Capital Product Partners CPLP reported third-quarter results Friday that tracked our expectations. With its fleet on fixed-rate contracts, the company's revenue and operating income were nearly identical to each of the past two quarters. Similar to its second quarter, Capital Partners did not enjoy any profit-sharing revenue because of continued tanker-shipping price weakness. The firm has only one contract to renew over the remainder of 2009, but nearly half of its fleet will face renegotiations in 2010. Although we've factored continued industry weakness into our discounted cash-flow analysis, we caution that worse conditions than we expect could threaten Capital Partners' hefty dividend. Given the industry's continued pricing downturn, we're placing our coverage under review. We expect to reduce our fair value estimate.

Looking into 2010, we think continued demand weakness across the company's industry and oncoming ship supply will probably lead to muted freight rates. If contracts renew next year at prices substantially lower than we project, the firm has little recourse to improve profitability because of its largely fixed costs. While we think Capital Partners could adjust its capital-expenditure reserves to improve cash flow, we nonetheless anticipate that the current dividend level could face head winds under such a scenario.

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