Knot Offshore Partners LP (KNOP) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to the KNOT Offshore Partners LP second-quarter earnings release conference call. All participants will be in a listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Arild Vik, CEO and CFO. Please go ahead.

Thank you very much. We are most happy to welcome you to the first quarterly presentation of KNOT Offshore Partners LP. Sitting here with me is Trygve Seglem, President and COO of KNOT AS and Chairman of KNOT Offshore Partners. And also with me is Bjorn Bakkevig, who is the Chairman of the General Partner.

Turn to slide number 3, we are going through the highlights. We are pleased to report that the second-quarter has been according to plan for the Partnership. And we generated net income of $4 million and operating income of $7.4 million, basically in line with our projections. We further generated adjusted EBITDA of $12.7 million and distributable cash flow of $7.2 million. We have declared distribution for this first quarter that we have been in operation, and we have declared -- the level is the minimum quarterly dividend adjusted -- being down $0.3173, per unit which has already been paid out. Further, during -- following the quarter, we also have acquired Carmen Knutsen for a total consideration of $145 million, less $89 million in existing bank debt that has been transferred to us.

Turning to page 4 for the remaining highlight points. The management has recommended to the Board to increase distributions by $0.06 per quarter, as a result of the Carmen dropdown. This represents an increase in distribution of 16%. We believe that there is significant potential for further growth, initially from the four defined dropdown candidates. But also based on the fact that there are still high level of activity in new developments in offshore oil, both in Norway, Norwegian sector, and the UK sector and in Brazil. It is also maybe worth mentioning, that we have elected the full Board to the Company at the Annual Meeting that have taken place in July.

Going then to page 5. Looking at our unaudited consolidated carve-out statements, we generated a net income of about $4 million. And as said, for, in this quarter we had a vessel operation in line with forecasted or even better than forecasted. We normally calculate about 2% offhire. In this particular quarter we had about two to three hours offhire. So it is a very good quarter operationally. Operating expenses is also positively affected by a weaker NOK, which represents in the range of 50% of the OpEx. It is worth noting that the financial statements of the Company for this period, is a carve-out [account] from April 1 to April 15, thereafter actual numbers. This means that some of the numbers are affected by IPO elements.

This relates to among others, G&A with -- where our costs which has partly been covered by the IPO proceeds. There are interest expense which are higher in the prior to the deleveraging that took place at the IPO. And there are other financial expenses, which are one-time expenses related to legal costs which will not be recurring, as this relates to loans going forward. And there are derivative costs, which are part of the accounts during the first 15 days, but these obligations are taken over by KNOT, the sponsor. So that they will not be affecting the Partnership.

Looking at page 6, our balance sheet. We have total cash of $27.1 million. There is $1.9 million, which is restricted cash, which is in reality a retention account, and this money is being used for repayments of the Windsor Knutsen. At the time of these accounts being closed at June 30, we also had an undrawn revolving facility of $20 million. This is part of the financing that has been used for the acquisition of Carmen Knutsen. At the time of concluding the accounts, our debt to EBITDA was in the range of 4.3. After including the Carmen in the account, we estimate that it is in the range of 5. At the time of closing the -- these accounts, [36], our interest-bearing debt was $217 million, and we paid an average margin of 2.7% in addition to LIBOR.

There is, in our balance sheet contract liabilities which rose when the predecessor acquired the vessels, due to the fact that at that point in time, the accounting value of the vessels was less than the value that could be attributed to the contract. This will be gradually added to the revenues over the contract life, and will have no cash effect. There is further, the tonnage tax entrance cost of $3 million as we put into the prospectus, that is reflected as short- and long-term in the balance sheet. And this is mentioned only because it is maybe an unusual element and there is non -- nothing new in that. We are fully in compliance with all financial covenants, with strong coverage in relation to both EBITDA, interest costs, equity to total assets, market value of the vessels, and liquid funds. Our distributable cash flow is then $7.2 million, which is in line with the forecast that we presented at IPO.

Next page is page 8, which is adjusted EBITDA. That has been $12.7 million, and I do not see that is necessary to go through the elements of that, as it should be pretty self-explanatory. But obviously we can take any questions.

On page 9, we are explaining the restatement of 2012 results. This is simply after discussion with the auditors, it has been found that some of the IPO costs put us -- into the balance sheet at the end of 2012, should according to the accounting rules have been put through the PL. Obviously, this adjustment is about $3.4 million. And it results in a reduction of net income of $4.1 million. However, all of these expenses are fully funded by the IPO expenses of $7.5 million. So this leads to no change in the distributable cash available to unitholders. The same applies to the $1.5 million and $0.4 million in 2013, which is also fully covered by the IPO proceeds. And these restatements will be made available within about two weeks, to the market and to the SEC.

Next, the main item happening after the conclusion of the IPO is the acquisition of the Carmen Knutsen. And we are setting out here the main figures, namely purchase price of $145 million, taking over existing bank debt, $10 million in seller's credit from the sponsor. And we have increased debt in the Company of in total $45.4 million, meaning that this transaction does not -- in this transaction, we do not use any of the Company's cash. The seller credit has a margin of 4.5% and a five year term, and the average financing margin above LIBOR is 2.8%.

Going to page 11. Basically, we are the same Company as we were at the IPO, except we have added the Carmen Knutsen. And then looking at page 12, you will see that we continue to strengthen our contract coverage in that we now added the Carmen, five-year Carmen Knutsen charter to our fleet, and we have an average remaining contract duration of 7.2 years.

Going on to page 13. This means that we continue to have four dropdowns, which will be the initial first source of growth for the next few years. And this is represented by the 2531 and 2532 to E&I to be working at the [Golar] field in the North Sea. There is the Exxon Mobile contract starting at the end of '13. And there is the fourth vessel is for [Repsol Sinopec] to start up in 2014. And we believe this continues to give us a good growth picture in the medium-term.

In summary, the Q2 operation is as forecasted, likely better. We have completed the first dropdown. And management as a result of that recommended $0.06, which equates to 16% growth in distribution from -- effective from third quarter. We continue to have obviously a solid contract base. And there are certain short-term delays in production both Brazil and North Sea. That does not change the long term picture for offshore shuttle tankers medium- and long-term in our view. And obviously, our Company are well-positioned in this period to maintain its growth. And we expect further expansion due to the high activity in the offshore oil market, looking at both drilling and exploration activities. So we continue definitely to believe that the industry dynamics create significant growth opportunities for the next few years. That concludes my presentation. So thank you very much. And then I think we are willing -- we are opening up for questions.

Certainly.

(Operator Instructions)

And our first question comes from Darren Horowitz of Raymond James.

Yes, hi. Just a couple questions. Bjorn, first, regarding those short-term production delays in the North Sea and Brazil that were outlined in the press release and that you just commented, on can you give us a sense for the amount of vessel capacity that is currently in surplus? And more importantly, how long do you think it is going to take to get that market back into balance?

Okay, I would like to answer to that question. (Inaudible). I think, okay, what we see at the moment, there is a surplus of tonnage. We have [OA] vessels delivered early in time, and there are some old vessels being taken out. So for these -- what we see is actually that is -- definitely the Brazil operation has been delayed a couple of years. And also we see that, okay, it has been a slowdown actually in the North Sea, before actually it would start up again. So actually we think actually, that for a new [tendering] business, we think actually that we see tendering coming out in the next 12 months. And that it could even come before this year. Some of our clients have said that actually that they would circle it, the tender business within this year, or it would be late in the year for deliveries in 2016. So actually, this slowdown at the market, or delay in production of starts will not actually affect our MLP at all. It will actually only affect the existing companies with existing vessels. And okay, to some extent it will affect KNOT, but it will not affect the MLP.

Okay. And then switching gears over to the four additional vessels that could be considered for dropdown. I know that you have previously said, and again reiterated that the expectation is to have the option to purchase those within 24 months of when they are delivered to the charters. Has anything changed from a timing perspective or a financing mix perspective, as it relates to when you think they would be worked into the income statement? And then the follow-on question to that would be, assuming the same type of math around the first dropdown for the next additional vessel, would it be fair to consider an increase to the distribution to the same magnitude as what was done for the Carmen?

Bjorn, do you want to --?

With regard to the timing of the drops, there is no changes. I mean, we follow the same strategy, as we have lined up from the start. With regard to the accretiveness of the next drop, that will of course, vary depending on whether we have to raise equity or not. And it is a fair assumption that we might need some more equity, meaning that there would be some dilution from that.

That's all I had. Thank you.

And the next question comes from Richard Diamond of Strait Lane Capital.

Yes. I want to follow-on to the questions from Darren from Raymond James. And I may be a little bit confused. But based on the proposed increase in the dividend, the Company is now yielding 7.4% with very secure charter party. And I am at a loss to see how temporary weakness in the shuttle market would have any impact on the Company. Except in outer years, there may be lower drop downs, and even then, it is not clear to me. So can you take me through the logic, and tell me if I am missing something?

We believe that actually, we will see more vessels, a lot more vessels actually needed in a couple of years. And actually, for the tendering business, they will come up within the next 12 months. So we see a lot of tendering activity for the next 12 months. And we believe that actually we should be in a position to acquire new business based on this tendering business, and actually give us new candidates for drop downs.

Yes, I think to add to that, I think basically we agree with you. We don't see that this should have any effects to this Company either. The reason that we are bringing this to the table, is just to make it clear that we have noted that there is some vessel overcapacity. And this may affect the timing of the tendering and the further growth. Obviously, the growth already built into the structure is going to be as we have predicted.

Thank you very much.

(Operator Instructions)

And showing no further questions, I will turn the conference back over to management for any closing remarks.

Thank you very much. We appreciate the questions. Obviously, we see as I mentioned that we continue to believe in the strong growth in this market. And we look forward to be able to present to you again in three months time. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.

Thank you.