Business Context and Reporting Period
Company: Capital Product Partners L.P. (CPLP), a foreign private issuer engaged in the seaborne transportation of crude oil, refined petroleum products, edible oils, and soft chemicals.
Reporting Period: Six months ended June 30, 2011 (Q2 2011).
Filing Date: August 5, 2011 (Form 6-K).
The Partnership operates a fleet of double-hull medium-range product tankers and crude carriers under time, bareboat, and voyage charters. A significant corporate development during the period was the acquisition of the M/V Cape Agamemnon and the announcement of a definitive merger agreement with Crude Carriers Corp.
Key Financial Metrics
| Metric (in thousands USD) | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenues | $55,506 | $65,239 |
| Operating Income | $17,203 | $28,882 |
| Net Income | $17,541 | $12,918 |
| Partnership's Net Income | $17,541 | $11,935 |
| Net Income Per Unit (Basic & Diluted) | $0.44 | $0.41 |
| Distributions Declared Per Unit | $0.47 | $0.64 |
| Cash and Cash Equivalents (June 30, 2011) | $37,868 | $32,471 (Dec 31, 2010) |
| Total Liquidity (Cash + Undrawn Debt) | $289,400 | $283,700 (Dec 31, 2010) |
| Long-Term Debt | $499,000 | $474,000 (Dec 31, 2010) |
| Partners' Capital | $307,608 | $239,760 (Dec 31, 2010) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $9.7 million (15%) to $55.5 million. This was primarily due to lower charter rates on vessels re-chartered in 2010 and 2011 compared to previous periods.
- Net Income Increase: Despite lower operating income, Net Income increased by $4.6 million to $17.5 million. This was driven by a non-recurring gain from bargain purchase of $16.5 million related to the acquisition of the M/V Cape Agamemnon.
- Expense Increases:
- General and Administrative (G&A): Increased significantly by $3.9 million to $5.2 million. This included $2.7 million in costs related to the merger with Crude Carriers Corp. and the Cape Agamemnon acquisition, plus $1.2 million in non-cash equity compensation.
- Voyage Expenses: Decreased by $2.4 million to $1.8 million, largely because the M/T Alkiviadis was operated under time charter (charterer pays costs) rather than voyage charter.
- Debt and Capital: Long-term debt increased by $25 million due to a new credit facility for the Cape Agamemnon acquisition. Partners' capital increased by $67.8 million, primarily due to the issuance of 7.1 million units for the acquisition and net income.
Guidance, Outlook, and Risks
- Merger Activity: On May 5, 2011, CPLP entered a definitive agreement to merge with Crude Carriers Corp. (CRU) in a unit-for-share transaction. CPLP will be the surviving entity.
- Acquisition: CPLP acquired the M/V Cape Agamemnon in June 2011. The vessel is under a 10-year time charter with COSCO Bulk Carrier Co. Ltd., providing stable revenue at rates above market levels.
- Liquidity Outlook: Management believes working capital is sufficient for the next 12 months. Primary funding sources are cash flows from operations, long-term bank borrowings, and external financing for acquisitions.
- Risks and Contingencies:
- Re-chartering Risk: Future cash flows depend on prevailing market rates as vessels come up for re-chartering; rates may be lower than current levels.
- Debt Covenants: Credit facilities require maintaining specific financial ratios (EBITDA to net interest expense, debt to fleet value). A decline in vessel market values could impair compliance, potentially triggering defaults or requiring debt prepayment.
- Market Disruption: Credit facilities contain clauses requiring compensation to banks for funding cost increases due to market disruptions.
Investor Verification Checklist
- Bargain Purchase Gain: Verify the sustainability of the $16.5 million gain from the Cape Agamemnon acquisition, as this is a non-recurring item significantly boosting net income.
- Merger Completion: Monitor the status of the merger with Crude Carriers Corp., including regulatory approvals and shareholder votes.
- Charter Rate Exposure: Assess the impact of lower re-chartering rates on future revenue, noting the $9.7 million revenue decline in the current period.
- Debt Covenant Compliance: Review the sensitivity of the debt-to-fleet-value covenant to potential declines in tanker asset values.
- Related Party Transactions: Note that $11.6 million of revenue (21% of total) and a significant portion of operating expenses were related to Capital Maritime & Trading Corp.