Knot Offshore Partners LP (KNOP) 2021 Q4 法說會逐字稿

Hello, everyone, and thank you for joining the KNOP Fourth Quarter 2021 Earnings Results Conference Call. My name is Daren and I'll be moderating call today.

Before I hand you over to your host, Gary Chapman (Operator Instructions) I now have the pleasure of handing you over to Gary Chapman. Please go ahead, Gary.

Thank you, and welcome, everybody, to our Fourth Quarter 2021 Earnings Call. As usual, our earnings release and this presentation are available on our website at knotoffshorepartners.com.

Moving straight in. Slide 2 provides important information concerning the nature of our presentation today and in particular that our presentation includes forward-looking statements that we make in good faith, but which contain risks and uncertainties, meaning that actual results may be materially different. Please do take this on board noting that the Partnership does not have or undertake a duty to update any forward-looking statements, and you may also wish to consider our annual and quarterly SEC filings for further details and information.

Please also be aware that our presentation includes mention of certain non-U.S. GAAP measures of distributable cash flow and adjusted EBITDA, although our earnings release does include a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.

On to Slide 3. The Partnership maintained very high fleet utilization during the fourth quarter of 2021, in fact, 100% for scheduled operations and we generated strong cash flow, all resulting in solid coverage for our distribution. Good progress has also been made in terms of employment contracts for a number of our vessels coming into the market. And of course we remain highly focused on securing further coverage for the quarters ahead.

Although we are not directly affected by short or midterm oil prices, the current high levels certainly further incentivize oil production, and we may also see general tanker charter rates improving, both of which we see as positive for our shuttle tankers in our markets.

In the fourth quarter of 2021, we generated total revenues of $72.1 million, operating income of $26 million, net income of $23.1 million and adjusted EBITDA of $52 million. The Partnership had $560 million of remaining contracted forward revenue, excluding options at December 31, 2021, and $117.3 million in available liquidity, including cash and cash equivalents of $62.3 million.

In the quarter, we were able to announce our 26th consecutive quarterly cash distribution of $0.52 per common unit, and this is our 35th consecutive distribution under our 1099 tax structure since the Partnership first listed in 2013. There was no refinancing activity in the quarter as our next tranche is not due until the third quarter of 2023.

And in the medium term and beyond with Brazil and Petrobras in particular committing extensive CapEx to the FPSOs that will serve as the basis for their deep-water expansion, we believe that KNOP remains very well-positioned to service the significant growth that we expect in the shuttle tanker-serviced offshore oil fields where we operate.

Slide 4 shows that in the fourth quarter of 2021 and to date, we've made progress on a number of vessel employment contracts. Although GalpSinopec did not take up their option on the Anna Knutsen, we subsequently agreed commercial terms for a new time charter contract for the vessel with a major oil company to commence in the second quarter of 2022.

This new charter is for a fixed period at the charterers option, of either a), 1 year, with options for the charterer to extend the time charter by up to 4 further 1-year periods; or b), 2 years, with options for the charterer to extend the time charter by up to 3 further 1-year periods. The Partnership also entered into a new time charter contract for the Tordis Knutsen with Petrobras, and this commenced on February 23, 2022, for a fixed period of 5 months with an option for the charterer to extend the charter by 1 month.

This is an example of the type of shorter-term contract that we hope to replicate for the gap periods between our longer-term charters. We also secured 2 future data charters for the Windsor Knutsen and Bodil Knutsen with Equinor.

Windsor Knutsen charter commences in the fourth quarter of '24 or the first quarter of '25 and is for a fixed period that the charterer's option of either 1 year or 2 years with options for the charterer to extend the charter in either case by 2 further 1-year periods.

The Bodil Knutsen charter commences in the fourth quarter of 2023 or the first quarter of 2024 and is for a fixed period at the charterer's option of either 1 year or 2 years with options for the charterer to extend the charter, again, in either case by 2 further 1-year periods. It's worth mentioning here that through the charter rates we offer for the various options, we do often try to incentivize the charterer to take the longer fixed charter periods, but ultimately, it's the charterer's choice.

And finally, the Bodil Knutsen continues to operate under a rolling charter contract with the sponsor Knutsen NYK, which currently expires in April '22 -- 2022, but with 2 further 1-month extensions at the charterer's option, which would take the vessel's fixed employment to June 2022. We continue to seek long-term employment for the vessel and the time charter with Knutsen NYK can be terminated early should an opportunity arise.

Slides 5 through 8 summarize our financial results. For the fourth quarter of 2021, revenues were robust, affected only by the scheduled drydocking of the Tordis Knutsen and the installation of the VOC plant on the Bodil Knutsen.

Vessel operating expenses for the fourth quarter were again slightly higher than previous quarters as crew and crew-related costs remained challenging due to the continuing impact of COVID issues around travel quarantine and logistics costs in particular. Coming into 2022, we have seen that some of those COVID pressures may be starting to reduce slightly, whereby crude changes are occurring with a little more ease, travel restrictions are being wound back and more flights are available.

However, with other global challenges such as inflationary pressures, we do remain cautious about the coming year. And as you might expect, we will be closely monitoring our cost base.

As stated, adjusted EBITDA showing on Slide 6 for the fourth quarter was a strong $52 million.

On Slide 7, you can see our healthy cash balance at the end of 2021 of $62 million, which balance is actually higher than at the end of 2020, partly in anticipation of the drydocks that are upcoming in early 2022. Our debt continues to be repaid each quarter on schedule. And in 2021, we repaid almost $96 million in scheduled repayments.

Distributable cash flow on Slide 8 was $23.2 million with a solid coverage ratio of 1.28x for the quarter.

Slide 9 provides an update on our contracted revenue and charter portfolio. At the end of the fourth quarter, we had $560 million of contracted forward revenue, excluding charter options held by our customers, an average remaining charter period of 2 years, and our customers have options to extend these charters by a further 2.7 years on average.

The Windsor Knutsen and the Bodil Knutsen are now respectively on charter to PetroChina and KNOT or Knutsen NYK, as we refer to KNOT in the earnings release. In respect of the new charters announced today for the Windsor Knutsen, the Bodil Knutsen and the Anna Knutsen, the chart here shows initial 1-year fixed charter periods, whereas actually these charters may become 2-year fixed contracts in due course once the charterers declare their preference.

We've been able to take a first step with the Tordis Knutsen closing some of the gaps related to the Tordis Knutsen, Vigdis Knutsen and Lena Knutsen before they commence their next long-term charters in 2023, and we are seeing a modest upturn in market activity, which provides us with some optimism that whilst bumpy, new opportunities will present themselves during this year in addition to those longer-term opportunities that we continue to anticipate.

What is also foreseeable is that our first quarter 2022 revenue will be impacted by the scheduled drydock works related to 3 vessels, the Tordis Knutsen, Vigdis Knutsen and Anna Knutsen. This concentration of drydock work impacting one quarter, whilst unusual, is anticipated by the Partnership and an impact on revenue and coverage for our first quarter 2022 should be expected.

However, aside from these planned drydocks works, it is important to note that all of the Partnership's vessels are otherwise employed on contracts during the first quarter of 2022, and the Partnership does not mechanically link our quarterly distribution to any single quarter's results or coverage ratio.

Slide 10 shows our sponsor KNOT continues to have 6 vessels that could be acquired by the Partnership with an average fixed contract period of 5.3 years from charter commencement and with an average of a further 7.3 years extension options.

Growth through the acquisition of new vessels remains a source of strength and diversification for the Partnership, and we continue to assess our options despite our cost of common equity today. We're constantly looking to further strengthen the Partnership's contracted revenue stream through a further acquisition of one of the available vessels from KNOT. Any such acquisition would need to be in the interest of the Partnership overall, avoid any undue financial risk to the wider business and should be expected to strengthen our coverage. Absent that, we're not compelled to grow for growth's sake and we'll provide further information on due course as our ideas and plans develop.

On Slide 11, we wanted to provide some supply data on the current global shuttle tanker fleet in response to questions we often receive. You can see it is very concentrated among the 3 largest market participants with KNOP and KNOT as the largest of those.

Beyond that, I would just make a few points. As you can see in the upper rows of the grid at the bottom, there are a total of 12 vessels currently on order. Clearly, the absolute number here is not the kind of figure that you would see in the far larger conventional tanker sector. These 12 ships are scheduled to come into the market, primarily into Brazil in 2022 and all of those are going on to charter contracts that are already in place. This is not speculative tonnage.

Additionally, following a high level of scrapping in the shuttle tanker market in 2021 and the fact that shipyard order books are typically full of LNG and container vessel orders such that we think no new shuttle tankers can now be delivered before 2025, except for the ones on the chart here. Taking all of that against the backdrop of significant demand growth in the medium term, which I'll come to in a moment, we believe the marginal oversupply we see today is still a situation that is transitory in nature.

Then on Slide 12, as I've mentioned before, Brazil is where we expect to see the majority of shuttle tanker demand growth moving forward. And we're showing here the extent of anticipated expansion over the next decade or so in the largest Brazilian basins, which is significant growth.

We've also added some commentary from Petrobras here on the right side of the slide that should provide helpful color. First of all, in the pre-salt fields, which are serviced by shuttle tankers, Petrobras expects its average marginal lifting cost to be $3.50 per barrel, pretax and leasing between 2022 and 2026, which very strongly supports continued production from existing platforms in almost any market environment.

And as a matter of interest, the equivalent average figure across the period 2016 to 2020 was still only $3.70. From 2022 to 2026, Petrobras is planning to significantly increase their total production of oil and the proportion of that oil that is sourced from the shuttle tanker service to pre-salt fields.

And moving forward, Petrobras expects to be able to establish breakevens for oil production at $20 per barrel, putting them in a position to confidently pursue expansion projects that can compete with almost any other international project, whether onshore or offshore.

Finally, I'll point out that Petrobras in 2021 made their largest ever reserve additions at nearly 2 billion barrel equivalents or 219% of what they produced during the year, even after their asset sales.

There are also a couple of further extracts in the appendices to this presentation that you may wish to take a look at, giving a little more on Petrobras' FPSO order book and some further details on what is widely anticipated to be the largest producing field in Brazil, the Buzios Field, for which 10 FPSOs are currently expected to be in operation by 2026. Of course, we're not in the business of FPSOs and Petrobras is not our only customer, but we do think that these metrics and this activity has close proxies for future shuttle tanker demand offshore Brazil.

Then coming back to our near-term priorities on Slide 13. For those that follow KNOP more closely, there will be no surprises on this slide. We remain absolutely committed to safety in all that we do. And then beyond that is the maintenance of our distribution through high utilization and our high operational standards. We need to take care of the several drydocks that are coming in and around the first quarter of 2022 in particular and be aware of the temporary impact that that concentration of work will have.

And of course, our immediate focus also remains on securing further charters for our vessels as they for due in the coming near-term quarters in anticipation of the growth that we see coming, as previously outlined. We still expect that 2022 will be bumpy for our business compared to previous years, but we remain confident that this is a temporary situation and that the business will be rewarded over time.

As I've stated previously, as an MLP, we are always looking at potential growth in the acquisition of another vessel. And whilst we have a supportive sponsor and no obligation to grow, we will still take an opportunity if the conditions and timing are right for the partnership as a whole.

So in summary for this quarter on Slide 14, we reported utilization of 100% for scheduled operations, distributable cash flow of $23.3 million with solid coverage of 1.28. We paid a quarterly distribution of $0.52 for the 26th consecutive quarter and had $560 million of remaining contracted forward revenue, excluding options at the end of the year.

We have no refinanced due until the third quarter of 2023 and our operations are not exposed to short-term fluctuations in oil prices, volume of oil transported or global oil storage capacity. 9 shuttle tankers were removed from the market in 2021 and there are no new shuttle tankers entering the market on a speculative basis.

And although softness in short-term demand for shuttle tankers seems likely to persist through at least the majority of 2022, we're discussing several opportunities with our customers and remain optimistic that we can secure further profitable charters for our vessels in the immediate and intervening periods.

Then finally, as outlined above, we continue to expect mid- to long-term expansion of offshore oil production in pre-salt Brazil and less, but still some growth in the North Sea and Barents Sea, supported most notably by the large number of FPSO orders and low marginal cost of oil production. We, therefore, remain very positive with respect to the mid- to long-term outlook.

And on that, that concludes today's formal presentation, and I'll be happy to take any questions.

(Operator Instructions) Our first question comes from Liam Burke from B. Riley.

On the -- obviously, the price of oil has made investment in the offshore by the offshore producer is more attractive. Have you seen additional interest in fixing short-term charters for the 4 vessels that are up for -- the need to bridge until the long-term charters? Is there any more interest there or is it pretty much the same?

Yes. Liam, we -- even before the recent shooting up of oil prices, we were actually seeing a modest increase in activities and inquiries. I think certainly, with the oil price where it is, I'm pretty sure that all of our customers and everybody involved is trying to produce as much oil as they can based on their current output and production levels. And we think that will probably filter through to shuttle tankers.

We're not seeing an immediate change. I think if you look at conventional tankers, those rates have increased considerably. Whether they stay high, we're not sure at the moment. But if they do stay high, then certainly that will help shuttle tankers and it will make shuttle tankers more credible in terms of longer journeys. So I think the oil price in the short term can help us in that way. But to answer your question, we haven't seen a direct corollary just yet in our market from the very recent increases in price.

Okay. And on Slide #10, you highlight the vessels that are potential drop-down candidates from your sponsor understanding that you do have some capital constraints. You mentioned that -- at the price of your units right now. But I mean, realistically, how many -- I mean do you think you could add not specifically how many, but do you think you could add vessels over the next 18 months or so?

Yes. I think we are deleveraging every quarter. And as I mentioned in the formal part of the presentation in -- we repaid over $90 million of debt in 2021. And that opens up the possibility of us using debt at sensible levels for an acquisition. And yes, we will still consider other options to the extent they're available, whether that's common equity, maybe that's not available pref units, maybe those are available. But I think the possibility of using debt and maybe a little bit of cash if need be, to the extent that we can do that at a sensible price that is positive for the partnership, then yes, we do think that's realistic in this year.

And obviously we need to pick the right time and we need to negotiate with the sponsor. Luckily, as I said before, they've been very supportive. They've been very flexible, and they understand our situation. So if it's not right, like if we didn't feel it was right in quarter for '21. But if we feel it's right, and we feel that we've got the depth capacity to do it that way, then absolutely, we will try to do that because we believe very strongly that by growing the partnership and getting more diversification in our charter income stream that can only be good for the business.

Our next question comes from Richard Diamond from Castlewood Capital.

Hey, Gary. I have 2 questions. One is just sort of a global question, but is there any impact from the Russian undefined conflict either on KNOP or the shuttle tanker market in general?

Sorry, Richard, I thought you were going to give me both questions at once. No problem. Let me...

The second question is less global. What is the number of shuttle tankers that have Norwegian continental shelf capabilities? In other words, if I wanted a shuttle tanker today to work the NCS versus a KNOP -- existing KNOP unit, how much more would it cost roughly in percentages and how long would it take to get delivery of such a vessel?

Yes. Let me address the first question. Yes, I mean, obviously, the Ukraine-Russia situation is terrible. But luckily our business is not directly affected either in KNOP or we believe in the wider shuttle tanker market. I think we have around 60 crew members that are either Ukrainian or Russian nationals and we're trying our best to look out for them and make sure they're fine.

But that's a small proportion of our overall crew. So the short answer is there's really no impact that we're seeing at the moment. On your second question, if I understand it, you're asking for how much more does a North Sea vessel cost? Is that -- am I understanding that right?

Yes. Asking versus a -- if you have -- if you want to go out and buy a new unit, how much more would it cost versus an existing KNOP NCS-capable shuttle tanker?

Newbuild versus existing?

Right.

Yes. I think because we've seen quite significant increases in newbuilding prices at the yards, we're probably talking 30%, 40% increases over the last 12 months. And also you can't get today we think a shuttle tanker before perhaps the middle of 2025. So regardless of the price you're willing to pay for it, the yards are full with container and LNG vessels.

So I think in a way, it's a bit of a mute question because you can't compete with a newbuild today, you have to really look at the existing charter fleet. And I think when you start to do that, it makes our existing vessels pretty competitive obviously, because, a), they exist already, so you have no construction risk, and you also don't have to wait, plus the costs are just going up for the newbuilds.

So I think today with newbuild prices being 30% more than they were even just 12 months ago, it puts our entire existing fleet in a much better place when it comes to discussing with our customers and going into tender opportunities.

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

A couple of questions relating to the vessels that -- which we see a gap on the -- was it Slide 9? First of all, when -- what Vigdis and Lena, both of them, they're scheduled for an anticipated drydock. So when they go to the drydock -- as soon as they go to drydock, they're off revenue, right? We're not generating revenue?

That's right.

Okay. When will Vigdis and Lena go to drydock?

We've got the dates -- well, you can see roughly the dates on the slide there. The Vigdis is around sort of spring and Lena is more summer, European summer -- Northern Hemisphere summer, sorry, of 2022. Is that -- for you?

Okay. So it looks -- yes, yes. Because what I'm -- and if -- which -- sorry, yes, Bodil will also the short-term rolling charter with Knutsen NYK does not go beyond June. So it appears that there's the potential for up to 3 of the vessels to be not generating revenue in the third quarter. Is that correct?

Yes. I think as has been the case for some quarters now, we are finding that our customers are taking time to make decisions and the Petrobras charter for the Tordis Knutsen that we've just announced, that happened quite quickly. And it was -- in shuttle tanker terms, it was a quite last minute in terms of getting that arranged.

But our customers, as I say, are taking time due to the uncertainties that they themselves are facing. But equally, their CapEx requirements and the projects are not waiting forever. So I think we'll find that whilst they may want to leave it until the last moment, they can't wait forever to make decisions on their tonnage. And we've secured 3 or 4 charters in the last 3 to 6 months, as we've announced today. And some of those, as I say, happened quickly, and some took more time to close.

So I think in terms of what you're talking about in terms of the second half of this year, we absolutely admit that the timing here is unpredictable. But that doesn't mean to say that things won't happen by that time. So we don't make guarantees, of course. We can't do that. But I think what we're trying to explain here is, as I say, that the timing is far more unpredictable at the moment for us due to the uncertainties and complexities that some of our customers themselves are trying to grapple and cope with.

Understood. And I've been an investor long enough to have developed considerable tremendous respect for your ability to manage the fleet and place it. But the basic rule of investing, always look out for the downside. Let's assume that in the third quarter, 2 of the vessels are not generating revenue, 2 of those 3 are not generating revenue. I'm not saying that's going to happen, but let's suppose it does happen. What would be -- can you give me an estimate of what the impact on distributable cash flow and EBITDA would be just given a ballpark figure?

Yes. I appreciate where you're going with this, but we don't generally like to give forward guidance like that. And I think in that situation, perhaps what I can say is we -- as we always have done, we look at the facts and circumstances and the longer-term outlook. And regardless of any 1 quarter or 1 vessel or 1 month, we try very hard not to make short-term hasty decisions. We've got a strong balance sheet today. We intend to maintain our distribution based on the positive mid- and long-term outlook that we've outlined. And whilst we can't predict the future, we're close to our customers. We operate critical infrastructure that they need. And actually, it's a small, tight niche market.

And as I've shown on the fleet slide today, there are 67 vessels, okay, some are coming into the market, but they're already on contract. Our imbalance, if you like, is not huge. And it won't take an awful lot for the market to tighten right back up. And with high oil prices and with the difficulties that we're facing in the world today, we're optimistic that we'll find business for them.

So I appreciate your idea of sort of debating what if. We prefer to look at it the other way around and think that actually there's a lot in our favor here that although the timing is unpredictable, we're optimistic that we can do something. Obviously, as I said before without guarantee, but we -- we're the main player in this market and we understand it very well, and we will do our very best.

Well, understood and I don't want to hog the conversation or ask you to disclose any granular information. Just on my -- let me look at it another way. Is it reasonable to assume that the -- each individual -- the individual ships have roughly comparable contributions to EBITDA and cash available for distribution, if I mean, it's -- if they're roughly comp like go my own estimates of the impact of having a couple of ships off hire?

I mean, obviously, we're talking to different customers about different vessels at different times. And the result of that is that we have different charter rates. So I think it's -- I can't give you any individual rates. But I think it's not -- it's not entirely reasonable to assume that they're all the same, no. They are different. And obviously...

No. All the same -- within the -- within the same ballpark, just from coming up with a rough back to the envelope estimate...

Not necessarily so because obviously, there were -- the various time charters were all fixed at different times as well. So the markets were different at each of those periods. And also as well you just need to bear in mind the 4 bareboat charter vessels, the rates for those vessels obviously we don't provide crew and OpEx. So those rates that we receive for those 4 vessels are definitely lower by definition.

Our next question comes from Robert Silvera from R.E. Silvera & Associates Marine Surveyors.

You touched on the situation with Russia, Ukraine. The sanctions that exist today, you don't see, as you said, very much of an effect on you at all at this point. Do you anticipate that if these sanctions became more severe and the China-Russia relationship being what it seems to be with China being very supportive of Russia, do you see any implications because China is one of our customers, do you see any implications along that angle that might hurt us?

Robert, that's a very, very big question. I...

I know.

Right now, where we are today, we're -- our biggest concern, if you can call it that, is our crew members and making sure that they're looked after. Beyond that, we've got some small suppliers that may be affected, but we have alternatives. So right now as we see it and to the extent that this is a Russia/Ukraine issue and it's kind of confined to that part of the world and those types of organizations, then our vessels don't sail anywhere near that location, that geography and we don't have suppliers or drydocks in those parts of the world.

So I think it would be wrong of me to start thinking further ahead as to what might happen. I mean if you start involving other global powers into this situation, then I'm sure lots and lots of people are going to be affected. But primarily, we drydock our vessels in Europe and our vessels operate in Brazil, Uruguay, South America, if you like, and Europe. So most of our finance is European-based. Obviously, we have U.S. investors. So at the moment, we're Americas and Europe. So to the extent that that remains our business and those are the areas that we would be worried about if things started to impact there.

Okay. So then it does not -- what's going on really does not impact our demand, the demand for our vessels very much because...

No, we don't think so.

With the price of oil being as high as it is, I would think the demand for oil is going to get greater and greater, which would put a greater demand on us to be able to provide vessels to supply?

Yes, in general terms, we agree with that statement.

(inaudible). Okay.

Yes. In general terms, we agree with that statement.

Great. Well, thank you very much for reducing the debt the way you are, and I hope you will be able to keep on doing that until we're in a position where we make decisions about dropdowns, et cetera. So we use less equity and more of our accumulated cash and we'll be in much better shape if we have rising interest rates, if we have reduced our debt significantly, which you have done in the past and I highly approve that you continue to do that, getting that debt load down as fast as possible.

It appears we have no further questions at this moment. I'm going to hand it back to Gary for any final remarks.

Now I'd just say thank you very much for everybody who's taken the time to join us today, and I wish you a good day.

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