Capital Product Partners - Going Forward

Feb. 07, 2021 6:32 PM ETCapital Product Partners L.P. (CPLP)30 Comments

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Summary

This blog post reviews the events that have happened at Capital Prodct Partners since my last blog post.
In particular it looks at the effect of the NSC Holdings' vessel dropdowns.
A wag is made at what the future may hold.

Capital Product Partners – Going Forward

Background

For those who are familiar with CPLP or have read my previous blog post on them may wish to skip to the end of this section. A lot of it is a verbatim repeat of the background section from my last blog post. I have added 7 bullets at the end to account for their recent activity.

Capital Product Partners (CPLP) is a Master Limited Partnership that owns 16 container vessels and 1 bulk vessel that are managed and operated by their sponsor, Capital Maritime/Capital Executive.
CPLP was brought public in 2008 by Mr. E. Marinakis and Mr. G. Kalogiratos (aka Jerry)
The original CPLP was an oil and product tanker owner. It entered the bulk market in 2010 with its single bulker and the container market in 2013 with 5 vessels fixed with Hyundai Merchant Marine (HMM). The sponsor continues to have vessels in all shipping areas except for lpg, although they only have small feeder vessels in their container fleet at this point in time.
During 2016, the container vessel market was under extreme stress due to oversupply. The Korean merchant fleet was heavily impacted. HMM basically restructured and Hanjin went out of business altogether. As part of the HMM restructuring, CPLP and other container vessel owners received HMM stock in return for lowering the rates until the start of 2020.
CPLP had a bank facility with a substantial balloon payment due in 2017. Banks were very nervous about extending any credit to any vessel owner at that time. This was a result of them taking extensive losses to a number of other vessel owners.
In order to try to get their bank line rolled, CPLP cut their distribution by about 66 percent and created a large cash reserve.
CPLP was successful in rolling its bank facilities, but their units continued to trade at a discount to Net Asset Value or NAV through 2018. The banks said thank you very much and took the cash reserve and rolled the loan in two tranches.
In november 2018, CPLP announced that it had reached an agreement with Diamond Shipping, which had to that point in time been private, to spin off its crude and product tanker fleet to them in a merger agreement. As a part of this agreement, Diamond Shipping (DSSI) would become public, CPLP unit holders would receive DSSI shares, and CPLP itself would receive funds. The private preferred issue that had been created in 2013 as part of the HMM vessel transaction would be repurchased and cancelled. This transaction was completed at the end of march, 2019. The $CPLP general partner CMar would continue to manage the tankers contributed to $DSSI for a set period of time.
As part of the spinoff, CPLP units were reverse split 7 to 1 and the distribution on them reduced to 4.5 cents pre-split or 31.5 cents per unit post-split. DSSI pays no dividend.
In december 2019, CPLP purchased (dropped) 3 container vessels that were owned by Capital Executive. These vessels were purchased by Capital Maritime/Capital Executive when Hanjin was liquidated in 2016. They are fixed with Hapag-Lloyd through 2026 at this moment. I term these vessels “Hanjin Specials” in my writings.
In January 2020, CPLP increased the distribution to 35 cents a quarter to reflect its increased earnings power due to those drops.
During January 2020, CPLP traded up to over $14 a unit and DSSI traded up to over $17 a unit.
Starting in late january 2020 and continuing through june/july 2020 we had a time space entanglement of the brown matter with the rotating blades due to the covid-19 crisis. The container trade had a severe downturn and any charters that were signed at that time were signed at large discounts to those signed in early january.
CPLP has/had 3 modern wide beam eco vessels fixed with CMA-CGM that are/were up for charter renewal in 2020 and early 2021. One of those has been redelivered to CPLP in june, another was redelivered in september, and the final one is due to be redelivered in Q2 2021. I refer to these as the CMA-CGM vessels.
The going rate for one of these wide beam eco vessels with a large number of outlets for running refrigerated containers (reefer) was around $40K/day in january. That rate collapsed to under $20K/day for a short term charter in june. The one redelivered in june was fixed for under $20K/day for 2 months. It is now delivered into a 2 year charter for a bit under $30K/day. It completed its 5 year special survey during this period.
The second CMA-CGM vessel, the Adonis, was redelivered and had its special survey. It was fixed on a short charter with ZIM of $33.5K/day. It is due to be redelivered around october 2021. Note that there is a window around the redelivery date. If the charter rate is high given the prevailing market, charterers redeliver as early as possible. If it is low, they try to hang on as long as they can. At this point in time, I expect them to hang on to it.
The third CMA-CGM vessel, the Magdelena, is expected to be redelivered in may at this point in time. It will then get its 5 year special survey and be fixed in the market. At the moment, a charter at or above $40K/day seems to be a more than reasonable rate.
In the second quarter of 2020, CPLP interacted with Chinese banks and entered into a sale-leaseback of the 3 CMA-CGM vessels at an interest rate of 3 month Libor plus 260 basis points. CPLP has renegotiated their other bank line to be 3 month Libor plus 255 basis points. A non-cash charge relating to the extinguishment of the earlier bank line was taken in Q2.
In response to the lagging unit price of the CPLP units that made a secondary offering or ATM sale of units to raise capital not feasible, CPLP reduced their distribution to 10 cents a unit when they announced their second quarter 2020 earnings. This will allow them to retain an additional $18 million a year that they can use for fleet expansion or replacement.
Capital Maritime purchased a brace of three 2008 panamax vessels from NSC Holdings. The various members of the shipping press such as Tradewinds incorrectly reported this purchase as having been performed by CPLP. The reports of this purchase surfaced in the press in early september 2020. The reported price was $29,500,000 for the brace.
Shortly thereafter, there were reports in the press that this brace had been fixed for 5 years with Hapag-Lloyd at a rate of $12,500/day.
When CPLP reported their 4^th quarter earnings results on February 29, 2021, they stated that they had bought the brace from Capital Maritime for $40.5 million.
The purchase of these vessels was financed by a sale-leaseback arrangement with a Chinese bank at Libor+2.85%. Amortization of the loan is at a rate of $825K/quarter with a $4.5MM per vessel buyback option at the end. I note that the $4.5MM per vessel is less than probable scrap value. In addition, Capital Maritime extended a financing agreement at 5% for 5 years. The partnership spent $5.1MM of its own money. Financing costs were $600K. Overall, if $CPLP pays $6.5MM per vessel in 5 years, they will own these vessels free and clear.
CPLP stated that the vessels were fixed with Hapag-Lloyd for a period of 5 years at a rate of $12.3K/day with an option to extend at $17K/day. It also stated that opex on the vessels was 6K/day including related party transactions. Mr. Kalogiratos has stated to me that there is little or no incremental G&A on these vessels. The vessels were put through their 5 year special survey and had ballast water management systems installed prior to the sale to $CPLP. Some other more minor improvements were also performed. The stated cost of this activity was $2MM.
When CPLP reported their Q4-2020 earnings, they announced that they had authorized a $30MM buyback of their common units. No time scale was given for this activity. They also noted that the sponsor will have a number of new buildings delivered starting in Q3-2021. My estimate of the raw cost of these new buildings is roughly $120MM per vessel. If they were dropped, they would have a charter in place and I estimate the vessel plus charter cost at $140MM to the partnership.
Q4-2020 results were reported as a slight miss. This is primarily due to a “out in left field” estimate from Randy Givens. He estimated 60 cents for the quarter. Others such as Ben Nolan and myself were much closer. The other analysts on the sell side wanted to see low $0.40s. My estimate of $0.377 was very close to the reported $0.38. That may have been luck and not skill however.
Approximately 18 percent of the CPLP units are currently owned by Capital Maritime and thus by Mr. Marinakis. Less than 1 percent are owned by Jerry and the other members of the board. The author has a significant but less than 1 percent ownership of the common units.

What else is important about their current state?

The current net asset value of Capital Product is over $27 per unit. Net asset value of a shipping company is defined as the value per share/unit of the company if all of their vessels were to be sold in the current shipping market along with their attached charters, their debt repaid, and their preferred shares bought in and any other liabilities paid. In its most elementary form, it is the fair market value of the company in liquidation at the moment. This is a notable increase since my last blog post. This is primarily due to the sudden increase in valuations for used vessels. Mr. Kalogiratos stated in the earnings call that the value of the 3 vessels that were just dropped are now about $51MM in the market. There is some dispute over that number, but the current NAV as computed by J. Mintzmeyer from current Vessel Values numbers is over $27 for the entire partnership. This implies that CPLP is trading at around 37% of liquidation value.

It is unusual for a MLP to trade at or above its NAV unless there is a large moat on the company’s business that inhibits competition or the sponsor is seen as being able to add an unusual amount of value. No such moat exists for the container ship business, quite the contrary. NAV is a fairly reliable metric of how a shipping company’s business can be duplicated however. There is often a premium or penalty attached to a partnership depending on the market’s view of the sponsor. The partnerships in the Navios fuster have traded at a large discount to NAV due to the abusive nature of Ms. Frangou’s actions as the general partner for instance. Opinions can vary, but I do not think that CPLP deserves a large discount.

Capital Product Partners is organized as a C corporation for tax purposes, but has a master limited partnership structure. As a result, they issue a 1099 to US holders and not a K-1. Many US holders consider this desirable. In particular it simplifies income tax preparation and removes any possibility of Unrelated Business Income in an IRA.

Prior to the most recent quarter, the CPLP’s fleet consists of 13 “young” container vessels and one “young” capesize bulk vessel. The following charter profile is from the their fourth quarter earnings presentation and represents the current employment of their fleet heading into the final quarter of 2020:

The Cape Agamemnon was redelivered in the quarter and has gone through its 10 year special survey. At the moment, it is being successfully deployed on voyage charters which are basically known as the spot market. The current rate for a 2 year charter on such a capesize vessel is given as $18.5K->$19K/day by Alibra after a period of softness. The Uruguay, Magdalena, and Akadimos are three modern wide beam eco post-panamax vessels that were built in 2015 and 2016. The Akadimos was redelivered by CMA-CGM, completed its 5 year survey and has been fixed at a rate that was slightly more than $10K/day lower than earlier rate for 2 years due to the effects of covid-19 on shipping demand at that instant. The following is the Harper Peterson rate estimates for 8500 TEU post panamax container vessels for a 2 year charter on the date I am writing this:

You should note the sharp rebound off the low rates and a large week over week rebound since the lows of early in 2020. You should also understand that these are the rates for 8500 TEU in general for a 2 year charter. Vessels such as the CPLP CMA-CGM vessels are modern wide beam eco vessels with a large number of reefer plugs. The Adonis was fixed with ZIM for a short period. It will come off charter in Q3 2021. Like the Akadimos, the Adonis has had its 5 year survey. Both the Akadimos and the Adonis are fixed at rates that are lower than the market at this point in time. At the time when they were fixed, the rates were not unreasonable. The market had a very rapid rebound which I think few people expected. The earliest the Magdalena can be returned is february. The current estimate is that CMA-CGM will do this in may. After it is returned, it will have a month of idle time while it goes through its scheduled 5 year survey. After that, it is expected that it will be fixed with a medium to long term charter. I personally expect it to be fixed on a 3 to 5 year charter at over $40K/day. I may be wrong. I suspect that the Adonis will command a similar charter in Q3 of this year.

The New Drops

During Q4, CPLP dropped three 2008 vintage panamaxes from Capital Maritime. These vessels had been owned by NSC Holdings and had been fixed with Maersk. The purchase by Capital Maritime was done on a speculative basis without charters being in place. The price paid for the three vessels was $29.5MM I believe. After purchase they had their special survey which included the installation of the required ballast water management system, an upgrade to their reefer plugs, and better trim management system which will allow better ballast water intake. Trim management allows the ballast water to be shifted within the vessel to keep the vessel trimmed while it is being loaded and unloaded. By pumping the water between ballast tanks instead of filling one tank and emptying another, these systems reduce ballast water consumption. Since ballast water must be treated before it is discharged, this reduces operating costs. The vessels were also given a new paint job with an anti-fouling paint. This reduces their bunker consumption which makes them more attractive to charterers who have to pay the bunker bill. Along those lines, the vessels are capable of steaming at a very low speed. Since bunker consumption is roughly exponential with vessel speed, this also has attractions given the IMO uncertainty about CO2 production from propulsion. The total costs of this maintenance and improvement was given as two million dollars. They did not have a scrubber install.

These three vessels were purchased at $40.5 million from CMar. In addition to the payments to CMar, an additional $600K was paid in “points” when the vessel was financed. This sum was generated through the use of a 5 year sale-leaseback arrangement, a seller’s credit agreement for $6MM at 5%, and cash from the partnership. The sale-leaseback was for 5 years at a rate of Libor+2.85% with an optional repurchase of the brace of $13.5MM at the end of the agreement. Amortization on the agreement is $825K/quarter. Since the amortization reduces the amount outstanding on the agreement, the “interest” will decrease by roughly $25K/quarter each quarter that the agreement is in force. At the moment, the buyback price of the vessels is less than scrap. Currently, the price being paid for vessels by the recyclers on the Indian sub-continent is about $450/ldt. What it may be in 5 years is anyone’s guess, but my guess is $6MM scrap value per vessel. Others think it is $5MM per vessel. Vessel Values assigns a value of $9MM as demolition value. We shall see. Scrap valuation of a vessel varies according to the number of vessels being sold for scrap and the demand for scrap metal and steel in general. It dropped under $300/ldt during the container shipping glut in 2016. The important thing is that at the end of 5 years, $CPLP can own the vessels free and clear for a final payment of $2M/vessel to CMar, and $4.5M/vessel to the Chinese banks who did the sale-leaseback. Since this is close to scrap value and perhaps below scrap value, the partnership would now own 3 vessels with zero interest cost over the next 7-8+ years and get their “bottle deposit” back at the end of that period. They will have spent a total of $21.6MM to get to this point between the “down payment” and the loan amortization. This is the realistic “basis cost” for determining any return on these vessels. Apportioned over a 13 year remaining lifetime it is $1.66MM for the brace or $554K per vessel per year of vessel lifetime.

So fine, we now own 3 more vessels, how good or bad was the deal? There have been howls about it due to the low 5 year charters that the vessels were fixed on along with the markup on them when they were dropped to the partnership. Certainly, if Capital Maritime had waited a bit, they might have gotten fixed at a higher rate. Of course, if they had been fixed at a higher rate, their cost to the partnership would have been higher since they would have been worth more on a DCF basis. DCF basis is Discounted Cash Flow when used in this context. It is basically the value of the EBIT produced by the vessels over the vessel life discounted at a 10% rate which is something of an industry wide hurdle rate. Let us now proceed to try and attack the deal from a number of angles.

The first angle is the straight Vessel Value valuation for these vessels. Mr. J. Mintzmeyer has kindly given me a valuation for one of the vessels plugging 12.5K/day into the algorithm. It assigned a DCF value to a single vessel of $8.7MM and a present scrap value of $9.15MM. This totals out to close to $18MM a vessel assuming their scrap and a 12.5K/day charter rate till the end of vessel life. I am not totally comfortable with their demolition value. I would prefer to use something like $6MM, but there it is and we are discussing the VV valuation. I am also not comfortable with the assumptions behind the DCF value. After the 3 vessels come off their 5 year charter, Hapag-Lloyd can extend the charters for 2 years and then 1 year at $17K/day. There is no guarantee that they will and there is no guarantee that the market will be strong enough that they will want to, but there is also no guarantee that the market will be distressed either. The $8.7MM DCF value is thus probably very conservative. Three vessels at $18MM each is a total of $54MM dollars of value for the purchase price of $40.5MM. From this viewpoint, the deal was more than reasonable. It was at a roughly 30% discount for a set of assets that will return 10% in earnings over their lifetime. I do not know about you, but I have to make sure the representative at my bank is not drinking coffee when I ask them if they have anything that I can deposit money in that will return 10% because they will spray coffee all over me as they laugh hysterically.

Let us try a different angle. I call this the Jerry angle. Basically, it is trying to value the vessels based on the numbers given in the Q4 earnings presentation. The presentation stated that the brace will produce $32MM of EBITDA over the next 5 years. This is on slide 10 of their presentation: http://www.capitalpplp.com/static-files/8e9397ab-3db5-4e7f-b823-e00902cecba2 along with the assumptions that went into it. Note the 12.3K/day rate given is probably the 12.5K/day rate that the charter specified less a broker’s commission. For simplicity, we will not argue about any of the assumptions given in that slide. So, our job here is to compute the various other things that impact the EBITDA and to determine the basis cost of that resulting cash flow.

EBITDA is by definition Earnings Before Interest, Taxes, Depreciation, and Amortization. It can be transformed into gaap earnings by accounting for those other factors. Taxes are real simple. CPLP basically does not pay any. It is incorporated in the Marshall Islands and most of its operations are not in the US. It is thus reasonable to set this number to zero. Depreciation is also straightforward. The straightline depreciation is to demolition value over a lifetime of 25 years. The lifetime used is totally standard within the marine industry and especially within the container ship industry. I will use a $6MM/vessel demolition value. The vessels have 13 years of life. The cost was $40.5MM. The annual depreciation is thus (40.5-18)/13 million dollars a year or $1.731MM per year. The amortization is usually involved with some sort of “good will” such as above market charters. Given that there are none here, I will set it to zero. Interest costs can be determined from the advertised numbers. The amortization on the lease-buyback is 825K/quarter and the rate is 2.85%+Libor. The starting value of the loan is $30MM. I will assume a Libor of 0.35% at the moment. The current USD 3M Libor as I write this is 0.1988%. Plugging this into a spreadshit (SIC) gives us:

	NSC Vessel Earnings Impact

EBITDA for 5 years	$32,000,000
Depreciation over 5 years	$8,653,846
Scrap Value	$18,000,000
EIT over 5 years	$23,346,154

Quarter Number	Sale Leaseback	Capital Maritime	Total for quarter
1	$240,000	$75,000	$315,000
2	$233,400	$75,000	$308,400
3	$226,800	$75,000	$301,800
4	$220,200	$75,000	$295,200
5	$213,600	$75,000	$288,600
6	$207,000	$75,000	$282,000
7	$200,400	$75,000	$275,400
8	$193,800	$75,000	$268,800
9	$187,200	$75,000	$262,200
10	$180,600	$75,000	$255,600
11	$174,000	$75,000	$249,000
12	$167,400	$75,000	$242,400
13	$160,800	$75,000	$235,800
14	$154,200	$75,000	$229,200
15	$147,600	$75,000	$222,600
16	$141,000	$75,000	$216,000
17	$134,400	$75,000	$209,400
18	$127,800	$75,000	$202,800
19	$121,200	$75,000	$196,200
20	$114,600	$75,000	$189,600

Total over 5 years			$5,046,000

Earnings for 5 years	$18,300,154
Average Earnings per share per quarter	$0.050

Obviously, this is a 5 year average and the gaap for any given quarter will be larger or smaller. It will be smaller initially since the interest paid on the sale-leaseback is larger, and will be larger later since that interest is smaller. The variation over the 5 years is $6,600 or $0.0004 per share. Still good enough for me since I am an engineer and not an accountant by trade. If you want to play, this simple minded spreadshit is available at: http://0008plz.rcomhost.com//public/nscvesselsreturn.xlsx I have assumed that they will continue the Capital Maritime seller’s credit throughout the entire 5 years. Paying it off early obviously effects my numbers. Ok, we now have how much we made, how much did we invest to make it? Well, we started being out of pocket by $5.1MM. We then went further out of pocket by $825K/quarter. Total on that is $21.6MM. We only got back $18.3MM on that. So, we come up short by $3.3MM, right? Well no. That $3.3MM is actually our out of pocket for the next 8 years of earnings power. That earnings power is a hand wave, so let us assume that the charters are done at $17K/day per the extension options. Opex will be higher then, reaching into my bag of numbers I pull out $7,000 per day. Interest will be zero, we own the vessels for terminal demolition value now. This is not strictly true since there is lost opportunity cost on our bottle deposit, but not unreasonable. Depreciation continues at the earlier rate. A conclusion here is that it is a sufficiently accretive deal to be considered a good one. It will boost the gaap earnings of the partnership by 10% per quarter.

To continue to beat the dead horse a bit, let us now run this deal through an IRR calculation. Jerry did that in his slide deck and his numbers came up as 41% to 89% over the life of the asset depending on certain terminal assumptions. Fair enough, but I am a tad fuzzy on what he used for the length of the deal. In order to satisfy my own curiosity, I decided to compute these myself from the cash flows. Plugging the various numbers into a spreadshit and using the Excel IRR function, we get the following:

			IRR Calculation

Year	Cash	Interest	Income From Operations	Amortization	Total Cashflow
2020	-$5,100,000				-$5,100,000
2021		-$1,220,400	$9,204,300	-$3,300,000	$4,683,900
2022		-$1,114,800	$9,204,300	-$3,300,000	$4,789,500
2023		-$1,009,200	$9,204,300	-$3,300,000	$4,895,100
2024		-$903,600	$9,204,300	-$3,300,000	$5,000,700
2025		-$798,000	$9,204,300	-$3,300,000	$5,106,300
2026	-$19,500,000		$12,601,125		-$6,898,875
2027			$12,601,125		$12,601,125
2028			$12,601,125		$12,601,125
2029			$12,601,125		$12,601,125
2030			$12,601,125		$12,601,125
2031			$12,601,125		$12,601,125
2032			$12,601,125		$12,601,125
2033	$18,000,000		$12,601,125		$30,601,125


		Total	Annual
IRR 2021-2025		90%	14%
IRR 2026-2035		183%	14%

There are some obvious things that have to be said. The IRR from 2021-2025 dodges “bottle deposit” issue. If we regard the balloon payments due in 2026 as being equal to the price the assets would fetch in either the P&S or demolition market, this is probably not important. Entering data the way I did implies a period in which there has been a $5.1MM cash flow out and no cash flow in. It probably makes the 2021⇾2025 IRR calculated to be conservative. Finally there is the nature of the hand wave for the rates after 2029. I continued to use the $17K/day charter rate that is the rate at which H-L can extend the current charters on these vessels. I personally expect CPLP to releverage the assets in 2026 and so think that the 14% annualized is an incorrect number. In any event, the IRR of 14% for the first 5 years, is above the hurdle rate of 10⇾11%. Looked at it in that light, the deal is quite good for the limited partners. This calculation is also available on the spreadshit mentioned earlier. Again, the deal does not turn into a pumpkin in 2026. The IRR remains high.

In summary, this deal was a good deal for the limited partners. Jerry has taken a lot of flak for it due to markup on the vessels and the low charter rates they will fetch. Various people look at the markup on the vessels and the higher rates they can fetch today and are of the opinion that Mr. Marinakis won and the limited partners lost. I will not engage in any “what if” scenarios. We are where we are, and the deal is what it is. Mr. Marinakis is not Santa Claus. First he has a dark beard not a white one, and secondly he lives in Greece and not at the North Pole. He is not going to do something that gives the limited partners a great deal and himself a poor one. He is going to do something that gives him a great deal and the limited partners a good one that is above the hurdle rate of 10⇾11% return on their capital. I am just fine with that. He benefits, and the limited partners benefit from deals such as the NSC Holdings vessels. Mr. Marinakis has gotten quite wealthy being in the shipping business. I am fine with that providing that I can make some money too. This deal does that and I am happy with it.

And Then What?

Any further additions to the Capital Product container fleet could several sources. A single vessel with an attached charter might be purchased directly by CPLP. If no reasonably long term charter is attached vessel, I expect the sponsor to purchase and drop once a long term charter is fixed on the vessel. If multiple vessels were involved, Capital Maritime/Capital Executive might buy the brace and warehouse some of them for eventual drop to Capital Product. We saw this with the NSC vessels. Any addition to the Capital Product fleet would have to involve a longer term charter to be a good fit with the partnership structure. The term “long term charter” is usually understood to mean a charter lasting 5 years or more. At the present point in time, it might be reasonable to reduce that to 2 or 3 years. Container liners are still unsure of their long term market due to covid-19. For this reason, they do not want to sign a long term charter at high rates. By the same token the container firms like CPLP would rather not sign a long term charter at low rates either. I expect this situation to resolve over the next year or two, but that is the case at present. The important thing is that CPLP is putting new vessels in service faster than the current fleet ages. Any vessel is a wasting asset. To not go into runoff vessels, either new or old, must be added to the fleet to compensate for the rate at which the fleet ages.

The final way vessels may make their way into the CPLP fleet is the one I expect to happen. That is that one or more of the new buildings that have been ordered by Capital Maritime will be dropped to the partnership. The sponsor has 4 13.2K TEU container vessels due for delivery starting later this year with options for 2 more. These are highly modern builds with extensive reefer capacity, scrubber refit design, etc. They are more fuel efficient than recent buildings and so are going to be very attractive to charters who are concerned about CO2. Of course, not having to pay for a lot of bunker does not hurt. My guess is that these vessels will cost $120MM each at the shipyard. To drop these, CMar would first fix them on a longer term charter and then receive the purchase price plus some valuation of the charter cash flow. A wag is that the total package might be worth $140MM/vessel. At the moment, I suspect that CPLP could get 60% or better financing to do the drops. As a rough guess, they will need $50MM or so per vessel for the “down payment” to drive the vessel off the lot. If they were to be able to get an even greater degree of leverage, $40MM per vessel might be possible. CPLP thus needs $40⇾$50MM per vessel unrestricted cash in the cash drawer to drop these. At the moment, the Q4 earnings release stated that they had $57MM in cash. I assume that they will need around $20MM of reserve cash under their covenants. This gives them $37MM of cash at the moment for both drops and the unit buyback. They can either drop one vessel or do a buyback but not both right this second. The DCF from the 3 new vessels should be $1.17MM per vessel. The DCF remaining from the existing fleet after amortization and payment of the current distribution is about $10.5MM a quarter. This would put them on a glide path to do $20MM of buybacks and drop the first new building. After that, they need to wait about a year between drops unless they can get creative with their financing. If Mr. Marinakis is willing to extend a seller’s credit for some amount and they can do a good deal on bank financing, that interval may be shorter. I think the important thing to note is that I consider it unlikely for CPLP to complete the entire $30MM unit buyback and drop the 4 new buildings unless either they are very creative with financing or we are very surprised by events I cannot foresee. It is possible that no buybacks will actually happen. At the moment, I think Jerry is serious about intending to do at least some of them, but I raise the point. A repurchase of units that are kept as treasury shares to be resold later at a higher price would be an excellent move. Finally, I have to raise the point that it might be possible for CPLP to float a preferred issue. At the moment, the marine preferreds are trading at close to par with the market looking for yield. An 8% preferred for some of the cost of a drop would not be the worst thing in the world, but I think they may be better alternatives. Finally, I can be wrong on my estimates of the cost of these vessels. Frankly, I am not in the habit of going down to the shipyard and kicking the tyres on a new building and asking how much. I think my price is high.

The earnings potential of some of the CPLP fleet is slightly open to question. For most of the fleet, the charter rates are currently determined for some number of years. There are 3 vessels whose rates going forward are somewhat unknown and 1 vessel whose rate going forward is known to be a bit over $10K/day lower than its previous rates. As I have indicated, it appears that the Cape Agamemnon can be fixed for 2 years at about $18.25K/day to $19K/day depending on which basin the vessel will trade in.

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The Adonis and the Magdalena should fix at over 40K/day, but time will tell. The same can be said of the Akademos that cones off charter in 2022.

In summary, that is sort of where we are at the moment. I am sure that I have probably forgotten something, so please comment on anything important that I have omitted.

The Cloudy Crystal Ball

So that is where I think we are at this point in time. The past is easy, the future is less so when it comes to predictions. That is especially so in today’s market. The past week or so has been amazing. We have seen the Robins blow up a couple of hedge funds and have had the S&P 500 close the week at a 2.5% earnings yield and under a 1.5% dividend yield. So please remember, anything I say now is just said with the view to CPLP in isolation. If the market implodes, the vortex will take the price of CPLP down with it for a bit.

Forcing myself to make some predictions and observations, I will state the following. CPLP is the ultimate in a value object. It trades at a P/E of under 5 with the S&P 500 trading at close to 40. It trades at 37% of liquidation value. The S&P trades at 4 times book and that book is larded with intangibles. CPLP looks to grow at 5% plus per year if it can continue to drop vessels or obtain them by some other means. CPLP engages in a cyclical industry. There have been some real booms and some real busts. The busts have come about when the shipowners overbuilt. At the moment, the orderbook for container vessels is extremely low due to the uncertainty as to propulsion technology being required later in this decade. However, high charter prices will keep vessels in the water that would have been demolished years earlier in times past.

My prognosticator says that CPLP should be worth 75% or more of NAV as it stands right this second. That puts a target price on it of around $20. At that price, it would only have a 2% distribution yield though. An increase would be worthwhile from an investor relations viewpoint. In the absence of that increase that $20 may be hard to get to. It may be that the unit buybacks will replace that increase. Stay tuned.

The conclusion that I must arrive at here is that CPLP is a well-run MLP with excellent management. That management is not abusive to the unit holders and has centered on running the company well and attempted to return value to the unit holders. Due to any number of factors, some bad luck, some just because stuff happens, and perhaps an occasional error, CPLP now trades at a large discount to its intrinsic value. The next conclusion is that any increase in the unit price will be slow to happen in the next six months to a year. There may be some sudden shifts in price either up or down due to trading pressure. CPLP is now a very small cap object with only 18 million units outstanding. With no single investor community convinced that it is a good holding at present, volatility will happen. This may provide trading opportunities for those who are inclined to that discipline. Otherwise, CPLP impresses me more as being a slow burn, cash a moderate but not rich distribution check, and a patient holding. A 10 bagger in six months such as Wayfair is not a correct description of them. Container shipping has caught the imagination of some folks who have noticed the container market. A number of other companies have risen very far, very fast. We have also had the first IPO of a shipping company in years.

What am I going to do with my holdings? I will probably continue to hold them. In all fairness, since they are one of the larger holdings in the portfolios that I mangulate, I may use them as a source of cash for other perceived opportunities if they occur. A wholesale exit or aggressive buy is probably not in the future though.

I wish to publicly thank Jerry for taking time out of his busy schedule to talk to me and clear up some questions that I had about CPLP. I continue to hold both Jerry and Mr. Marinakis in high regard as both people and shipping executives.

Disclosure: I own a significant position in CPLP. I have not bought or sold any in the past 10 minutes and I probably will not in the next 10 minutes. Beyond that, I make no promises. The opinions I have expressed are my own, I have not received any compensation for writing this. I will not even get the penny a view Seeking Alpha money. Happy investing, and please let me know if I have missed something or you disagree with my conclusions. If you disagree, please tell me why. Thank you. That is my payment for taking the time to write this.

Happy investing,

Bill & Bucky

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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