.8 million compared to $7.2 million in the third quarter of 2017. Total other expense, net includes interest expense and finance costs of $6.9 million for the third quarter of 2018, compared to $7.5 million in the third quarter of 2017. The decrease primarily reflects the decrease in the average balance of our outstanding indebtedness during the third quarter of 2018 compared to the same period in 2017, partially offset by an increase in the LIBOR weighted average interest rate compared to the third quarter of 2017.
As of September 30, 2018, total partners’ capital amounted to $881.2 million, a decrease of $52.2 million compared to $933.4 million as of December 31, 2017. The decrease was primarily due to the net loss of $13.3 million for the first nine months of 2018 and the distributions declared and paid in the total amount of $39.5 million for the period.
Total cash, including restricted cash under our credit facilities, as of September 30, 2018 amounted to $47.3 million. Restricted cash under our credit facilities amounted to $18.5 million.
As of September 30, 2018, the Partnership’s total debt was $465.1 million, a decrease of $10.7 million compared to $475.8 million as of December 31, 2017, which was attributed to the scheduled loan principal payments during the first nine months of 2018 and the mandatory prepayment of $14.4 million made under the 2017 credit facility in connection to the sale of the M/T ‘Aristotelis’ in the second quarter of 2018. The decrease in the Partnership’s total debt was partially offset by the assumption of a $28.3 million term loan in relation to the acquisition of the M/T ‘Aristaios’ and a $15.6 million term loan in connection to the acquisition of the M/T ‘Anikitos’ in the first half of 2018.
Plan to Equip Part of Our Fleet with EGCS
The Partnership is planning to install EGCS, also known as ‘scrubbers’, on up to 14 of its larger vessels, comprising ten containerships, three crude tankers and one bulk carrier. The final decision for certain of these vessels is expected to be reached within the coming months and the installation of the scrubbers is expected to be completed throughout 2019 and 2020.
In connection with the agreement to equip our five 5,000 TEU container vessel series with EGCS, namely the ‘Hyundai Prestige’, ‘Hyundai Premium’, ‘Hyundai Paramount’, ‘Hyundai Privilege’ and ‘ Hyundai Platinum’ (the “HMM Vessels”), we have entered into a series of agreements (the “Scrubber Agreements”) with Hyundai Merchant Marine (“HMM”), the charterer of the vessels, to increase the daily charter rate by $4,900 for each vessel. The increase will be effective from January 1, 2020, or, if later, the installation date of the scrubbers until the expiry of each charter in 2024 and 2025, as applicable. The HMM Vessels are currently earning $23,480 gross per day following a restructuring agreement with HMM dated July 15, 2016. Under the restructuring agreement, the charter rate is set to be restored to the original daily gross rate of $29,350 from January 1, 2020 and will increase further to $34,250 once the scrubbers are installed in accordance with the Scrubber Agreements.
Sale of the M/T ‘Amore Mio II’
The Partnership has entered into an agreement for the sale of the M/T ‘Amore Mio II’ to an unaffiliated third party for the amount of $11.2 million. Upon entering into the sale, the Partnership classified the M/T ‘Amore Mio II’ ‘as held for sale’ and, accordingly, recognized an impairment charge of $28.8 million. The vessel was delivered to its buyer on October 15, 2018. A mandatory prepayment of $5.9 million was made on October 15, 2018 under the 2017 credit facility in connection with the sale. As a result, the quarterly installment under the 2017 credit facility will be reduced by $0.3 million beginning with the first quarter of 2019.
Fleet Employment Update
The M/T ‘Aktoras’ (36,759 dwt, IMO II/III Chemical Product Tanker built 2006 Hyundai Mipo Dockyard, South Korea) extended its employment with Shell Tankers Singapore Private Limited (‘Shell’) for one year (+/- 30 days) at a gross daily rate of $12,000. The new charter is expected to commence in January 2019 in direct continuation of its current employment. The vessel is currently earning $13,500 gross per day.
As a result of the above employment, the Partnership’s charter coverage for the remainder of 2018 and 2019 stands at 78% and 63%, respectively.
Quarterly Common and Class B Unit Cash Distribution
On October 18, 2018, the Board of Directors of the Partnership (the “Board”) declared a cash distribution of $0.08 per common unit for the third quarter of 2018 payable on November 14, 2018 to common unit holders of record on November 5, 2018.
In addition, on October 18, 2018, the Board declared a cash distribution of $0.21375 per Class B Unit for the third quarter of 2018, in line with the requirements of the Partnership’s Second Amended and Restated Partnership Agreement, as amended. Such cash distribution will be paid on November 12, 2018 to Class B Unitholders of record on November 5, 2018.
Product Tanker Market
Trends in the product tanker market remained negative in the third quarter of 2018, with spot freight rates retreating further towards historical low levels. In the U.S. Gulf, refinery utilization rates increased during the three-month period and reached record high levels in the beginning of August. That positive development, however, was offset by seasonal high domestic consumption of refined fuels and by low distillate inventories, which combined to limit product exports and demand for product tankers in the region. In the Atlantic, the market experienced increasing gasoline imports to the U.S. east coast for a third consecutive quarter. Nonetheless, this was outweighed by lower imports in West Africa through inventories draws in Nigeria and a lengthy position list, and as a consequence, rates on the benchmark transatlantic trade hovered at below operating expenses levels for the most part of the quarter. East of Suez, the beginning of the quarter was relatively firm, but as the quarter progressed the market came under pressure due to newbuilding crude tankers increasingly poaching cargoes on traditional clean routes.
Activity for period charters longer than twelve months was limited for the quarter, while period rates remained under pressure.
On the supply side, the orderbook remained close to historically low levels. As at the end of the third quarter of 2018, the MR product tanker orderbook stood at approximately 8.1% of the current worldwide fleet. In addition, product tanker deliveries continued to experience significant slippage during the nine months of 2018, as 20.8% of the expected MR and handy size tanker newbuildings were not delivered on schedule. Looking ahead, analysts estimate that product tanker deadweight demand growth will increase to 3.3% in 2019 from 2.4% in 2018. At the same time, the product tanker fleet is projected to expand by 1.9% and 2.7% in 2018 and 2019, respectively.
Suezmax Tanker Market
The Suezmax spot market remained under pressure in the third quarter of 2018 and in line with the previous quarter. The market was plagued by high vessel supply and seasonally weaker demand, with the refinery maintenance season in Europe limiting cargo volumes for Suezmaxes. Despite the negative sentiment, spot rates slowly improved from late August onwards on the back of increasing OPEC production and rising U.S. crude oil exports. In addition, Chinese crude oil imports increased during the quarter, reversing a downwards trend observed in the last two months of the preceding quarter. As a result, average earnings for Suezmaxes in September rose to the highest level in the first nine months of 2018.
Activity in the Suezmax time charter market was limited, while period rates were maintained at subdued levels, reflecting the depressed spot rate environment.
On the supply side, the Suezmax orderbook represented at the end of the third quarter of 2018 approximately 9.5% of the current worldwide fleet. The delivery of new vessels is expected to slow down going forward, as 22 vessels are expected to be delivered in 2019, assuming no cancellations or slippage. In 2019, Suezmax dwt demand is projected to grow by 2.2%, supported from growth in shipments into Asia and the continued rise in U.S. exports, which are expected to expand by 50% in 2019.
Tanker demolition activity slowed down in the third quarter following record scrapping in the first half of 2018 but remained at high levels. On aggregate, 18.1 million dwt of tanker tonnage was scrapped in the first nine months of 2018, including 17 Suezmax vessels. This represents the highest level for the first nine months of the year since 1985.
Neo-Panamax Container Market
After an active first half of 2018, the container market experienced the traditional seasonal slump in the third quarter of 2018, with lower charter rates across the board as a consequence.
Discussions on the further imposition of tariffs, in particular between the U.S. and China, continues to affect sentiment, while market players are seeking to assess the actual consequences for the container trade. The idle container fleet stood at the end of the third quarter of 2018 at approximately 2% of the current worldwide fleet, compared to 1% at the end of previous quarter, and compared to 7% and 2% at the end of 2016 and 2017, respectively.
At the end of the third quarter of 2018, the container orderbook remained close to historically low levels, standing at 12.8% of the current fleet, up from 11.8% in the previous quarter – but down from 14.1% at the start of the year. Slippage for the nine months of 2018 is estimated at 17%, while container vessel demolition until the end of the third quarter stood at approximately 42,600 TEUs. Overall, analysts anticipate container vessel demand to grow by 5.0% in 2018, while the container fleet is forecast to expand by 5.7%.
Mr. Jerry Kalogiratos, Chief Executive Officer of the Partnership’s General Partner, commented:
“As a general note, the overall weakness of the tanker market this quarter, which continued to experience multi-decade lows, and the off hire and expenses related to certain of our vessels undergoing special survey continued to adversely affect our financial results. However, we are pleased to see our common unit distribution coverage increase to 1.1x in this quarter, as our cash flow generation improved on the back of increased revenues, as certain of our vessels entered into previously secured long term charters.
“Furthermore, we believe that our decision to equip part of our fleet with scrubbers is an important and necessary decision in view of the IMO 2020 regulation, whose effects on our underlying markets remain widely debated in the industry. We believe that this move can help increase the appeal of the Partnership’s larger vessels to period charterers post January 2020, but also potentially allow us to capture meaningful premiums, such as that negotiated with one of our charterers for five of our vessels.”