Capital Clean Energy Carriers Q1 2024 Earnings Call Transcript

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April 30, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to the Capital Products Partners Q1 2024 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer Mr. Spyros Louausis, Chief Commercial Officer and Mr. Nikos Kalaparathos, Chief Financial Officer of the company.

Operator

At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press star 1 on your telephone and wait for your name to be announced. I must advise you this conference is being recorded today, April 30, 2024. The statements in today's conference call that are not historical facts, including our expectations regarding acquisition transactions and their expected effect on us, cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts or unit buyback 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 also be forward looking statements as such defined in Section 21E of the Securities Exchange Act of 1934 as amended.

Operator

These forward looking statements involve risks and uncertainties that could cause these 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 conform to actual results or otherwise. We make no prediction or statement about the performance of our common units. I would now like to hand over to your speaker today, Mr. Cali Girotta.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Paul, and thank you all for joining us today. As a reminder, we'll be referring to the supporting slides available on our website as we go through today's presentation. The Q1 of 2024, we did delivery of the LNG carrier Axios II, the second delivery under our agreement to acquire 11 latest generation 2 stroke LNG carriers. Moreover, we concluded the sale of 2 container vessels, recognizing a gain on sale of 16,400,000 Furthermore, we announced the sale of 3 10000 TEU containers and 2 Panamax container vessels. Turning to the partnership's financial performance, net income for the Q1 of 2024 was 33,900,000 or 17,500,000 excluding the gain on sale of vessels.

Speaker 1

Our Board of Directors has declared a cash distribution of $0.15 per common unit for the Q1 of 2024. The Q1 cash distribution will be paid on May 14 to common unitholders of record on May 7. Finally, the Partnership's current fleet charter coverage for 2024 and 2025 stands at 100% 82% respectively with the remaining charter duration corresponding to 7.3 years contracted revenue backlog of $2,800,000,000 Turning to slide 3, total revenue for the Q1 of 'twenty four was $104,500,000 compared to $81,000,000 during the Q1 of 'twenty three. The increase in revenue was primarily attributable to the revenue contributed by the new building vessels we acquired between February 2023 January 2024, partly offset by the sales of our sold Capesize vessel in the Q4 of last year and the 2 containers during the Q1 of this year. Total expenses for the Q1 of 2024 were 54,900,000 compared to 45,100,000 in the Q1 of last year.

Speaker 1

Total vessel operating expenses during the Q1 of 'twenty four amounted $22,700,000 compared to 19 300,000 during the Q1 of 'twenty 3 and were higher mainly due to the net increase in the average size of our fleet. Total expenses for the Q1 of 'twenty four also include vessel depreciation and amortization of $24,000,000 compared to $19,200,000 in the Q1 of last year. The increase in depreciation and amortization during the Q1 of 'twenty four was mainly attributable to the net increase in the average size of our fleet. General and administrative expense for the Q1 of this year increased to $4,400,000 from $2,800,000 in the same quarter last year, mainly attributable to certain one off costs we recognized in connection to our equity incentive plan. Interest expense and finance costs increased to 34 $1,000,000 for the Q1 of 'twenty four compared to $23,700,000 for the Q1 of last year.

Speaker 1

The increase was mainly attributable to the increase partnership's average indebtedness and the increase in the weighted average interest rate compared to the Q1 of 'twenty 3. Average interest rate for the quarter amounted to 7%. The Partnership's recorded net income of 33,900,000 dollars or $17,500,000 excluding the gain on sale of vessels for the quarter compared to net income of $10,000,000 in the same quarter of last year. Net income per common unit for the quarter was $0.61 or $0.32 excluding gain on vessel sales compared to $0.49 per common unit in the first quarter of last year. On Slide 4, you can see the details of our balance sheet.

Speaker 1

As of the end of the Q1, the partner's capital amounted to $1,204,000,000 an increase of $29,000,000 compared to $1,175,000,000 as of the end of 2023. The increase reflects net income for the Q1 of this year, other comprehensive income and the amortization associated with the equity incentive plan of 2,600,000 partly offset by distributions declared unpaid during the period in a total amount of 8,300,000 Total debt increased by $156,000,000 to $1,944,000,000 compared to $1,788,000,000 as of year end 2023. The increase is attributable to the assumption of 190,000,000 of bank debt and 92,600,000 of seller's credit in connection with the acquisition of the LNG carrier Axios II in January of this year, partly offset by the $7,200,000 decrease in the U. S. Dollar equivalent of the euro denominated bonds issued by the partnership, the scheduled principal payments for the period of 28,500,000 The early repayment in full of the facility we entered into to partly finance the acquisition of Academos and the partial prepayment of 52,800,000 of the seller's credit we drew to partly finance the acquisition of LNG carrier Axios II.

Speaker 1

Total cash flows at the end of the quarter amounted to 157,700,000 including restricted cash of 11,200,000 which represents the minimum liquidity requirement under our financing arrangements. On slide 5, you can find an update on the progress of container vessel sales. As mentioned earlier, during the Q1 of 2024, we successfully sold and delivered the containers Long Beach Express and Academos. In April 2024, we also completed the sale of the container vessels AFOS, Afinian and Seattle Express. Finally, we expect to complete the sales of the Aristomenes and the Force Express in early May.

Speaker 1

From the sale of these 7 container vessels, we expect net proceeds after debt repayment of approximately 182,500,000. So far for the net proceeds of approximately 144,000,000 received from the vessels delivered already to the new owners, we have used $92,600,000 to repay in full the amount we drew under the seller's credit for the acquisition of the LNG carrier Axios II. Under the umbrella agreement and the provisions of the seller's credit, any sale proceeds net of debt repayment are applied first towards repayment of any balance outstanding under the facility. Moving to Slide 6, the partnership's contracted revenue backlog stands at $2,800,000,000 with over 85% of contracted revenue coming from LNG vessels with a highly diversified and high quality customer base of 10 shutters. This is excluding the 7 container vessels we have sold or agreed to sell.

Speaker 1

On slide 7, you can see the charter profile of our LNG fleet. We have a contracted backlog of 76 years at an average daily rate of 88,500 which could increase to 111 years if all options were to be exercised. I should stress that we have no open vessels between now and Q1 of 2026. In we have 4 LNG carriers coming up for delivery from the shipyard and one being redelivered from its shutters in the Q4 of 2026. In 2027, we have an additional 2 vessels being delivered from the shipyard in the Q1 of the year and potentially one additional vessel coming up for renewal in the Q4 2027 if its charters do not exercise certain options.

Speaker 1

These vessels are expected to be seeking employment when the new wave of about 170 MTPA of additional new liquefaction capacity is expected to come online between 20262028. We estimate that these projects alone, which have taken FID and export permits, will require between 190 and 220 additional vessels, with only 156 vessels due for delivery during that period. This is without taking into account the replacement of older technology vessels and in particular steam turbine vessels which are expected to generate substantial incremental demand for 2 stroke vessels like ours. Currently, we count only 31 vessels in the order book between now and 2028 that are not committed to a certain project, with CPLP controlling 6% or about 20% of these uncommitted vessels. On Slide 8, you can see the charter expiration of the container fleet.

Speaker 1

Once all agreed sales are complete, we will have sold a total of 7 container vessels, leaving us with a fleet of 8 vessels. Our contracted backlog on the container fleet spans 32 years at a weighted average daily rate of 38,200 and could increase to 51 years if all options are exercised. We continue to seek to divest opportunistically from containers, provided we deem the sale price reasonable in view of the contracted cash flows, our market views our expectations with regard to residual value. And with this, I will pass on the floor to our Chief Commercial Officer, Mr. Lewis.

Speaker 2

Thank you, Thierry. So turning to Slide 9, we review the LNG market. After a period of historically high rates following the start of the Russian and Korean conflict, rates are normalizing towards 3 world levels. Warm weather and high gas storage levels in Europe and Asia have led to decreased demand for LNG, causing spot rates to weaken. This, combined with

Speaker 1

prolonged availability of vessels throughout the year, has kept tanker rates lower than previous year. For the year, have kept charter rates

Speaker 3

lower compared to

Operator

previous year.

Speaker 3

Sport rate for

Speaker 1

Tustro Peso averaged $58,370 per day

Speaker 2

in Q1 2024, with the average 1 year time charter charter rate hovered around $76,000 per day. On the other hand, the 3 year time charter stands today at $85,000 per day, while for longer periods, as for example for 5 years, rates are even higher, indicating that the market is pricing in and anticipate tightening from 2026 onwards. Geopolitical disruptions are key for the electric carrier sector and while we are yet to see any major upside movement for day rate, we expect high volatility later in the year. LNG carrier transits through the Panama Canal remain highly limited with just 4 ships having transitioned since start of February. At the same time, no LNG vessels have crossed the Suez Canal since January 16.

Speaker 2

Overall, it is fair to say that the LNG shipping market appears more balanced for 2024 and 2025 with multiple new buildings being delivered and only incremental new LNG volumes coming online. Charter markets for 2 sub vessels are expected to remain generally healthy in 2024 and 2025 due to the attractive unit freight cost they offer compared to DFT and steam turbine vessels as well as environmental benefits that deliver to charters as EU ETS, CII and other regulations start to have an economic and reputational impact on LNG charters. Global LNG import remains strong at both basins, with China continuing to import at seasonal records. Overall, ton miles have been higher in Q1 this year versus last year due to a close West Canal and limited use of the Panama Canal. Total gas in storage also remained high and with the recent mild climate conditions putting further downward pressure on gas demand, Europe has finished the winter period with near record levels of inventories.

Speaker 2

Russian gas supply to the EU is now at less than 2,000,000 tons per month. Finally, the LNG fleet order book currently stands at approximately 50% of the total fleet, encompassing 332 vessels on order. Fleet years responding to heightened demand find themselves mostly fully booked throughout 2027. Appetite remains high for LNG carrier newbuilds following elevated contracting activity across 20212023 with 44 newbuilding orders being placed in Q1 2024. 35 orders were part of the second phase of ordering for the Qatar expansion And with Qatar related orders now complete, the pace of ordering for the remainder of the year is expected to be slower.

Speaker 2

Looking at liquefaction projects, in March, NextDecade announced plans to take FID on a 4th train for Rio Grande LNG in the second half of twenty twenty four. The company took FID on Phase 1 of the project last year, comprising 3 trains of 5.4 MTPA each, which is currently expected to come online in 2027. And with this, I'll pass back to Jerry.

Speaker 1

Thank you, Spiro. Now to the final slide, Slide 10, you can see an updated timeline of the transaction we closed in Q4 of 2023 for the acquisition of the 11 LNG carriers. We have so far taken delivery of 2 LNG carriers, the Amore Mio-one and the Axios-two. We have sold 5 container vessels and agreed to sell another 2, while we continue with our LNG carrier shipbuilding program. Looking ahead, we are focused on taking delivery of the next 3 LNG carriers, which are expected at the end of May, early June July, And of course, we continue to make progress with the conversion of the partnership with the corporation as previously communicated, which we expect to conclude over the coming months.

Speaker 1

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

Operator

Thank you. We will now be conducting a question and answer session. Our first question is from Omar Nakhta with Jefferies. Please proceed with your question. Thank you.

Operator

Hi, Jerry and Spiro, good afternoon. Thanks for the update. Just a couple for me. Maybe just one on the firstly on the last comment you made, Jerry, just regarding the corporate conversion. Still making progress, expecting that in the coming months.

Operator

Just wanted to check-in sort of timing of that. I know you had put a target of, I think, June 20 or 21. Is that still feasible? Is that still realistic? Or you think it's going to be pushed out a little bit?

Speaker 1

It feels thank you, Omar. It feels that we should be able to be done by that date or at least communicate the outline of the new corporate governance and the conversion. There are still a few things to iron out, including whether we will need a unitholdershareholder vote for the approval of the conversion, which seems quite likely. So I would expect that we will be able to announce our plan sometime in June or thereabouts, maybe slip by a few weeks, but nothing material and then go into the shareholder vote.

Operator

Okay. Thank you. And then maybe just a couple more, just kind of on the vessel specific, I just wanted to ask on the Axies 2, you took delivered that earlier this year. That's going to go on a contract long term. But before it starts that, it's doing a 12 month on a spot linked contract or index linked.

Operator

Just wanted to ask, what are the mechanics of that contract? Is that the is it spot linked or is it linked to like the time charter assessments? And is there a collar like a basin or a basin ceiling? Any color you can give on that?

Speaker 1

Sure. The it's a 12 month index related charter. It's fully floating. So it is based on 2 Baltic the average of 2 Baltic indices. Axios in the Q1 has earned a cash DC which is slightly lower than the market that was around $45,000 per day because under the charter party the 1st 12 days of the quarter, she did not any higher until she was delivered to its shutters.

Speaker 1

For April, she has recorded on average around $49,000 per day, always on the back of the 2 average indices. But as you know, the spot market for LNG carriers is highly volatile and highly seasonal. Today, if you look at the second, 3rd and 4th quarter forward rates for the same indices, you would be around 55,000, 78,000, 140,000 per day respectively. So we are going through now the seasonal low, but the market has feels already tighter and we expect that it will start picking up as we go into the summer months.

Operator

Okay. Thanks, Gerry. And then just to double check that those indices, I'm not saying that we're going to go there again, but they had been showing 200,000, 300,000 back when things were on fire in 2021 and 2022. If we were to see that type of index rate, is that sort of achievable for you guys?

Speaker 2

No. I think, look, going forward, I mean, for the other vessels, we would be looking at fixed rates like the floating rate. I think it was kind of a bit opportunistic play from us because we had only 1 year opening. But the priority for the other vessels is to fix at longer term rates as we have with all the fleet, including Axios from January from starting start of next year.

Operator

No, I appreciate that. And I was just checking just on the access itself specifically if the index were to hit, say, 200,000, you would that basically translate into the TC for the ship?

Speaker 2

Yes, of course. Yes, yes. Sorry, yes, that's of course. Yes, that's it's a fully floating. As Jerry said, I mean, that's fully floating index, so that's the way it would work.

Operator

Okay. All right. Thank you. And then maybe just a final one on the remaining containership vessels. What's the liquidity look like in the S and P market?

Operator

So those clearly you've been fairly active and you were able to move a bunch of vessels already. What does it look like or what's the appetite look like you think for the remainder?

Speaker 1

The container market as you know has been feeling also quite tight as of late. Charter rates have been moving up and especially for Panamax and Post Panamax container vessels. As a result, you have seen this momentum also being reflected in asset values and also in appetite of buyers, be it trampled owners or liners to acquire more tonnage. We have seen increasingly higher period rates, I mean longer period rates and higher period rates and as well as asset values. We have, I think, so far taken advantage of this momentum with all our container charters, they have long term charters.

Speaker 1

So it's either a bet on the residual or more of a momentum buying. So I think we have been quite good in taking advantage of that. In terms of the remaining vessels, now these are all very high quality assets. We have the 5,000 TEU wide beam container vessels. Effectively, if you were to order ships today, you would get the same design.

Speaker 1

So these are actually quite attractive assets for charters and buyers alike. And I should also say here that these 5,000 TEU vessels do not have any debt, so they are debt free. And then we also have the 313000 TEU brand new, again, Nico White Beam, dual fuel ready LNG carriers that have a long term charter to Hapag Lloyd. They have another 9 years or so. Given the tenure of the remaining chapter, I think these are this is more of a cash flow transaction and less of kind of your typical secondhand container transaction.

Speaker 1

So there is no lack of interest for sure. For us, we are not in a hurry. We do see people approaching us on these assets, but I think we are going to be quite patient until we see what we think we should be realizing in a market residual. So I think we have done the bulk of it. Now we will be looking for good opportunities to divest from the remaining assets.

Operator

Okay. Thank you. Thanks for the update. Thanks, Jerry. Thanks, Biraj.

Operator

Thank you, Omar. Our next question is from Ben Nolan with Stifel. Please proceed with your question.

Speaker 3

Hi, guys. Going back, I think maybe to Omar's first question about the timing of transition and so forth, Appreciate the color that you did give, but as you guys have gotten closer, is there anything more that you can let me know about how you are thinking on the dividend or the capital return policy just as we are sort of getting close to that time?

Speaker 1

Thank you, Ben. That's a fair question. The truth is that I think we will leave this decision for after the conversion. What I can say and I think that echoes the overall view of the Board is that the idea is to move at some point in a more flexible type of payout and slightly different capital allocation policy that could involve a fixed dividend plus some share of net income or free cash flow generation. But with regard to the exact structure of the payout, when it will start and those details, I'm afraid I cannot give more detail right now.

Speaker 1

I think we'll wait for a final decision for the Board, which I presume will be definitely within this year and post conversion.

Speaker 3

Okay. And then secondly, on the container sales. The 313,000 TEU ships have super long contracts on them. Are those I don't know, I guess I'm curious if you view those as sort of also for sale or given the contracted nature of the assets that maybe they are still a fine fit within the broader portfolio?

Speaker 1

I think just like the other vessels, we are perfectly happy to sit with those vessels going forward. We know these are good assets and there will be an opportunity to at some point to reach out or divest. So we are I mean, the decision is that was taken was not to enter into the container segment. The strategy is to focus on LNG and energy transition gas, right? So ammonia, LPG, liquid, CO2 and so on and so forth.

Speaker 1

So no more containers. However, I think that the timing of potential sale is contingent 100% on whether we believe that the valuation we are getting is a reasonable price. And as you say, especially for these 13,000 TEU containers with the long term charters, the contracted cash flows and maybe where the valuations may be more a little more contingent on movement of interest rates rather than anything else. I think we would be also perfectly happy to have them in the background to generate cash if we don't find a reasonable bid.

Speaker 3

Okay. And then lastly for me, as it relates, Sune, you just mentioned the ammonia carriers on the private side, the multi gas or CO2 carriers. Curious if you have contracts in place on those or if you can if not or maybe even if you do, if

Operator

you can give a little

Speaker 3

bit of color on sort of what you're seeing in the market in

Speaker 2

terms

Speaker 3

of customer appetite to put assets like that on long term charter or is it still in development stage and probably have to get closer to delivery to know what sort of business those assets will have.

Speaker 1

In terms of the overall exposure of Capital Maritime as far as the other gas sectors are concerned that comprises 6 MGCs or medium gas carriers, LPG ammonia carriers that is and the 4 liquid cell 2 carriers, so which are effectively handy multi gas or in a more generic way LPG carriers that can also carry liquid S2 because of their separate cargo system and strengthened tanks and other functionalities. And then there is also the 2 very large ammonia carriers. So overall, we have had dozens of discussions around the world and literally, I mean around the world from the U. S. To Europe to the Asia Pacific region regarding let's say the new trade.

Speaker 1

So apart from your usual LPG ammonia trade, both in terms of how the maritime transportation of liquid CO2 carrier of liquid CO2 is going to be done in the different regions on what is dependent, what are the drivers, who are the customers and about and we had similar discussions for the ammonia, that is especially the transportation of green and blue ammonia. Overall, there is dozens of projects on both sides that are moving ahead and are materializing at different levels of maturity. Overall, I would say that the timeline for those would be 2027, 2028 onwards. And then you can see almost a snowball effect from there. The very interesting thing is that some of these projects are led by independent operators or investors, But the bulk of these projects are being moved along by existing clients of ours.

Speaker 1

So that is energy companies, utilities, traders and so forth. So we are and also this is very much part of the strategy that we have going forward. The ability to sit at the table and have a discussion with an energy company or utility across all these different segments. So, we would discuss an LNG carrier and then move on to the liquid CO2 or via the carriage of blue or green ammonia. And this has happened multiple times.

Speaker 1

So it is still early to say whether we can I mean, we can fix today long term charters for this type of trades, although we have had and we continue to have discussions? I think the demand will, as I said, will be much higher from 2027, 2028 onwards. But because of the fact that some of these customers have multiple trades, including for example LPG, current gray ammonia trades, they might be able to for example to charter in vessel long term in 2026 and then use it in one trade for a while and then move it to another trade. So right now, I would say that the base case is that these, let's say, multi gas carriers, LPG carriers or ammonia carriers will start with the conventional trades and start moving into the, for the lack of a better word, energy transition trades from 2027, 2028 onwards.

Speaker 3

Appreciate it. Thanks Gerry. Thanks.

Operator

Our next question is from William Burke with B. Riley Securities.

Speaker 4

Jerry, as you go through the conversion from an MLP to a corporate, is there any hiccups with the lenders? Or are they comfortable with the transition?

Speaker 1

No. In reality, there is no material change to the company other than the, let's say, the corporate structure. So we don't for see any issues with the lenders or our bond holders going forward.

Speaker 4

Great. And on the 6 newbuilds, are there

Speaker 2

does there seem to

Speaker 4

be an appetite for longer term contracts there, especially when you're looking at a significant amount of the fleet being less efficient steam turbine?

Speaker 2

Yes, I think, as you said, I mean, we see some activity now. Obviously, the current market doesn't help, but we still have a lot of time. If we had to guess, I would say that our vessels will probably go to a field replacement project as we see that there will be significant demand as you said from replacing steam turbines to with newer fleet, especially as people start to realize the effect of EU ETS and CII under relevant schemes?

Operator

Our next question is from Clement Mollins with Value Investor Edge. Please proceed with your question.

Speaker 5

Good afternoon. Thank you for taking my questions. Following up on Liam's question on the unfixed newbuilds, could you talk a bit about the terms currently being offered? And secondly, is there any appetite to potentially forward fix some of them over the next year?

Speaker 1

Yes. Let me pass this on to

Speaker 2

hi. So I think the strategy is we're always open to discussions. I don't think we can actually discuss specific terms as the discussions are a bit premature at this stage. We foresee that there should be some activity during the next year, but for sure the target is to fix the vessels before we get delivery. And pass to Jerry.

Speaker 1

I think the important thing is what we said during the call that in reality there are very few available ships for longer term period. And you see today 1 year or 3 year or some 3 year deals that are done at lower levels, but these are all relays from existing charters as they wait for their projects to take off. But in reality, when you look at 5 years or longer, there is there are effectively no relays because their current charters know that they will need the vessels going forward. And so your competition, if it's not available ships, is going to be newbuilds. And then you look at newbuilding prices at $260,000,000 plus for a basic spec.

Speaker 1

Often today, CPLs will require you to pay 15%, 20% upfront for delivery at the end of 'twenty seven, early 'twenty eight. And then the additional milestones which will end up resulting in delivered cost together with supervision of close to $300,000,000 So if you look at let's say a financing of 75%, 80%, 85% on a vessel like that, and then you bake in a decent even a single digit return on your equity, then you will find that the guys that will be ordering vessels in order to fulfill new requirements as they come up, be it replacement or inquiries related to new projects. They will have, let's say, a breakeven for single digit equity returns in the $90,000 to $95,000 per day area. So this I think will kind of create a natural floor to the long term market because this is going what to set the rate, the long term rate going forward. That is the lowest common denominator in terms of cost of capital if they order a new building for a new project.

Speaker 1

So, that's a long way to say that we see that there's going to be a floor in the mid to low 90s for the long term market. And if our expectations with regard to vessel demand materialize that is we expect the demand for new projects, FID projects to be much more than the ordered ships plus of course the replacements of older technology vessels, then we can see a much tighter market, which of course will be well above $100,000 You know, that I hope that kind of gives you an indirect answer.

Operator

It does. It does.

Speaker 5

That's helpful. Thank you. Most has already been covered, but I also had a question more on the modeling side. Could you provide some commentary on the remaining CapEx you had outstanding for the LNGCs as of the end of the quarter?

Speaker 1

So effectively, we have remaining 9 LNG carriers with 3 of these to come until July, so May, June, July. In terms of the total CapEx, let me give you a number offline. It should be around €2,500,000,000 but let me also drop me a line, I'm happy to confirm the exact number.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Mr. Jerry Kalogor Oslin for any closing comments.

Speaker 1

Great. Thank you, Paul, and thank you all for joining us today.

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Capital Clean Energy Carriers Q1 2024
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