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IPO Analysis: Navios Maritime Midstream Partners LP (NYSE: NAP)

By Peter Staas, on Nov. 29, 2014

Navios

Navios Maritime Midstream Partners LP completed its initial public offering (IPO) on Nov. 13 at a price of $15 per share and gave up about 8 percent of its value on its inaugural day of trading.

Don’t let the fledgling publicly traded partnership’s name fool you: A spin-off from Navios Maritime Acquisition Corp (NYSE: NNA), Navios Maritime Midstream Partners specializes in tankers, “floating pipelines” that transport crude oil and other hydrocarbons overseas.

The master limited partnerships (MLP) initial asset base comprises four very large crude carriers (VLCC) that operate under multiyear contracts with an average of 7.7 years remaining.

Navios Maritime Midstream Partners’ counterparties on these agreements are Taiwan-based Formosa Petrochemical Corp (Taipei: 6505, OTC: FPTCF) and China Ocean Shipping Company (COSCO), a state-owned logistics company. The financial strength of these customers reduces the risk of potential default.

Vessels in this class have a cargo capacity of between 200,000 and 320,000 deadweight tons and usually transport crude oil over long-haul routes from the Middle East and Africa to Northern Europe and the Far East.

(Click table to enlarge.)Navios Maritime Midstream Partners -- Inital Fleet

Although the Shinyo Ocean and Shinyo Kannika’s fixtures expire in 2.3 years, Navios Maritime Acquisition has offered to cover any potential shortfall between the vessels’ existing day-rates and their replacement time charters.

All four vessels operate under charters that include a profit-sharing element, which ensures that Navios Maritime Midstream Partners will participate in any upside in the prevailing day-rates for VLCCs.

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For example, the profit share on the Shinyo Ocean is calculated twice annually based on the daily value of the Baltic Exchange Route AG/Japan for the previous two quarters, adjusted for voyage-related expenses. Navios Maritime Midstream Partners and the charterer split any daily profit above $43,500.

Drop-down transactions from Navios Maritime Acquisition will drive much of Navios Maritime Midstream Partners’ growth.

Navios Maritime Holdings (NYSE: NM), a global leader in dry-bulk shipping and general partner to Navios Maritime Partners LP (NYSE: NMM), formed Navios Maritime Acquisition in 2008 as a blank-check company that would use the proceeds from its IPO to acquire tanker assets.

Through acquisitions from distressed operators and new orders from shipyards, Navios Maritime Acquisition has assembled a fleet of 44 vessels, 38 of which were on the water at the end of the second quarter:

  • 11 VLCCs (four of these were contributed to Navios Maritime Midstream Partners);
  • 8 Long-Range 1 (LR1) product tankers;
  • 21 Medium-Range 2 (MR2) product tankers; and
  • 4 chemical tankers.

Navios Maritime Midstream Partners has the option to acquire the seven remaining VLCCs in its sponsor’s fleet.

(Click table to enlarge.)Navios Maritime Midstream Partners -- Potential Drops

Three of these vessels operate under multiyear contracts that would make them suitable for the MLP.

The VLCC C. Dream has 4.4 years remaining on its current charter and includes a profit-sharing arrangement with the customer, while the Nave Celeste, Nave Galactic and Nave Quasar have more than 4 years of contract coverage when you factor in backstops from Navios Maritime Acquisition that would offset any shortfall below $35,000 per day.

Note that the profit-sharing arrangements associated with the latter three vessels will terminate when these agreements reach their conclusion; whether subsequent charters will include similar terms depends solely on prevailing conditions in the tanker market.

The Nave Galactic also operates under a floating-rate agreement, which exposes the revenue generated by this vessel to fluctuations in tanker rates.

We would expect Navios Maritime Midstream Partners’ sponsor to drop down these three vessels first while waiting for prevailing rates in the tanker market to improve to the point that securing longer fixtures for Nave Buena Suerte, Nave Neutrino and Nave Electron would make sense.

Angeliki Frangou, Navios Maritime Acquisition’s CEO, alluded to this strategy during the company’s second-quarter earnings call:

I think what you have seen on the VLCCs, it moved from a one-year time charter in the low $20,000s to now being high $20,000s. And you’ve been seeing rates on the three-year moving to the low $30,000s. This is [indiscernible] (29:14) as market is firming up and it seems that it’s going to be a stronger second half for the VLCC market, that this will be a strategy that as we can see better rates, we will fix the vessels at longer periods with profit-sharing.

Frangou went on to indicate that Navios Maritime Acquisition would look for day-rates to climb into the mid- to high $30,000s for longer periods before pursuing longer fixtures for these vessels.

In addition to the VLCCs, Navios Maritime Midstream Partners’ F-1 registration statement also indicated that the MLP could look to acquire product tankers and chemical tankers, though these vessels tend to operate under short-term contracts.

And although the emergence of the US as a major exporter of refined products and the projected refinery closures in Europe and the Caribbean suggest that product tankers’ ton miles will increase, questions have emerged about whether an influx of new vessels will offset this tailwind.

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The Verdict

Navios Maritime Acquisition’s pipeline of potential drop-down transactions creates a highly visible source of distribution growth, while the minimum quarterly distribution of $0.4125 per unit translates into an implied yield of more than 12 percent at the stock’s current quote.

The day-rates that VLCCs earn in the spot market have rallied considerably this fall, reflecting seasonal strength and the recent drop in crude-oil prices, which has stimulated demand.

Although the tanker market has bottomed from the over-ordering that occurred during the industry’s last up-cycle, additional scrapping will need to occur for a sustainable improvement in day-rates.

Navios Maritime Midstream Partners LP rates a hold. We may become more constructive on the stock once we get a better sense of management’s strategy and the industry is further along in its self-help efforts.

Note that like many marine-transport MLPs, Navios Maritime Midstream has opted to be treated as a corporation for US tax purposes; investors will receive the familiar Form 1099, not the Form K-1 usually associated with publicly traded partnerships.

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