Capital Product Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript

 |  About: Capital Product Partners L.P. (CPLP)
by: SA Transcripts


Thank you for standing by and welcome to the Capital Product Partners’ first quarter 2013 financial results conference call. We have Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the Partnership.

At this time, all participants are in a listen-only mode. After the presentation followed by question-and-answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone.

I would like to remind you, this conference is being recorded today Tuesday, April 30th, 2013. The statements in today’s conference call that are not historical facts, including our expectations regarding the developments in the markets, our expected charter coverage ratio of 2013 and 2014, and expectations regarding our quarterly distribution may be forward-looking statements, such as defined in Section 21E of the Securities Exchange Act of 1934, as amended.

These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we express 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 to actual results or otherwise.

We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units.

I would now like to hand the call over to your speaker today, Mr. Lazaridis. Please go ahead, sir.

Ioannis Lazaridis

Thank you, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today’s presentation.

Starting with slide one, I’m going to make some comparison on today’s call between the first quarter of 2013 and the first quarter of 2012, as this is the most meaningful analogy in our business.

On April 22, 2013, our Board of Directors declared a cash distribution of $0.2325 per common unit for the first quarter of 2013, in line with the managements annual distribution guidance. The first quarter common unit cash distribution will be paid on May 15, 2013 to unit holders of record on May 8, 2013.

The partnership’s operating surplus for the quarter amounted to 22.6 million or 17.3 million adjusted for the payment of distributions to the Class B unit holders, following the issuance of 24.7 million Class B convertible preferred units during the first quarter of 2013 and the second quarter of 2012.

As announced, on March 15, 2013, the partnership issued 9.1 million Class B unit which are convertible at any time into common units for the partnership on a one-for-one basis. The Class B preferred units will pay fix quarter distribution of 213.75 a unit.

The partnership used a network from the issuance of the Class B unit together with approximately $54 million of the existing third facility in part of its cash balances for the acquisition two 5,000 container vessels which have been fixed for the 12-year charter employment to Hyundai Merchant Marine or HMM at the gross rate of $29.350 per day.

At the end of the first quarter, we fixed the medium rate product tanker MT Agamemnon II at an increased rate of 14,500 a day for12 months with our sponsor of Capital Maritime which commends in late March 2013.

On February 28th, we announce that CPLP have agreed to enter into new charters with OSG on substantially the same terms of the prior target but at bearable rate of $6,250 per day. Importantly, CPLP has reserve its rights to make claims as the result of the difference between the reduced amount of the new charter and the amount due under each of the rejected charters of $13,000 per day as well as additional cost related to the charters.

As of the end of the first quarter, the average remaining charter division of the partnership stands at 7.1 year with charter coverage of 88% for 2013.

Turning to slide 2, revenues for the first quarter of 2013 were $40 million, including 0.3 million in profit sharing revenues. Total expenses for the first quarter were 28.9 million compared to 28.6 million in the first quarter of 2012.

The vessel operating expenses for the first quarter of 2013 amounted to 12.6 million for the commercial in technical management of our fleet. The total expenses for the first quarter of 2013 also include 11.9 million in depreciation compared to 12.2 million in the first quarter of ‘12.

General and admin cost for the first quarter amounted to 2.6 million which includes 1.2 million non-cash charge related to the partnerships on the incentive compensation plan.

In the first quarter of ‘13 we reported again from bargain purchase of $17.5 million related to the purchase value of the motor vessel Hyundai premium and the Hyundai Paramount which were acquired by the partnership on March 20 and 27, 2013 respectively as a fair value of the vessels at an attached time charter exceeded the purchase consideration.

Total other expense net for the first quarter of 2013 amount to $3.5 million compared to $8 million for the first quarter of ‘12. The decrease in the interest expense and final scores for the first quarter reflects expiration of certain interest rate swap and the reduction of the partnership’s total debt when compared to the first quarter of ‘12.

The remaining for these swaps, we had in place at the end of 2012 expired by the end of March again and all our debt currently is on floating rates. The partnership’s net income for the quarter was 25 million including a million and a half gain from bargain purchase I discussed earlier.

After taking into account the 5.3 million preferred interest in net come attributable to the unit holders of the outstanding Class B units, the results of the quarter ended March 31, was $0.28 net income, the limited partnership unit which is $0.83 cents higher than the $0.55 net loss per unit of the previous quarter ended December 31, 2012 and $0.23 higher than the $0.05 net income per unit in the first quarter of 2012.

Prior to taking into accounts of preferred interest in income attributable to the Class B unit holders as they gain from bargain purchase, the result, the limited partnership unit for the first quarter of 13 was a net income of $0.11, the limited partnership unit compared to net income of $0.05, the limited partnership units in the first quarter of ‘12.

Moving on to slide 3, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter.

Operating surplus is a non-GAAP financial measure which is defined fully in our press release. Having certain non-cash items back to net income, we have generated approximately 22.6 million in cash from operations before accounting for the Class B preferred units distribution.

After adjusting for the Class B unit’s distribution, the adjusted operating surplus amounted to 17.3 million which translates into approximately 1.1 times common unit coverage.

Please note that the first quarter results do not include the full impact of the two 5,000 TEU container vessels as these were delivered to the partnership at the end of the first quarter of ‘13.

On slide 4, you can see the details of our balance sheet. As of March 31, the partners capital amounted to 653.2 million which is 79.4 million higher of the partner’s capital as of December 31.

We think this primarily reflects the issuance of the 9.1 million Class B units which raised gross profit of approximately 75.1 combined with a payment of 19.8 million in distributions since December 31 and the net income for the first quarter of 2013.

As of March 31, the partnership’s total debt has increased by 54 million to 512.4 million compared to total debt of 458.4 million as of December 31 as the result of the draw down on the partnerships credit facilities during the first quarter in connection with the acquisition of the 5,000 TEU container vessels.

Overall, our balance sheet remains strong, with a net debt to cap ration of 39.7% and with partners capital representing 54.4% of our balance sheet.

Turning to slide 5, you can see our fleet list. The partnerships average fleet dates starts at 5.7 years and comprises of 18 product tankers for Suezmax crude tankers for post panamax container vessel and one Capesize bulk carrier.

The young age and high specification fleet as well as the oil major qualifications for long term employment of our sponsor and its extensive network of relationships with charters and liners, are distinct, competitive advantages for the partnership specially into this market with the increased focus on safety, security, efficiency and financial strength.

Turning to slide 6, following the acquisition of the two 5,000 TEU container vessels with 12 year charters to HMM, and the employment of Agamemnon II at an increased rate of $14,500 per day for 12 months to our sponsor, the average remaining charter division is 7.1 years.

An additional nine vessels we’ll see the charters expire in 2013 with eight of them being product tankers that are fixed at an average rate of $13,900 per day approximately.

All but one of the product tankers are chartered to our sponsor capital maritime. The fixtures at the product tanker market recently have been at slightly high levels than this average.

And we expect to take advantage of the attractive fundamentals of the product tanker market, the increased activity in terms of period fixtures as well as the improving spot and period market to secure favorable employment for these vessels.

Turning to slide 7. Capital Maritime & Trading has provided us with certain unaudited balance sheet information as the currency [ph] light of the percentage of revenues attributable to capital maritime for the period which amounts to 33% of our total revenues and has undertaken no obligation to provide additional information.

Capital Marital & Trading Corp is a private profitable diversified shipping company. Having divested a large number of vessels in the last few years, it currently owns five tanker vessels all trading in the spot market or on spot related suppliers.

Also has a presence in the dry bulk and container markets to the ownership of two bulk carriers to 1700 TEU container vessels and an additional vessels to the partnership’s 5,000 TEU containers with identical 12 year charters to HMM.

One of the three 5,000 TEU container carriers has been delivered earlier this year to Capital Maritime and then another two are due for delivery during the second quarter of 2013.

Under this new building order, Capital Maritime has paid all pre delivery installment and it has financed in place for the delivery of the remaining vessels.

Capital Maritime boasts a strong balance sheet with low leverage. Total assets amounted to circa $841 million, at the end of 2012 and the total stockholder’s equity at the end of 2012 stood at approximately 65% of the total assets.

The net debt as a percent of the market value of its vessels, is approximately at 25% currently.

Capital ship management our technical managers enjoy an excellent operational safety and developmental track record and is recognized by tanker dry bulk and container charters as well as suppliers and shipyards worldwide.

Capital ship management has developed a global network of commercial crew and emergency officers that allow us to compete effectively and build a strong reputation in the market. It has a long history operating our vessels efficiently without compromising safety and at the same time, achieving minimal of hire days.

Capital ship management’s onshore and offshore personnel have a lot of experience in the segments we operate and the retention ratio of our crews keep the [inaudible] for charters everywhere, is above 90%.

Our offices have been successfully vetted by all major charters and we have received accreditations for quality assurance by Lloyds Register, for our systems and procedures.

Capital Ship has also a very strong reputation of a technical expertise it brings on building new vessels, a very important factor in our performance over the years.

All of the above are significant benefits for CPLP, the relation to our sponsor allows us to be able to maximize the vessel employment while maintaining cost below, without compromise to safety of the environment.

Turning to slide 8, the partnership as I mentioned, acquired on March 20 and 27 respectively with the Hyundai Premium and Hyundai Paramount to 5,000 TEU containers for a total consideration of $130 million.

Both vessels are 2013 built at Hyundai Heavy Industries. They were originally ordered by Capital Maritime, and were built with the latest fuel efficient and eco friendly design. Both vessels have secured a 12-year time charter employment to HMM at the gross rate of $29,350 per day.

HMM is a public related global logistics company with approximately 160 operating vessels and enjoys a long history and strong reputation in the shipping and container markets.

Turning to slide 9, the consideration paid for the acquisitions of the two 5,000 TEU container carriers, was financed by 75.1 million in additional Class B units issued to a number of our existing shareholders including our sponsor, 54 million drawn under our existing credit facility and part of the partnership’s cash balance.

This transaction further diversifies CPLP’s counter party portfolio, it significantly extends the partnership’s average charter duration and at the same time provides, create visibility to the sustainability and future growth of the current $0.93 annual distribution guidelines.

Turning to slide 10, we announced on the 7th of January 2013 that the partnership acquired from capital maritime on December 22, 2012 two Panama container vessels. Both the motor vessel Archimidis and the motor vessel Agamemnon are employed on time charters and industry leader in Maersk line at a gross day rate of $34,000 per day.

Maersk have the option to extend the charter of both vessels for an additional four years.

If all options were to be exercised, the employment of the vessels would extend to July 2019 for the motor vessel Agamemnon and December 2019 for the motor vessel Archimidis.

Turning to slide 11, I would like to remind you that the partnership has reached an agreement with overseas ship holding group or OSG and certain of OSG subsidiaries regarding the long-term new charters of three of its product tanker vessels.

On November 14, 2012, OSG made a voluntary filing for relief on chapter 11 in the US Bankruptcy Court for the districts of Delaware. And it is currently subject to bankruptcy proceedings.

CPLP has three IMOII/III chemical product tankers all built in 2008 with long-term built contracts to subsidiaries of OSG. This bareboat charters have scheduled terminations in February, July and September of 2018 respectively and have bareboat rate at $13,000 per day a substantially above current market rate.

CPLP has agreed to enter into a new bareboat charters with OSG on substantially the same term and duration as a prior charter but at the bareboat rate of $6,250 a day. We have the option of extending the employment of each vessel following the completion of the bareboat charters for an additional two years on a time charter basis at the rate of $16.5 per day.

Under the terms of the agreement between CPLP and OSG, the new charters for Aristotelis have commenced retroactively as of March 1st, 2013 while in the case of Aristotelis II which was delivered back to CPLP on January 22.

No payment and guarantee obligation still arise prior to the completion of its try out and we deliver to OSG was expected in early 2013.

The retraction of the original charters constitutes a material breach of such charter and CPLP is reserving its rights to make claims as a result of the breach for the difference between the reduced amount of the new charters and the amount due under each of the reject charters as well as other related cause.

No assurance can be given that we will be successful in pursuing our claims in the proceedings.

Turning to slide 12, we review there the product tanker market development in the first quarter 2013. The average spot earnings for the first quarter of 2013 continues their fourth implement as average earnings in the first quarter, and it’s the highest level since the fourth quarter of 2008.

Demand of product tankers was particularly strong in the Atlantic market due to increase arbitrage opportunities in the Atlantic basin as well as stronger demand from South America and West Africa and increase oil product exports from their face.

A product tanker period market remains active with approximately 56 fixtures in the first quarter of 2013 similar to the first quarter of 2012.

Failure rates have been gradually improving over the last six months or their one year and three-year time chart rates increasing by approximately 12.5% in the summer respectively on the knot of a stronger spot market.

Analysts expectations regarding overall demand for product tankers have been revised up to 4.6% for 2013 as structural changes in the refinery industry would increase refinery capacity being established [inaudible] and increase extras from the US Gulf are expected to result the increase, long-hold product movement and decrease on miles.

On the supply side, net fleet growth for medium range and handy-sized product tankers for 2013 is forecasted to be in the region of 3.3%.

The product tanker and other book continue to experience substantial slippage during 2012 as approximately 57% of the expected medium range and handy size tankers, new buildings were not delivered on schedule.

Slippage remains substantial into the first quarter of 2013 is 33% of the expected tanker. New buildings were not delivered on schedule. We believe that the current low medium range product tanker order book is 12% of the total freight in combination of the demand fundamentals and the order book slippage should positively affect spot period charter rates going forward.

Turning to the last slide, we’ll discuss the Suezmax tanker market, which is the only crude market exposure we have. As soon as spot market remain exceptionally low level of the increased vessel supply continued to put down pressure on rates is starting cargo activity towards the end of the quarter.

The IEA forecast of global demand growth for 2013 is little change at 795,000 barrels per day to 90.6 million following slightly lower than expected first quarter ‘13 demand. A projected contraction in OCD demand led predominantly by Europe partially offsets growth counselor.

Suezmax tanker DWT demand is expected to grow by 4.3% for the full year of 2013 on the part of increasing market share for Suez markets on traditional Marks roots while we expect nice growth for the year of 7.4%

On the supply side, 2013 must the last year of substantial deliveries. The total order book now sends after 3.8% of the freight. However, slippage continues to affect demand and supply of approximately 34% of the expected crude new buildings in 2012 that are not delivered on schedule.

Slippage failed to 16% for the first quarter of 2013. Further in the [inaudible] expected slippage and cancellation rate to increase going forward to historically weak spot market, the soft chipping environment and downward pressure on asset values.

Suezmax demolition remained robust in 2012 at 3.2 million deadweight tons was removed from the market close to 4.5% of the highest level since 2002. In conclusion, we are very pleased to have acquired two container vessels with long-term period charters partly financed by the proceeds from our 9.1 million Class B convertible refer limitations.

We believe that this transaction enhances the cash flow visibility to our shareholders further diversified our revenue stream for the addition of HMM to our charters and will further underpin our existing distribution level and to allow for potential distribution growth ahead.

Additionally, we came to an agreement with OSG for the three bareboat charters while reserving the partnership rights of future claims. Once more, I would like to reiterate our commitment to the $0.93 per unit annual distribution guidance going forward and to the continued and enhancement of our financial flexibility in order to pursue growth opportunities and forge a pathway to distribution growth.

And with that, I’m happy to answer any questions you may have. Operator?

Question-and-Answer Session


Thank you. (Operator instructions) Your first question comes from John Chappell of Evercore Partners. Please go ahead.

Jonathan Chappell – Evercore Partners

Thank you. Good afternoon, Ioannis.

Ioannis Lazaridis

Hi, Jonathan.

Jonathan Chappell – Evercore Partners

So first question has to do with the language around the dividend and then some of your comments from the presentation. I notice you said in the press release and then you’ve reiterated not only just the commitment to the dividend but added a couple of new parts to the sentence about forging a pathway to distribution growth.

You also mentioned in the operation surplus slide, you made sure to mention that didn’t include the full contribution from the last two container ships that you still had 1.1 times coverage.

So my question is just based on these four container ships that you’ve purchased thus far in 2013, is that enough to spark an increase in the distribution or do you think that you would need to add additional tonnage at some point this year before you can take a next step up in the annual distribution run rate?

Ioannis Lazaridis

To start on your last comment, I don’t think we need to add more tonnage for us to be in a position to list our distribution. I think we have, a young fleet with a very good specifications, attractive commercially. So this fleet is going to allow us subject to market developments to bring up our distribution.

I think the diversification into containers allowed us to provide the market with much better visibility as the duration of our charters, if you remember at the end of the third quarter of last year was less than 4.5 years, and now, it’s an excess of seven. So certainly, that is, I believe, good for our unit holders.

Also, if you look into the new charters that we brought, we have reduced, let’s call it our dependency to Capital Maritime which accounted in the first quarter to 33% of our revenues compared to 49% of our revenues for the third quarter of last year. And you have this with a full contribution of the two containers that is going to come even lower in the second quarter of 2013.

However, in order to be able to increase distribution, we need to see a better market in the product space, we have eight vessels coming up for renewal this year, but has been an intentional strategy, the average rate there is approximately 13,900 and I believe with the fundamentals that we’re seeing in the product tanker market, certainly we will be looking forward to better rates.

I think an important constituent for us to be able, an important factor for us to be able to increase distribution apart from the unit coverage, is also the duration of our charters.

So as we see a better product market, gradually, we will be thinking to get into longer term period contracts, but today, is not the time for that yet, as we still believe that the market overall is at low levels compared to history.

So we’ll see more upside, and as this upside let’s say emerges, then we will be looking to fix for longer period, and that is an important factor for us to consider distribution growth.

Jonathan Chappell – Evercore Partners

All right. That’s very helpful. So then in regard to those eight vessels, it sounds like, you know, you’re probably a little bit longer off from where you’d like to see longer term charter rates relative to their expirations.

Do you expect to employ them on kind of a shorter term contracts? And are you marketing them to third parties, or you just expect to renew them like the other one announced this morning with Capital Maritime?

Ioannis Lazaridis

I think the period market in products has improved. As I mentioned to you, the market has improved by between 5% and 10% since the summer. And we have seen many fixtures close to 180 fixtures last year. And so far this year, a level consistent with that. So I believe that the product of tanker market is improving.

I believe though that if you look what is the five year average close to 17,000 or 16,500 and given the three-year average closer to 20,000 will still have a long way to go specially as the fleet, supply is very limited, and there is quite good demand especially given the new routes that are developing.

So I think that if anything, as I said, I believe that the period market is improving, but until it moves to that levels, it would be fair to remain exposed to that improving trend by fixing for the shorter, rather the longer term.

Jonathan Chappell – Evercore Partners

All right. And then just one last quick one. You’ve laid out a pretty, I guess cautiously optimistic view on the product tanker market, but then you also laid out a bunch of favorable dynamics that the container ship acquisitions have provided diversification long term charters et cetera, as you think about any potential future expansion for the capital product fleet, do you think you would move back to the traditional product tanker fleet given the improving fundamentals or do you think that you would want to diversify further into the container market?

Ioannis Lazaridis

We remain open-minded to accretive acquisitions if that is products or containers, so whatever else, we remain open-minded.

I think what the container acquisitions have brought to us is long term contracts which today are not attractive in the product tanker space, the product tanker space for long term is not as robust as in the containers, so we prefer to be in the containers for that end.

But really, we are quite exposed to the product tanker market near term given the charter expirations. And our view in the product tanker market is optimistic because of, as I mentioned to you, the developing of the supply. Simply, we have been patient throughout the past couple of years by fixing in the shorter end of the period market and will remain until we see numbers in terms with 15, 16, 17 level.

Jonathan Chappell – Evercore Partners

Okay. Thank you, Ioannis.

Ioannis Lazaridis



Thank you. Your next question comes from Justin Yagerman of Deutsche Bank. Please go ahead.

Justin Yagerman – Deutsche Bank

Hey, Ioannis, how are you?

Ioannis Lazaridis

I’m good. Yourself?

Justin Yagerman – Deutsche Bank

Good. You know, along the lines of what Jonathan was just asking, I know you guys have three larger container ships at Capital Maritime, the sponsor, I’m just wondering how you think about timing for potential dropdowns of the those assets given the long term charters attached to those vessels.

And then alongside of that, I guess the other piece of that question is how you think about raising the capital needed for making those purchases. Is that something that you would do in advance of any type of dropdown or do you think that would be in concert where you would already have the assets identified and you would take them into the fleet as part of the kind of capital raise?

Ioannis Lazaridis

There is always – our desire is always to grow our fleet in an accretive manner. And I believe these transactions that we’ve done recently, the two 5,000 TEUs and the two 8,000 TEUs are accretive.

So potentially this three 5,000 TEU vessels, if it makes sense, we will bring them to the partnership if it makes sense.

I think though, as I mentioned to Jon earlier, there is no hurry for us to do anything like that as we have all the ingredients in place and subject to the development in the product tanker market to build all these important factors to bring our distribution up in the future.

What we’re working on is to boost our debt capacity, to be able to bring in more debt lines, facilities in place, so we have the debt element in case we needed to do transaction. And whenever we’ve done transaction in the past, whenever we’ve done an equity raising, then more or less simultaneously, we brought in a vessel.

So I think we have as I mentioned, a junk fleet, a very good distribution of expirations in our product tanker fleet to take advantage of the better fundamentals in the product tanker space, and as the market develops, we’ll decide on the duration of how, of the charters of how we fix these vessels, and secondly, regarding acquisitions, we have, I believe opportunities to buy assets, but we’ll do that only when the time is right, and only if that [inaudible].

Justin Yagerman – Deutsche Bank

How is the timing going on increasing the debt capacity? I know that that is something you guys have talked about. Where are you in that process?

Ioannis Lazaridis

Look, we have a facility of 350 million that expired on the 29th of March and we took full advantage of it basically, only 1 million with payable.

And I think that you don’t want to ask for more money from the banks before you use what they have given you at the first place. Not that we have fully utilized the previous one, we’re in discussions, in advance discussions to build a new debt facility and we expect to be able to have this – in this again.

Justin Yagerman – Deutsche Bank

And just switching focus to the product tanker charter that you signed. I’m just curious why you signed again with Capital Maritime as opposed to going out and identifying a third party charter given the strength of the product market, and also why maybe not take a lower base rate and maybe look for profit sharing on a charter given your you know, positive view of the market?

Ioannis Lazaridis

Look, I think if you look into the exposure that we have in Capital Maritime, that has been reduced from 49% in the third quarter, to 33% of our revenues in the first quarter, and that’s going to go even lower in the second quarter when we have the full effect of the two HMM vessels.

So certainly, our exposure to Maritime is not less. Certainly, our unit holders are looking for visibility of big comps, so to an extent, while we would like to have a profit sharing agreement, the base rate today is not high enough to allow us to have a base rate, plus profit share while at the same time providing good visibility to our unit holders.

So let’s say sacrifice the upside in order to be able to bring visibility to our unit holders because that’s important for our distribution credibility if I can say that.

Justin Yagerman – Deutsche Bank

That actually makes a lot of sense. Yes.

Ioannis Lazaridis

That’s what I think. And I think that what we have been able to do with Maritime overall, is to be able to have some flexibility of the terms, and I think that unless we get some similar flexibility from third parties, I think the Maritime exposure, is not that significant now, and as I have had the chance earlier in the call to give you some of the finance of Capital Maritime, Capital Maritime enjoys a strong balance sheet with 65% equity to total assets and 25% net leverage.

So it’s a very good partner with a very good commercial and technical management.

Justin Yagerman – Deutsche Bank

So without putting words in your mouth, is that basically saying if I can get a charter at the market with Capital Maritime, then it makes sense because I can always then re-neg on that charter and go to a higher paying charter if the market improves?

Ioannis Lazaridis

Look, we cannot just re-neg on a charter with Capital Maritime because at the end of the day, we are two separate companies, and these agreements are not decided by us, we are conflicted by our independent directors.

So I think what however, Capital Maritime is offering us, is if you look at the market fixers of late, you can see that some of the higher fixers have longer duration. So we decide to keep the shorter duration and keep the higher rate if possible, and I think that Capital Maritime is offering that to us.

Justin Yagerman – Deutsche Bank

That makes a lot of sense. Last question, and I’ll turn it over. Have you guys quantified your claim against OSG? Have you filled proof of claim in bankruptcy court?

Ioannis Lazaridis

We have until the end of May to do so. And we will.

Justin Yagerman – Deutsche Bank

Okay. And at that time, you guys will have a number?

Ioannis Lazaridis

We will.

Justin Yagerman – Deutsche Bank

Okay, great. Thanks. Appreciate the time, you guys.

Ioannis Lazaridis

Thank you.


Thank you. And your next question comes from Michael Webber of Wells Fargo. Please go ahead.

Michael Webber – Wells Fargo

Hi, good morning, guys. How are you?

Ioannis Lazaridis

Hi, Mike. How are you?

Michael Webber – Wells Fargo

Good, good. I wanted to jump back to you conversation earlier on distribution coverage and Q1 is a pretty muddy number considering the full distribution, the full perspective and the gain and everything else, and you’ve been pretty upfront about wanting to get the 1.1 X, and getting there comfortably before moving the distribution, I’m just curious about how you think about actually boosting and kind of restarting reserves along with actually growing the distribution. I mean our numbers, I think another drop down is probably required, but at that point, you may need to start thinking about moving that reserve number.

I’m just curious as to how that factors into the way you think about eventually kind of providing growth on top of your distribution.

Ioannis Lazaridis

It is a very important consideration, certainly. And that is of course, something that we’re thinking about. But be aware that in the past, we have all the reserves, and we have been reserving to replace our vessels at values double of what they are today, fully with equity.

So I think we have all the reserve in the past, as well as our fleet is quite young today. So I said earlier, the market recovers we’ll do some reserves, but I think the number may not be as high as it used to be in the past simply because I think we have all the reserves in the past, but we will decide that in the border when the time is right.

So I think what is more important for our distribution going ahead, is as I said the visibility of our income which is in direct relationship with the duration of our charters, and also what we see in terms of product market and overall shipping market outlook.

Michael Webber – Wells Fargo

Got you. Okay. That’s fair. I wanted to touch on, I guess, kind of piggy back on Justin’s question around the OSG claim, you know, I think putting a number on it, I think you said you’re going to do in May, I mean, in terms of what you think you could do with that kind of cash, assuming a successful claim, one, I mean, any sort of degree, any sort of color on timing would be helpful.

I know it’s a difficult question to answer, but two, just in terms of how do you think about that cash because you basically be getting back operating cash. Is that something you would kind of look to apply towards distributions and view it as kind of operating cash? Or at that point is it more kind of growth capital or just how do you internally, how are you guys kind of thinking about potential outcomes of that cash?

Ioannis Lazaridis

Look, I have to say that is rather premature to talk about what we’ll do in our cash before even we have filled for a claim. So I think that as I mentioned, there’s no guarantees of what the outcome of the claim will be when the court has to decide, there are many different creditors involved in this proceedings.

So not to answer this question, but certainly, if we take some money, probably we’ll see it as a growth capital than anything else.

Michael Webber – Wells Fargo

Growth capital. Okay, that’s helpful. And given where the...

Ioannis Lazaridis

But I think as I said, this is a premature discussion at this point. We have not filled a proof of claim yet.

Michael Webber – Wells Fargo

Right. No, I just think, given with the bond – people are looking at it as a potential positive cash, but we can look back on it later.

I guess one more for me and I’ll turn it over, and actually, I appreciate greatly the detail you guys provided on capital parent, like some of that is new, and you started doing that last quarter, and it’s appreciated.

Ioannis, are you just going to put your kind of Capital Maritime hat on for a second, you know, we just got off the fees [ph] bank call, and they were talking about the opportunities there in the spaces typically for larger assets, so kind of beyond what capital has and its container ship fleet now, where do you rank container ship opportunities specifically at the parent level and what would be your appetite for larger tonnage, and maybe just some color in terms of new business, and then what you’re thinking about at the parent level?

Ioannis Lazaridis

Look, the parent is a different animal, if I can use the expression, compared to the partnership. It’s more opportunistic because we invested in different assets, small and big markets, small and big tankers, as well as containers.

But if I look at the container market today, I believe the larger size containers are something that we’ll be looking more post panamax and beyond, but that is something that is for the private company to consider.

Michael Webber – Wells Fargo

Right. No, that’s still hopeful. In terms of, I guess, ranking those post panamax opportunities against other things in the product tanker, dry bulk of other sectors, I mean where would you place this in terms of the priorities at capital parent?

Ioannis Lazaridis

We are also looking at opportunities elsewhere, but as I said, this matters for the private company and so I’m afraid that I cannot really expand on this discussion.

Michael Webber – Wells Fargo

No, that’s fair. And then the color you gave is helpful to begin with. So all right, that’s all I’ve got. Thank you for the time, Ioannis.

Ioannis Lazaridis

Thank you.


Thank you. Your next question comes from Ken Hoexter of Bank of America Merrill Lynch. Please go ahead.

Ken Hoexter – Bank of America Merrill Lynch

Hi, Ioannis.

Ioannis Lazaridis

Hi Ken, how are you?

Ken Hoexter – Bank of America Merrill Lynch

Good, good. Thank you. Maybe just step back for a second on the product side and just talk about what happens as domestic oil production continues to increase and how that, does that change the trade lanes, does that [inaudible],does that increase or decrease demand levels and just think about how that impacts pricing if you can kind of just step back and give a bigger picture view on that?

Ioannis Lazaridis

Let me pass to my colleague, Jerry Kalogiratos for this one.

Jerry Kalogiratos

Hi again. Overall, there are two developments. There’s of course the development in terms of new trade routes that serve in new refining capacities coming online, [inaudible] that is mainly in India and the Middle Eastern Gulf, and we have seen including exports out of these new refineries predominantly to the Atlantic basin. And that’s definitely a development that has been contributing to the mile.

But the other development is also quite important is the increased exports out of the U.S., and specially out of the carriage, as well as the U.S. east coast, to South America. And while this is not a necessarily a very long haul root, it’s definitely a new one, and has been keeping the Atlantic market very busy as well as the carriage market.

And it you add to that increase activity in the east, that is Singapore becoming a hub, an export hub for many of the established economies, Australia, but as well as for the emerging economies like Indonesia, even China from time to time, then you have robust market across the globe, and that has been contributing to not only the ton mile, but increased utilization and triangulation which has been driving rates upward consistently over the last couple of quarters as well as at the beginning of this quarter.

So all in all, all these development in terms of new trade routes as well as increased activity has been contributing to the kind of rate environment that you see today.

Ken Hoexter – Bank of America Merrill Lynch

Jerry, I appreciate that insight, but if we look at maybe more specifically on the domestic oil production, is that maybe changing more domestic within the U.S., I guess the trade routes or in pull from, on the refined product? Or does that not really change just what we bring to our refineries, it’s more solely on the crude side?

Jerry Kalogiratos

That’s mainly on the crude side. There’s little change as far as the product in the market. I think it has been affected in the U.S. [ph] fleet and you have seen rates also moving upwards there, but it does not affect directly, the product on that market.

Ken Hoexter – Bank of America Merrill Lynch

Okay. And then Ioannis, just – thanks, Jerry. On the focus that you’ve put now on Capital Maritime, or I guess more specifically, on the management company, is that in preparation to bring or to roll in the management company or I guess, just wondering the increased focus on the call for that?

Ioannis Lazaridis

No, nothing like that. No, nothing like that if anything. The main is to do with the fact that you need a bit more information. I think that Capital Maritime, apart from – it’s balanced in its assets, what it brings to the partnership is Capital Ship management.

And a lot of the times, we talk about our commercial and technical ability, and I think it’s important from time to time to give a little bit more color because what differentiates us is, basically on the tanker side, is our ability to trade with all oil majors as well as the fact that we have a competitive costs and very little off higher.

I think these are very important qualitative differentiations as we have, I believe with many of our competitors. And I think from time to time, it’s very important that people, I think get to know a little bit more about the sponsor than just some balance sheet numbers.

Ken Hoexter – Bank of America Merrill Lynch

Thanks. And as you look at the product market overall, are you seeing carriers that are inquiring, I guess not in investing new vessels, but are they coming to you yet? I’m just trying to get a feel of how you’re seeing the market, I know prices are keeping up a little bit, but are you seeing any new customers come to you and inquiring about locking in rates, or opening new discussions at this point?

Ioannis Lazaridis

I mean there has certainly been, as I said, from the beginning of 2012, a much better market period. So the numbers certainly have moved up both in terms of charter rates and in terms of number of features.

And 2013 has started well and with period rates up. But the players in that space are not necessarily new. I mean you have some new players in the east as they become bigger and so on, but the players, the oil majors and the big traders such Vitol, such as Trafigura, such as these names, I mean these have not really changed. I mean don’t forget that these traders used to have dozens of vessels of period in the past. I mean they are still far away from the levels that they used to be.

So there is plenty of upside in the market if these people decide to fix vessels in the same way as they used to.

Ken Hoexter – Bank of America Merrill Lynch

Wonderful. I appreciate that. Thank you.

Ioannis Lazaridis

Thank you. Thank you, Ken.


Thank you. Your next question comes from Urs Dur of Clarkson Capital. Please go ahead.

Urs Dur – Clarkson Capital Markets

Good morning, good afternoon.

Ioannis Lazaridis

Hi Urs, how are you?

Urs Dur – Clarkson Capital Markets

I’m very good. I don’t want to put any words in your mouth, but I think it’s interesting for the audience maybe to hear your views because clearly, you’re very confident with HMM as a counter party. And we too, hold the belief that the liquidity issues that people have raised recently are not material for the long term. But I was wondering if you had any insight as to how you look at HMM as a counter party for those vessels.

Ioannis Lazaridis

Remember, they’re very strong counter party, we have agreed with charters close to two years ago and they are starting do very well this charter since the beginning of February. So we have no issues with HMM. But we expect them to have issues.

Urs Dur – Clarkson Capital Markets

Okay. That’s very good. That’s basically what we’ve been seeing on the container ship market too, but just good to address that one issue, but everything else is really been asked for, for me. So thank you very much.

Ioannis Lazaridis

Thank you.


Thank you. As a reminder, that’s star 1 if you wish to ask a question. The next question comes from Paul Jacob of Raymond James. Please go ahead.

Paul Jacob – Raymond James

Hi Ioannis, I just want to spend a moment on the debt to cap ratio. Is that 40% number where you want to be, or do you think you might try to rebalance that if you do end up pursuing some drop down opportunities with CMTC?

Ioannis Lazaridis

Paul, I think that as we have discussed in the past, we’ll work very harder to improve our debt to cap ratio over the past two, three years. So I think that we want to keep our balance sheet quite strong.

And I think that if you look, we’ve done four acquisitions of approximately, or total number more than $250 million over the past three months. But our debt to cap has not really changed. So we are quite careful in maintaining balancing the segment.

Paul Jacob – Raymond James

Okay, that’s helpful. And then just remind me on the convertability of Class B and was there a lock up period, or are those free to convert currently?

Ioannis Lazaridis

Free to convert, at the price of nine and above.

Paul Jacob – Raymond James

Okay. And then just sort of a housekeeping question, recognizing the use of your existing fleet, do you expect to incur any integrity capital expenditures this year?

Ioannis Lazaridis

You mean replacement of capital expenditures?

Paul Jacob – Raymond James


Ioannis Lazaridis

I think it’s for the board to decide, but as I have mentioned earlier, we have over provided in the past for buying the vessels fully with equity at prices double what they are today.

I think that subject to what our coverage ratio will be, we will have to revisit that, at that point.

Paul Jacob – Raymond James

Okay. So it would be more of an end of the year type of thing if you did?

Ioannis Lazaridis

It will be a board decision whenever the time is right.

Paul Jacob – Raymond James

Okay. And then last question from me and I appreciate the time. Do you have a target in mind for the overall dependency that you’d like to have to CMTC? I mean clearly, that’s been coming down, but where do you think that may end up going?

Ioannis Lazaridis

I think that, as I mentioned, the second quarter will be below 30%. And I tried to give a bit of color about CMTC being a very strong counterparty. So to that end, I believe that it’s important to highlight that we probably have half the exporter to our sponsor within six to nine months.

So certainly, that’s a good development and I think the exporter in mostly of the product signed fleet which it has been intentional given our charter slide [ph] there has been intentional given the profile of how the market has been.

I mean if you look, we have about nine vessels coming up for renewal within the coming nine months, eight of these vessels are with Capital Maritime. So you can understand that the exposure will be dependent on what rates we get on these vessels from third parties and how they look compared to what, how the sponsor will offer us, will offer at the time of renewal.

Paul Jacob – Raymond James

Okay. That makes sense. I appreciate the color.

Ioannis Lazaridis

Thanks a lot, Paul.


Thank you, as a reminder, that’s star 1 if you wish to ask a question. We have no further questions. Please continue.

Ioannis Lazaridis

Thank you all for finding the time to participate. And we’re always available to answer any other questions you may have offline. Thank you very much. Bye-bye.


That does conclude the conference for today. Thank you for participating. You may now disconnect.

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