Knot Offshore Partners LP

NYSE:KNOP

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the KNOP First Quarter 2024 Earnings Call. My name is Carla, and I will be your coordinating your call today.

[Operator Instructions]

I would now like to hand you over to Derek Lowe to begin. Derek, please go ahead.

[Derek Lowe, executive]

Thank you, and good morning, ladies and gentlemen. My name is Derek Lowe, and I'm the Chief Executive and Chief Financial Officer of KNOT Offshore Partners. Welcome to the Partnership's earnings call for the first quarter of 2024. Our website is knotoffshorepartners.com, and you can find the earnings release there along with this presentation.

On Slide 2, you will find guidance on the inclusion of forward-looking statements in today's presentation. These are made in good faith and reflect management's current views, known and unknown risks and are based on assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied in forward-looking statements, and the partnership does not have or undertake a duty to update any such forward-looking statements made as of the date of this presentation.

For further information, please consult our SEC filings, especially in relation to our annual and quarterly results. Today's presentation also includes certain non-U.S. GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures.

On Slide 3, we have the financial and operational headlines for Q1. Revenues were $76.6 million, operating income $19.7 million, net income of $7.4 million and adjusted EBITDA of $47.5 million. We closed Q1 with $55 million in available liquidity, made up of $50 million in cash and cash equivalents, plus $5 million in undrawn capacity on our credit facilities.

We operated with 97.6% utilization and the vessel time available for scheduled operations was not impacted by any planned drydocking. Following the end of Q1, we declared a cash distribution of $0.026 per common unit, which was paid in early May.

On Slide 4, we have the headlines of the contractual and operational developments since our last results call, which was on February 27. In our major market, Brazil, Vigdis Knutsen was delivered to Shell in March for a 3-year time charter. Anna Knutsen saw exercise of an option by Total Energies, extending the current charter to April 2026. And by the time of the last results call, Dan Sabia chartered to Transpetro have been extended to early June this year.

In the North Sea, Hilda Knutsen, Torill Knutsen and Bodil Knutsen have continued to operate under time charters to our sponsor, Knutsen NYK. For Bodil Knutsen, this charter lasted as planned until delivery to Equinor at the end of March on a charter of 2 years fixed plus 2 years options.

For Hilda Knutsen and Torill Knutsen, the charter is rolling 1-month terms up to January 2025. Ingrid Knutsen was redelivered by Altera at the end of March as anticipated and has since gone on to time charter with Knutsen NYK, both Ingrid Knutsen and Torill Knutsen will commence charters with Eni in Q4 this year.

For Ingrid Knutsen, this was a deferral to October from a previously contracted April delivery. This deferral is on terms that are no less favorable to us than applied previously. That chart is 2 years fixed plus 2 options each of 1 year. For Torill Knutsen, the new time charter with Eni is a 3 years fixed plus 3 options each of 1 year. In the meantime, Torill Knutsen is undergoing repairs to a broker generator rotor, which has limited the range of client facilities, which this vessel is able to serve. We expect repair to be completed later in Q2 or into Q3 and both the repair costs and some loss of higher are expected to be covered by insurance subject to the relevant policy terms.

After we received redelivery of Dan Cisne in December 2023, we have deployed our own short-term conventional tanker work while also assessing the upgrades required for compatibility of shuttle tanker work in the North Sea. Those upgrades are due to be carried out in the coming weeks. Dan Sabia is due for redelivery to us in June, which is the extended expiry date of charter to Transpetro. The continuing area of focus for our contracting team is on Dan Cisne, Dan Sabia and Hilda Knutsen. For near-term deployment, focus always also remains on Ingrid Knutsen and Torill Knutsen until each of them are delivered to Eni in Q4 this year.

On Slide 5, our outlook rains positive on both industry dynamics and the partnership's positioning to participate fruitfully in our markets. Significant growth is anticipated in production in fields, which were on service by shuttle tankers. We see reported orders from earlier this year of around 6 vessels as an endorsement of confidence in the sector. Three of these vessels have been ordered by our sponsor for delivery over 2026 and 2027. Each of these sponsor vessels has a 10-year fixed contract with Petrobras, along with the client option to extend by a further 5 years. We would expect to see further newbuild orders placed in order to service the large new production volumes coming online in the years ahead. A measured amount of new shuttle tanker ordering is imperative, it should not be understood as some sort of negative development for the sector, a material shortage of shuttle tanker capacity remains projected in the coming years.

We also remain mindful of near-term market conditions, where we're particularly focused on marketing the Dan Cisne, Dan Sabia and Hilda Knutsen as well as seeking third-party employment of Ingrid Knutsen and Torill Knutsen until commencement in Q4 of their next long-term charters.

In the meantime, the partnership remains financially resilient with a strong contracted revenue position of $683 million at the end of Q1 on fixed contracts, which average 2 years in duration. Charter's options are additional to this and average a further 2 years. Our pattern of cash generation and liquidity balance is sufficient for our operations and the significant paydown rate for our debt. And we have demonstrated the strength of our relationships with [indiscernible] banks by several refinancings completed over the last year. Finally, the average age of our vessels at 9.9 years places as well when compared with the useful life model at 23 years.

On to Slide 6, you can see the consistency of revenues and operating income when comparing between quarters and also between 12-month periods. Slide 7 similarly reflects the consistency of our adjusted EBITDA, and you can find the definition of this non-GAAP measure in the appendix.

On Slide 8, the most notable change in the balance sheet over the first quarter has come from refinancing of the loan secured by Hilda Knutsen, the balance of which has moved from current liabilities into long-term debt. The overall change in the partnership's liabilities has been a reduction by $42 million, which is reflective of our debt repayment schedule.

On Slide 9, we have expanded on the terms of the partnership debt facilities to provide added color around the dynamics of debt repayment. The highlighted column shows how the outstanding balances of each facility have been reducing because of the repayments we've been making in line with scheduled repayment terms. The current installments are the amounts of capital repayments due over the next year, which do not include interest and the balloon payments are the final amounts of principal, which will be due on the maturity dates. Of note, $91 million is due to be paid on these debt facilities over the 12 months following 31st March. Completion of Hilda loan refinancing is due imminently, following which no further balloon repayments or refinance are due within that 12-month period. Our typical pattern is through our for our vessels to provide security for our debt facilities, and that applies to 16 out of 18 vessels. At present, the exceptions of the Dan Cisne and Dan Sabia are free of debt, and we do not have plans to incur additional borrowings secured by these vessels until we have better visibility on their future employment. $880 million out of $925 million in debt facilities are secured by vessels, while the 2 revolving credit facilities totaling $50 million of capacity are unsecured.

Slide 10 shows the contracted pipeline in chart formats reflecting the developments I set out earlier. Similarly, Slide 11 highlights the focus of our commercial efforts on adding near-term contracts, particularly for Dan Cisne, Dan Sabia and Hilda Knutsen and in the near term, also for Ingrid Knutsen and Torill Knutsen.

On Slide 12, we see our sponsors inventory of vessels, which are eligible for purchase by the partnership. This applies to any vessel owned by or an order for our sponsor, where the vessel has a firm contract period at least 5 years in length. The present 5 existing vessels and 5 under construction fall into this category. There is no assurance that any further acquisitions will be made by the partnership and any transaction will be subject to the Board approval of both parties which includes the partnership's Independent Conflicts Committee. As we have said, our stop priorities remain securing additional contract coverage for our existing fleet and fostering our liquidity position.

On Slides 13 to 15, we provided some useful illustration of the strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras' materials directly. The primary takeaway from each of these slides is consistent. It's very significant committed demand growth coming in the Brazilian market in the form of new FPSOs that will require regular service from shuttle tankers. We believe that reports earlier this year of up to 6 vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term. As I mentioned earlier, 3 of these recent newbuild contracts are for our sponsor Knutsen NYK and are due for delivery over 2026 and 2027. We would expect to see further newbuild orders placed in order to service the large new production volumes coming online in the years ahead and a material shortage of shuffle tanker capacity remains projected coming years.

On Slide 16, we provide information relevant to our U.S. unitholders and particularly those -- in particular, those seeking a Form 1099. Those holding units by their custodians or brokers should approach those parties directly. Those with directly registered holdings should contact our transfer agent, Equiniti Trust Company, whose details are shown there.

On Slide 17, we include some reminders of the strong fundamentals of our business in the market we serve, our assets, competitive landscape, robust contractual footprint and resilient finances.

I'll finish with Slide 18, recapping our financial and operational performance in Q1 2024 and the subsequent time and our outlook for the remainder of 2024. We are glad to have delivered high and safe utilization which have generated consistent financial performance. We are pleased with the new contracts and extensions we have secured during the quarter and since, along with our ability to navigate our refinancing needs and period of capital expenditure. And our continued commercial focus remains on filling up third-party utilization for 2024, while looking further forward to longer-term charter visibility and liquidity generation. Thank you for listening. And with that, I'll hand back the call back to the operator for any questions.

[Operator]

[Operator Instructions]

And our first question comes from Liam Burke from B. Riley.

[Liam Burke, analyst]

Derek, could you give us a little more color on the macro side, specifically the activity in the North Sea. I mean, it's pretty well known that the step-up investment in offshore in Latin America is pretty high. We're not here in much on the North Sea.

[Derek Lowe, executive]

Sure. Well, we -- I mean, the main developments we're looking to are [indiscernible] and the Penguins. FPSOs coming online with production either late this year or early next year, and we think there's going to be a significant increase in demand for the whole of the North Sea shuttle fleet once those come along. And the question in the meantime is at what stage do clients want to start entering into contracts in anticipation of that.

[Liam Burke, analyst]

So everyone is anticipating the actual projects coming to fruition. Does that make sense to just keep the Hilda and Torill busy until you can charter it. I mean are they good candidates to be chartered into this market?

[Derek Lowe, executive]

Torill has a charter from Q4 this year with Eni. So the Torill use in perhaps the COA pool until delivered into that contract, that's certainly a relevant point for us, but not after that.

[Liam Burke, analyst]

Okay. And on the CIsne and Sabia, I mean they're in a good market, but just not the right size. Do you have any more alternatives rather than just running them into the traditional market.

[Derek Lowe, executive]

Well, Cisne, I think you'd be aware that we brought over to the North Sea and are going to put the upgrades in place for North Sea work because we think Cisne is much better suited to North Sea because of the size than the Brazilian -- than to the Brazilian market. So she'll be exposed to the same dynamics in the North Sea as we have with the other vessels as well, which is why she's got probably the greatest amount of focus from the contracting team of all of our vessels.

Sabia, we are -- we expect redelivery in early June and she's subject to all the normal and energetic marketing efforts, as you might imagine, given that she's not contracted afterwards.

[Operator]

Our next question comes from Poe Fratt from AGP.

[Unknown Analyst]

Congrats on closing some of the holes. I'm especially surprised about the trial just because as you just mentioned, the North Sea market could be very tight as you have the 2 FPSOs coming on later this year. Do you -- your market intelligence, what do you understand as far as the incremental demand that could be generated from those FPSOs? And then is there -- it seems like there won't be any available capacity ex the Hilda at that point in time? Is that a fair statement?

[Derek Lowe, executive]

Well, we think there's more than enough incremental demand to come through to cover the short -- the, I guess, underemployed or underutilized vessels that we've got potentially that others have as well. So this -- North Sea has always been a timing issue. And obviously, the bit goes, the more frustrating it is, but it's a timing issue rather than anything worse than that. So the vessels that we would have available for that because the Torill and Ingrid have both been contracted to Eni from Q4, they won't be in the question for that. But Hilda and Dan Cisne, she's been set up for the North Sea, will be as well.

[Unknown Analyst]

But if you would answer the question, what do you think the incremental demand of those 2 FDSOs could could be.

[Derek Lowe, executive]

I don't have a figure to hand I'm afraid, but certainly more than enough to soak up the capacity that we've got.

[Unknown Analyst]

Would it be fair to say that 2 to 4 for each FPSO or maybe 2 so that you have incremental demand developing into 2025 for shuttle tankers in the North Sea?

[Derek Lowe, executive]

Yes. I'm afraid I don't have that to hand, so I can look at that and maybe we can discuss offline.

[Unknown Analyst]

Okay. And my understanding is that neither of those projects have lined up any capacity that would you understand.

[Derek Lowe, executive]

As far as I know, they haven't lined anything out.

[Unknown Analyst]

Okay. Great. And then if you could just talk about the Dan Cisne. How much was the upgrade -- the cost of the upgrade? And then will there be any downtime on that vessel in the second quarter?

[Derek Lowe, executive]

Well, she's currently not contracted. So downtime is perhaps a slightly move point. We think it's around a month of both the work and the testing and trials and so on that going afterwards, maybe a month to 6 weeks. There's [indiscernible] not on contract in any case during that time. We haven't published the cost, but it's not material in the context of the financial results we've produced, but we haven't produced a figure.

[Unknown Analyst]

Okay. Maybe you could describe the upgrade that was required.

[Derek Lowe, executive]

Yes, it's some harsh weather facilities.

[Unknown Analyst]

And then do you think that Dan Sabia will stay in Brazil? It seems like there's strong enough demand there and I guess, what's your sort of working assumption on the Dan Sabia at this point in time.

[Derek Lowe, executive]

Well, we are very mindful that she's not the size that is ideal in Brazil, but there's enough demand that potentially a client might want to take in any case. So we continue to market in Brazil given that at especially.

[Unknown Analyst]

Okay. When you look at the impact of the Torill in the first quarter, the -- what was it, broken motor rotor. Can you just quantify the number of days? Will it just be that the deductible -- the lot of higher deductible of 14 days that was in the first quarter?

[Derek Lowe, executive]

Well, we certainly will be subject to that 14 days deductible. It's not straightforward because she's able to serve some client facilities, but not others. So she's got some earnings. So it's not a basic loss of where she's completely out and the calculation involved is actually relatively simple in those cases. This is going to be more complicated.

[Unknown Analyst]

Got you. So was she down at all in the first quarter? And then if you could quantify the -- any other idle days that you might have had in the first quarter to sort of get to that utilization number that you published?

[Derek Lowe, executive]

Sure. Something like a month in the first quarter. I need to check the exact figures, but order of magnitude a month.

[Unknown Analyst]

And was that -- was there any other downtime or idle days in the first quarter? It sounded like you worked at Cisne, the conventional tanker market. So that was more of a more in voyages, right?

[Derek Lowe, executive]

That's right. I mean she had downtime between those as well. But I think total employment for the Cisne, this isn't a Q1 comment because her work has continued since then, something like 80 days in the last 5 months.

[Unknown Analyst]

Sorry, would you clarify that 80 days, she's worked 80 days over the last 5 months?

[Derek Lowe, executive]

Something like that, yes.

[Unknown Analyst]

Okay. Got you. So 80 of 150, if you look at it.

[Derek Lowe, executive]

[indiscernible] and 3 different quarters of performance as well. So it's not easy to fit into quarterly results.

[Unknown Analyst]

Understood. And when I combine your -- or just look at your OpEx, it looks like the OpEx in the first quarter might have gone up just slightly on a daily basis. Is that accurate? And can you just comment on looking forward OpEx and G&A.

[Derek Lowe, executive]

Sure. G&A has been pretty stable. Main difference in OpEx is voyage expenses. Bear in mind also, of course, we have provided revenue to offset that as well. And that's a classification issue relating to -- I expect that's the down site because of the nature of our employees at that time.

[Unknown Analyst]

Got you. So that was mainly absorbing the bunker costs and logs and other potential fees.

[Derek Lowe, executive]

Yes.

[Unknown Analyst]

And then just one mid-picky one. It looks like you might have layered on some interest rate hedges in the first quarter, the overall notional amount of the swap went up. Can you just talk about that.

[Derek Lowe, executive]

Yes, we did a small amount of additional fixing. We are -- at the moment, we're well within our policy range of the amount of debt that is either fixed rates or effectively fixed through hedges. And in due course, as those hedges come off, we'll need to put some more in place, and so we did a small amount of that quite early in Q1. So we're fairly pleased with the rate that we got at that stage, even though rates have moved a little bit since then.

[Unknown Analyst]

Yes. It looks like you still were able to fix in the low 2 range because your average interest rate costs fixed wise only went up to 2 from 1.9, right?

[Derek Lowe, executive]

Sure, it's as low as 2 for the new fix, but it certainly was a great that we were happy with it.

[Unknown Analyst]

Yes, yes, okay. And then it looks like other than the 3 that you talked about, the Hilda -- sorry, the Hilda, Dan Cisne and Dan Sabia with open windows and no longer-term work. Can you just talk about the [indiscernible]. It looks like [indiscernible] has a year option at the start of next year. When would the notice period be on that option before it moves to the [indiscernible] oil company for, what is it, 4 years or 3 years.

[Derek Lowe, executive]

We would generally expect that to be within something like 1 to 3 months of the start of the optional period. I don't have the exact terms for that particular one in front of me, but that sort of period we'd expect to, would be the latest we'd expect to know.

[Unknown Analyst]

Well, congratulations, Derek, on the contracting, chartering during the quarter.

[Operator]

Our next question comes from Pavel Oliva from RockHill Global.

[Pavel Oliva, analyst]

Congratulations On a great quarter. I had a few questions, if you don't mind. One is, my understanding is that the new builds -- that the prices of new builds are around $160 million for the North Sea and $140 million for Brazil and that there are really no new builds for North Sea. Does the value of the newbuilds impact pricing, daily pricing of the existing fleet.

[Derek Lowe, executive]

I wouldn't say so. Certainly not in the North Sea. I mean, we're aware of the short- to medium-term issues around when demand for those 4 North Sea vessels couldn't come in, and that's a far greater driver than anything else.

[Pavel Oliva, analyst]

I see. So the charters that are on those new ships, for example, in Brazil would be similar to what they are now? Or they would reflect the new cost and the new cost of capital?

[Derek Lowe, executive]

They will reflect the terms of market conditions at the time they were entered into. So the nearest ones, obviously, expect to be let's say, recognizably current, but some of the other vessels that aren't yet delivered, obviously, we're contracted time and time to go and will be on different terms.

[Pavel Oliva, analyst]

Right. So if I have a ship that's coming off higher and I have to recharter it. Is it fair to say that, for example, in Brazil, the rates would be a lot higher than they were at the historical charter?

[Derek Lowe, executive]

We are seeing them firming up, if anything. So we clearly went in the direction that's going in.

[Pavel Oliva, analyst]

Can I ask in the North Sea, besides your ships, are there any other ships like Altera ships that may be available for those projects or are these ships sort of it?

[Derek Lowe, executive]

I understand there is competing capacity. I don't have figures to hand on that, and I wouldn't want to comment on another operators contractual profile anyway. But yes, we understand there is capacity aside from our own.

[Pavel Oliva, analyst]

I see. Okay. And you had really good results in terms of free cash flow generation in the first quarter. That's without a lot of the charters. Have you guys considered potentially buying some shares back at this point, given what the NAV is in light of the new ships that are being built in Brazil and sort of the value or replacement value of the fleet as well as just the ability by lowering the number of shares to potentially increase the dividend when and if you're ready to reinstate that dividend?

[Derek Lowe, executive]

Yes. Well, we certainly understand and appreciate the value of that strategy, and that's a question for the Board to be addressing in due course. The greatest priority is actually that we continue to make progress on visibility of our contracting schedule. And at the moment, clearly, there are 2 or 3 vessels that remain uncontracted, which is quite a rare position for us to be in. And they're more concerned that, that capacity is filled first before looking at as anything else.

We certainly look forward to the point where that is a really good use of capital. I would also say, if you look at our liquidity position, which we are certainly content with we had 55, I think. So we had $50 million of cash equivalents,

[Pavel Oliva, analyst]

Cash.

[Derek Lowe, executive]

Cash and cash equivalent at the end of March, but we also had $45 million of drawn down revolving credit facility. So the net liquidity, if you look at the difference between those is rather less and we wouldn't feel -- I expect the Board wouldn't feel able to invest cash in buying back units when that's the position.

[Pavel Oliva, analyst]

Understood, but as you kind of get to that more comfortable position, and you have repaid a lot of debt so far. You would -- it's something that the Board will certainly consider, right?

[Derek Lowe, executive]

Yes, it's certainly one of the options.

[Pavel Oliva, analyst]

Okay. Awesome. Very good. Congratulations on a great quarter and terrific performance.

[Operator]

And our next question comes from Robert Silvera from R.E. Silvera and Associates Marine.

[Robert Silvera, analyst]

Yes, we're marine surveyors by the way. She dropped the word Surveyors. In any case, I'd like to congratulate you on improving the company's situation considerably versus the past. Our input is that we would love because we own thousands of shares, we would love to see you keep the dividend about where it is for an extended period of time and aggressively continue your move toward reducing debt. Don't take any more drop-downs for the time being because the fleet is fairly young and let's fill the gaps, as you've been saying and get to the position where we have significantly continue to reduce the debt. You have some of the ships already debt free, and that's really great. So that's our position as shareholders, and we hope you will take that into consideration.

[Derek Lowe, executive]

Sure. Thank you very much. I would just show you again Slide 9, if you want to go back to it. The current installment figure is basically a 12-month look forward from the balance sheet date of the debt repayments that are coming due by amortizations. And that $91 million over the 12 months starting first of April this year is very recognizable on a year-by-year basis for the amount we repay in our debt in cash purely on the scheduled repayment terms. So point very well taken, and I hope you're also pleased with the amount of debt repayment we're managing to do already.

[Robert Silvera, analyst]

Yes. Very pleased with that. And I'm saying our point is I'm not interested in getting the dividend raised back $0.52 right away, but rather continuously aggressively continue pay down the debt, don't take any drop-downs for at least a year at this point and filling the gaps on where we are with our ships putting us in a very, very solid position. And I think the share price will reflect it. And in the future, with the market in Brazil, looking as good as it is, given that much time that I'm talking about a year, we will know the market a lot better by then, and we can make very judicious decisions on what to add to the fleet and future.

[Derek Lowe, executive]

Thanks, Robert.

[Operator]

[Operator Instructions]

We currently have no further questions. I will hand back over to Derek for any final remarks.

[Derek Lowe, executive]

Well, thank you all again for joining this earnings call for KNOT Offshore Partners First Quarter 2024 and I look forward to speaking with you again following the second quarter results.

[Operator]

And this concludes today's conference call. Thank you for joining. You may now disconnect your lines.