Navios Maritime Midstream Partners' (NAP) CEO Angeliki Frangou on Q1 2018 Results - Earnings Call Transcript

Navios Maritime Midstream Partners L.P. (NYSE:NAP) Q1 2018 Results Earnings Conference Call May 3, 2018 8:30 AM ET

Executives

Angeliki Frangou - Chairman and CEO

Erifili Tsironi - CFO

Ted Petrone - Vice Chairman

Analysts

Operator

Thank you for joining us for Navios Maritime Midstream Partners First Quarter 2018 Earnings Conference Call. With us today from the Company are Chairman and CEO, Angeliki Frangou; Chief Financial Officer, Erifili Tsironi; and Vice Chairman, 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 at 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 call can 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. The information set forth herein should be understood in 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’ll turn the call over to Navios Midstream Partners’ Chairman and CEO, Angeliki Frangou. Angeliki?

Angeliki Frangou

Thank you, Laura and good morning to all of you joining us on today’s call. We are pleased to report the results for the first quarter of 2018. In Q1, we reported $13.7 million of adjusted EBITDA and $2.9 million of adjusted net income. We also announced the distribution of $0.125 per unit, representing an annualized yield of about 11%. Our new distribution policy allows us to redeploy cash flow to renew our fleet at a time when assets are attractively priced, without having to rely on the equity capital markets and also continuing to maintain a healthy balance sheet.

Slide four summarizes our Company’s position. NAP has charters that provide approximately $340 million in contracted revenue. Our fleet is 100% contracted for 2018 at an average rate of $39,443 per day. Our average remaining charter period of 3.1 years provides us with forward visibility. Moreover, we have purchase options for three VLCC vessels expiring in November of 2018 that provide an avenue for significant fleet growth. Our financial strength and flexibility is represented through our conservative leverage profile of 42.3% net debt-to-book capitalization. Navios Group provides Navios Midstream with significant economies of scale as well as access to potential future creative acquisition. Our operating expenses are fixed through December 2018 and are in line with the industry average.

Slide five highlights our recent developments and how we are progressing our plans to renewal fleet in March of 2018 and sale of [ph] 17-year old Shinyo Kannika for $17 million and purchased a 9-year old vessel, Nave Galactic for $44.5 million. As a consequence, we reduced the average age of our fleet by about 11%. We hope to continue to refresh fleet [technical difficulty] because asset pricing attractive while the underlying flotation volumes [ph] are continuing to grow. In these transactions, we were able to have NNA charter rate backstop extended to Nave Galactic, which was also added as collateral under the Term Loan B. Annualized distribution is $0.50 per unit and we intend to deploy it, our excess cash flow to renew fleet.

Slide six outlines Navios Midstream strength. We are favorably positioned to take advantage of attractive vessel valuations. Our balance sheet is strong; net debt to book capitalization is 42.3%; no forward curve CapEx commitment; and no debt maturities until 2020.

Our cost structure is fixed. Under the management agreement with Navios Holding, Navios Midstream operating expenses are fixed until December 2018. Under this arrangement, Navios Midstream does not pay any additional fee for technical or commercial management or for sales and purchase or any financing transactions.

As mentioned earlier, our fleet is 100% fixed to the 2018 including the backstop commitments from Navios Acquisition. Our fleet is fixed at an expected coverage rate of $39,443 net per day for 2018, which is well in excess of the current one year VLCC time charter. For 2019, our fleet is 40.8% fixed at expected average rate of $45,613 per day.

Please turn to slide seven, which demonstrates liquidity position at March 31, 2018. We have $21.5 million in cash and $196.3 million of debt. Our leverage profile is conservative with 42.3% in net debt to book capitalization with no committed growth CapEx and 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. Erifili?

Erifili Tsironi

Thank you, Angeliki, and good morning all. I will briefly discuss our financial results for the quarter ended March 31, 2018. This financial information is included in the press release and is summarized in the slide presentation on the Company’s website.

Moving to the financial results, as shown in slide eight, revenue for the first quarter of 2018 decreased by $1.3 million to $19.8 million compared to $21.1 million for the same period in 2017. Revenue was low due to the lower available days as a result of the sale of Shinyo Kannika as well as the drydocking of one our vessels. All our vessels are vessels fixed on time charters, having an average remaining duration of 3.1 years including backstop commitments from Navios Acquisition.

In the first quarter of 2018, we achieved an average time charter equivalent rate of $39,139 compared to $38,547 for the first quarter of 2017.

Other expenses for the quarter included management fees and general and administrative expenses amounted to $5.9 million, which was in line with the Q1 2017 figure. Our OpEx for the vessels excluding dry docking is fixed at $9,500 per day per vessel until December 2019.

For the first quarter of 2018, EBITDA was affected by $32.4 million one-off non-current book loss on the sale of Shinyo Kannika. Adjusted EBITDA excluding the above mentioned book loss was $13.7 million compared to $14.7 million for the first quarter of 2017. The reduction was mainly as a result of lower revenue due to lower available days, partially mitigated by $0.2 million decrease in other expense and $0.1 million decrease in management fees.

Net loss for the quarter -- net loss for the first quarter of 2018 was $29.6 million. The figure adjusted for excluding book loss on vessel sale result is net profit of $2.9 million or [technical difficulty] compared to $4.5 million for the same period in 2017. The decrease in adjusted net income of approximately $1.6 million was due to $1 million decrease of in adjusted EBITDA, $0.4 million increase in direct vessel expenses, and $0.3 million increase in interest expenses and finance cost, partially mitigated by $0.1 million decrease in depreciation and amortization.

Navios Midstream generated an operating surplus for the quarter of $7.8 million while replacement and maintenance CapEx reserve for the period was $2.8 million. Our fleet continues excellent operational performance. Vessel utilization during the first quarter of 2018 was approximately 99%.

Turning to slide nine for the balance sheet highlights. Cash and cash equivalents as of March 31, 2018 was $21.5 million compared to $37.1 million, the cash and cash equivalents including restricted cash as of December 31, 2017. Following the settlement of the 2017 backstop in Q1 2018 other current assets decreased by $13.7 million. The amount accrued for first quarter of 2018 under the [technical difficulty]. Long-term debt net of deferred finance costs, the net of discount including current portion was $196.3 million as of March 31, 2018. 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 first quarter of 2018 was at a comfortable level of 42.3%.

As shown on slide 10, we declared a cash distribution for the first quarter of 2018 of $0.125 per unit, which translates into $0.50 on an annual basis. This distribution provides our unitholders with a yield of approximately 11%. The cash distribution is payable on May 11th to unitholders of record on May 9, 2018. Total distributions for the quarter amounts to $2.7 million. Our total unit coverage for the quarter is 2.9 times. I would like to remind you that for U.S. tax purposes, a portion of our distribution is treated as return on capital. Also, we report the cumulative annual distributions to common unitholders on Form 1099.

I’ll now pass the call to Ted Petrone, our Vice Chairman to discuss the industry section. Ted?

Ted Petrone

Thank you, Eri.

Please turn to slide 11. Navios Midstream expects to receive approximately $340 million in long-term contracted revenue from top tier companies. We have 3.1 years of average remaining employment with strong counterparties, including the backstop commitments from Navios Acquisition. Through our profit sharing arrangements we can capture and benefit from market improvement over our current charter rates.

Turning to slide 12. Slide 12 shows that 2018 cash flow cushion from our low breakeven. We expect to earn an average contracted daily base rate of $39,443. Our average fully loaded cost is $19,835. As you know, daily operating costs includes drydocking, general and administrative expenses, interest expense and capital repayment. Navios Midstream enjoys vessel operating expenses in line with the industry average. The operating costs under this management agreement with Navios Holdings are fixed at current levels until December 2018.

Turning to slide 13. World crude oil consumption has generally grown for the past 30 years with declines in ‘08 and ‘09 due to global financial crisis. Starting in 2010, world crude and refined product consumption returned to this pattern of growth. The main structural drivers going forward are moderate VLCC fleet growth, an increasing demand from the Asian economies, particularly, China and India.

The IMF projected global GDP growth for 2018 and 2019 at 3.9% for each year with emerging and developing markets growing at 4.9% in 2018 and 5.1% in 2019. Increases in world 2018 GDP year-on-year generally led to higher infrastructure rates for VLCCs.

Turning to slide 14. In terms of the ton miles, the move of crude from West Africa and South America to China uses about as many VLCCs as they move it from the Arabian Gulf, even though the Arabian Gulf shipped about 2 times more oil to China. Increases in Atlantic basin crude going in China in 2017 created an additional demand equaled 31 [ph] VLCCs based on 90-day round trip.

VLCCs supply unfortunately grew faster than demand last year causing lackluster rates for most of last year. As a newbuilding deliveries begin to slow later this year, increasing ton mile demands should bring the VLCC market back to balance. For example, increased in U.S. crude production had led to 89% increase in 2017 exports adding to ton miles.

In 2017, U.S. exported 6.8 [ph] million barrels per month to China. Near term crude export streams from West Africa, Brazil and other Atlantic basin suppliers to the new refineries in the eastern hemisphere should help increase ton miles and support VLCC rates. Going forward, this trend should continue as Chinese domestic oil production declines and consumption increases.

Please turn to slide 15. China is the world’s largest importer [ph] of oil and the second largest consumer of oil importing about two-thirds of its requirements. Chinese imports have more than doubled since January ‘09, representing 13% CAGR. Chinese crude imports averaged 8.4 million barrels a day in ‘17 and 9.1 million barrels a day in Q1 of this year, up almost 7% quarter-on-quarter. Additionally, refinery openings going forward could additional about 2.7 million barrels a day to come on stream from 2018 to 2020. As you can see in the table below, on a per capita basis, U.S. oil usage is 6.7 times that of China, European usage is 3.1 times and world usage is 1.5 times.

If China goes to world per capita consumption levels, China will require additional 261 VLCCs assuming all crude is imported by sea. This represents an expansion of existing fleet by about 36%.

Let’s turn to slide 16. According to [indiscernible] latest worldwide oil demand projection through 2040, about half of the increase in demand will come from China and India. A significant portion of additional demand will come from the Middle East, meaning that less crude will leave the area as exports.

Majority of supply increases will come from non-OPEC Atlantic basin sources and in conjunction with less Middle East exports should increase ton miles as VLCC is going forward.

Please turn to slide 17. The graph on the left hand side on slide 17 shows [technical difficulty]. Even with the recent new building orders, the current order book as of May2nd this year [technical difficulty] 102 vessels that are 17 years in age or older. [technical difficulty]

Please turn to slide 18. The forecast for net fleet book continues to decline from January 1, 2018. With 11 VLCCs new building deliveries so far combined with the previously mentioned 19 VLCCs we moved, net fleet growth year-to-date stands at [technical difficulty]. Given the outlook of continued turmoil, [ph] the supply and demand look healthy going forward.

Thank you. I’d like to turn the call back over Angeliki.

Angeliki Frangou

Thank you, Ted. We’ll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question from Chris Wetherbee with Citi.

Unidentified Analyst

Well, this is William [ph] on for Chris. Thank you for taking my question. I just had a few questions about your renewal targets. So, what you’re thinking about your fleet renewal generally speaking? Are you looking for targeting average age for your vessel fleet or is there a typically age that [technical difficulty] new vessels?

Angeliki Frangou

What we are looking, [technical difficulty] nine-year old vessels. We grew our average age of our fleet by about 11%. There is another two vessels in our portfolio that are our ‘17, ‘18 figures already. [Ph] And by even replacing one, we become much [technical difficulty] industry average which is around 10 years.

Unidentified Analyst

All right that’s very helpful. And when you’re thinking about those renewals, are you thinking about using the dropdown margins in [technical difficulty] have you big trade off between those [technical difficulty]

Angeliki Frangou

[Technical difficulty]

Unidentified Analyst

And on the backstop issue, I’m just wondering, if you could discuss some of the risks opportunity that you see as we move through 2018 and into 2019. What these backstops [technical difficulty]?

Angeliki Frangou

That’s why we gave [technical difficulty]. So if you take the entire portfolio and you assume market around [technical difficulty].

Operator

I’ll now turn the call back over to Ms. Frangou for closing remarks.

Angeliki Frangou

Thank you. This completes our Q1 results.