Business Context and Reporting Period
Company: Capital Product Partners L.P. (CPLP), a Marshall Islands master limited partnership and international owner of modern double-hull tankers.
Reporting Period: First quarter ended March 31, 2011.
Filing Date: May 5, 2011 (Form 6-K).
Key Events: The Partnership announced a definitive merger agreement with Crude Carriers Corp. (CRU) and the acquisition of the dry cargo vessel M/V Cape Agamemnon from its Sponsor, Capital Maritime and Trading Corp.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $27.7 million | $33.5 million |
| Net Income | $2.4 million | $7.8 million |
| Net Income per Unit | $0.06 | $0.25 |
| Operating Surplus (Non-GAAP) | $9.1 million | $11.7 million |
| Net Cash from Operating Activities | $11.2 million | $11.4 million |
| Long-Term Debt | $474.0 million | N/A |
| Partners' Capital | $238.6 million | N/A |
| Cash and Cash Equivalents | $34.6 million | N/A |
Quarterly Distribution: $0.2325 per unit, payable May 16, 2011.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 17% year-over-year to $27.7 million. Management attributes this to lower charter rates on vessels re-chartered after original fixed-rate charters (2006-2008) expired in 2010.
- Profitability Drop: Net income per unit fell from $0.25 in Q1 2010 to $0.06 in Q1 2011. Operating surplus decreased by $2.6 million compared to the prior year.
- Expense Stability: Total operating expenses remained relatively flat at $17.2 million (Q1 2011) versus $17.8 million (Q1 2010). Depreciation increased slightly to $8.1 million.
- Debt Levels: Long-term debt remained unchanged at $474.0 million as of March 31, 2011.
Guidance, Outlook, and Material Transactions
Merger with Crude Carriers Corp.
CPLP entered a definitive agreement to merge with Crude Carriers Corp. (CRU) in a unit-for-share transaction. The exchange ratio is 1.56 CPLP units for each CRU share (valued at $17.58 per CRU share based on May 4, 2011 pricing). CPLP will be the surviving entity.
- Combined Fleet: Expected to be 2.2 million dwt, consisting of 2 VLCCs, 4 Suezmaxes, 18 MR Product tankers, 2 smaller product tankers, and 1 Capesize dry cargo vessel.
- Market Position: The combined entity is projected to be the eighth largest US-listed tanker company by dwt with the youngest fleet (average age 3.2 years).
- Ownership: Post-transaction, CPLP unitholders will own ~65%, CRU shareholders ~35%, and Capital Maritime shareholders ~32% (including GP interest).
Acquisition of M/V Cape Agamemnon
CPLP agreed to acquire the 179,221 dwt dry cargo vessel M/V Cape Agamemnon for $98.5 million.
- Charter: The vessel is under a 10-year time charter to COSCO Bulk Carrier Co. Ltd., with rates of $53,100/day (gross) until July 2015, then $33,100/day.
- Consideration: CPLP will issue 7.1 million units to Capital Maritime (at $10.35/unit) and pay $25 million in cash funded by a new non-amortizing credit facility from Credit Agricole Emporiki Bank (LIBOR + 3.25%).
Management Commentary and Outlook
Management views the merger and acquisition as accretive to distributable cash flow per unit. CPLP intends to gradually reduce crude spot market exposure from the CRU acquisition over the next 6 to 18 months by securing fixed-period charters. The company expects sustained recovery in the product tanker market due to increasing demand and limited newbuilding supply.
Investor Verification Checklist
- Merger Approval: Verify the outcome of the class vote by CRU shareholders required to close the merger.
- Financing Closure: Confirm the finalization of the $25 million credit facility from Credit Agricole Emporiki Bank for the M/V Cape Agamemnon acquisition.
- Charter Rates: Monitor the re-chartering of vessels previously fixed at 2006-2008 rates to assess revenue recovery trends.
- Debt Covenants: Review the impact of the new debt facility and the merger on the company's leverage ratios and covenant compliance.
- Related Party Transactions: Note that a significant portion of operating expenses ($7.0 million) and revenues ($6.2 million) are related to the Sponsor, Capital Maritime.