That sinking feeling. You know the one. It usually hits when your recently purchased or prized income stock comes under relentless selling pressure or short attack, and you just can't really justify a reason why. You're not alone in this.
Capital Product Partners L.P. (NASDAQ:CPLP) investors have been navigating choppy seas since June 2014, when CPLP hit a multi-year closing high of $11.42 and immediately began an ongoing retreat. But recent developments regarding the company's fleet have sparked new questions about whether the latest intraday 52-week low of $3.01 is a short-term dip or a sign that this high-yield (roughly 29.81% as I write this) ship is taking on water.
Just two weeks ago, CPLP reported overall solid Q4 and 2015 earnings, noting relatively stable revenues, EPS, and operating expenses, along with positive fleet developments and declining debt. In the press release and conference call, management remarks on rising fleet employment rates among its diversified chemical and product tankers (+$11,300/day), and noted the company's isolation from struggling dry bulk and container spot rates. Added to that, management was optimistic that its two idle containerships, M/V "Agamemnon" and M/V "Archimidis", would earn new charters soon. A few days later, CPLP formally announced these ships earned 12-month charters with additional 12-month options (at higher rates), guaranteeing two new revenue streams. Yet, despite these catalysts for share price strength and dividend security, a new and unpredictable South Korean tsunami is threatening to crest the horizon, overshadowing CPLP's generally positive news.
That tsunami is Hyundai Merchant Marine (HMM), which is drowning in excessive debt that's being exacerbated by plunging dry bulk and container shipping rates, creditor pressure, and capital shortfalls. HMM is a long-time customer of CPLP, employing five containerships on 12-year time charters that each bring in $29,350/day. To little surprise then, headlines like "HMM's shares plunge 20% on North Korean links," "HMM disposes of dry bulk fleet in desperate bid to stay afloat," and "HMM chair will use her own cash to save line" are fueling fears that CPLP could be dragged down as HMM sinks.
Seeing more questions than answers among the comments on recent CPLP article and news discussions (see fellow Seeking Alpha contributor Andres Rueda's recent article, for example), I took the opportunity to touch base with the company's investor relations team to talk about CPLP's relationship with HMM, where it and the overall shipping market may be heading and how investors can better weather the storm.
While there's seemingly endless doom and gloom surrounding all sectors of the shipping space right now, I'd first like to point out that of the 12 analysts ratings available to me via FactSet, CPLP receives 9 "buys," 1 "overweight," and 2 "holds." Second, I'd say the attitude towards the company on Seeking Alpha remains mostly optimistic. How long this optimism remains afloat remains to be seen.
Below is an abbreviated transcript of my conversation with CPLP's Investor Relations advisor. So, let's get this discussion started.
IR: Hi Derrick, how are you? [Investor Relations Advisor name withheld for confidentiality. The advisor represents several competing firms in the maritime space].
DL: Hi, I'm good. Thank you for taking the time to speak with me - that says a lot about the organization right there.
IR: Yeah, well, we have been extremely busy talking to investors and analysts. The Company is, and always has been, very proactive in doing that. Obviously, the market has been extremely weak, no fault of CPLP. I know there is news on HMM, but again, CPLP hasn't announced anything to push down the stock like we are seeing.
DL: I think the thing right now is mostly fear because of the lack of clarity on what's happening at HMM and how it may impact CPLP. We recently received the good news that the formerly idle containerships finally received time charters, but now we have five charters potentially in jeopardy with HMM. Do you have any insight into where the relationship with HMM could be heading at this point?
IR: What I understand from CPLP is this - right now there is nothing to communicate, because there's nothing that they have on the table. What we know regarding HMM is that it was in the press that their creditors are requesting 20-30 percent reductions in rates. But again, this is just something in the press at this point. This is not news directly from HMM. This is just me speaking, but the Korean economy would be hurt severely if HMM goes down or goes bankrupt. So, I believe the government and creditors will do everything they can to work with HMM to prevent that from happening. CPLP issuing any press releases right now would be alerting investors to something that's not there, because HMM has not approached CPLP at this time regarding their charters detailed on our fleet list.
DL: Right, the HMM charters go out several more years, but that's part of the worry. While it's only five ships, that's really nothing for HMM, because as of November 2015 they had 87 vessels leased out, with another 6 planned for 2016. But for CPLP, losing those charters or having to renegotiate rates could really hamper things. But this leads to the point that I want to eventually get across to readers: Are we premature with the fears? I mean, it would be nice to hear that CPLP management is monitoring the situation and has a plan of action if something comes up.
IR: That's very hard to do. Again, CPLP has not been approached by HMM, so management cannot assume anything right now. And obviously, we don't want to put anything in the press that opens up a can of worms with HMM. Obviously, they have a lot of customers, and on a positive, our vessels out to them are very young. What happens in shipping is that you sign a contract, and you can't just back out of it. You have to pay what you agreed to or else, as we have seen with situations in the past, the two sides will go to court and fight it out. So, it's not just about HMM backing out and pretending this money never existed - it doesn't work like that.
DL: So are CPLP shareholders right to be fearful, or is this the time to be patient and level-headed?
IR: Let's assume one of the worst-case scenarios here. CPLP is currently at 1.1x dividend distribution coverage. Even if there is a 30 percent cut in rates for HMM, it will bring down distribution coverage by a very small amount to about 1x coverage.
Let's not forget that CPLP has some Suezmaxes and product tankers with charters expiring soon, and those are doing phenomenal. They are doing very, very well, so that's something to look forward to. And the two formerly idle containerships have been employed above operating expenses. Right now, there is no destruction in CPLP's business or in their revenue.
I'd encourage everyone to listen to the latest conference call. Nothing has changed since then. I think the slide presentation is also worth a look. It's a good company, and yes, the stock price is down, but so are other MLPs and shipping companies; it's not like the market is picking on CPLP alone - it's the whole group. So we have extreme weakness and volatility in the Asian markets - you saw the Nikkei decline? That's unbelievable; that's something you see in the history books - and we have volatility here. So I wouldn't say it's that the Street doesn't like CPLP, it's just that everything is being sold off.
DL: Right, I agree, and what we are seeing is that there's not much, if any, differentiation between the weak and solidly managed companies with strong balance sheets, charters, or access to capital; we are seeing the entire group getting crushed. I don't know how a company actively addresses that.
IR: What happens, as you know, is that analysts can contribute something positive at Seeking Alpha, for example, and investors appreciate that. And I can talk to brokers and shareholders that are positive on the company, that like the company, that like the company's management, that like what the company has been doing... but you know who I don't speak to? I don't speak to the sellers. The sellers never call me, for some reason. I don't understand. But listen, I think saying something only lasts a couple of days; we just need the market to turn around.
CPLP is a good company. The majority of the fleet is locked up in long-term employment. As mentioned above, the two idle containerships have been employed above operating expenses, so we are in pretty good shape.
DL: On that, why haven't there been more details about the rates or customer?
IR: When that happens in the industry, it's usually the request of the customer. It's not that we don't want to disclose the info. We like to be transparent, but sometimes the charterer doesn't want to disclose the rates and time and everything else.
DL: So at this point, do you have any other words for CPLP shareholders? Is it just a matter of staying diligent?
IR: Again, Jerry (CPLP CEO Jerry Kalogiratos) and I talk a lot, and I have the same message as he stated during the conference call. With CPLP, you have a company where the majority of the revenue is already locked up. The majority of the fleet is product and crude tankers that are doing very well. Even with HMM and what is happening in the market overall, when you look at what CPLP has been doing with the fleet and distributions, and raising equity and paying down debt last year - what tremendous timing, by the way - CPLP is probably one of the best-positioned MLPs out there right now.
DL: MLPs are getting a bad rap right now. Do you see sentiment changing anytime soon in the space. What's the outlook within CPLP or maybe the other maritime companies you represent?
IR: It depends. The dry bulk sector is... umm, pick a word... it's just really bad. The spot rates are below operating expenses. Then, on the other side, take the LNG sector - although spot rates are pretty much in line with operating expenses, you have to feel good about that sector going forward. So, it really depends on the sector.
DL: What are your thoughts on trying to invest in the shipping space right now?
IR: You have to look at what each company is doing as far as paying the dividend and their business outlook and growth. Right now, capital markets are choppy, so raising money is a bit tough for those with weak balance sheets. And there's just a lot of news to digest. Look, the global economy has to settle down. There's a lot of volatility out there. So if you're in this market, you are investing for the long haul. Diversify well.
DL: In your view what's behind most of the volatility? Do you see it letting up soon?
IR: Worldwide volatility has to come down - it's just too much. And of course, we have to get a concrete outlook from the Fed. I'm hearing two sides: we may increase rates, or we may go to negative interest rates. It's incredible! That's like saying we may get 20 inches of snow or maybe a nice, sunny, balmy day. We don't know what we're going to get!
DL: Going back to dividends. We've seen companies cutting or suspending dividends, while others are touting their security and even increasing distributions. Then, we have those that told investors the dividend was safe and turned around and cut it. I think that is putting added pressure on share prices across the sector, and is driving uncertainty. What's going on there?
IR: Again, it depends on the space that they're in. Navios Maritime Partners (NYSE:NMM) suspended their dividend because the sectors they have their assets in (container and dry bulk) are in bad shape. Then, there are other companies that have extremely high yields. Are they really going to increase the yield even more? It's a hard decision for management to make during a difficult time.
But it's also a good time for diligent investors. I always tell investors this: Go to the company's website, read the press releases and look at the management commentary and the numbers that they're producing. These are very important things to do, and so many investors don't do it. I'm not sure why they don't. But don't act surprised six months from now if a company says their business is horrible, because it's a trend you probably could have seen coming.
DL: Lazy investors. What about oil's impact on sentiment in the shipping space?
IR: Crude oil is jumping up today, but clearly trending down - it may even hit the teens. That's not very positive for the drilling business, but it is very positive for the tanker business. Everyone thinks the tanker companies are tied to high oil prices, but that's not the case, and there's a big disconnect with everyone always thinks there's a crisis somewhere. We could sit down all the investors in the world and tell them, "Hey, it's like this," and they'll nod their heads and then go do the exact opposite. You can't control it.
DL: Well, it's been good to speak with you instead of reading some prepared remarks, so thanks for taking the time today.
IR: Thank you very much, and it was nice speaking with you. I look forward to touching base again in the future. Listen, there's plenty of stuff out there that you can go through to see the messages for yourself. You can find all of CPLP's earnings and press releases, market commentary, and conference calls on their website. The message is there for you.
So, what can we take away from this?
For one, I think we all need to keep our cool. Emotional investing is not investing, it's reacting, and more likely is guessing or gambling.
Second, the importance of due diligence has never been greater. There are several contributors on this site and others that never take the time to speak with a company's management and spout off opinions, and then, there are others that dive deep into the numbers and really analyze what's driving the business. Choose who you listen to and follow wisely. That's not to say that even the best analysis can accurately predict share price performance. As we are experiencing, fundamentals are certainly not playing a leading role in dictating price performance as of late.
Last, patience is likely the best response to CPLP for now (or possibly buying some protective puts). It's just not clear if HMM will pose a certain threat to the company. If rates do need to be renegotiated, we can clearly see that the performance of the rest of the fleet will soften, or maybe even offset, the blow. So let's let management do their job, while we do ours - which is being responsible and diligent investors seeking alpha, of course.
Disclosure: I am/we are 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.
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