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Capital Product Partners L.P. (NASDAQ:CPLP) has been struggling over the last year under what was expected to be a positive environment for the shipping industry as a whole, primarily from increasing demand and a low count of vessels available to meet demand.
The impact of COVID-19 resulted in the share price of the company dropping to about $6.00 per share in the latter part of March 2020, and after a few months of a temporary rebound, the share price collapsed again in the latter part of July 2020, dropping to about $5.50 per share.
After that, the company started a rebound in its share price, culminating in its 52-week high of $19.65 near the end of March 2022. That only lasted for a couple of weeks before the share price started to fall once again, where it’s been moving in a range of the low $13s to mid-$15s.
In this article we’ll look at the recent earnings numbers, and the probable impact the weak economy, high inflation and high interest rates will have on the performance of CPLP over the next year or two.
Latest earnings
Revenue in the third quarter was $71.86 million, up 66.6 percent year-over-year, but slightly missing by $0.08 million. The increase in revenue from the $43.1 million generated in the third quarter of 2021 was primarily attributed to the increase in the average number of vehicles the company had in its fleet during the reporting period.
Non-GAAP earnings per share were $0.57, missing by $0.43. Overall expenses in the quarter climbed to $40.4 million, significantly up from the $27.8 million in the third quarter of 2021. Total vessel operating expenses increased from $11.3 million in Q3 2021 to $17.0 million in Q3 2022. That was also attributed to the in the boost in the average number of vessels in the reporting period.
Net income in the quarter jumped to $58.7 million, or $2.90 per unit, up 368 percent from the $11.9 million, or $0.62 per unit year-over-year. The increase in net income came from the $47.3 million it received from selling the M/V Archimidis and M/V Agamemnon. Takeaway the sales and net income was down $500,000 for the quarter.
The company held total cash of $144.2 million, which includes restricted cash of $9.7 million required under its financing arrangements. Debt at the end of the quarter was $1.2 billion, down $126.5 million from the $1.3 billion in debt held last year in the same quarter. The decline in debt came paying down principle and debt, repayment of its credit facilities, and a decrease in its euro-denominated bonds.
Other expense of $20 million increased from $3.4 million year-over-year. That’s a concern because $14.9 million of that is related to an increase in finance costs and interest expenses; that’s more than likely going to continue to increase until inflation and rising interest rates are brought under control.
Operating Surplus
Operating surplus is the metric used in the partnership to help determine the performance of the company and its “ability to make quarterly cash distributions.”
Surplus in the quarter was $37.6 million, up from the $29.7 million in operating surplus from the third quarter of 2021, but down from the $43.9 million in the prior quarter.
After the quarterly allocation to the capital reserve, operational surplus stood at $7.8 million. For the third quarter of 2022 the company had a unit distribution of $0.15.
Economic outlook and impact
Economic headwinds will continue to put downward pressure on the container industry, as container charter rates dropped significantly in Q3, according to management, citing “demand headwinds, easing congestion and weaker sentiment.” While rates, at this time, were still higher than they were last year in the same reporting period, I see them continuing to fall as the global economy continues to weaken.
One standout area that could perform well in 2023 is the LNG market. Spot rates in September were up a lot in the charter market, with record high floating storage as a result of the impact of the Russia-Ukraine war. With much of the winter demand in the EU already met though, there are questions that need to be answered as to what the pace of demand will be through next summer. How cold the winter and spring months are will determine demand over the next 6 months or so.
It’s questionable as to whether or not charter rates will be able to maintain pricing power like it did in the third quarter, where they went from $160,000 per day early in the quarter to $230,000 per day by the latter part of the quarter. Again, with EU storage approaching full levels, demand is going to shrink, as should prices.
Conclusion
I don’t see CPLP falling off the cliff over the next year, but I also don’t see a lot to be excited about either.
Even though investors don’t take positions in CPLP for growth, its share price is still a measure of health and performance, and in the regard, I see it trading largely flat in the year ahead, and that points to a performance that isn’t likely to improve much, if at all, in 2023.
How deep and long this recession is will determine a lot of the company’s performance, as will inflation and interest rates, which will have an impact on the bottom line of CPLP.
On the revenue side, I see it being subdued over the next year. What would change that is if it sells more vessels as it did in the third quarter, or the number of vessels in operation for the quarter surprises to the upside. Other than that, its performance should be very modest.
For investors that like this type of holding, I would wait to buy on the dips in order to get a better unit yield for my dollar.
The bottom line for me though is this is a company to pass on. There are other options for income investors that provide more predictable, safer, and higher income.
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