The entire universe of master limited partnerships (MLP) in the transportation of liquefied natural gas (LNG), crude oil, refined petroleum products, other chemicals, dry-bulk shipping and other marine transportation services comprises just five names: Capital Products Partners LP (CPLP), Golar LNG Partners LP (GMLP), Navios Maritime Partners LP (NMM), Teekay LNG Partners LP (TGP) and Teekay Offshore Partners LP (TOO).
We'll start our discussion with the highest-yielding member of the group. Capital Products Partners transports oil, refined oil products and chemicals by sea. Its current fleet consists of 18 product tankers (13 of which are Ice Class, which means their hulls are strengthened to enable them to navigate through sea ice), six crude tankers and one Capesize vessel. The company operates its vessels on a mixture of short- and long-term time charters.
The product tanker market softened over the course of the third quarter, with long-term contracts drying up and spot rates declining as a consequence of weakening global economic growth. One- and three-year time charter rates are down by 7% and 3% since mid-2012, to roughly USD12,500 per day and USD14,000 per day, respectively.
But the case for a gradual recovery for product tankers is supported by a relatively limited number of new ships under construction as well as still-rising demand from Middle Easter and Asian refiners.
Capital Products has a number of ships coming off charter in 2013 and 2014, but its sponsor, Capital Maritime & Trading Corp, has already exercised its options to extend charters for two Suezmaxes at above current market rates and continues to support the MLP's distribution.
Capital Maritime will decide whether to exercise options on two Very Large Crude Carriers; the Alexander the Great this month and the Achilles in February 2013. These options are priced well above current one-year market rates.
Capital Products has three vessels on bareboat charters to Overseas Shipbuilding Group Inc. (OSG) to 2018; OSG filed for Chapter 11 bankruptcy protection last month. The company expects to continue operating through its restructuring, but Capital Products' charters are at above-market rates and could be "marked to market" as part of the bankruptcy proceedings.
Capital Products posted a distribution coverage ratio of 1.16-to1 during the third quarter. This ratio could come under pressure should the restructuring of OSG's obligations result in court-enforced reduction in Capital Products' charter rates. However, Capital Maritime's support should ensure a coverage ratio of at or above 1-to-1 even in a worst-case.
On December 4, presenting at the Wells Fargo Energy and MLP Conference, CEO Iannis Lazaridis noted that the risk of a reduction to its OSG charters had been built into guidance it issued along with third-quarter earnings.
Mr. Laziridis also reiterated Capital Products' commitment to its current annualized distribution level of USD0.93 per unit and noted the continuing support of Capital Maritime. Mr. Lazaridis also noted that the operating environment for petroleum product tanker operators is getting better, albeit at a slow pace.
Although the potential for distribution growth is constrained by the OSG situation, even a modest recovery in the product tanker market would more than offset this drag. The Capital Maritime extensions this month and in early 2013 are of greater significance from a distribution-growth perspective.
Management also noted the possibility of the drop-down of a containership already under time charter. Realization would also provide support for the current distribution.
Although it's organized as a publicly-traded MLP, Capital Products has elected to be treated as a C corporation for tax purposes, which means unitholders receive a Form 1099 and not a Form K-1.
Capital Products' current yield is 13.9%, which clearly suggests the market is pricing in a distribution cut. But management continues to express confidence in its ability to maintain the existing payout level, this confidence built on the support of a solid sponsor in Capital Maritime.
This is an MLP investment for aggressive investors who understand the potential risks: that the OSG bankruptcy could put significant pressure on an already tight distribution coverage ratio and that recovery for the product tanker market could be pushed further out based on global economic developments, including the success or failure of U.S. "fiscal cliff" negotiations.
Meanwhile, Navios Maritime Partners took a steep dive in early November, closing at USD12.11 on November 15 after hitting an end-of-day peak of USD15.78 on November 2. The units have recovered some of that decline but are still priced to yield 13.5%.
That's despite the fact that from an operational perspective, Navios has remained somewhat insulated from the prevailing dry bulk market weakness, with 2012 and 2013 charter coverage at 99% and 83%, respectively.
The MLP posted increased third-quarter revenue on the drop-down of the Buena Ventura, a Capesize vessel, in June and two second-quarter purchases, the Soleil and the Helios, a Panamax and Handymax respectively. The latter transactions marked the first time Navios has ventured away from parent Navios Maritime Holdings Inc (NM) for growth.
Management noted during its third-quarter conference call that it will continue to evaluate the market for growth opportunities and is focused on adding four to six additional vessels using internal funds and 50% leverage.
For the third quarter Navios posted a 15.6% increase in revenue to USD55.5 million, a 33.1% increase in net Income to USD22.1 million and a 21.5% increase in operating surplus to USD35.6 million.
Distributable cash flow per unit was USD0.45, and the MLP declared a distribution of USD0.4425 per unit.
Navios completed USD44 million in new financing in August to partially fund the acquisitions of the Buena Ventura, Soleil and Helios at Libor plus 350 basis points with a maturity of February 2018. The MLP also refinanced its two existing facilities with a new USD290 million facility that matures in November 2017 with an interest rate of Libor plus 180 to 205 basis points.
Combined with the USD52 million cash on hand as of the end of the third quarter, Navios is in a good position to add to its fleet and generate new cash flow.