2023-04-04 15:03:05 ET
Summary
- Navios Maritime Partners L.P. enjoyed record-setting charter rates during 2022 that saw a massive cash windfall.
- Despite ending the year on a positive note, thus far into 2023 their unit price is down with their charter rates for their containerships and dry bulk vessels under pressure.
- The one bright was their oil tanker that could have actually benefited from weak economic conditions, thereby helping to offset the pain elsewhere.
- Alas, it seems OPEC destroyed this hope by cutting oil production and thus demand for their oil tankers.
- Given that 2023 looks difficult in every way, I believe that maintaining my sell rating on Navios Maritime Partners L.P. is appropriate.
Introduction
When last discussing Navios Maritime Partners L.P. ( NMM ) back in late 2022, they were pushing ahead with a debt-funded capital-intensive strategy that, as my previous article warned, seemed alike to loading up on the wrong cargo, metaphorically speaking. Whilst it remains too early to tell as these are medium to long-term investments, in the short term it seems that 2023 looks difficult in every way, especially after OPEC announced a surprise oil production cut that is not good news for unitholders.
Coverage Summary & Ratings
Since many readers are likely short on time, the table below provides a brief summary and ratings for the primary criteria assessed. If interested, this Google Document provides information regarding my rating system and importantly, links to my library of equivalent analyses that share a comparable approach to enhance cross-investment comparability.
Author
Detailed Analysis
Thanks to the record-setting charter rates for containerships and dry bulk vessels during 2022, they enjoyed a massive cash windfall with their operating cash flow climbing to a never-before-seen $506.3m and thus almost twice as high year-on-year versus their already very strong result of $277.2m during 2021. That said, their free cash flow was still negative $110.4m, which was due to vessel acquisitions that I view as capital expenditure given they are both routine and required to sustain their operations in the medium to long-term.
When viewing their operating cash flow on a quarterly basis, it shows they brought home $140.1m during the fourth quarter of 2022. Whilst down sequentially versus their previous result of $219.1m during the third quarter, this was due to their sizeable $47.2m working capital build. If these movements are excluded from their reported results, it leaves their underlying result at $187.3m during the fourth quarter, which was actually record-setting and surpasses their previous equivalent result of $171.2m during the third quarter. Despite this great end to the year, their unit price is down thus far into 2023 with charter rates for most of their vessels under pressure.
Navios Maritime Partners Fourth Quarter Of 2022 Results Presentation
Their fleet is comprised of three types of vessels, namely oil tankers, containerships and dry bulk vessels that respectively comprise 46, 47 and 83 vessels of their total 176 vessels, as per slide six of the fourth quarter of 2022 results presentation . Despite being responsible for their record-setting results during 2022, alas they saw charter rates plummet by early 2023 as market conditions now swing to a bust after a boom, as the above graph shows. Whilst there are many moving parts, charter rates for containerships are suffering a double-whammy of supply-chain pressures easing alongside weak economic conditions, thereby leading to a prolonged imbalance in supply and demand for vessels.
Fitch Ratings
Whereas in the case of dry bulk vessels, their charter rates remain depressed as the reopening of the Chinese economy proves slow and not driven by massive construction stimulus. This already did not see a positive outlook going forwards into 2023 but in light of the recent banking crisis and associated economic concerns that arose back in March, it create further headwinds. A fragile stability is seemingly back after Credit Suisse Group AG ( CS ) was taken over to avert a potential catastrophe, although there is no way that banks collapsing is anything other than a negative indicator for the economy and thus by extension, containerships and dry bulk vessels that benefit from a strong economy.
The one bright spot was their oil tankers, which started the year on a solid note before seeing their charter rates surge a few weeks ago to circa $100,000 per day for a VLCC. Alas, sadly for their unitholders, OPEC announced a surprise oil production cut, and whilst this sent oil prices higher, it nevertheless hurt charter rates for oil tankers.
Almost comically, higher oil prices are not good news for oil tankers when they stem from production cuts as this actually means less demand for oil tankers to transport and store oil. In theory, a recession or weak economic conditions could have actually helped oil tanker charter rates by increasing demand for floating storage, as was the case during 2020 when the Covid-19 pandemic saw a record oil production oversupply.
Unfortunately, OPEC destroyed this hope and, given their clear willingness to cut production to support prices, I suspect that if oil demand further suffers going forwards into 2023 due to weak economic conditions, they are likely to keep cutting their production to support prices. In turn, this is bad news for the partnership because it effectively removes the one bright spot from their fleet and thus increases their exposure to the generally agreed weak economic conditions in the year ahead. As a result, it seems that 2023 looks difficult and whilst the inherent volatility of their industry makes it impossible to gauge their exact financial performance, there are no real signs for positive catalysts on the horizon.
Despite their sizeable working capital build in the fourth quarter of 2022, Navios Maritime Partners L.P. nevertheless saw their net debt edge ever-so-slightly lower to $1.77b versus its previous level of $1.806b following the third quarter. That said, this is only temporary because going forwards into 2023, they are merely on the cusp of their $1.1b new build program that as my previous article discussed, stands to send their net debt higher in the magnitude of 50%+. There are no new developments on this front, which makes it redundant to reassess their leverage and debt serviceability in detail, especially because their outlook for 2023 was the primary focus of this follow-up analysis.
The two relevant graphs are still included below to provide context for any new readers, which similar to the previous analysis sees their net debt-to-EBITDA at 2.72 and net debt-to-operating cash flow at 3.50, which are within the moderate territory of between 2.01 and 3.50. Similarly, their debt serviceability is still healthy with interest coverage at 5.58 and 6.28 when compared against their EBIT and operating cash flow, respectively. If interested in further details regarding these topics, please refer to my previously linked article.
When conducting the previous analysis, there was a lack of a complete balance sheet , which left their current and cash ratios a mystery. Upon the release of their fourth-quarter results, this was thankfully included and, as such, we can now see their current ratio is 0.50, which is weak and concerning but on the other hand, their cash ratio of 0.28 is strong and resilient, which nets out to adequate liquidity overall. This odd situation arises due to their cash balance of $157.8m comprising circa 51% of their current assets of $310.4m, which is higher than normal and obviously, this is positive. On the other hand, their current liabilities are vast at $617.7m of which $391.1m or circa 63% pertain to debt maturities as they see a wave of upcoming maturities, which is obviously not positive.
Navios Maritime Partners 2022 20-F
Even without the aforementioned difficult outlook going forwards into 2023, these debt maturities still leave the partnership exposed if the recent banking crisis remerges, which remains possible given it was only a few weeks ago that Credit Suisse was taken over to avert a potential catastrophe. They obviously cannot repay almost $400m of debt during 2023 and therefore, they will require refinancing and in turn, access to capital markets. Whilst this is normal, during abnormal times when turbulence strikes capital markets at the same time as tight monetary policy, such would be the case if the recent banking crisis remerges, this task could prove difficult and thus poses risks.
Conclusion
At the moment, a fragile stability is seemingly back within capital markets. Whilst this means there is no imminent threat, they are nevertheless still exposed should this only be proven to be an intermission within a wider-ranging banking crisis. Ultimately, only time will tell, but even looking elsewhere, it seems that 2023 looks difficult for Navios Maritime Partners L.P. given the economic concerns and the surprise OPEC oil production cut that creates further headwinds for their oil tankers. Since they were the bright spot within their fleet, I believe that maintaining my sell rating is appropriate, as I doubt the remainder of the year is going to be a profitable year for Navios Maritime Partners L.P. unitholders.
Notes: Unless specified otherwise, all figures in this article were taken from Navios Maritime Partners’ SEC filings , all calculated figures were performed by the author.
For further details see:
Navios Maritime Partners: 2023 Looks Difficult In Every Way