Navios Maritime Midstream Partners LP (NYSE:NAP)
Q2 2016 Results Earnings Conference Call
July 28, 2016, 08:30 AM ET
Angeliki Frangou - Chairman & CEO
Erifili Tsironi - CFO
Ted Petrone - Vice Chairman
Chris Wetherbee - Citi
John Humphreys - Bank of America Merrill Lynch
Thank you for joining us for Navios Maritime Midstream Partners' Second Quarter 2016 Earnings Conference Call. With us today from the company are Chairman and CEO, Ms. Angeliki Frangou; Chief Financial Officer, Mrs. Erifili Tsironi; and Vice Chairman, Mr. Ted Petrone.
As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors section of Navios Midstream's website www.navios-midstream.com. You'll see the webcast link in the middle of the page, and a copy of the presentation referenced in today's earnings conference call will also be found there.
Now I'll review the Safe Harbor statement. This conference call could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Midstream. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Midstream's management, and are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements.
Such risks are more fully discussed in Navios Midstream's filings with the Securities and Exchange Commission. This information set forth herein should be understood in the light of such risks. Navios Midstream does not assume any obligation to update the information contained in this conference call.
The agenda for today's conference call is as follows, first, Mrs. Frangou will offer opening remarks, then Mrs. Tsironi will review Navios Midstream's financial results, then, Mr. Petrone will provide an industry overview and lastly, we will open the call to take questions.
Now, I would to turn the call over to Navios Midstream Partners' Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?
Thank you, Doris. And good morning to all of you joined us on today's call. We are pleased to report our second quarter results. In Q2, we reported $16.4 million of EBITDA and $5.9 million of net income, representing an increase of 17.5% and 9.2% respectively, over Q2 of 2015.
We recently announced a distribution of $0.4225 per unit, representing an annualize distribution of $1.69 per unit and a current yield of approximately 13%. The profit sharing mechanism of our adjusted arrangement and $4.3 million of additional profits during the first half of 2016 of which we recognized a $2.6 million in Q2. Our total unit coverage ratio for the distributions was a healthy 1.14 times for the quarter.
The MLP market has recovered from the low in Q1 this year, despite broad market pressures in the days following the Brexit decision, but in MLP recovered to level that adjusted prior to their referendum by early July.
Oil price has stabilized to $45 per barrel, assisted by a 50% decrease in US rig count and a 12$ decrease in US crude oil production over the last12 months. Moreover US depreciation this year heaved and China slowdown for the year have resided. The market has experienced improved sentiments, particularly in the energy and other commodity sectors.
Slide four represents a summary of our company's position. Our long-term charters provide visible cash flows and we expect a $0.5 billion in long-term contracted revenue with top-tier companies.
Our average charter period of 4.8 years provide a great win forward visibility. Overall, we have a solid revenue base for distributions to our unit holders, along with an upside through profit sharing arrangement, which earned us about $4.3 million in the first half of 2016.
Our financial strength and flexibility is represented through our conservative leverage profile of 33.7 net-debt-to-book capitalization. Moreover, our sponsors provide Navios Midstream significant economies of scale, as well as access to potential future accretive acquisition. Our operating expenditures as of which grew through November of 2016 and Navios Midstream enjoys OpEx of around 8% below the industry average.
Slide five outlines Navios Midstream strength. Our fleet is a 100% fix for 2016 and '17 and 99.4% for 2018. In addition, Navios Midstream enjoys potential upside through profit sharing, we generated $8 million in 2015 and $4.3 million in the first half of 2016.
Also, from a balance sheet perspective, Navios Midstream has no forward growth CapEx requirements nor debt maturities until 2020. So we can enjoy a significant cash flow generation and have an ability to increase distributions once MLP and energy markets recover fully.
Please now turn to slide six. We have a proven ability to grow our cash flow. We grew our fleet by 50% within approximately six months of our IPO. We gained options to buy five VLCCs from Navios Acquisition fleet of modern vessel at fair market value. These options and our ability to purchase tankers directly from third parties should allow us to grow our distribution further.
Slide seven demonstrates our liquidity position. We have $38.2 million in cash and $197.5 million of debt. Our leverage profile is conservative with 33.7 in net-debt-to-book capitalization, we are not committed growth CapEx, and no significant debt maturities until 2020.
At this point, I would like to turn the call over to Erifili Tsironi Navios Midstream's CFO. Eri?
Thank you, Angeliki, good morning all. I will briefly review our unaudited financial results for the second quarter and six months ended June 30, 2016. The information is included in the press release and is summarized in the slide presentation on the company's website.
During the quarter, our revenue generation increased due to the healthy VLCC market, and we recognized $2.6 million of net income from our profit sharing arrangements. The profit share recognized for the six month period ended June 30, 2016 was $4.3 million.
Moving to the financial results, as shown in slide eight, revenue for the second quarter of 2016 increased by approximately 24% to $22.7 million, compared to $18.4 million for the same period in 2015.
The increase was due to the acquisition of the Nave Celeste and the C. Dream in June 2015 and an increase of $1.2 million in profit sharing recognized in relations to certain charters. Revenue was also negatively affected by the loss of high due to the scheduled drydocking of two of our vessels.
All our vessels are fixed on time charters having an average remaining duration of 4.8 years. In the second quarter of 2016 we received an average time charter equivalent rate of 45,783 compared to 46,545 for the second quarter of 2015. The decrease was due to the lower fixed charter rate of the two VLCCs acquired in June 2015, compared to the initial fleet.
Other expenses for the quarter including management fees and general and administrative expenses amounted to $5.9 million. Our OpEx for the vessels, excluding dry-docking is fixed at $9,500 per day per vessel until November 2016.
For the second quarter of 2016, EBITDA increased by approximately 18% to $16.4 as compared to $14 million for the same period in 2015. The increase in EBITDA was mainly due to the increase in revenue, which was partially mitigated by a $1.7 million increase in management fees and general and administrative expenses due to the additional two VLCCs in the fleet in June 2015.
Net income for the second quarter of 2016 was $5.9 million, compared to $5.4 million for the same period in 2015. The increase in net income was due to the increase in EBITDA and a $0.1 million increase in interest income and is partially mitigated by a $1.3 million increase in depreciation and amortization due to the expansion of the fleet and a $0.7 million increase in direct vessel expenses.
Navios Midstream generated an operating surplus for the quarter of $10 million, while replacement and maintenance CapEx reserve for the period was $3.6 million.
Moving the six months operation, time charter revenue for the first six months of 2016 increased by approximately 34% to $46.8 million, as compared to $35.1 million for the same period in 2015.
The increase was due the acquisition of the Nave Celeste and the C. Dream in June 2015 and an increase of $1.9 million in profit sharing recognized in relation to certain charters. Time Charter Equivalent was 44,565 for the six month period ended June 30, 2016 and 46,234 for the six month period ended June 30, 2015. As mentioned, the decrease was due to the lower fixed rate of the two VLCCs acquired in June 2015, compared to the initial fleet.
EBITDA increased by approximately 28% to $34.1 million for the six month period ended June 30, 2016, compared to $26.6 million for the same period in 2015. The increase in EBITDA was mainly due to the increase in revenue.
The above increase was partially mitigated by a: $3.2 million increase in management fees and general and administrative expenses, following the acquisitions of the two VLCCs in June 2015 and a $0.4 million increase in time charter expenses.
Net income for the six month period ended June 30, 2016 was $13.4 million compared to $11.7 million for the six month period ended June 30, 2015. The increase was mainly due to the increase in EBITDA and was partially mitigated by a 2.1 million increase in interest expenses and finance cost, and $2.8 million increase in depreciation and amortization to the expansion of fleet; and a $1 million increase in direct vessel expenses.
Navios Midstream generated an operating surplus for the six month of 2016 of $21.3 million. Replacement and maintenance CapEx reserve for the period was $7.2 million. Our fleet continues fixed line operation performance. Vessel utilization for the first half of 2016 was almost 100%.
Turning to slide nine, for the balance sheet highlights. Cash and cash equivalents was $38.2 million compared to $37.8 million as of December 31, 2015. Other assets increased to $14.1 million as of June 30, 2016, compared to $8 million as of December 31, 2015 mainly due to advance payments for special survey expansions and management fees, as well as an increase in accounts receivable relating to profit sharing invoiced within the quarter.
Long-term debt, net of deferred finance costs and net of discount, including current portion was $197.5 million. Our long-term debt relates to the Term Loan B facility concluded in June 2015. Net-debt to book capitalization at the end of the second quarter of 2016 was at the comparable level of 33.7%.
As shown in slide 10, we declared the cash distribution for the quarter – for the second quarter of 2016 a $0.4225 per unit, which translates into 1.69 on an annual basis. This distribution provides our unitholder with a yield of about 13.2%.
The cash distribution is payable on August 12, 2016 to unitholders of record on August 10, 2016. Total distributions for the quarter amount to $8.7 million. Our common unit coverage for the quarter is 2.53 times and our total unit coverage is 1.14 times.
I would like to remind you that for US tax purpose, a portion of our distribution is treated as return of capital and we also report the cumulative annual distributions to common unitholders on Form-1099.
I will now pass the call to Ted Petrone, our Vice Chairman to discuss the industry sections. Ted?
Thank you, Eri. Please turn to slide 11. Navios Midstream expects to receive over $500 million in long-term contracted revenue with top-tier companies. We have 4.8 years of average remaining employment with strong counterparties, Cosco Dalian, a Chinese state owned enterprise, Formosa Petrochemical, a Taiwan Stock Exchange listed company with a market cap of approximately $27 billion, and SK Shipping which dominates one-third of South Korean crude oil transportation.
We have significant upside through profit sharing which is approximately $8 million for 2015 and $4.8 million in the first half of 2016, with $2.6 million of this total coming in Q2.
Turning to slide 12, slide 12 shows the 2016 cash flow cushion from our low breakeven. We expect to earn an average contracted daily base rate of $421,707. Our average fully loaded cost is $18,917.
As you know, the daily operating cost that includes drydocking, general and administrative expenses, interest expense and capital repayment. Navios Midstream enjoys vessel operating expenses significantly below the industry average.
Currently, Navios Midstream's daily OpEx is about 8% below the industry average. We achieved these operational savings through a management agreement with Navios Holdings which creates economies of scale and in turn lowers operating expenditures. The operating costs under this management agreement are fixed at current levels until November of this year.
Turn to slide 13. Oil, crude oil consumption is generally growth of 30 years with declines in '08 and '09 due to global financial crisis. Starting in 2010 oil, crude oil and refined product consumption returned to this pattern of growth, the main structural drivers going forward from moderate VLCC growth increasing demand from the Asian economies, particularly China and India, as well as growth in the US and the Eurozone.
Going after decade global GDP growth through '16 and '17 at 3.1% and 3.4% respectively, led by emerging and developing markets growth of 4.1% in '16 and 4.6% in '17.
We note that the IMF left its growth forecast for emerging markets, a key driver in future oil demand, unchanged in its recent revision. Increases in world GDP growth year-on-year have generally led to higher time charter rates for the VLCCs.
Turning to slide 14, as noted in the top half of slide 14 in terms of ton miles, the movement of crude from West Africa and South America to China uses about as many VLCCs as the movement from the Arabian Gulf, even though the Arabian Gulf shipped 1.9 times more oil than China.
The growth in VLCC ton miles will continue as China imports more crude from Venezuela, Brazil and West Africa as it diversifies its core source of oil. Given current demand in the US, any decline in crude production should lead to increased imports adding to ton miles.
Near term crude shipment increases from Nigeria, should help increase tons miles and support VLCC rates after the deferred refinery maintenance period. The expansion of West to East trade crude movements can be seen in the bottom part of the slide, which shows spot VLCC fixtures from load ports west of the Suez headed to the East, these have grown significantly in the past three years, this is increasing ton miles.
Please turn to slide 15. China is the world's second largest consumer of oil importing more than half of its requirements. Chinese imports have more than doubled since January 2009, representing a 13% CAGR. Crude imports reached 8 million barrels per day in February, and again in April all time records.
Chinese crude imports remain elevated in the first half of 2016 averaging 7.5 million barrels, which represents almost 1 million barrel per day increase or 14% over the same period last year. Additional refinery openings going forward will add about 370,000 barrels per day in crude demand this year.
As you can see on the upper right and on the table below, on a per capita basis US oil usage is 6.9 times that of China, and Europe is 3.1 world use is about 1.5 times. If China goes to world for capita consumption levels, China would require an additional 271 VLCCs. Assuming all crude is imported by sea, this represents an expansion of the existing fleet by about 43%.
Please turn to slide 16, the upper graph spotlights and the additional crude demand that is likely to come as the Chinese complete to remaining a 150 million barrels as per phase 2 of their strategic petroleum reserve.
The IEA estimates that China will complete about 95 million barrels of SPR storage this year and still plans to have total SPR storage of 500 million barrels by 2020. This is in addition to commercial storage, encouraged by current government policies.
Current projections of China's crude oil imports will probably surpass the US in '16, growing to about 13 million barrels a 2035, as the country continues to urbanization, industrialization and modernization of its economy.
Refinery expansion in both the Asia-Pacific and Middle East regions is a key driver to VLCC demand. As the Middle East refines more crude in its expanding refinery network, there will be less crude available for export.
As a result, the new refineries being built in the Far East we'll have to source crude from further away. New refineries stockpiling requirements and SPR fills should be met by shipments on VLCCs.
Please turn to slide 18. Fleet growth was a modest 3.1% in 2015. So far this year, non-deliveries have remained high at 24% through the end of the first quarter, but there has been no scrapping as of yet.
Forecast for net fleet growth for '16 is approximately 40 VLCCs of which the majority come from the second half. Deliveries are expected to be less than the number of VLCCs needed for the expected increase in demand.
Note also that the current oil book of 120 vessels due to 2019 is less than 174 vessels that will be coming to the end of the useful line during that period.
Thank you. I'd like to now turn the call back over to Angeliki.
Thank you, Ted. This concludes formal presentation. We open the call to questions.
Thank you. [Operator Instructions] Our first question comes from the line of Chris Wetherbee of Citi.
Good morning, guys.
I wanted to ask a question, just sort of near term when you think about third quarter and just profit sharing, given what were seeing on the VLCC side, how do we think about that, should we assume we kind of see a sequential deceleration, does it go it away all to together. Just kind of wanted to get a sense of how that’s looking for the third quarter specifically?
Most probably there will be – there maybe a small element of profit sharing that comes from the previous quarters. But it won't be on any marginal piece of what we have already experienced in the last two quarter.
Okay. Okay, that’s what I thought, I just want to make sure, you were thinking about things right. In terms of the distribution you know, how do we think about the potential for an increase of the distribution, does it need to come concurrently with a drop down or is it the kind of the thing that you might – may be there is too much volatility on the potential for profit sharing. So does it make sense in this environment, so how do you think about distribution increases and asset acquisitions at the partnership?
I think they gained about 13%, what it makes - very nice comment that you brought is that we asset prices making a lot of sense, values today make sense. And the weakness in the freight market and because of the weakness in the freight market and the overall financing environment, the condition of the bank balance is [indiscernible] you see that we have a lot of opportunities in asset values.
So today it makes a lot of sense to redeploy the money on acquiring vessel, same that this seasonality - low period that because of the fear it created, dislocation in pricing. And that will provide you that, maybe to grow you distributions later with an additional you know, recovery.
Okay. Okay, that’s helpful. And wanted to kind of touch back, with the comments about the order book and one of the things I am just thinking about is for the fourth quarter in particular when you look at sort of the size of the deliveries for the fourth quarter, relative to typical seasonality of the fourth quarter, so an improvement in rates if you normally expect.
Do you think that order book is digestible as you going to into the fourth quarter here, should we able to see sort of the normal seasonal rebound in VLCC rates, how do you think about that?
Yes, I mean, I don’t see why not. I think you have, I would just call it sort of deeper seasonality right now, right. It’s the third quarter. You've got a lot of refinery maintenance that was delayed. So you're doing it, it’s been extended now.
You have some high stocks, right diesel, gasoline. You've also had some other minors, as where you've had the Atlantic suppliers, Venezuela , Mexico, Columbia were a little bit short on their exports.
There maybe fleet come in, but that was kind of a push, because they accelerated. To keep our refiners you have to big surge, slow down a bit, that congested on one. So you have a little bit of deeper seasonality.
I do think a lot of that goes – turns back to maybe not positive, but less negative at least in the Q4 and you have stock piling. And I do think you're going have, you had 24 ships delivered the first half of the year and I think you'll be seeing a kind of similar number the second, let's see what it actually delivers.
But I do think by the time the year is over we'll be you know, near the 20 year average what we've been saying for the last two years. Last year was exceptionally good, but we do think the next few years – let say Q4 is not as high as expected, you have a lot of ships that are older, a lot of ships you know, I think 20% or 30% more that are expected on order now with almost 15 years ageing and they have to go. So it’s a self body mechanism. So we're very confident going forward, let’s see how Q4 develops.
Okay. That makes sense. And my last question would just be on the, your four ships in the fleet on the VLCC side, that kind of have 2.5 years less give or take on the charters. This obviously is not the period you re charter or try to get extensions for those.
But when you think about sort of just the timing of looking at that book of business, is it first half 2017 initiative for you guys or priority for you guys. How do you think about sort of the timing of maybe getting a little bit more extension on some of the VLCC in the fleet?
I think as we're going to be going closer in - Q4 and Q1 is usually seasonally strong, you'll have the opportunity of really seeking those vessels out. I mean, we have seen that you know, one year age or three years of age have been quite comfortably above the level. So I think is a matter of waiting on bringing – coming close to the maturities.
Okay. This is very helpful. Thanks for your time this morning. I appreciate it.
Our next question comes from the line of John Humphreys of Bank of America Merrill Lynch.
Hi, good morning all of you.
I just wanted review, at a question you had mentioned that your costs are fixed until November of this year. If you could just sort of walk me through how you're expecting to change, how those get negotiated and where you expect the new cost to be fixed and how long they will be fixed for?
I mean, the usual agreement that is every two years, they increase, I mean, there is not really any significant increase, actually we are steady for the first time and would not estimate to have any substantial increase, usually the margin were 2%, 3%.
Okay, so 2% to 3% inflation on that, but not expecting any materials of concern?
We don’t see any substantial increase and then it states gone for another two years.
It’s great. And then the next one is just on the Celeste [ph] I've see in the slides, the net charter rate, I had that in it 42,705 and then the 35,000, if you could just sort of explain when that charter rate applies?
This is actually the backstop that, that 25,000 and if apply upon termination of the existing charter of the vessel, so starting mid-December 2016, if you don’t in the alternative employment as a higher rate.
So mid-2016 it will – that charter rate will reset, that 35,000?
No, no, December 2016.
Either re-enter the backstop of 35, or we have an alternative charter at the higher rate.
Okay. But that’s the 35,000 is the backstop. And when do you – is it not until December or you know prior to that if that settles, reset or refine is that a 3Q or 4Q event?
It’s a Q4 event, meaning either we will have before or we'll be at the high rate.
I repeat, 35.
35, yes. Okay. And then just the last one, your maintenance CapEx at 3.7, should we expect that now that the vessels that were brought in June are now part of the fleet, expect that to be maintenance CapEx sort of going forward, 3.7 is that a good run rate?
Okay. Very good. That’s it from me. Thanks.
Ladies and gentlemen, at this time we've reached the allotted time for questions. I will now like to turn the floor back over to Angeliki Frangou for any additional or closing remark.
Thank you. This concludes our Q2 results.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect. And have a wonderful day.
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