Why Navios Maritime Partners May Be in Trouble


Source:  Navios Maritime Partners

What is there not to love about Navios Maritime Partners (NYSE: NMM  ) ? Excellent management, cash in the bank, and net income has been soaring, and it pays a generous dividend. The company is operating well, and its management believes we are about to hit a new bull market in shipping rates. Everything seems peachy. But there is a problem that you may not see coming.

Victim of their own success
Navios Maritime Partners has wisely secured many long-term, fixed-rate contracts for ships at rates that are currently well above market rates. The result is revenue and profits far above what it would if it were using a strategy that involved using its fleet based on daily spot rates.

The extra revenue and net income is no doubt very welcome. But the problem from a shareholder perspective is that as these high-priced contracts expire one by one revenue and net income will drop accordingly unless rates move substantially higher first. Nobody will reenter new contracts without Navios Maritime Partners severely cutting the rates first.

The good news
Navios Maritime Partner's Capesize ships, which are the biggest and generally most profitable ships, have mostly multiyear term contracts priced at very high levels. For example, it has three Capesizes with contracts that go all the way to at least the year 2020 with rates a hair under $30,000 per day or more than double the current spot rates.

Navios Maritime Partners even has one contract with a $50,588 a day rate and September 2015 expiration. These contracts give Navios Maritime short- and medium-term protection against depression in the global market rates.

The bad news
The real problem is with the Panamax ships of its fleet. These ships are roughly half the size of the Capesize ships. At the time of this writing, rates for Panamax ships have been chopped to under $4,000 per day. For most, if not all ship owners, $4,000 per day is less than the cost to operate them, though it should be noted that time charter rates currently are much higher than $4,000, but still not high enough compared to the contracts the company has currently.  

Navios Maritime Partners owned 12 of these ships at yearend. The contracted rates for all of these range from just over $10,000 per day to as high as $26,000 per day. These rates are excellent compared to the daily spot rates. However, eight out of 12 of these contracts are set to expire this year. Another two of them next year.

This means Navios Maritimes Partners' revenue and net income with its Panamax fleet is about to get crushed unless an enormous percentage rally happens among Panamax rates and fast. Since each $1 drop in rates tends to mean $1 less to the bottom line, these contract expirations could have a startling effect.

The $64,000 question
The eight Panamax ships approaching contract expiration have an average rate of $11,700 per day. Let's say the spot rate for Panamax ships rises to $4,700, from $3,953 today. That's a decline in revenue and net income of $8,000 per day for eight ships or $64,000 per day.

So what does $64,000 per day mean for Navios Maritime Partners? $64,000 per day comes out to around $5.8 million per quarter. This means just those eight Panamax ships alone over the next six months and change are on a course to cause a reduction in the quarterly revenue and net income run rate by $5.8 million.

For a company that reported an $18.4 million net income like Navios Maritime Partners did last quarter, it's not necessarily the end of the world. But it is still a 32% decline. And it is $5.8 million less in cash flow available to the company and its shareholders.  Again, these numbers will be better if Navios enters fresh charter rates at higher than spot rates but we're talking "less worse" at that point. 

Foolish final thoughts
Considering Navios Maritime Partners only earned $0.24 per share last quarter and is likely to report less than that quarterly for the rest of the year unless there's a huge rally in rates, the market is telling you that it doesn't believe the $0.44 quarterly dividend can be sustained long term. I wouldn't rely on Navios Maritime Partners' dividend if you are looking for a safe income stream.

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