Capital Product Partners exits dry bulk sector

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Capital Product Partners L.P., an international owner of ocean-going vessels, released its financial results for the second quarter ended June 30, 2023.

Highlights

 Three-month periods ended June 30,
 20232022Increase/(Decrease)
Revenues$88.5 million$74.0 million20%
Expenses (excl. impairment of vessel)$50.6 million$40.9 million24%
Net Income before impairment of vessel$15.4 million$20.4 million(25%)
Less: Impairment of vessel$8.0 million
Net Income$7.4 million$20.4 million(64%)
Net Income per common unit$0.36$1.00(64%)
Average number of vessels122.121.05%
  • Operating Surplus2 and Operating Surplus after the quarterly allocation to the capital reserve for the second quarter of 2023 were $38.2 million and $3.2 million, respectively.
  • Announced common unit distribution of $0.15 for the second quarter of 2023.
  • Took delivery of the M/V Buenaventura Express with long term employment in place.
  • Agreed to sell the 179,221 DWT dry cargo vessel M/V Cape Agamemnon.
  • Repurchased during the second quarter of 2023 156,560 common units at an average cost of $13.30 per unit.

1 Average number of vessels is measured by aggregating the number of days each vessel was part of our fleet during the period and dividing such aggregate number by the number of calendar days in the period.

2 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.

Overview of Second Quarter 2023 Results

Net income for the quarter ended June 30, 2023, was $7.4 million or $15.4 million before the impairment from the agreed sale of the M/V Cape Agamemnon, compared with net income of $20.4 million for the second quarter of 2022. Taking into account the interest attributable to the general partner and the allocation of net income to unvested units, net income per common unit for the quarter ended June 30, 2023, was $0.36 or $0.75 before the impairment from the agreed sale of the M/V Cape Agamemnon, compared to net income per common unit of $1.00 for the second quarter of 2022. The decrease in net income was primarily attributable to increased interest expense and finance cost, resulting from the increase in the Partnership’s total average indebtedness and the increase in the weighted average interest rate compared to the second quarter of 2022, the increase in operating expenses as a result of the net increase in the average size of our fleet and costs incurred during scheduled maintenance of certain of our vessels.

Total revenue for the quarter ended June 30, 2023, was $88.5 million, compared to $74.0 million during the second quarter of 2022. The increase in revenue was primarily attributable to the revenue contributed by the newbuilding vessels acquired by the Partnership, namely the M/V Manzanillo Express, which was delivered to the Partnership in the fourth quarter of 2022, the M/V Itajai Express and the LNG Carrier (“LNG/C”) Asterix I, which were delivered to the Partnership in the first quarter of 2023, and the M/V Buenaventura Express, which was delivered in the second quarter of 2023, as well as the increase in the daily rate earned by two of the Partnership’s LNG/C vessels effective since September 1, 2022, partly offset by the sale of two 8,266 twenty-foot equivalent (“TEU”) container vessels in July 2022.

Total expenses for the quarter ended June 30, 2023, were $58.6 million, compared to $40.9 million in the second quarter of 2022. Total vessel operating expenses during the second quarter of 2023 amounted to $23.5 million, compared to $16.4 million during the second quarter of 2022. The increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet and costs incurred during scheduled maintenance underwent by certain of our vessels. Total expenses for the second quarter of 2023 also include a non-cash impairment charge of $8.0 million that we recognized on the date we agreed to sell the M/V Cape Agamemnon and vessel depreciation and amortization of $20.9 million, compared to $17.7 million in the second quarter of 2022. The increase in depreciation and amortization during the second quarter of 2023 was mainly attributable to the net increase in the average size of our fleet, partly offset by lower amortization of deferred dry-docking costs. General and administrative expenses for the second quarter of 2023 amounted to $2.3 million, in line with the second quarter of 2022.

Total other expense, net for the quarter ended June 30, 2023, was $22.6 million compared to $12.6 million for the second quarter of 2022. Total other expense, net includes interest expense and finance costs of $25.5 million for the second quarter of 2023, compared to $11.7 million for the second quarter of 2022. The increase in interest expense and finance costs was mainly attributable to the increase in the Partnership’s average indebtedness and the increase in the weighted average interest rate compared to the second quarter of 2022. Total other expense, net also includes an unrealized gain of $2.6 million resulting from the change in the fair value of the cross-currency swap agreement not designated as an accounting hedge and the decrease in the U.S. Dollar equivalent of our euro-denominated bonds issued in October 2021.

Capitalization of the Partnership

As of June 30, 2023, total cash amounted to $104.7 million. Total cash includes restricted cash of $11.7 million, which represents the minimum liquidity requirement under our financing arrangements.

As of June 30, 2023, total partners’ capital amounted to $649.4 million, an increase of $11.0 million compared to $638.4 million as of December 31, 2022. The increase reflects net income for the six months ended June 30, 2023, other comprehensive income of $1.7 million relating to the net effect of the cross-currency swap agreement we designated as an accounting hedge and the amortization associated with the equity incentive plan of $1.9 million, partly offset by distributions declared and paid during the period in a total amount of $6.2 million and the cost of repurchasing our common units under our Unit Repurchase Program for an aggregate amount of $3.8 million.

As of June 30, 2023, the Partnership’s total debt was $1,631.7 million before financing fees, reflecting an increase of $332.5 million compared to $1,299.2 million as of December 31, 2022. The increase is attributable to a $5.0 million increase in the U.S. Dollar equivalent of our euro-denominated bonds as of June 30, 2023, the drawdowns of: a) $100.0 million under a new credit facility to partly finance the acquisition of the M/V Buenaventura Express in June 2023, b) $184.0 million under a sale and leaseback transaction to partly finance the acquisition of the LNG/C Asterix I in February 2023 and c) $108.0 million under a new financing arrangement to partly finance the acquisition of the M/V Itajai Express in January 2023, partly offset by the scheduled principal payments for the period of $41.1 million and the early repayment in full of the facility we entered into with CMB Financial Leasing Co., Ltd in February, 2021, of a total amount of $23.4 million.

Operating Surplus

Operating surplus for the quarter ended June 30, 2023, amounted to $38.2 million, compared to $36.3 million for the previous quarter ended March 31, 2023, and $43.9 million for the quarter ended June 30, 2022. We allocated $35.0 million to the capital reserve, an increase of $1.6 million compared to the previous quarter due to the increased debt amortization resulting from the drawdown of the M/V Buenaventura Express facility. Operating surplus for the quarter ended June 30, 2023, after the quarterly allocation to the capital reserve, was $3.2 million.

Delivery of the M/V Buenaventura Express

On June 20, 2023, the Partnership took delivery of the M/V Buenaventura Express, the last of three 13,000 TEU container vessels we acquired together with the LNG/C Asterix I. The vessel commenced its ten-year employment with Hapag Lloyd Aktiengesellschaft (“Hapag Lloyd”), which maintains three two-year options to extend the charter. The acquisition of the M/V Buenaventura Express was funded through a combination of (a) a cash deposit of $6.0 million advanced in 2022, (b) $100.0 million drawdown under a new credit facility and (c) $16.5 million of cash at hand. The new credit facility was extended by a syndicate of banks with Cathay United Bank and Bank Sinopac Co. Ltd as Mandated Lead Arrangers and Bookrunners, and Taishin International Bank Co. Ltd and Woori Bank Singapore Branch as Mandated Lead Arrangers. It has quarterly principal repayments of $1.6 million, an eight-year term and a balloon payment of $50.0 million due in June 2031.

Fleet Upgrade

In the second quarter of 2023, the Partnership completed the scheduled drydock of M/V Athos and M/V Athenian and the installation of a Sulphur oxides (“SOx”) scrubber system. In addition, both vessels were retrofitted with a bulbous bow and silyl acrylate self-polishing technology hull coating, which are both expected to improve the energy efficiency of the vessels. The M/V Aristomenis completed its scheduled drydock and was retrofitted with the same upgrades in July 2023. The Partnership has reached a commercial agreement with Hapag Lloyd, whereby the latter will refund part of the total cost of the upgrades to the Partnership.

Sale of Dry Cargo Vessel M/V Cape Agamemnon

On June 27, 2023, the Partnership agreed to sell the dry cargo vessel M/V Cape Agamemnon (179,221 DWT, built 2010, Sungdong Shipbuilding & Marine Engineering Co., Ltd, South Korea) to an unaffiliated party. Delivery of the M/V Cape Agamemnon to the buyer is expected by October 2023. In view of the agreed sale, the Partnership classified the vessel as held for sale and recorded a non-cash impairment charge of $8.0 million.

Russia-Ukraine Conflict

Due to the ongoing conflict in Ukraine, the United States (“U.S.”), European Union (“E.U.”), Canada and other Western countries and organizations have announced and enacted numerous sanctions against Russia, and certain other countries or regions, to impose severe economic pressure on the Russian economy and government. 

Current U.S. and E.U. sanctions regimes do not materially affect the business, operations or financial condition of the Partnership and, to the Partnership’s knowledge, the Partnership’s counterparties are currently performing their obligations under their respective time charters in compliance with applicable U.S. and E.U. rules and regulations. Sanctions legislation has been changing and the Partnership continues to monitor such changes as applicable to the Partnership and its counterparties.

Management Commentary

Mr. Jerry Kalogiratos, Chief Executive Officer of our General Partner, commented:

“In the second quarter of 2023, we successfully completed our latest acquisition cycle, which included three newbuilding 13,000 TEU eco container vessels, each with a ten-year charter attached, and one latest generation LNG/C with a seven-year charter attached. Furthermore, we have completed significant energy efficiency upgrades to the M/V Athos, the M/V Athenian and the M/V Aristomenis, improving the overall efficiency and carbon footprint of our fleet. Finally, we have agreed to sell the dry cargo M/V Cape Agamemnon, a non-core asset for the Partnership, continuing to execute on the strategic renewal of our fleet..”

Unit Repurchase Program

On January 25, 2021, the Board of Directors of the Partnership (the “Board”) approved a unit repurchase program, providing the Partnership with authorization to repurchase up to $30.0 million of the Partnership’s common units, which was effective for a period of two years through January 2023.

On January 26, 2023, the Board approved a new unit repurchase program, providing the Partnership with authorization to repurchase up to $30.0 million of the Partnership’s common units, effective for a period of two years through January 2025. During the quarter ended June 30, 2023, the Partnership repurchased 156,560 common units at an average cost of $13.30 per unit.

The Partnership has repurchased a total of 1,058,030 common units since the launching of the first unit repurchase plan on February 19, 2021, at an average cost of $13.44 per unit.

Quarterly Common Unit Cash Distribution

On July 20, 2023, the Board declared a cash distribution of $0.15 per common unit for the second quarter of 2023 payable on August 8, 2023, to common unit holders of record on August 2, 2023.

Market Commentary Update

LNG market

Despite the seasonal softening of spot and term rates from the highs of the fourth quarter of 2022, demand for LNG/Cs remains strong. As of July 2023, the 174k cbm 1-year Time Charter rate stands at $140,000/day. Overall, analysts expect the term market to tighten as we approach the winter period, particularly for modern vessels, in view of increased commodity demand.

Trade patterns remain consistent, with the bulk of U.S. LNG heading to Europe, maintaining last year’s import levels. Expected LNG trade growth stands at 4.4% for 2023, and 4.2% for 2024, reaching 432.9 million tonnes per annum. Corresponding tonne-mile trade growth is estimated at 4.5% for 2023 and 5.1% for 2024.

Container market

Container market conditions in the first half of 2023 were relatively soft due to weaker trade volumes and reduced port congestion. Freight rates have been fluctuating in recent months but have generally returned to levels closer to historical averages, while vessel charter rates exhibited divergent trends during this period. Rates for larger-sized vessels experienced an increase in the past two months, while rates for feeder vessels followed a more downward trajectory.

The Clarkson’s charter rate index stood at 103 points in the first week of July 2023. Despite decreasing by 76% from the peak of April 2022, the charter rate index remains 102% higher than the average recorded during the 2010-2019 period and 1.8 times higher than the 2019 average.

The container vessel orderbook stands at approximately 27.7%, while by mid-July 2023 about 38 container vessels with approximately 73,400 TEU capacity have been demolished compared with 11 vessels with 15,890 TEU capacity in the full year of 2022.

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