Monday, October 31, 2011

Capital profit disappoints, so why is Evercore pushing this stock?

Since Jonathan Chappell moved to Evercore from JP Morgan, he has been touting the virtues of Capital Products Partners and the management of Evangelos Marinakis. Chappell even went so far as to replace Teekay Tankers in Evercore Partners' conviction buy list. Despite my high personal regard for Chappell as an analyst. I find this viewpoint to be misguided. Recent financial results seem to corroborate my reservations.

Stripping out all of the noise, Capital’s bottom line stood at US$ 1.7 million, well short of the US $6.6 million the market was expecting from vessel operations. Most of its profit was made up of an accounting gain on the takeover of Crude Carriers.

Capital’s CEO Evangelos Marinakis holds the conventional view that the products market is amongst the most attractive in shipping right now. The theory is that this class of vessel, especially MR (medium range) tankers, has less of an order book overhang and will see more demand growth from new refinery projects than the crude sector.

Not everyone shares this viewpoint. DvB Bank, a transportation specialist, warns that product tanker values could fall by a fifth if the European sovereign debt crisis negatively affects all global economic markets and creates a significant drop in demand to ship refined oil products. DvB expects product tanker fleet utilization to remain less than 90% until 2013. Platou Markets - who normally have a fairly positive bias - also do not see relief in tanker markets until 2013. Recent large losses of TORM, an established top tier product tanker operator are ominous for this sector.

What confounds me is why Chappell sees Capital in a more favorable light than methodical players like TeeKay or Scorpio which both have greater depth of management? Compared to these peers, Capital is a relative newcomer without much intrinsic value. It was only last year that Capital began its foray as a listed pure play product tanker company.

By contrast, TeeKay has a proven track record and has made every effort to build intrinsic value in its business. It has a strong presence in higher margin niche businesses like shuttle tankers and LNP and in its cargo book operations where it has built up tanker pools. Scorpio invested in an exceptional chartering brokerage team as well some ex-OMI senior management. It also built a cargo book before entering into capital markets to acquire tonnage.

Marinakis has been more of a Greek wheeler and dealer with his Olympiakos football team involvement. I do not see the same management depth at Capital. Does it belong in the same league as the above mentioned peers? Marinakis tends to be very mercurial in his decisions. After launching his pure product tanker play, he then used company funds to buy a bulk carrier that he chartered to Cosco. A year later, he decided to merge his crude tanker listing into this venture, adding VLCC’s and Aframaxes with significant spot exposure.

Although Chappell is cautious in his market projections in both dry and tanker sectors, there seems some irrational exuberance in betting on Capital over other peer companies with more solid management.

No comments:

Post a Comment