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Market observer with legal background and interest in financial services, physical commodities trading, shipping and irrational exuberance. Values entrepreneurship and good governance, may also use some behavioral investment/contrarian criteria.
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  • Boardwalk Pipeline Partners, The MLP/Full Payout Model, And A Small Investing Experiment

    I know nothing about midstream oil and gas MLPs. I know a bit the "MLP" model in marine transportation, where companies have tried to emulate the MLP funding model. The majority of them, if not all, are not true MLPs in the sense that international shipping is generally not subject to taxation in the first place. They just model themselves after the MLP paradigm and just pay out all or most of something they decide is "distributable cash".

    In shipping for example (my favorite example, in fact), Navios Maritime Partners (NYSE:NMM) runs out of cash from time to time. Today NMM announced another follow-on offering in order to survive its commitment to its distribution (which was more than obvious that could not materialize without fresh money) -

    Of course there is a known debate as to whether MLPs have ponziish elements since most, if not all of them, pay out much more in cash distributions than they earn as income under any type of GAAP. Constant follow-on offerings at inflated valuations refill the tank and everyone is happy.

    If you time it well, you may make a good short trade. In fact, follow-on offerings by definition become more frequent. But in general, investors love MLPs. They have been fabulously succesful, generally offering both capital appreciation but most importantly, distribution growth.

    Of course, it works until it doesn't. The train wreck at Boardwalk Pipeline Partners (NYSE:BWP) shows that anyone who bought at any of the previous 5 or 6 follow-on offerings lost a serious chunk of their "safe" investments.

    There is quite a bit of analysis on BWP on this site. Many argue that it was badly run and its assets mediocre.

    I bought some shares yesterday at $14 as an experiment. MLP funds, income oriented investors and bounce traders will continue to leave the stock. But I would really like to see what happens when management acknowledges that the semi-ponzi can't go on and start running a normal company.

    P.S. In shipping, just after the Great Recession Diana Shipping (NYSE:DSX) decided to cut its dividend. This was a huge surprise for investors, who left the stock in droves. But DSX had a habit of almost-full payout coupled with regular follow-on offerings. By stopping the dividend, they accumulated a huge pile of cash. Of course management uses other methods to skim the cash pile (mainly inflated costs) but the point is that deleveraging and cash accumulation protects your investment.

    Disclosure: I am long BWP.

    Additional disclosure: I am long BWP, sold to close $20 puts NMM today (after previously trying on Dec expiration), and have no position on DSX

    Tags: BWP, NMM, DSX
    Feb 11 2:20 PM | Link | 3 Comments
  • NMM: From Spin In The Press Releases To Spin In The SEC Filings?

    The results of Navios Maritime Partners (NYSE:NMM) last week were a non-event as U.S. investors appear fascinated with the prospect of the company relying on fresh equity raises to sustain a cash distribution which is unconnected with the quality of underlying earnings.

    Cashflows from the drybulk business are evaporating and NMM is looking at a sale and leaseback of containerships with the highly indebted Hyunday Merchant Marine to make ends meet.

    Anyway, whatever works. But seeing accounts receivable increasing, I thought I would check the typically immaculate SEC filings of the company (Form 6-K filed 01Nov2013):

    Accounts receivable increased by $7.7 million, from $7.8 million at December 31, 2012, to $15.5 million at September 30, 2013 due to the increase in amounts due from charterers. The increase in accounts receivable was mainly due to $10.0 million recognized as part of the new suspension agreement for one of the Company's vessel.

    This must be a reference to the compensation for the Navios Melodia, chartered to Korea Line, which was the reason for the accounts receivable increase in Q2. The $10 millions was received over Q3. From the same Form 6-K:

    As part of a new suspension agreement entered into in June 2013, Navios Partners received up-front compensation of $10,000 covering hire revenues for the suspension period until April 2016. During the six months ended June 30, 2013, the amount of $10,000 was recognized in the statement of income under the caption of Other income since the Company has no future requirements to provide services or refund any payments received. During the three month period ended September 30, 2013, additional suspension compensation of $3,333 was recognized in the statement of income under the caption of Other income since the Company has no future requirements to provide services or refund any payments received. As of September 30, 2013, $2,083 remained outstanding from the charterer and is included in Accounts Receivable. This remaining outstanding balance is expected to be received by February 2014.

    In other words, the increase in account receivables for Q3 can't be "mainly due" anymore to the $10 million compensation for the Navios Melodia as only $2 million remain outstanding.

    A $5 million increase in AR is not huge but what is it? I don't know for sure, but let's make a guess.

    While according to the Form 6-K the Navios Pollux remains chartered until 2019 at $40,888 per day, the following bizarre disclosure follows in the Related Party Transactions section:

    In July 2013, Navios Partners entered into a charter with a subsidiary of Kleimar N.V for the Navios Pollux. For this charter, for the three and nine months ended September 30, 2013, the total revenue of Navios Partners from Navios Holdings amounted to $1.5 million.

    The Pollux was included in STX Pan Ocean's fleet - NMM's presentations also included STX as major charterer until Q1 2013. Afterwards, STX disappeared from the presentations.

    So any AR increase is logically related to the Pollux.

    If the Pollux is chartered out to a third party, why is it at the same time chartered to a group company? It looks like a mitigation charter.

    But the 6-K disclosure keeps the Pollux chartered out at $40,888. As NMM is insured for its charter-outs, this could make sense but why no mention of the problem at all?

    Very bizarre. I thought I'd buy some speculative puts as NMM's shelf registration statement expires this week, the stock price has gone up to a level that allows a very quick secondary, the ex-distribution date is this week and the above disclosure shows the typical Navios spin entering into their SEC filings.

    Disclosure: I am short NMM.

    Additional disclosure: I am short NMM via options.

    Tags: NMM, shipping
    Nov 04 11:49 AM | Link | 5 Comments
  • How To Add $100m To Your Company's Annual P&L With One Paragraph

    China Shipping Development, listed in Hong Kong and Shanghai with about $2 billion market, is the largest Chinese tanker and coastal dry-bulk operator, heavily expanding in large wet and dry tonnage. I was browsing its 2012 H1 Results (a loss of RMB395 million or about $62 million) when I stumbled upon the following paragraph:

    "During the period, the Group adjusted the estimated useful life of vessels from the range of 17 to 25 years to 25 years. Residual values of vessels were adjusted from USD180 (approximately RMB1,350) per light displacement ton to USD470 (approximately RMB2,960) per light displacement ton. As a result of these changes in accounting estimates, the depreciation decreased by approximately RMB300,897,000 for the period and will also decrease by approximately RMB601,794,000 for year ended 31 December 2012."

    In other words, the change in depreciation policy added some $50 million to the result for 2012 H1 and will add some $100 million to the full year - reducing the expected losses accordingly.

    This is at a time when it is quite clear that estimates of useful life of shipping assets should be reduced, not increased. Oversupply, charterer vetting procedures and new vessel designs make vessels older than 15 years less competitive and older than 20 years useless for international trade. Scrap steel prices are also on a downtrend and in any event the long-term average is nowhere near USD470 per ldt.

    Straight-line depreciation may not be very much appropriate for a highly cyclical sector like shipping. It is also a non-cash expense. However, using and planning around conservative accounting policies means respect for the shareholder. A number of posts in this instablog expand on depreciation policies in shipping.

    But whatever works for China Shipping Development, which is down 40% for the year and going nowhere. And anyway this is peanuts compared to Groupon accounting:

    Aug 22 5:05 AM | Link | 2 Comments
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