Navios Maritime Midstream Partners LPÂ (NAP, Financial) is a master limited partnership that owns and operates large crude oil tankers under long-term contracts with oil companies, refiners and large vessel operators.
Navios Maritime Acquisition Corp. is the company’s sponsor with 57.9% interest in Navios Midstream as well as 2% interest through general partner, which Navios Maritime Acquisition fully owns and controls. The company has a fleet of four vessels with 4.3 years of remaining average charter period.
Industry dynamics support growth
The International Monetary Fund has projected global gross domestic product (GDP) growth of 3.1% for 2016, 3.4% for 2017 and 3.6% for 2018. Increase in GDP is expected to drive the global demand for oil as well, and this is the reason why oil demand increased by 2.1% (2.0 mb/d) in 2015 and by another 1.6% (1.5mb/d) in 2016. The IEA projects that the demand would further increase by 1.3% or 1.3 mb/d in fiscal 2017.
We can expect the demand to increase considering that in 2016, OEA increased the demand projection five times. Moreover, lower oil prices are a positive factor for increase in oil demand; assuming the price hovers around $60 in fiscal 2017, the demand could further increase.
According to BP 2016 energy outlook, the market with crude oil will gradually get rebalanced with a decline in demand in non-OECD countries. Subsequently, there will also be a rise in demand in emerging countries with China and India accounting for over half of the increase. In terms of production, non-OPEC supply would increase considerably, and the net increase would come from U.S. shale, Brazilian deepwater and Canadian oilsands. Thus, with a demand rise toward non-OECD east Asia, the trade is also expected to shift which would increase medium to longer haul trades.
Also with increasing demand for oil, demand for VLCC fleet is also expected to rise by another 3% to 4% in fiscal 2017 and fiscal 2018. Companies like Navios Maritime Midstream, Euronav (EURN, Financial) and Nordic American Tankers (NAT, Financial), with a more focused approach and strong fundamentals, will see rises in their fleet contracts as well.
Strong growth visibility
Navios Maritime has a long-term charter that provides revenue visibility. The company has 100% of its available days fixed through 2018, which includes the backstop commitment to Navios' acquisition. In addition to this, the MLP enjoyed profit sharing of $4.9 million in fiscal 2016 and $8 million in fiscal 2015. Moreover, the MLP expects to receive $25 million in its long-term contracts with top-tier companies with an average remaining charter period of 4.3 years.
This strong contract and employment period provides visible cash flow with an expected average contracted daily base rate of $39,850 for fiscal 2017. With average fully loaded cost of $19,032, which is expected to remain the same until 2018, the MLP will have sufficient cash flow cushion. A low break-even can be considered another positive for a better outlook of cash flow.
The other important point to note is that the MLP has the option to purchase three vessels from the NNA group which would include any crude, product, LPG or chemical tanker with five-plus years charter. The company is also actively involved in surveying markets for third-party acquisitions.
At the time of IPO the MLP owned four fleet, and it acquired two VLCCs since then, which has led to 50% fleet increase. With purchase option available, the fleet is expected to grow further by 51%. With the potential to expand the fleet, the MLP also has the potential to increase its revenue based on the increasing demand for oil.
Balance sheet and liquidity profile
A strong balance sheet and liquidity status of all oil and gas companies is essential to identify if the company is viable and has the potential to outperform in the long run. This is primarily because the oil price plunge has resulted in tough market conditions, and only companies with strong debt profiles and liquidity positions were able to survive the storm.
Though the market has improved, it is companies like GasLog (GLOG, Financial) that would benefit in the long run. Navios Maritime Midstream is also such a company with a balanced debt profile and no debt maturity until 2020. With cash in hand of $52.8 million and net debt to capitalization ratio of 30.7%, the company has a well-managed debt profile and sufficient liquidity to meet its cash distribution obligation and at the same time invest in capex for fiscal 2017.
Though the stock has seen a few downgrades by analysts, the company has strong fundamentals to outperform in the long run. The company has a well-managed fleet with long-term charter that provides revenue visibility. With annualized cash distribution of $1.69, the company has an impressive yield of 16.1%, which is favorable for income investors. Investors can accumulate this stock for a period of two to three years for sustained distribution and unit price upside.
Disclosure: No positions in the stocks discussed.
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