Capital Clean Energy Carriers Corp. (CCEC) Earnings Call Transcript

Thank you for standing by, and welcome to the Capital Product Partners' conference call to discuss the acquisition of 3 last generation LNG carriers. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company; and Mr. Spyros Leoussis, Business Development Director of Capital Gas Shipment Management. [Operator Instructions] I must advise you this conference is being recorded today, 1st of September 2021. The statement in today's conference call that are not historical facts, including our expectations regarding the impact of the vessel acquisition, cash generation, equity returns and future debt levels, our ability to pursue further growth opportunities, our expectations or objections regarding future distribution amounts or unit buyback amounts, future earnings as well as our expectations regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates may be forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

Thank you, Sarah, and thank you all for joining us today at a short notice. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. Starting with the first slide on Page 2. We are delighted to announce a strategic and highly transformative transaction for the partnership. We have agreed to acquire 3 brand-new, high-specification, latest generation 2-stroke LNG carriers with medium- to long-term employment to BP and Cheniere, 2 major energy companies. The acquisition is taking place at the time when the LNG charter market is at an inflection point, as long-term demand and trade fundamentals for natural gas and LNG are quite favorable. In broad terms, natural gas is expected to be the major transition fuel for the next 15 to 20 years and is expected to cover over 40% of the additional global energy demand. At the same time, LNG is the fastest-growing gas supply source with the market expected to double by 2040, which in turn is expected to translate into significant demand for seaborne transportation. With the already announced acquisition and our plans for growth in this segment, the partnership can play a significant role in the transition of shipping to carbon neutrality as part of the LNG logistics chain. In line with our business model, we are investing in assets with charters in place, providing our unitholders with cash flow visibility. The charters in place are expected to increase contracted revenues for the partnership by 86% and the remaining charter duration to 4.6 years. Importantly, this charter coverage goes beyond 2024, when certain of our container vessels start coming off their long-term charters into unknown container market conditions. At the same time, we are diversifying our revenue stream with the addition of 2 investment-grade counterparties as well as our asset base with brand-new vessels with a longer useful life. Last, but not least, the acquisition of these vessels is an emphatic step towards renewing our fleet with vessels that will reduce the carbon intensity of our fleets and in general, the environmental footprint of the partnership. The average acquisition price of just south of $200 million compares favorably with current newbuilding prices, which are in excess of $205 million for delivery into 2024 and translates into rough delivery cost of more than $215 million. The transaction is expected to be significantly accretive across all metrics, including to earnings per unit and distributable cash flow per unit. Finally, we have managed a completed transaction of approximately $600 million with minimal use of common equity, which is being issued at a premium, while we have secured at no additional cost interest-free unsecured sellers credit, together with the assumption of $424 million of debt at no extra cost. Turning to Slide 4 and a more detailed transaction overview. CPLP will acquire 3 2-stroke X-DF Mark III Flex LNG carriers with partial reliquefaction capacity and the high specification that includes approximately $5 million in extras compared to the standard Korean LNG specification, including an air lubrication system, which increases energy efficiency. The prime fuel of these vessels is natural gas through mainly the boil off of the cargo, but they can also burn conventional fuel. They have an average remaining charter duration of 5.6 years with an average day rate of approximately 67,600. The financing of this transaction is expected to take place with $147 million of cash at hand, the resumption of $427 million of debt with a blended cost of approximately 264 basis points plus LIBOR, $10 million sellers credit and $15 million only in common equity. The seller has a 90-day lockup on those units. We expect that the Aristos I and Aristarchos will be delivered to the partnership in early September, while the Aristidis I will be acquired once we deliver the container vessel Adonis to its buyer, which is expected in November this year. The partnership has also secured an option to acquire 3 sister vessels, all built in 2021, at a total acquisition price of $623 million. The vessels have long-term employment to major cash companies with an average remaining charter duration of 6.3 years and an average rate of approximately $70,650. In addition to that, we retain the right of first offer and a number of additional vessels, including 3 13,000 TEU container vessels with 10-year charters to Hapag-Lloyd and 3 LNG carriers due for delivery in 2022 and 2023. Turning to Slide 5. We expect the addition of the 3 LNGCs to be highly accretive across all metrics. On the last 12 months pro forma basis for the acquisition of the 3 vessels, we expect the Partnership's revenues to increase by 49% to $221 million from below $150 million under the existing fleet, while EBITDA is expected to increase by $58.5 million to $151.3 million, representing a 63% increase. It should be noted here that we do not expect a material increase in the SG&A of the partnership going forward on the back of this acquisition other than the costs associated with the completion of this transaction. Operating surplus after reserves, which can be used as a proxy to distributable cash flow, is expected to increase on a pro forma basis by 34% to $70.4 million or an increase of $0.90 per common unit. Please note that these estimates use average rates and average amortization figures. For a more detailed breakdown on revenues and amortization schedules, please refer to Pages 18 and 19 in the appendix. Turning to Slide 6. The value of our fleet is expected to increase significantly and more than double in terms of book value. In terms of charter-free market value, we estimate that the increase will be close to 55% compared to the current CPLP fleet. Importantly, the average age of the fleet will be reduced to 8.8 years from 10.4. LNG carriers typically have also a longer useful life compared to other vessel types. And as a result, we depreciate their book value over 35 years compared to 25 years for our container and dry bulk vessels. Turning to Slide 7. I believe this is an important slide as it shows not only that the Partnership's remaining charter duration increases by almost 1 year to 4.6 years on the back of the 3 vessel acquisition, thus giving our unitholders increased cash flow visibility, but also provides us with additional contracted revenue from 2024 onwards when many of our container vessels start coming off charter in what could be a more challenging container market to what we are experiencing today. Last, but not least, and turning to Slide 8. We are very pleased that we are able to execute against our plan of reducing the Partnership's environmental footprint with the acquisition of these 3 gas fuel vessels. The vessels are already compliant with IMO 2030 requirements, while they provide the lowest environmental footprint in LNG transportation. In terms of carbon dioxide emissions, natural gas delivers at least 20% reduction, while it does not contain sulfur, so there are no sulfur oxide emissions. Low-pressure engines like the X-DF engines that drive these 3 vessels, reduce nitrous oxide or NOx emissions by 85%, while particulate matter emissions fall by 95% to 100% compared to conventional fuel. Overall, we estimate that the average efficiency ratio or AER, of these 3 vessels to be about 23% lower compared to the average of the CPLP fleet and with the addition to the vessels in our overall fleet, our average AER is expected to drop by 4%. Turning to Slide 9. I would like to introduce Spyros Leoussis, Business Development Director of Capital Gas Ship Management, who has extensive experience in the LNG industry and will cover a few general slides on the industry.

Thank you, Jerry, and good morning, everyone. I would like to start by discussing the evolution of LNGC's existing fleets and the order book. It can be broadly divided into 3 tiers with vessel design and technology advances, making the typical new LNG vessel larger and more efficient. Looking at these vessels, we identify about 1/3 as Tier 3 with steam turbine propulsion typically built between 2000 and 2010 and holding up to 150,000 cubic meters of LNG. Another set of the fleet built between 2008 and 2018 is Tier 2 vessels propelled with Tier 3 engines, while at the same period, the Qatar Qmax, QFlex vessels were delivered. And lastly, from 2019 onwards, the Tier 1 NYK and SCF class of LNGC propelled by 2-stroke engines. We noticed that as a result of improvement in technology, both in terms of propulsion, out of containment system, the latest generation vessels are larger and more efficient. Importantly, we, together with many other industry players, believe that the industry has reached a plateau in terms of vessel propulsion, cargo capacity and cargo containment technology, as there is no significant technological innovation insight. And vessels like the 3 that the Partnership is about to acquire, are significantly more efficient than some of its predecessors. As you can see from the charts at the bottom of the page, the unit transportation cost for the different vessel classes vary significantly among the 3 Tiers. As expected, cost of boil off gas and charter hire have the greatest impact on the total cost and with the difference of over $30,000 per day between the lowest and highest Tier like ours, the new generation vessels have a clear advantage over previous ones. We expect that the favorable charter economics of such vessels, the flexibility these vessels give to customers due to the low boil-off and the reliquefaction capacity and the introduction of the ESI regulatory framework, which is expected to penalize materially the older steamships, will result in increasingly more removals of such vessels from the global fleet and the very distinct 2-Tier market, thus fairly restricting supply of vessels. Turning to the next slide on Page 10. You can see how our average acquisition price of $200 million across the 3 vessels compares very favorably with the current LNG newbuilding prices for delivering to 2024, which stands in excess of $205 million or approximately $215 million on a delivered basis. As a rule of thumb, delivered cost is calculated at approximately an additional $10 million due to the high cost of supervision of such sophisticated vessels and the long lead time from contract signing and tanker fleet deployment to delivery, which varies between 28 to 32 months in Korea. Newbuilding prices for LNG carriers are currently on an upward trajectory due to the increase in cost of raw materials and in particular, steel prices, increasing cost of equipment and also competition from other shipping segments, such as the container market for the same sea building purpose. Finally, another key takeaway from this slide is that the Partnership's entry point is historically quite low, especially if one was to adjust for the earnings differential between latest generation LNG carriers to DFEs or even steamships thus giving the partnership significant comfort in terms of residual value risk. Turning to Slide 11. The LNG trade is expected to grow significantly in the next decade playing a leading role in the energy transition scheme. LNG shipment demand is expected to continue to grow at a steady rate with analysts estimating that another 600 additional vessels above the existing order book will be required by 2014. As a result of fewer FIDs materializing between 2015 and 2018, we expect lower LNG supply growth up to 2024, which, on the other hand, is expected to increase significantly thereafter as most of the increased supply is expected to come from projects under construction that are due to be delivered after 2025, such as Goldman Sachs, LNG Canada, Qatar North Field expansion and Antero. Strong demand and weak domestic natural gas production means Asia may account for the overwhelming majority of global LNG growth in the coming years, with the trend likely to continue beyond 2030. As Northeast Asian demand is increasingly met by North American LNG supply, it is expected to create strong ton mile demand for shipping. From the chart on the right, the route with the highest growth is the Americas Pacific route, which requires around double the donors than any other route. This is in contrast to the Middle East supply, which travels to shorter fall destinations in South and Southeast Asia. For example, at 4.5 million tonnes per annum train in the U.S. Gulf would require 8 to 9 ships to move the entire volume to the Japan, but only 4 to 5 ships to move it to Northwest Europe. The same volume from Eastern Australia to Japan requires only 3 to 4 ships. Turning to Slide 12. The charter expiration of the 3 vessels we have agreed to acquire as well as other optional vessels start from 2025 onwards when analysts expect an increasing favorable demand/supply balance. In the base case, global LNG demand growth is expected to be resilient in the mid-term, supporting demand for LNG carriers through to 2040. The total additional capacity of approximately 135 million tonnes per annum, that is expected to come online by 2027 can potentially translate into demand for 114 new ships to transport the volume. The majority of supply from this project is marketed on a delivered basis, and shipping is controlled by the producers' LNG fleet. As a result of the 134 newbuilds on order and due to be delivered in the period '21 to '25, 114 are committed to charterers or will be only huge ships, while only 20 are potentially available for charter. At the same time, it is important to acknowledge that the shipyards have limited capacity due to strong demand from container ships as well as for LNG fleets ordered by larger projects like the Qatari North Field expansion. Delivery lead times required to commission ships have fallen from 45 months to 30 months. However, in the case of the LNG sector, owners compete for the more limited number of berths capable of building wide build ships. As a result, we do not expect the supply side to change materially in the short to medium term, and together with advantageous demand fundamentals, we expect a favorable charter market ahead.

Thank you, Spyros. Now turning to Slide 14. You can see an outline of the additional 3 LNG vessels, which we have an option to acquire until November 1. These are all sister vessels built in 2021 and have long-term charters in place with BP, Cheniere and Engie, the French utility company. The average acquisition price is slightly higher compared to the first 3 vessels as a result of the younger average age, the higher average day rate and the longer-term period. There is debt financing in place, which we expect to be able to now weigh to the partnership with the amount of approximately $440 million. And as a result, we will require approximately $180 million for all 3 ships or $60 million per vessel. Based on the relatively short fuse of the option, we have already commenced discussions for raising additional capital. In view of the equity valuation dislocation, we will be looking for other types of capital including preferred equity or unsecured debt with our focus remaining on accretion to EPU and distributable cash flow. We sincerely hope that we can deliver on this unique growth opportunity as together with the first 3 vessels we can deliver significant growth to the partnership and enhance the already substantial accretion that the first 3 vessels bring across all metrics, including distributable cash flow. Finally, on the next Slide #15, we have obtained, as part of the negotiation for the acquisition of the 3 LNG carriers, a right to first offer from our sponsor Capital Maritime on a number of additional vessels, including 3, 13,000 TEU container vessels with delivery at the end of 2022 and early 2023, which have a 10-year charter in place Hapag-Lloyd as well as 3 additional LNG carriers with delivery in 2023. The right of first offer vessels amount to total market value of approximately $1 billion, thus giving us further growth potential beyond the vessels we are about to acquire under 3 optional vessels. Finally, I would like to stress that our Board will continue to review the partnership's capital allocation policy with a view to growing the partnership but also continuing to return capital to unitholders through distributions to our common unitholders as well as unit buybacks. This concludes the presentation for today. I'm pleased to answer any questions that you might have.

[Operator Instructions] Your first question comes from the line of Ben Nolan from Stifel.

All right. Congratulations on getting this deal. I wanted to dig in a little bit more on some of the options as it relates to these first 3 ships specifically. I know in the press release that you said that the 2 vessels on contract to BP have option periods that you're sort of baking in to the total cash flow profile. I kind of used back of the envelope math and was getting about $50,000 a day or so. I don't know if that's right. But maybe if you can confirm that? And then also, if you could talk about what some of the types of rates that are outlined and some of the longer-dated options, just so we can get a better sense of sort of what the full option cash flow profile might look like?

Thank you, Ben. There is a reason that we did not include the actual charter rates because that was part of the agreement that we have with the charter, so we cannot disclose the exact numbers. But I think if you look at Page 18, you will find a very detailed kind of year-by-year breakdown of the average rate across the 3 ships. And I think that will give you a good visibility of what to expect. Maybe I should say just a few words on the BP charters and why we are assuming that these first 2 sets of options will be exercised. So the -- there is a background to this, and it was that BP at the time was looking for a 7-year charter. We found the creative solution, whereby the charter was structured such that the first 3 years are at a very high rate, which comprised, let's say, in the firm period, and the BP has 2 sets of 2-year options at rates very close to historical lows. So in this way, BP got the benefit of avoiding to have to record the total duration of the charter under the new lease standards or so in their books. And we, as owners get the benefit of being paid upfront at a very high rate and taking only, in our opinion, a very low calculated risk of the additional 2 to 4 years not being exercised. So this is the reason why no materials, we assume, effectively that the 2 sets of 2-year options, so up to 7 years is part of the firm period or will be exercised. So BP has additional options after that for another 6 years at more normalized rates. But of course, we don't take this into account. I hope this partly answers your question. I know that I can't give you the exact rates. But I think, again, if you look at Page -- 2018, I think you can -- sorry, Page 18, you can infer most of it.

Okay. No, that's helpful. And that's -- using Page 18 is how I was getting to that 50-ish number, although it's sort of hard to say without the front end. But obviously, it seems to be at a price that I would agree with you, they would be incentivized to exercise. So the...

But as you can see, I mean, look at the last box there, the last row there -- thereafter, you can see that's around $62,000 per day and that's after Cheniere has expired. So I'm not sure how you're getting to the $50,000 number, but this is what I think you should be thinking. Importantly, I would say that even in the very tough market that we experienced about a year ago, we would have expected a charter to have exercise an option like the one that BP was holding. So I don't think we have seen a market yet where that option wouldn't be exercised in the way that it's structured. So we are -- that's why we feel quite comfortable.

Okay. That's helpful. And yes, looking at that, I didn't put that together, but that makes sense. The other question around those options that I had was when -- what's the time frame as to sort of when they would need to exercise those? I mean, is it 6 months before? Obviously, it seems like they will, but just trying to get a sense of the timing?

It's 9 months before the due date. That's another benefit, if you want.

Sure. And then lastly for me, just thinking about the options on -- away from this, but the options on the other 3 LNG carriers that you have, is it pretty short window of time, just a couple of months between now and when you would need to exercise those options. Can you maybe just talk me through sort of what the thinking was there with respect to kind of a narrow window?

So the optional vessels were negotiated together with the firm vessels earlier in the summer. We have to go through a long process, as you know, with the involvement of the conflicts committee who take their own advice and Turner's opinions in all acquisitions, if there's involvement of a related party, in this case, 50% of these assets is beneficially owned by the Marinakis family. The other 50% is owned by a well-known financial sponsor out of the U.S. The prices that we have negotiated, I think, across the 6 vessels are quite attractive, especially in view of the developments in the newbuilding market. We are seeing LNG prices -- LNG vessels being priced at $205 million for basic spec and spec differentials in LNGs can be $3 million to $5 million. And so if you add to that cost of supervision, initial supplies and equity cost, that's well north of $215 million. So it's not that we can -- we could negotiate a very long tenor that option, but having this in mind, we have already started discussions on the potential funding of these optional vessels. As you saw in the presentation, the funding gap is about $180 million, assuming we take over the existing debt. One thing to take into account is that if you look at our cash position, pro forma for these acquisitions and the delivery of the Adonis to its buyers, it goes down to around $15 million. If you take into account similar, let's say, recommended reserves like the ones that we have been generating over the last few quarters, you would get, let's say, by the fourth quarter, to a cash balance of $30 million, $40 million. So this means that we can potentially use a small amount from our cash, $10 million to $20 million, but that would still leave another $160 million to $170 million to cover with external capital. Now in the various discussions we are having, the -- for the funding, they range for very different types of product from preferred equity to unsecured debt. Obviously, the focus is on accretion to APU and DCF, distributable cash flow. And at the same time, as I said in my remarks, we recognize there is a substantial gap in our equity valuation and hence, common equity is not our focus. I mean, we just completed the transaction of $600 million with only a very small equity issuance and that was at the premium and after negotiating also very favorable sellers credit. So it's ongoing discussions. I think with these attractive assets and charters in place, I'm hopeful that we'll find the right capital to exercise this option. Can we extend the option period? That I don't know. There is obviously, in a way, it is a related parties and affiliate, but it's not controlled 100% by the capital group. So we will try to, if possible, to execute within the time period.

All right. As always, Jerry, you're great about giving a whole lot more information than I even was thinking about. So I really appreciate it.

Thanks, Ben.

Your next question comes from the line of Liam Burke from B. Riley.

Jerry, on a relative basis, it looks like you'd like to move away from the container space, even though you obviously are still invested in it to the LNG space, but looking at where your options are with your sponsor that includes the additional purchase of container vessels. So how are you looking at the world in terms of relative LNG to container? It looks like you're still very positive on both spaces. Well, very positive on LNG, but you're still positive on the container space.