Knot Offshore Partners LP

NYSE:KNOP

Earnings Call Analysis

KNOT Offshore Q4 Earnings: Solid Performance, Strategic Focus

In Q4 2023, KNOT Offshore Partners LP reported revenues of $73 million and an operating income of $18.1 million, despite a net loss of $5.3 million due to non-cash losses on derivatives. The adjusted EBITDA stood at $45.7 million. The fleet operated at near full capacity, with a utilization rate of 99.6% for scheduled operations. A cash distribution of $0.026 per common unit was announced post-quarter. The company extended several charters in its key market, Brazil, and in the North Sea, which contribute to a strong contracted revenue position of $699 million on average 2-year fixed contracts, with the option to extend for another 2.1 years. They successfully reduced total liabilities by $92 million, reflecting significant debt repayments. Refinancing efforts are underway for future balloon payments, with $87 million repayable over the next 12 months, excluding potential refinancing. Two vessels remain debt-free, and no new debt is planned until future employment is clarified. They continue to evaluate sponsor-owned vessels with contracts of at least 5 years for potential acquisition. The demand in Brazil looks promising, with significant growth expected and new vessel orders seen as a positive market indicator.

Delivery of High Utilization and Consistent Performance in Q4 2023

The company closed the fourth quarter of 2023 with high and safe utilization rates, leading to consistent financial results. New contracts and extensions obtained in the quarter are shaping the company's positive outlook. Efforts to navigate refinancing and capital expenditures, particularly in relation to dry docks, were successful throughout the past year. Looking ahead to 2024, the company's commercial efforts are focused on securing charter utilization while maintaining liquidity generation.

Preference for Operating Vessels in the Shuttle Tanker Market

The company has expressed a clear preference for operating their vessels in the shuttle tanker market over the conventional market. The potential higher earnings power of shuttle tankers is preferred to the sale and capital redeployment from these vessels. The upcoming gap in utilization is acknowledged, and outcomes will depend on the success of contract negotiations and securing work.

Manageable Debt Service Projected for 2024

The company's debt service in 2024 is projected to be consistent with past years, implying that the refinancing initiatives have put the company in a manageable position regarding their debt obligations.

Impact of OpEx and Tax Rate Adjustments

Operational expenditures (OpEx) are impacted mainly by unit costs related to significant expenses such as manpower and logistics. A notable OpEx incident included a tax item adjustment worth approximately $4.4 million recognized from Q3. The company also discussed the changes in utilization and potential revenues with specific reference to the Dan Cisne vessel, which was redeployed in the conventional market. No dry docking activity is expected in 2024, reducing potential operational downtime.

Utilization and Revenue Impact from One Off-Hire Vessel

Although Dan Cisne is off-hire and affecting utilization, its impact on the fleet's performance is limited due to its short-term conventional tanker work, which provides some income and utilization. This situation is reflected in the first quarter's performance figures, with an expected minor decrease in revenue as the vessel constitutes only a small fraction of the overall fleet.

Healthy Increase in Contracted Backlog

There was a healthy increase in the company's backlog from $645 million to $699 million, primarily due to the exercise of an option by Repsol on the Carmen Knutsen and an additional six-month contract for Dan Sabia. The backlog's boost was supplemented by additional contracts secured in Q4 for the Windsor and Brasil Knutsen, as well as extensions on Tordis and Lena Knutsen. The company's contract backlog increased effectively, adding to the company's future revenue stability.

Earnings Call Transcript 2023-Q4

[Operator]

Hello. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the KNOT Offshore Partners Fourth Quarter 2023 Earnings Results Conference Call. [Operator Instructions]

Derek Lowe, you now may begin your conference.

[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 fourth quarter of 2023. 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 Q4. Revenues were $73 million, operating income $18.1 million. There was a net loss of $5.3 million after accounting for an unrealized. In other words, noncash loss of $8.9 million on derivatives and adjusted EBITDA of $45.7 million. We closed Q4 with $63.9 million in available liquidity, made up wholly of cash and cash equivalents.

We operated with 99.6% utilization of the vessel time available for scheduled operations, which is equivalent to 96% of total fleet time after accounting for the planned dry dockings of Torill Knutsen and Ingrid Knutsen. Following the end of Q4, we declared a cash distribution of USD 0.026 per common unit which was paid in early February.

On Slide 4, we have the headlines of the contractual developments since our last results call, which was on December 14, 2023. In our major market, Brazil, Carmen Knutsen saw exercise of a 1-year extension option by Repsol, which commenced in January. Repsol hold a further 1 year's option, which if exercised would see Carmen Knutsen employed through to January 2026. Dan Sabia is chartered to Transpetro has 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 will last until the end of March and delivery to Equinor to commence a charter of 2 years fixed plus 2 years options. For Hilda Knutsen and Torill Knutsen, the charter is a rolling [indiscernible] terms after January 2025. The continuing area of focus for our contracting team, especially for near-term deployment is on Dan Cisne, Dan Sabia, Hilda Knutsen and Torill Knutsen. We received redelivery of Dan Cisne in December 2023. Our size is more suited to the North Sea market, and we are assessing our technical compatibility for shuttle tanker work in the North Sea. In the meantime, we are deploying Dan Cisne on conventional tanker work.

Dan Sabia is due for redelivery to us in June, which is the extended expiry date of our charter to Transpetro. Marketing of all 4 vessels continues to potential charterers both existing clients and others, including the partnership sponsor.

On Slide 5, our outlook remains positive on both industry dynamics and the partnership's positioning to participate fruitfully in our markets. Significant growth is anticipated in production and fields which rely on service by shuttle tankers. We see recently reported orders 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 '27. Each of these is a 10-year fixed contract with Petrobras, along with a 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 and should not be understood as some sort of negative development for the sector.

We do also remain mindful of the near-term market conditions, where we are focused on the marketing of the 4 vessels, as I described earlier. In the meantime, the partnership remains financially resilient with a strong contracted revenue position of $699 million at the end of Q4 on fixed contracts, which average 2 years in duration. Charter's options are additional to this, an average a further 2.1 years.

Our pattern of cash generation and liquidity balance is sufficient for our operations and the significant paydown rate for our debt. We have demonstrated the strength of our relationships with the lending banks by several refinancings completed over the last year. Finally, the average age of our vessels at 9.7 years places us well when compared to the useful life model at 23 years.

On to Slide 6, you can see the consistency of revenues and operating income when comparing with those of previous quarters, including Q2 of 2023, when that is viewed without the impairment.

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 2023 has been the reduction in current liabilities, which has arisen from the refinancing secured during 2023. Long-term debt has increased as a reflection of these refinancings. However, the overall change in the partnership's liabilities has been a reduction by $92 million, which is reflective of the debt repayments we've made during the year.

On Slide 9, we've expanded on the terms of the partnership's 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 repayment 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, $153 million is due to be paid on these debt facilities over the 12 months following 31st December '23, of which $57 million is a balloon repayment due in May '24 on the loan, which is secured by Hilda Knutsen.

Our practice with a significant repayment such as this is to seek a refinancing, and our track record demonstrates the viability of this approach. Negotiations are well advanced with potential lenders for a new facility to be secured also by the Hilda Knutsen, sufficient to finance the balloon repayments of the maturing facility. The partnership is not aware of any reasons why this refinancing will be unlikely to complete. However, there can be no guarantees of the success of any financing exercise.

Aside from that refinancing, $87 million will be repayable over the course of this 12-month period, of which $10 million has already formed the repayment of the Dan Sabia facility in January. This leaves both Dan Cisne and Dan Sabia free of debt, and we don't have any plans to incur additional borrowings secured by these vessels until we have better visibility on their future employment.

Slide 10 shows the contracted pipeline in chart format, reflecting the developments I set out earlier.

Similarly, Slide 11 highlights the focus of our commercial efforts on adding near-term contracts, primarily for the 4 vessels mentioned earlier.

On Slide 12, we see our sponsors' inventory 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. At 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 top priorities remain securing additional contract coverage for our existing fleet and fostering our liquidity position.

On Slides 13 and 14, we have provided some useful illustrations of the strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras' materials directly on the web page as shown there. The primary takeaway from each of these slides is consistent. There is 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 recent reports of up to 6 vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term and do not think this is an excessive amount of added supply in the context.

As I mentioned earlier, 3 of these recent newbuild contracts are for our sponsor, Knutsen NYK and are due for delivery over 2026 and '27.

On Slide 15, we provide information relevant to our U.S. unitholders, in particular, those seeking of Form 1099. Those holding units via their custodians or brokers should approach those parties directly. Those with directly registered holdings should contact our transfer agent, American Stock Transfer, who come under the umbrella of Equiniti Trust Company, whose details are shown there.

On Slide 16, 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 17, recapping our financial and operational performance in Q4 2023 in the subsequent time and our outlook for 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've secured during the quarter and since, along with our ability to navigate our refinancing needs and CapEx relating to dry docks throughout last year. And our continued commercial focus remains on filling up 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 to the operator for any questions.

[Operator]

[Operator Instructions] Our first question today comes from Liam Burke from B. Riley.

[Liam Burke, analyst]

On the Cisne and Sabia, asset values in the traditional tanker market are pretty healthy. And you've got one of those vessels currently working as a conventional tanker now anyway. Would a priority be to sell these 2 tankers for conventional use and redeploy that capital?

[Derek Lowe, executive]

I wouldn't say it's a priority. And we think any shuttle tanker is better equipped to earn higher rates in the shuttle tanker market rather than in the conventional market, and that goes for both us operating or a potential purchaser. So our interest is in actually operating vessels in the shuttle tanker market, and we're marketing them as such.

[Liam Burke, analyst]

So I mean based on the supply-demand outlook, you see the earnings power of these 2 vessels outperforming a onetime sale and redeploying that capital?

[Derek Lowe, executive]

For the time being, yes, obviously, we've got a gap in utilization coming up, which we're seeking to fill. So it's a function of how well we secure or negotiate contracts for them.

[Liam Burke, analyst]

Okay. And then just on your current debt, you laid it out, you paid $10 million. You've got a $57 million balloon that's due in May that you've had a long history of successfully refinancing. So if I look at the balance and your current cash balance and your predictable cash flow, once you're past that refinancing, 2024 debt service should be pretty manageable?

[Derek Lowe, executive]

It's -- it will be pretty consistent with previous years. So if you look at the reduction in debt over '23, which was $92 million, the equivalent figure on Slide 9 is the $90 million of which, as I say, we've paid $3 million from that [ column ] and additional $6.5 million from the balloon payment list.

[Operator]

Our next question today comes from Poe Fratt from Alliance Global Partners.

[Charles Fratt, analyst]

Two questions on the quarter. If you could just highlight the increase in -- the sequential increase in OpEx, what caused that? And then also, it looks like the tax rate jumped a little bit or just there was a tax payment as opposed to what you would have expected with the loss. So can you just address those two things?

[Derek Lowe, executive]

Sure. Poe, thank you for the question. Yes. So OpEx is typically impacted by unit costs in our major expenditure items. So things particularly like manning, if you extend that to growing, if you can extend that to costs like crude travel and so on, on an off shift. So those -- that was the -- so that's sort of unit pricing and other suppliers like [indiscernible] and so on. That's the major impact when OpEx changes. And then tax rate, the tax item, you can see at the bottom of Page 6. It's an adjustment to the value recognized in Q3. So there's a single item there, the net amount of which is something like $4.4 million.

[Charles Fratt, analyst]

Great. That's helpful. And then can you talk about OpEx going into this year as far as 2024? And then Derek, could you discuss the impact that the Dan Cisne is going to have on utilization and potential revenues as it works as the conventional tanker versus the shuttle tanker?

[Derek Lowe, executive]

Sure. So we are -- as I said, we're marketing all 4 of those vessels, which are either on short-term or limited contracts of which Cisne is the most notable one because it's been redelivered to us. And we are -- our preference is to secure medium- and longer-term shuttle tanker work. So the conventional work is pretty much spot market for the Cisne. We don't see it as a strategy and anything other than the near term to deploy into that market.

[Charles Fratt, analyst]

Great. Should we expect any downtime on it? Is it flips between charters? And then also, can you confirm that you don't expect any dry docking activity in 2024?

[Derek Lowe, executive]

Correct about dry docking. We don't anticipate any dry docks in 2024. And what you'll see on Dan Cisne is the utilization information will come through in the first quarter results because we received redelivery. I think it was around mid-December, so it had very little impact, if any, on the Q4 figures. And so our impact will come through in Q1 figures.

[Charles Fratt, analyst]

Okay. So expect a little bit of downtime. And can you -- the other major option, it seems like is the -- on the [ ANA ] with Total. And what's the notice period on that? And have you heard or when do you expect to hear on a potential option exercise there?

[Derek Lowe, executive]

Yes. I believe the notice period is between 1 and 2 months. And obviously, we're coming up to the end of that notice period over the next month or so. I know we're always in active dialogue with all of our clients and potential clients. So we don't -- while we don't have any news to announce there, it's not currently causing us any concern.

[Operator]

[Operator Instructions] Our next question comes from Jim Altschul from Aviation Advisory Service.

[Unknown]

A couple of related questions. Look, the big thing is with the utilization because in the fourth quarter, for the whole year of 2023, you had something like 99% utilization. Now I guess, was it the Dan Cisne will be off-hire for part of this quarter? You indicated that you have as of today, charter or coverage or -- something like 70% -- a little more than 70% for the full year. What is utilization? What is the percentage figure going to look like for the first and second quarters based on the contracts you now have?

[Derek Lowe, executive]

Well, Jim, thanks for your questions. So the range of utilization that -- or contracting that we currently have in terms of full visibility for this year, 79% fixed and 91% if that's -- if you include exercise of all client options. Those figures, I appreciate in chart format that are set out on Slide 11. And I don't have the individual numbers directly to hand, but you can -- the chart will give you a good indication of those levels.

[Unknown]

Oh, I'm sorry, I didn't look at that. I just saw the news release. Sorry about that. But you're going to have one ship off hire for this quarter, Dan Cisne -- if I remember correctly. And also maybe I wasn't listening carefully enough, but will there be much of an impact on the revenues and in fact, some of the ships that were on charter are now on short-term conventional tank contracts. Is that going to make a meaningful -- combination of all these things, is that going to make a meaningful -- create a meaningful impact on first quarter revenues?

[Derek Lowe, executive]

Well, we're only talking about one vessel, so 1 out of 18. So the percentage there is order of magnitude 5%, and that's assuming no income. But actually, as we've described with the conventional work that she's been able to do, there has been some income and some utilization. So those overall figures should feed through to the figures in Q1. But it's not a question of entirely removing a vessel from the performance of the fleet over this quarter, and it is limited to one vessel in this quarter.

[Unknown]

Okay. Is it reasonable to assume that the rates is getting short-term conventional tanker work are less than you would get on a medium or long-term charter for shuttle tanker work?

[Derek Lowe, executive]

Yes, that's correct. And obviously, they're modeled on a slightly different basis because of the short-term nature of those -- of the conventional contracts that we're looking at as well.

[Operator]

Lastly, we have a follow-up from Poe Fratt from Alliance Global Partners.

[Charles Fratt, analyst]

Derek, can you talk about the backlog? There was a pretty healthy increase in the backlog of -- to $699 million from $645 million from the time of the third quarter call. Can you just talk about that incremental increase because it didn't seem like you're contracted backlog in years went up that significantly, but you did add $50 million. Can you just talk about the mechanics of that, Derek?

[Derek Lowe, executive]

Sure. I mean the -- obviously, we burn off backlog each quarter as well, and that would be factored into it. And I appreciate that serves to reduce the number before any additions. The main addition to the backlog was the Carmen Knutsen with the exercise of 1-year option by Repsol. We also had the -- the Dan Sabia for an additional 6 months in the first half of this year as well. So those are the major changes.

[Charles Fratt, analyst]

Yes, you sort of calculated that is adding about 4.5 years of backlog and you burn off every quarter about 4.5 years of backlog just and -- so you take the $645 million, you take out the $72 million that you recognized in the fourth quarter revenue and to get to the new number. And that delta is about $126 million. And it just seemed a little bit higher than I would have anticipated given that the Torill and Hilda which I assume are included in the backlog are working at reduced rates and the Carmen was really the only option that would have been expired or would have been exercised at a decent rate in my mind.

[Derek Lowe, executive]

Yes. I mean the Carmen was the main headline since we held our call in December. And these figures relate to quarter end. So you need to look at also at the additional contracts secured during Q4, but were before December 14. So apologies for the complexity there. So on Slide 4, you've got, just a reminder there, and it will also be in our Q3 release as well. So there was additional work secured for Windsor Knutsen, which we announced in December; and Brasil Knutsen as well and then a 1-year extension on each of the Tordis and Lena Knutsen. So those will also be part of the addition to backlog over that time.

So I apologies, it's in 2 places, but we didn't want to reannounce the same thing twice.

[Operator]

There are no further questions. I will now hand back over to Derek Lowe for any closing remarks.

[Derek Lowe, executive]

Thank you again for joining this earnings call for KNOT Offshore Partners fourth quarter in 2023, and I look forward to speaking with you again following the first quarter results for 2024.

[Operator]

That concludes today's call, you may now disconnect your lines.