Capital Product Partners: A Play On The Growing Market For Chemical Tankers

| About: Capital Product (CPLP)


Growth in Natural Gas and NGL's gives CPLP a growing market for its chemical tanker fleet.

Container ship fleet provides diversification into a non-energy business.

Strong capital structure with long-term debt at 41% of assets.

8.8% distribution yield with modest payout growth since 2010.

Capital Product Partners L.P. (NASDAQ:CPLP) is a small-cap shipping MLP which went public in 2007. The partnership owns thirty vessels, of which eighteen are chemical product tankers. The remainder of the fleet consists of four conventional crude tankers, seven container carrier vessels, and one Cape Size bulk carrier. The average age of the fleet is 6 years. Based on current lease rates, revenue breaks down as approximately 40% chemical tanker, and 40% container ship, with the balance coming from dry bulk and crude transport. Let's take a look "into the hold" and get a little better understanding of the business.

The shipping business historically has been subjected to large swings in demand and charter rates for tankers and container ships. A look at the history shows periods of oversupply followed by shortages and skyrocketing rates. Very Large Crude Carriers (VLCC's) are one area where the business is currently struggling. On April 2, Bloomberg reported a 22% tanker surplus in the Persian Gulf for VLCC's (Very Large Crude Carriers). The container shipping industry is slow as well, with Alix Partners reporting recently that "widespread financial distress" is affecting carriers.

While the VLCC's and containerships struggle, the increase in US natural gas and liquids production is pushing the chemical tanker business to multi-year highs. The chemical tankers are more complex than their crude or bulk carrying sisters. They require up to 50 reinforced compartments to segregate potentially hazardous materials into smaller volumes. Retrofitting existing tankers is not practical and a new tanker ordered today would likely not be delivered before 2016. This puts CPLP in a good spot for the moment with its relatively young fleet of eighteen chemical tankers.

CPLP has consistently generated strong cash flow from operations, and generated $129.6 million in 2013 while paying approximately $88 million in distributions. At the recent unit price of $10.56, market cap is $953 million. Cash flow distribution coverage is 1.0X, and distribution yield is 8.8%. The quarterly distribution has grown slightly from the $.225 paid in May 2010 to the most recent payout of $.2325. The company has accessed the equity and debt markets several times in the last few years while expanding its fleet. Long-term debt is a reasonable 41% of total assets.

CPLP generates a 1099 as opposed to the typical K-1. This makes it more appropriate for an IRA than most MLP's. The partnership has an IDR as well with the general partner collecting a 2% split up to $.4313 in quarterly distributable cash.

I currently hold a small position in CPLP as part of a diversified portfolio of MLP's and other holdings. The relatively young, diversified fleet makes it attractive relative to other firms with older fleets and a less advantageous business mix. I have no plans to make changes to that position in the next 72 hours.

Investors should realize that while CPLP has merit as an income generating investment, it is subject to economic and financial risks which could jeopardize the distribution and market value. It should not by any means be considered "safe" or "low risk". Please do your own research before investing.

Disclosure: I am long CPLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.