LNG Charter Backlog And Fleet Transition Will Drive Modest Upside Amid Mounting Industry Risks

Catalysts

About Capital Product Partners

Capital Product Partners focuses on owning and chartering modern LNG and multi-gas carriers that support global energy transportation.

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

• While the company is steadily building a long-duration LNG charter backlog into the late 2020s, any delay or downsizing of LNG projects that have recently reached final investment decisions could leave newbuilds temporarily underemployed or earning lower short term rates. This could constrain revenue growth and slow earnings expansion.
• Although rising LNG trade and longer voyage distances tied to shifting Russian and U.S. export flows should support carrier demand, the current oversupply of prompt tonnage and potential ordering of additional efficient vessels could compress future charter renewals. This could pressure time charter equivalent rates and net margins.
• While the pivot to state of the art LNG and multi gas carriers positions the fleet for tightening environmental regulation, higher lifecycle maintenance and special survey costs for these complex assets may offset part of the cash flow uplift from premium charter rates. This may limit growth in free cash flow and earnings.
• Despite having secured financing for its current multi gas newbuild program and maintaining leverage below 50%, the remaining funding needs for LNG newbuilds, combined with mostly floating rate debt, could erode the benefit from any rate cuts and divert cash away from distributions or buybacks. This could weigh on earnings per share growth.
• While the expected scrapping and commercial removal of older LNG tonnage should eventually tighten supply demand balances, a slower than anticipated pace of demolitions or prolonged idling of legacy vessels could mute the anticipated rate upcycle. This could cap upside to revenue and limit operating margin expansion.

Assumptions

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

• The bearish analysts are assuming Capital Product Partners's revenue will grow by 20.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.5% today to 3.2% in 3 years time.
• The bearish analysts expect earnings to reach $21.9 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 bearish analyst cohort, the company would need to trade at a PE ratio of 76.3x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the US Shipping industry at 6.5x.
• The bearish 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?

• The combination of a record wave of LNG projects reaching final investment decision and an anticipated 50% increase in global LNG trade by the late 2020s could drive a structural undersupply of efficient LNG carriers from 2027 onwards. This could support higher long-term charter rates and lift revenue and earnings over time.
• CCEC’s growing backlog of multi year LNG charters, already totaling up to $4 billion of contracted revenue with an average charter duration of 6.9 years, provides rising visibility and resilience of cash flows. This could support a re rating in the valuation and sustained growth in earnings.
• The accelerated ban on Russian LNG into Europe, together with possible substitution of Russian volumes by longer haul US exports and pressure on Asian buyers to source more US LNG, may structurally increase ton mile demand. This could tighten vessel supply and expand net margins and free cash flow.
• The rapid scrapping and commercial removal of older steam and tri fuel LNG carriers, many facing uneconomic special surveys and prolonged idling, could bring forward the shift from fleet surplus to deficit. This may strengthen pricing power for CCEC’s latest generation fleet and improve time charter equivalent rates and operating margins.

Valuation

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

• The assumed bearish price target for Capital Product Partners is $18.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be $683.3 million, earnings will come to $21.9 million, and it would be trading on a PE ratio of 76.3x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $16.77, the analyst price target of $18.0 is 6.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.