Capital Product Partners, LP (NASDAQ:CPLP) is a Greece-based limited partnership providing crude oil, petroleum products and fuel transportation with a fleet of 34 vessels.
Overview of Current Earnings: via CPLP
Capital Product Partners LP,
The Partnership's net income for the quarter ended December 31, 2016 was $13.7 million compared with $15.4 million for the fourth quarter of 2015 and $11.8 million for the previous quarter ended September 30, 2016. After taking into account the preferred interest in net income attributable to the unit holders of the 12,983,333 Class B Convertible Preferred Units outstanding as of December 31, 2016 (the "Class B Units" and the "Class B Unitholders"), and the interest attributable to the general partner, net income per common unit for the quarter ended December 31, 2016 was $0.09, compared to $0.10 for the fourth quarter of 2015 and $0.07 for the previous quarter ended September 30, 2016.
Total revenues for the fourth quarter of 2016 reached $62.4 million, an increase of 5% compared to $59.4 million during the fourth quarter of 2015. The increase in total revenues was primarily a result of the expansion of our fleet partly offset by the reduction in the charter rate payable to our vessels under charter with HMM following its financial restructuring in July 2016.
As of December 31, 2016, total partners' capital amounted to $927.8 million, a decrease of $10.0 million compared to $937.8 million as of December 31, 2015. The decrease primarily reflects distributions declared and paid during 2016 in the total amount of $68.2 million, partially offset by our net income for the year ended December 31, 2016, the net proceeds from the issuance of common units under our at-the-market equity offering (the "ATM offering") and the equity compensation expense.
As of December 31, 2016, the Partnership's total debt increased by $33.4 million to $605.0 million, compared to $571.6 million as of December 31, 2015. The increase was due to a $35.0 million drawdown under our $225.0 million senior secured credit facility with ING Bank to fund the acquisition of the M/V 'CMA CGM Magdalena', which was delivered in February 2016, and the assumption of a $15.8 million term loan under a new credit facility with ING Bank, in relation to the acquisition of the M/T 'Amor' in the fourth quarter of 2016.
Market Commentary (via CPLP)
Product & Crude Tanker Markets
Product tanker spot rates remained depressed for most of the fourth quarter of 2016, but saw a gradual improvement towards the latter part of the three-month period. In the first month of the quarter, the market was under pressure as lack of arbitrage opportunities and high product inventories had a negative impact on medium-range tanker ("MR") chartering activity, offsetting firm U.S. and Chinese product exports.
Analysts have revised their demand growth estimate for containerized cargo for full-year 2016 down to 3.2% from 3.4% in the previous quarter, with net fleet growth for 2016 also being revised downwards to 1.1% from 2.2% in the previous quarter.
Potential Dilution: (via the Earnings press release)
Mr. Jerry Kalogiratos, Chief Executive and Chief Financial Officer of the Partnership's General Partner,
Fourth, we launched an ATM offering for up to $50 million, with the aim of raising further capital over a period of time for vessel acquisitions, debt repayment or refinancing and general corporate purposes. We aim to only gradually execute the offering.
The possibility of an offering presents uncertainty to the share price as current shareholders could be diluted in the future. The company has fewer alternatives to get financing due to current market conditions and the current debt load. It's important for investors to realize that the possibility of an offering, creates uncertainty and adds volatility to the shares.
As we review the financials, we can see that despite a significant industry downturn over the past 18 months, CPLP is still in adequate shape in terms of the balance sheet and financial flexibility.
Balance Sheet: (via the Company presentation slide deck)
The company describes their balance sheet as "strong." As a value investor, I would describe the CPLP balance sheet as adequate, but not strong. Specifically, the $578M in debt is considerable. Even accounting for the asset value of their vessels and fixed assets at a 30% discount, I do not see a large margin of safety at the current time. And that is a concern. However, I think that the debt load is only a moderate concern for investors at this time.
The earnings strength of the company is what I find their strength, not the balance sheet. As presented, we see the consistent earnings of the company over the last 5 years. It should not be overlooked by investors that the company was able to stay profitable during this downturn, when many of their competitors, like Dryships (NASDAQ:DRYS), were struggling for survival.
Estimates are for CPLP to earn .31/ share this year (IBD/Marketsmith) Current P/E is 10. The P/E is constrained due to industry pressure and fears that the worst of the downturn in the sector is not yet over.
If market conditions were to return to normal, the typical P/E of the company over the last 8 years is ~24. So, at current earnings, we could expect a valuation of $7.20 or a 118% rise from current levels.
It should be noted that investors who have attempted to play a quick rebound in the sector have been burned and I make no predictions as to when investors will regain confidence in the sector and allow valuations to return to normal. However, the earnings and dividend make the risk/ reward favorable to wait during the interim.
Sentiment and Institutional Interest:
In the latest quarter, we can see that 11 funds have sold their stakes in the company. This is the reason why the P/E relative to the historical price is so low. Institutions have taken a wait and see approach to the shares. Also, since losses in the industry have been so pronounced, institutions have realized that they took too much risk in their exposure to the sector. As institutions return to the sector, we expect to see the P/E return to normal levels and the shares appreciate.
The shares generate a healthy cash flow of $1.17/ per share, which is extremely attractive for a $3.30 stock. Again, due to the consistency of the earnings (even during this downturn), this makes the shares that much more attractive.
The shares are currently trading at .41 of book value (IBD/Marketsmith). As a value investor in a distressed industry, I am comforted by the relative value displayed by the low book value.
However, book value alone is not enough to make any security in this situation worth purchasing. The industry is in distress, so logic dictates that the only potential acquirer of a vessel would be another distressed competitor. Additionally, it requires time to liquidate a fixed asset into cash. Book value alone is no guarantee of safety.
Current dividends of .07/ per share or 8.48% annually make for a nice enhancement to the total return. Again, the shares are not attractive just for the dividend, but for the ability of the business to generate income and the strength of the balance sheet.
Because it is difficult to predict when investors will return to the sector and allow the shares to trade at a normal P/E, it is certainly attractive to have a large dividend to support the shares and enhance the total return.
Finally if the industry suffered another downturn, (which I view as unlikely due to the industry trends mentioned previously), the company has the financial flexibility to reduce or cut the dividend. Again, I am not suggesting this is likely. However, it adds an extra layer of security as we evaluate the risk/ reward of the company.
Technical Analysis Overview;
Unfortunately, the shares are still in a downtrend but a bottoming process seems to be underway. At $3.30, the stock sits right under the 50-day and 200 day moving averages. The stock needs to hold this level or the stock could re-test the $3 level. What would indicate a new uptrend would be a break above the $3.47 level, ideally with a surge in volume, indicating increasing institutional interest in the shares.
Based on the consistent earnings and balance sheet, the shares present an attractive combination of medium risk with high appreciation potential.
Risk factors include possible dilution, debt and uncertainty as to when the industry will regain favor with investors.
For investors willing to assume medium levels of risk, there is value and plenty of upside in CPLP.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
Additional disclosure: Investors should consider their overall exposure to the group before adding to positions.
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