Knot Offshore Partners LP (KNOP) 2022 Q1 法說會逐字稿

Hello. Welcome to today's KNOT First Quarter 2022 Earnings Results Conference Call. My name is Jordan, and I'll be coordinating your call today. (Operator Instructions)

I'm now going to hand over to Gary Chapman, CEO, to begin. Gary, please go ahead.

Thank you, and welcome everybody to our 2022 first quarter earnings call. The earnings released in this presentation are already available on our website at knotoffshorepartners.com. Slide 2, as always, provides an important notice about the nature of our presentation today and in particular that we include forward-looking statements made in good faith but which contain risks and uncertainties such that actual results may be materially different. The partnership does not have or undertake a duty to update any such forward-looking statements. And for further information, you may wish to read our annual and quarterly SEC filings.

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

On to Slide 3 highlights of the first quarter and subsequent. We announced a further cash distribution of $0.52 for the 27th consecutive time at this level under our 1099 structure, which was the 36th consecutive distribution made since the partnership first listed in 2013. And indeed, this should be received by our unitholders today in fact.

We maintained very high scheduled fleet utilization during the first quarter of 99.7% and 92.8% taking into account the scheduled dry dockings at the Tordis Knutsen, Anna Knutsen, and Vigdis Knutsen.

We continue to make good progress in agreeing both interim and longer-term employment contracts for a number of our vessels coming into the charter market. The Tordis Knutsen commenced on her time charter to Petrobras in February 2022 after successfully completing her dry dock. We have a new 2-year time charter for the Anna Knutsen with TotalEnergies, which commenced immediately after the vessel returned to Brazil following successful completion of her dry dock. TotalEnergies had an option to take only a 1-year fixed charter, but instead, chose to take 2 years fixed.

Knutsen NYK, our sponsor, has agreed to extend the time charter of the Bodil Knutsen for 3 further months, plus 9 additional 1-month extension options, which in total could take the vessel's employment to June 2023. The current time charter for the Brasil Knutsen is now expected to end in or around September 2022. However, we are currently negotiating with an oil major for a proposed 1-year time charter contract to commence in or around September '22 and with options for the charter to extend further.

And from the time that the Windsor Knutsen is expected to commence her mobilization trip to her drydock in June, the partnership currently expects the Vigdis Knutsen to step in and fulfill most or all of the remaining existing PetroChina time charter contract, such that PetroChina would retain the use of the vessel throughout, and we would suffer a little less off-hire. And in such case, after her dry dock, the Windsor Knutsen would be available for other employment. We're also in discussions as to several further charter opportunities, and we believe we've seen a noticeable upturn in market activity in Brazil in this first quarter of 2022. And with continuing higher oil prices, combined with low breakeven prices and low lifting costs for offshore deepwater Brazilian oil, certainly working to incentivize our customers to invest and produce, this all helps to lift demand for shuttle tankers.

And to round off this slide with some important metrics. At March 31, 2022, we had $594 million of remaining contracted forward revenue, excluding options, and $96.3 million in the available liquidity, which included cash and cash equivalents of $41.3 million. And we've got no debt maturities until the third quarter of 2023.

Slides 4 through to 7 summarize our financial results, and as usual, I will allow you to read this for yourself, but I will mention just a few points. On Slide 4, in the first quarter of 2022, whilst we generated good numbers across scheduled operations, our revenue, operating income, and adjusted EBITDA were all predictably affected by the off-hire incurred due to the vessel dry docks that were taking place. Whilst these dried docks affect our results, they do so in a controlled and scheduled manner for which we have budgeted. Up to 6 vessel dry docks will occur in 2022. And due to the timing of the works, we expect the main impacts we'll be seeing in the first and the second quarter of the year.

Vessel operating expenses for the first quarter of 2020 was slightly higher than the fourth quarter of 2021, mainly as a result of bunker fuel costs for the Tordis Knutsen, Anna Knutsen and Vigdis Knutsen in connection with their voyages to dry dock. We only incur fuel costs when a vessel is off-hire, such as during the dry dock, as otherwise, fuel for our vessels is a cost for our customer. Crew and crew-related costs remained challenging due to the continuing impact of COVID issues around travel quarantine and logistics costs, but we have seen some pressures continuing to ease. So hopefully, such cost increases have peaked. So, as everyone right now, we are closely monitoring our costs and supply bases to guard against the inflationary pressures that seemed to be building in certain parts of the world. Though I would say that we do have a wide and geographically spread supplier base to draw upon. And so at this time, we have no immediate or specific inflationary concerns.

Finally, as over half of our net debt is effectively fixed rate, principally through the use of interest rate swaps. The mark-to-market noncash valuation of those swaps, that is a major part of our realized and unrealized gain loss on derivative instruments in our income statement, has shown a significant gain in the first quarter of 2022, reflecting upward market sentiment for U.S. dollar interest rates going forward.

Adjusted EBITDA on Slide 5 for the first quarter was stronger at $43.4 million, but down compared to previous quarters for the reasons related to our vessel dry docks as explained previously.

On Slide 6, you can see our significant cash balance at the end of the first quarter of $41.3 million, which, again, is naturally and predictably lower than the end of 2021 as a result of the planned vessel dry docks.

The distribution coverage ratio on Slide 7 was 0.80 for the first quarter of 2022. And although perhaps some investors and analysts will want to focus heavily on this figure for each quarter to inform about current and maybe even future distributions, the partnership and the Board instead takes a longer, wider and more rounded view. When deciding on the payment of a distribution, we don't make simple reference to or have a mechanical link to the distribution coverage ratio for that quarter.

Rather, we take into account many factors including our liquidity position, the outlook for the business in our market, our strategic interests and anything else that we consider to be relevant. We feel this allows us to operate in the best interests of our unitholders and serve the long term, and we always try to encourage our investors and analysts to think in the same way.

Slide 8 provides an update on our contracted revenue and charter portfolio. As many of the changes here are explained previously on Slide 3, I won't say too much more, other than, at the end of the first quarter, we had remaining forward contracted revenue of $594 million, excluding options; average remaining firm charters remaining of 1.8 years and charters had options to extend these charters by a further 2.4 years on average. Then on Slide 9, we have the potential drop-down vessels held by our sponsor that the partnership may choose to purchase in the future. There are no changes on this slide this quarter compared to the previous quarter.

Slide 10. As regular listeners to this earnings call will know, in the limited time we have each quarter, we try to provide some extra market information or background that we hope people may find useful. We have some further information in the appendices to this presentation today, but I wanted to look further at the offshore expansion in Brazil that has already started.

Although oil and gas sanctioning momentum in Brazil stalled in 2020 due to the COVID-19 pandemic, we've seen it pick up again in 2021. Several projects were approved including pre-salt projects operated by Petrobras at (inaudible) and 2 more FPSO in the Búzios Field, Búzios 6 and 7. And we expect activity to continue at pace over the next 3 years with several more projects in line for sanctioning, including FPS areas for Búzios, 8 and 9.

Rystad Energy projects that Brazil from 2021 to 2025 will receive a total of over $36 billion in investments across its oil and gas industry from Petrobras and a variety of other international oil majors, representing 9% of worldwide estimated CapEx, for new sanctioning across that period. Things are happening in the near term also with Brazil's Minister of Mines and Energy recently announcing the aim to increase crude output by around 10% this year to help stabilize international oil markets.

What is also good for us is that companies such as Shell, Equinor and TotalEnergies are growing their influence in the Brazilian offshore oil market and reaffirming their strategic commitment to deepwater oil production in Brazil, which brings more diversification and business to the shuttle tanker market. With very limited new net tonnage coming into the market before the end of 2025 and breakeven for those Brazilian oil offshore deep-water projects as low as $20 per barrel, there are some key reasons why we are confident about the Shuttle Tanker Market as we move forward.

Then our near-term priorities on Slide 11. Again, for those that follow KNOT closely, there will be no surprises here. We remain committed to safety in all that we do, first and foremost, and to target the maintenance of our distribution through high schedule utilization, high operational standards, and stable cash flows. We will continue our dialogue with all of our customers and work to secure employment for those vessels that remain open or partially open in 2022 and beyond, and we have already made further progress on this front so far in 2022, with the Tordis Knutsen, Anna Knutsen and Bodil Knutsen and, we hope, the Brasil Knutsen on the back of what we believe has been a noticeable upturn in market inquiries and activity, particularly in our main market of Brazil. And although the North Sea Market is more mature and hence we would not expect to see the same rapid growth as in Brazil, we have continued -- and KNOT has continued with its charter of the Bodil Knutsen and we remain optimistic about the mid- to longer-term prospects there also.

We need to take care of the several dry docks that are still to be performed, mainly in and around the first half of 2022, and be aware of the temporary but scheduled and budgeted impact that that concentration of work will have on our results. We're continuing to weigh up options for the acquisition of a new vessel, most likely using debt and available liquidity rather than new equity.

Such a transaction should be expected to further strengthen the partnership's stability, contribute to net cash flow, and in the opinion of the Board and the partnership's independent conflicts committee, being in the interest of the partnership as a whole. As I stated previously, once we have a supportive sponsor and have no obligation to grow, we will still take an opportunity if we believe the conditions and timing are right.

So in summary for this quarter on Slide 12, utilization was 99.7% for scheduled operations, distributable cash flow was $14.5 million and coverage was 0.8, principally due to the scheduled dry docks that are taking place. The partnership continues to believe that its longer-term cash flow prospects and near-term liquidity offer good support for its quarterly distribution, and as such, we maintained our distribution of $0.52 for the 27th consecutive time. Again, we had $594 million of remaining contracted forward revenue excluding options at the end of the first quarter and we have no refinancing due until the third quarter of 2023. Please continue to bear in mind that the partnership's operations are not exposed to short-term fluctuations in oil commodity prices, volumes of oil transported on our vessels or global oil storage capacity. And we can report that multiple opportunities are being discussed with customers, and the partnership is optimistic that we can secure further profitable charters for its vessels for any open and intervening periods.

And this follows, given the signs of increasing activity we are seeing in the market, particularly in Brazil. Though we do continue to expect the path of this year to be bumpy. Some market softness may continue, and our second quarter will be impacted by the dry dockings in the manner we have described. Thereafter, we continue to expect mid- to long-term expansion in the offshore oil production in pre-salt Brazil and some growth in the North Sea Barents Sea, supported most notably by the large number of FPSO orders and low marginal costs of oil production. And therefore, we remain very positive with respect to the mid- to long-term outlook.

Then following this formal part of today's earnings call, I'll be happy to answer any questions. But just to say that the partnership now has a LinkedIn page under KNOT Offshore Partners LP. For those that use LinkedIn, please feel free to go there and follow our posts. And also, we plan to release an updated website very shortly at the same address as now, which will include more information than is on our current website, and we hope that people will find it to be a useful reference. Thank you very much for listening.

(Operator Instructions) Our first question comes from Robert Silvera of Silvera & Associates.

I do like some explanation please on the cash and cash equivalence over the last 3 months dropped by $21 million. Can you give me some understanding as to where most of that $21 million went?

Yes. I mean the dry docks, obviously, have had a big impact, but they're not -- it's not a surprise development for us. They're scheduled and budgeted and they're expensive. And I think that's probably the simple answer.

Okay. So there's only one more to do this year, right?

No, like I said there are up to 6. So actually they're mostly spread between the first quarter and second quarter. So we're expecting to see a similar position for the second quarter in terms of the coverage ratio, for example.

Okay. So we have -- clear up for me. We have 3 done already and we'll have 3 more to go?

Well, some are in progress. So I guess it depends at what point you're talking. So for example, the Tordis started in December of last year and finished in January of this year. Like I said, the Anna has started in 2022 and finished already. The Windsor is yet to go. But they should all be close to being done by the end of the second quarter.

They should all be done by the end of the second quarter? Okay.

The current timing suggests that they'll all be done around the end of the -- by the end of second quarter. It's possible that, for example, the Windsor might fall a little bit into the third quarter. But as we tried to make clear in the prepared remarks earlier, most of the effects are going to be in the first and second quarter of the year.

Okay. Where would you -- at our current run rate, where would you envision us being cash-wise at the end of the year? I mean last year, [you had] [$82] million. Where would we be at the end of this year at this current run rate with the dry docking?

Yes, I think the liquidity that we've got at the end of the first quarter was $96.3 million, and obviously, we're going to use up some of that on the dry docks. But notwithstanding, we're obviously going to be earning more through the charters and the new charters that we also hope to get in the near future. So it's a little bit difficult for us to predict the end of the year at the moment, Robert. But as we've said, these dry docks and this reduction in cash, if you like, as a result of the dry docks are scheduled and budgeted. So we're kind of trying not to read more into this than is really necessary, if you see what I mean.

Okay. Well, I'm trying to see it through the lens of what you said about future and perhaps taking a drop-down from the parent and how much cash would we need. Or do you really feel that we could do it all without issuance of new equity, et cetera? That's the lens I'm trying to look through.

Yes, I mean...

How much cash...

That's really what -- those are the things that we're analyzing right now in terms of is it the right timing for us to do it? And also bearing in mind that we prioritize our distribution. So we're only going to make that drop-down decision if it's right for us to do it.

Okay. You didn't really address how you will, over the next few years, stop the diminishment in book value for the business in total. How do you plan to at least stabilize book value or increase it?

Well, obviously, increasing through acquisitions. But over time, of course, the book value will naturally fall if we have a fixed number of vessels. So the second purpose of the MLPs is growth after distribution. So growth is the solution to that. Does that answer your question?

Right. And that's what I'm trying to figure out how it's going to be funded.

Yes, well, that's -- as I say, the MLP structure typically is new equity to finance growth. Obviously, that's been a difficult situation for us and for many other companies in recent times. So for the time being, we were able last year to do one drop-down with internal funding and still maintain our distribution and maintain our stability. So in the short term, perhaps we're able to do that again. It may not be an answer for all of the vessels that the sponsor currently has. But certainly, we want to keep this MLP moving and growing in any way that we can.

Our next question comes from Liam Burke of B. Riley Securities.

Tordis, Lena and Windsor are sitting on gaps without even -- in the short-term market now. Obviously, the Windsor has got a ways to go before any long-term contracts kick in. But how is the short-term market to bridge those 3 vessels?

Yes. As I alluded to in the formal comments, we've seen a marked upturn in inquiries this quarter -- or first quarter should I say, and I think that's continued up to today. So we feel that there are opportunities there for us, and obviously, as we sit here today, we're disclosing all that we can. But there are many discussions with multiple customers going on in the background. So we're optimistic that things are moving in the right direction for us and that we'll be able to secure what we need to combat that extra activity.

Okay. So the short-term market or the non-long-term charter market is still -- is more active -- is still very active. My concern is how much can you bridge between once the longer-term contracts do kick in.

Yes. Look, we're optimistic we can fill most of those gaps. It's easy, obviously, for me to say that sitting here, but that's where we sit today in terms of the inquiries that we're getting and bearing in mind that there aren't actually that many shuttle tankers available at any point in time. And to the extent that you're seeing production growth in Brazil, it really doesn't take very much at all for the market to tighten right up remembering that the vast majority of shuttle tankers are on contracts already.

And it's a big cost for our customers to not have tonnage when they need it. It's millions of dollars of costs. So to the extent that we're seeing production going up and the market going in the direction that we think it's going in -- particularly in Brazil, it brings us extra confidence that we will be able to fix what we need to fix in a profitable manner.

Our next question comes from Climent Molins of Value Investor's Edge.

The outlook for the offshore sector has improved noticeably over the past year. And as you mentioned, Brazil has been no exception in the trend. You've had some vessels coming up and throughout 2023. So it will be definitely a welcome development. You mentioned you have seen an increasing number of inquiries for your vessels. And I was wondering, could you provide some commentary on the rate environment? Is this increasing interest leading to higher rates?

Thank you, Climent. I think, generally speaking, we don't talk too much, as you probably already know, about specific rates for our shuttle tankers. The market is very small in terms of the number of suppliers of shuttle tankers and also our customers. Of course, if the market is tightening up and we're getting more inquiries, then that's obviously helpful in terms of competition and charter rates that we can get. So I think, on the whole, the rate environment, as you describe it, is certainly moving in our favor, we think.

All right. That's helpful. And regarding the steep dry docking schedule you faced during Q1, you mentioned in the press release you had 104 off-hire days during the quarter and you estimate an increase to closer to 166 days in the second quarter. Does the estimate of off-hire days include repositioning days?

Yes, I believe it does. I believe it does. If you want me to categorically check...

Right. No, go on, sorry.

But I think it does. I think it includes an estimate of repositioning because typically, a dry dock would not -- if you took 166 and divided it by 3 or 4 vessels, dry docks don't take that long. So, yes, I'm pretty sure it does.

Yes, I was wondering that same thing.

We have no further questions on the phone line. So I'll hand back for any closing remarks.

Thank you very much, everybody, for joining. We much appreciate it and look forward to talking to you about Q2. Have a good day.

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