LNG Trade Shift And Fleet Renewal Will Drive Strong Long Term Upside Potential

Catalysts

About Capital Product Partners

Capital Product Partners focuses on owning and chartering modern LNG and multi gas carriers that support global energy trade and the energy transition.

What are the underlying business or industry changes driving this perspective?

• Rapid growth in LNG production volumes following a wave of new project investment decisions is set to materially increase demand for efficient LNG carriers from 2027 onward, supporting higher time charter rates and driving sustained revenue expansion.
• Structural reshaping of global gas trade flows, including the shift of Russian LNG away from Europe toward longer haul routes and substitution by U.S. Gulf exports into Europe, is expected to lengthen average voyage distances and increase tonne mile demand, underpinning utilization and operating margins.
• Accelerating removal and idling of older, less efficient LNG vessels as they approach costly special surveys is tightening the supply of viable ships, which enhances pricing power for CCEC’s latest generation fleet and supports higher earnings over the second half of the decade.
• CCEC’s growing contracted revenue backlog on long duration, high day rate charters secured against blue chip counterparties provides strong forward cash flow visibility. This positions the company to convert its $2.3 billion newbuilding program into rising EBITDA and stable dividend coverage.
• Entry into multi gas and liquid CO2 capable carriers with flexible specifications that can serve LPG, ammonia and petrochemical cargoes leverages emerging demand tied to decarbonization and energy transition. This creates additional high margin growth avenues alongside LNG.

Assumptions

This narrative explores a more optimistic perspective on Capital Product Partners compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Capital Product Partners's revenue will grow by 22.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 24.5% today to 3.0% in 3 years time.
• The bullish analysts expect earnings to reach $21.7 million (and earnings per share of $0.28) by about December 2028, down from $96.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 103.0x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the US Shipping industry at 5.9x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If LNG project timelines slip or fewer new projects reach final investment decision than anticipated, the expected inflection from surplus to deficit in LNG carrier capacity around 2027 to 2028 could be delayed, which would pressure charter rates and weaken revenue growth and earnings.
• A prolonged oversupply in the LNG spot market, driven by idle steam and tri fuel vessels competing aggressively for employment, could cap upside in long term charter rates for latest generation carriers, eroding the assumed pricing power and compressing net margins and future earnings.
• High and rising capital intensity from the 2.3 billion dollar newbuild program, including special survey and outfitting costs for LNG and multi gas vessels, may prove difficult to offset if market conditions underperform expectations, which would increase leverage over time and constrain free cash flow, dividend coverage and equity returns.
• Customer and geopolitical risks around Russian LNG bans, evolving sanctions and shifts in import policy in Europe and Asia could alter trade flows in ways that reduce tonne mile growth versus current expectations, limiting utilization and putting downward pressure on revenue and operating margins.
• If demand for multi gas and liquid CO2 capable carriers, including LPG, ammonia and petrochemical trades, grows more slowly than anticipated or proves more cyclical, the company may struggle to secure attractive employment for its 10 new multi gas vessels, which would drag on fleetwide utilization, EBITDA and overall earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Capital Product Partners is $24.0, which represents up to two standard deviations above the consensus price target of $20.67. This valuation is based on what can be assumed as the expectations of Capital Product Partners's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $720.7 million, earnings will come to $21.7 million, and it would be trading on a PE ratio of 103.0x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $16.77, the analyst price target of $24.0 is 30.1% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.