Navios Maritime Midstream Partners' (NAP) CEO Angeliki Frangou on Q1 2016 Results - Earnings Call Transcript

| About: Navios Maritime (NAP)

Navios Maritime Midstream Partners L.P. (NYSE:NAP)

Q1 2016 Earnings Conference Call

April 27, 2016 08:30 ET

Executives

Angeliki Frangou - Chairman & CEO

Erifili Tsironi - CFO

Ted Petrone - Vice Chairman

Analysts

Noah Parquette - JP Morgan

Chris Wetherbee - Citi

Amit Malhotra - Deutsche Bank

John Humphreys - Bank of America

Operator

Thank you for joining us for this morning's Navios Maritime Midstream Partners' First 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 also being webcast. To access the webcast, please go to the Investors section of Navios Midstream's website at www.navios-midstream.com. You will 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 let's view the Safe Harbor statement. 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. The 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; next, 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'd like to turn the call over to Navios Midstream Partners' Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

Angeliki Frangou

Thank you, Laura, and good morning to all of you joined us on today's call. We are pleased to report our first quarter results. In Q1, we recorded $17.7 million of EBITDA and $7.5 million of net income, representing an increase of 40.2% and 18.7% respectively over Q1 2015. We also announced a distribution of $0.4225 per unit, representing an annualized distribution of $1.69 per unit and a current yield of approximately 14%. Continued healthy rates for VLCCs and the profit sharing mechanism of our charter agreement created $1.7 million of profits during the quarter. We anticipate continuing to add profit sharing in the current rate environment.

Our total unit coverage ratio for the distribution was a healthy 1.29x for the quarter. While the MLP space experienced a difficult volatility during the first quarter of 2016, we seemed to have bottomed on improving investor sentiment. During the past few months, there seems to have been an even inflationary fear with improvement in energy and commodity pricing. In fact, during March, MLP units tightened by 190 basis points, the biggest positive move since commodity prices began to decline in August of 2014. In addition, Marine MLPs have outperformed the broader MLP index, although the Marine MLP yield is still almost 60% higher from 7.7%.

Slide four represents a summary of our company's position. Our long-term charters provide visible cash flows and we expect about $0.5 billion in long-term contracted revenue with top-tier companies. Our average charter duration of 5.1 years provide a great forward visibility. Overall, we have a solid revenue base for distributions to our unit holders along with upsides with profit sharing arrangement which earned us about $1.7 million in the first quarter of 2016. Our financial strength and flexibility is represented through our conservative leverage profile of 33.6%, net-debt-to-book capitalization. Moreover, as [indiscernible] provide Navios Midstream significant economies of scale as well as access to potential future accretive acquisition. Our operating expenditures grew at November 2016 and Navios Midstream enjoys OpEx around 8% below the industry average.

Slide five shows the Navios Midstream strength. Navios Midstream fleet is a 100% fit for 2016 and 2017. In addition, Navios Midstream enjoys potential upside through profit sharing we generated $8 million in 2015 and $1.7 million in the first quarter 2016. Also, from a balance sheet perspective, Navios Midstream has no forward growth CapEx requirements and not debt maturities until 2020. So we can enjoy significant cash flow generation and have the ability to increased distribution once MLP and energy markets normalize.

Please now turn to slide six. We have a proven ability to grow our cash flow. We grow 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 our third parties should allow us to grow our distribution further. Slide seven demonstrates our liquidity position. We have about $38 million in cash and $198 million of debt. Our leverage profile is conservative with 33.6% in net-debt-to-book capitalization, and no committed growth CapEx, no significant debt maturities until 2020.

And at this point, I would like to turn the call over to Erifili Tsironi Navios Midstream's CFO. Eri?

Erifili Tsironi

Thank you, Angeliki and good morning all. I will briefly review our financial results for the quarter ended March 31, 2016. This financial information is included in the press release and is summarized in the slide presentation on the company's website. During the quarter, our cash flow generation increased due to the strong VLCC market, and we recognized $1.7 million of net income from our profit sharing arrangements. Moving to the financial results, as shown in slide eight, revenue for the first quarter of 2016 increased by $7.4 million to $24.1 million as compared to $16.7 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. During the quarter, we recognized $1.7 million of net income from profit sharing compared to $1 million last year.

In Q1 2016, we achieved an average time charter equivalent rate of $43,476 per day compared to $45,898 per day in Q1 2015. The decrease in time charter equivalent was due to the lower average charter rates for the two VLCCs we acquired in June 2015. All our vessels are fixed on long-time charters with an average remaining duration of 5.1 years. Other expenses for the quarter including management fees and general and administrative expenses amounting to $6 million compared to $4 million for the same period last year. The increase is mainly attributable for the expansion of our fleet. Our OpEx for the vessels excluding dry-docking are fixed at $9,500 per day per vessel until November 2016 under the management agreement with Navios Tankers Management.

EBITDA increased by $5.1 million to $17.7 million for the quarter ended March 31, 2016 compared to $12.6 million for the same period in 2015. Net income for the first quarter of 2016 was $7.5 million or $0.36 per unit, compared to $6.3 million or $0.33 per unit for the same quarter in 2015. Navios Midstream generated an operating surplus for the quarter of $11.3 million, an increase of almost 20% compared to $9.4 million generated for the same period in 2015. Replacement and maintenance CapEx reserve for the period was $3.6 million. Our fleet continues its excellent operational performance. Vessel utilizations for Q1 2016 was 99.8%.

Turning to slide nine for the balance sheet highlights. Cash and cash equivalents was $38 million as of March 31, 2016 compared to $37.8 million as of December 31, 2015. Other assets increased to $14.8 million as of March 31, 2016 compared to $8 million as of December 31, 2015 mainly due to the payment expenses relating to the special survey of two vessels. Long-term debt, net of deferred finance costs and net of discount, including current portion was $197.7 million. Our long-term debt relates to the term loan facility concluded in June 2015 which was utilized to refinance our previous credit facility and to acquire two additional VLCCs. Net-debt to book capitalization as of March 31, 2016 was at the comparable level of 33.6%.

As shown in slide 10, we declared the cash distribution for Q1 2016 of $0.4225 per unit, which translates into $1.69 on an annual basis. This distribution provides our unit holder of yield of around 13.9%. The cash distribution is payable on May 12, 2016 to unit holders of record on May 06, 2016. Total distributions for the quarter amount to $8.7 million. Our common unit coverage for the quarter is 2.86x and our total unit coverage is 1.29x. I would like to remind you that for U.S. tax purpose, a portion of our distribution is treated as return of capital. Also, we report the cumulative annual distributions to common unit holders on Form-1099.

I will now pass the call to Ted Petrone, our Vice Chairman to discuss the industry sections. Ted?

Ted Petrone

Thank you, Eri. Navios Midstream expects to receive over $500 million of long-term contracted revenue with top-tier companies. We have 5.1 years of average remaining employment with strong counterparties, Cosco Dalian, wholly owned by the Cosco Group, 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 in crude oil transportation. We have significant upside through profit sharing which was approximately $8 million in 2015 and $1.7 million in the first quarter.

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 $41,537. Our average fully loaded cost is $18,742. As you know, the daily operating costs includes dry-docking, 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 to 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, as you can see on the lower right hand graph, longer term charter rates have increased dramatically since 2014 and continue at healthy levels. The average year-to-date VLCC earnings stood at approximately $57,000 a day as the end of last week, well above the 10 year general average of about $41,000 a day. As global demand for energy continues to grow, major oil companies and oil producers should seek to secure more vessels on long-term charters. While there will always be seasonality, continued healthy rates are projected going forward even after taking into account this year's order book.

Turning to slide 14, world crude oil consumption has generally grown for 30 years but declines in '08 and '09 due to the global financial crisis. Starting in 2010, world crude oil and refined product consumption returned to this pattern of growth. The main structural drivers going forward are modern VLCC fleet growth, increasing demand from the Asian economies, particularly China and India, as well as growth in the U.S. and Euro zone. The IMF projected global GDP growth for 2016 and 2017 at 3.2% and 3.5% respectively, led by emerging and developing markets growth of 4.1% in '16 and 4.6% in '17. Increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs as we have seen since the middle of 2014.

Turn to slide 15 please, as noted in the top half of slide 15 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 1.9x more oil to 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 U.S., any decline in crude production should lead to increased imports adding to ton miles. Our end desire to increase market share after release from sanctions should increase from demands for tankers particularly if the Saudi [ph] increased production capacity to maintain their market share. The expansion of West to East crude movements can be seen in the bottom part of the slide which shows spot VLCC fixtures from load port West of Suez headed to the East have grown significantly in the past three years increasing ton miles.

Please turn to slide 16, China is the world's second largest consumer of oil and importing more than half of its requirements. Chinese imports have more than doubled since January 2009, representing a 14% CAGR. Crude imports reached 8 million barrels per day in February, an all time record. Chinese crude imports remain elevated in Q1 of this year averaging 7.3 million barrels a day, which represents 800,000 barrels a day increase over 12% over Q1 2015. Additional refinery openings going forward will add about 370,000 barrels a day in crude demand this year. As you can see on the upper right and on the table below, on a per capita basis U.S. oil usage is 7.3x that of China, European use is 3.4x and world use is about 1.6x. If China goes just to world for capita consumption levels, China would require an additional 285 VLCCs. Assuming all crude is imported by sea, this represents an expansion of the existing fleet by about 43%.

Please turn to slide 17, the upper graph spotlights the additional crude demand that is likely to come as the Chinese complete to remaining a 150 million barrels as part of 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 U.S. in 2016, growing to about 13 million barrels by 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 will 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 42% through the end of the first quarter, but there has been no scrapping yet. Forecast for net fleet growth in 2016 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. Thank you.

I would now like to turn the call back over to Angeliki.

Angeliki Frangou

Thank you, Ted. This completes our formal presentation. We open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Noah Parquette of JP Morgan.

Noah Parquette

Hi. Thanks for taking my questions. I just wanted to kind of talk about the dividend, obviously you have good coverage. In the last quarter you made a decision so it's kind of causing increases. Has anything changed there or are you still comfortable with the dividend payout and yeah, just get some color there would be helpful? Thanks.

Angeliki Frangou

Yes, we're comfortable with the dividend, I mean you have – earnings, our coverage is about 1.3x and we have five years of cash flow with visibility.

Noah Parquette

And then, I just wanted to ask about the MLP markets gotten a little bit stronger in last two weeks, last month or so. How do you think about additional drop downs here? Are you still kind of long-haul or what would change your calculus of that transaction?

Angeliki Frangou

I think this is the positive thing to be honest, MLP is moving by 119 points, it has recovered. Of course on the shipping MLPs we have seen recovery, but I think we are -- correct direction. The overall commodity and energy expected [ph]. So I think, the one thing that we can see we can afford to be patient and we are well patient, so we are not in a run. We don't have growth CapEx, so the position we have we are able to – and see further recovery.

Noah Parquette

And then, maybe it's a little early but you mentioned the management contract agreements coming up at the end of the year, the renegotiation. Can you give any guidance on what we could expect or anything just sort of rough any early indications? Thanks.

Angeliki Frangou

The [indiscernible] you cut even the rates, there you can easily see some on those levels, but the important thing is that Q4 is a strong quarter, is seasonally stronger. Sorry, I thought that about the chartering of the vessels, I apologize, I was -- about…

Noah Parquette

No that's fine. Yeah, just the vessel operating expense.

Angeliki Frangou

The operating expense, I didn't hear you, I apologize for that. On the management agreement late in November, there will be a review but I don't expect something that I mean we don't have concluded something but we don't see anything that will be different.

Noah Parquette

Okay. That's all I had. Thanks.

Operator

Your next question comes from Chris Wetherbee of Citi.

Chris Wetherbee

Hey thanks. Good afternoon. Wanted to ask about the depth of the VLCC market, just trying to get a sense, it seems like charterers are probably not particularly anxious to go along at this point, but I'm not sure if you're seeing something different than that in the market currently.

Angeliki Frangou

You are right that you have not seen so much pick up of activity is more in line with the 2014, 2015 was a quite significant pick up on activity. On actual earnings, you can see that this year, year-to-date for 2016 has been better than actual year-to-date 2015, about $57,000 versus $54,000. So, earnings are good. Period charter in 2015 was exceptionally robust, but we do not see anything that -- we don't see that this is an indication. Don't forget that a lot of the vessels were fixed last year, so you have quite a committed fleet. Therefore, knowing VLCC that you have dedicated vessels, you have vessels that are committing in last year in period. So you have less vessels or may be also willing to commit for longer periods.

Chris Wetherbee

Okay, that makes sense. And I guess, if I'm putting myself in a charterer's shoes and thinking about sort of the market, I'm guessing there is sort of a hope that the order book as it plays out really through 2016 and to a lesser extent to '17, would may be dampen rates. To the extent that it doesn't, do you think that there is a sort of psychology or sentiment amongst charterers' changes materially towards the back half of the year? I'm just trying to get a sense of may be sort of how the cadence of this market could play out in terms of the charter debt. It feels to me like there is the opportunity towards the back half of the year may be beginning of '17, actually see a decent bid in the market from these guys because of the expectation that may be sort of these higher rates are going to stick around from longer and once you get past sort of the bulk of the book, the rate environment feels structurally stronger.

Ted Petrone

Chris, I think you're absolutely right. I think what's on paper right, in the second half of the year may be holding some charters back, but if you're sitting on 42% non-deliveries so far, and you project that through the year, you're below 40 ships delivering. And as we said, it's been a stronger Q1, and usually in the last six years, Q1's been about 95% of what the yearly average should be and Q4 is about 150%, right? So if you start getting into the end of the year, the rates start moving pre-winter. Everybody feels the order book isn't what they think it is, although, -- about to do the drill down know what it really is, I think you will start seeing some people coming back in for period, because the following years it goes down slightly and after that, there's no orders, there hasn't been any orders and – we have seen others report and it's actually right, barrier to entries, where the financing is going to come from? Bank, capital markets isn't there right now.

Chris Wetherbee

So yeah, so it seems like it's a pretty strong set up for back half. So I guess when you think about that potential and I guess translating that back to may be growth of the fleet at NAP and then potentially distribution growth, I guess that's kind of how we should be thinking about kind of keeping an eye out at that time of the year to get a signal on may be further drop downs and potentially distribution increase, is that a fair way to think about it?

Ted Petrone

Yeah, and it goes along with the seasonality, right? I think that's probably about right.

Chris Wetherbee

Okay. Great. Well thank you very much. Appreciate it.

Operator

Your next question comes from the line of Michael Webber of Wells Fargo.

Unidentified Analyst

Hello. Hi, this is Hillary calling in for Mike, thanks for taking my questions.

Operator

Michael your line is open, please state your question.

Ted Petrone

It's hard to hear you please.

Unidentified Analyst

Hello? Hi, I'm sorry, this is Hillary calling in for Mike. First I just have a quick question on dry-dock. Do you have any dry-dock scheduled for 2016?

Angeliki Frangou

Yes, there is about three dry-docks.

Unidentified Analyst

Three dry- for the second quarter or just one each quarter, the rest of the year?

Angeliki Frangou

We already have one as in Q1 and developing in Q2 and Q3.

Unidentified Analyst

Okay, great. Thank you. And then in terms of your balance sheet, you definitely have strong balance sheet, just had a question on your term loan. Is there any type of EBITDA covenant attached to the loan? The leverage covenant.

Angeliki Frangou

Leverage covenant exists, but not EBITDA covenant.

Unidentified Analyst

I'm sorry, not on the loan?

Angeliki Frangou

The MLP covenant there is no EBIT

Unidentified Analyst

Okay. And the MLP covenant, what would be the ratio?

Angeliki Frangou

85.

Unidentified Analyst

Okay, great. And that's it for me. Thank you for taking my question.

Operator

Your next question comes from the line of Amit Malhotra of Deutsche Bank.

Amit Malhotra

Hey, thanks guys. Appreciate you taking the question. Had a longer term question on the market, given that you guys are MLP and your duration is I guess almost three years now on the most recent may be roll over. The question I had was when you look at 2018-19, there is a case to be made because of the barriers to entry and the lack of financing that the up-cycle could reaccelerate in '18 and '19 and that's a fair argument. The other part of it that I wanted to see if you had thought about it or had color on is how you think sort of the addition of gas or liquefaction capacity may impact sort of the overall demand, at least on the margin for crude? And whether you think, when we look out to 2018-19 and may be this is an academic question, but 2018-19 do you think there are some risks at the demand side accrued with the introduction of gas vis-à-vis liquefaction capacity?

Angeliki Frangou

I think that is a good question, but is a very, on the actual dynamics of the VLCC and the crude are here to remain. There is going to be a demand of course for gas and that can take you through this. But this is not something that will affect – market as it stand, it is a longer term trend that may be having to do with the position of U.S., Europe and Asia on gas but this is not on the actual fundamentals of VL market.

Ted Petrone

If you're looking at gas prices here in the state, Henry Hub versus what the delivery cost in China it's double there. So I think you have to look at the relationship between the delivered cost on both the products before we start projecting out two or three years in terms of – this is an effect on the margins of both markets. But, at the end of the day, movements of the margins can change the direction. So it -- watching, I agree with you.

Amit Malhotra

Okay. And one more just may be a little bit more tangible question on the duration, the five years is great, but obviously you're looking at a lot that expires in 2.5 to 3 years. And so, what can you do right now where you have may be a little bit better visibility of the strengths of the markets versus whatever happens three, four years from now, hopefully, you guys are right about the markets staying stronger for longer. But is there anything that you can do now over the next 6 to 12 months to may be push out those 2.5 to 3 year explorations may be a little bit more or is that just not possible?

Angeliki Frangou

This is something we are very active on those vessels and at the end we will be looking on expanding that and this is something that is active I mean we are very active on doing the longer duration. And I think as 2016 develops and approach in Q4 which is a stronger quarter, you will be able to do a longer duration on the vessels. This is something that we always examine, we always care about creating a target levels so that you don't have a single point that you really be exposed.

Ted Petrone

And I think having come up to the trading site, one of the worst things a trader can do is trade for the sake of making movements. And I think if we believe seasonality and supply and demand fundamentals second half of the year are going to be better, the best thing to do would be wait till we then before to start trying to put out ships in a longer period. I don't think right now, me personally, this is the right time to start moving. I think it's little too early.

Amit Malhotra

But if we fast forward 12 months, are you basically kind of implying that 5.1 years of weighted average duration could be higher, 12 months out based on the movements you do towards the end of this year?

Ted Petrone

Could be, yes.

Amit Malhotra

Okay, great. Thanks for taking my questions. Appreciate it.

Operator

Your final question comes from the line of John Humphreys, Bank of America.

John Humphreys

Hi, good morning. This is sort of going into Ted what you spoken of before with the non-deliveries and some questions that were brought up around the order book. And if you could just sort of go into a little bit more of taking a look at slide 18 that you've provided, sort of how that – how you anticipate non-deliveries playing out? On the surface, the order book looks quite robust, but if you can sort of help me see into that a little bit more and get some comfort around why the market won't be over-flooded with supply when the Celeste, Kannika, Ocean and Dream come up with charter?

Ted Petrone

You have to look at history that brought us to this point. If you look at the last three years, your non-deliveries is probably close to 40%. The issue has been an ongoing statistical error by the research firms, putting out ships, it's not like the ships don't show up are half-built VLCCs around the world waiting to be finished, they just haven't been there. So, it's been a problem, because back then you stop people from investing but now maybe it's a good play, because people look at your boat and they are saying how high it is? They start at 66 this year, research firm is saying that it may not even get to 40, and so that tells you how the following year is going to go also.

And with the lack of financing, I think the probability is known that we always have to do a probability calculation is that 1.2 million barrels a day increase that the IEA is talking about, remember IEA is usually behind the curve, they are very conservative and why is that being more, but it's just 1.2 million barrels a day and most of that gets moved on these, you will soak up all the new billings this year and next year going forward, because they are projecting at least 1.2 million barrels through 2020. So, when you sit back and take a big picture view, to me, it appears the probabilities of the average VLCC earnings on a quarterly basis being above the 20 year average which is around 40 is very good.

John Humphreys

Okay, great. Thank you very much. And just sort of following up on that, where you said that this might be a little early to start moving on those three charters that are coming up in '18 and '19. Do you have an idea of this year, or '17 I mean have those discussion even begun yet?

Ted Petrone

No, this is just one old trader talking about the market and I can tell you that seasonality will play side by side with people realizing second half order book is not delivering. And I think you'll see more people coming back to the market. And it's like in the old business school lesson about people bringing sheep to the meadow, everybody rushes in at once. And I think that will project – then you'll have an overboard market in terms of period. Right now I think it's oversold because there is nobody there.

John Humphreys

Great. Thank you very much. That's it for me.

Ted Petrone

Sure.

Operator

At this time, there are no further questions. I'll now return the call to Ms. Angeliki Frangou for any additional or closing remark.

Angeliki Frangou

Thank you. This completes our Q1 results.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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