Knot Offshore Partners LP (KNOP) 2013 Q3 法說會逐字稿

Good afternoon, and welcome to the KNOT Offshore Partners third-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (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 sir.

Good afternoon, gentlemen, and welcome to the KNOT Offshore Partners third-quarter earnings call. Here with me is also Trygve Seglem, who is Chairman of the Partnership, and Bjorn Bakkevig, who is Chairman of the General Partner.

First of all, I'd like to draw your attention to Page 2, where there is a notice to recipients, and then I'll go on to present in accordance with the presentation that we put out on the website.

Initially, starting on Page 3, and the highlights, the third quarter has been a quarter without any particular events for the partnership and with excellent operation. We have generated net income of $6.4 million and an operating income of $9.4 million. And this gives us an adjusted EBITDA of $15.7 million and we generated distributable cash flow of $9.3 million. This is well in line with the forecast that we made in connection with our IPO.

And in connection with the acquisition of the Carmen Knutsen as of August 1, we also announced or repaid on November 14 a quarterly distribution of $0.435 per unit with respect to third quarter, and this represents a 60% increase in distribution from the minimum quarterly dividend level. We have in our drop-down portfolio significant potential for further growth, as I will come back to.

Looking at Page 4, we have set out the earnings statement for the three months ended September 30. And all the numbers here are, as mentioned, well in line with our forecast. The uptime in this period has been 98.5%, reflecting 3.4 days of prior, which is below what we budget for. And as mentioned, the operation reflects the Carmen Knutsen from August 1. And there are not really any particular items. We continue to have low interest costs due to low levels of LIBOR. I'll come back to that. We have, however, done one interest rate swap which has given us marked to market costs of a non-cash item of $252,000 for this period.

It's also worth mentioning that our general and administrative expenses are affected by the Carmen drop-down with about $120,000 cost related to that particular transaction.

And then, looking at Page 5, our balance sheet, we have a strong cash position. And at the end of this quarter, we have $357 million in total interest-bearing debt, including the seller loan which we took from the sponsor at the time of acquiring Carmen Knutsen.

Average margin on our debt was 2.74% as of September 30. As of today, we have done a total of $200 million in interest rate swaps up to on average the period of April 2018. And the average fixed rate for this is 1.33%. So this has been done to secure future interest rate cost potential increases.

We are fully in compliance with all financial debt covenants. And that relates to the equity, 42% versus a requirement of 30%. Our cash requirement is $50 million. We have well above that, and we have an EBITDA-to-interest coverage of 6%, as the requirement there is 2.5%.

Looking at Page 6, this then leads us to have distributable cash low after adjusting for depreciation, non-cash items, maintenance, and replacement CapEx of in total $9.3 million. This gives us a coverage ratio of 1.22%. And one of the reasons that this is high is that we have lower interest cost than we normally calculate as long-term interest of course for the partnership and also we have lower than budgeted operating costs.

On Page 7, we have calculated the adjusted EBITDA of $15.7 million, basically reflecting the adjustments as shown here.

On Page 8, we have reiterated the main numbers in connection with the acquisition of Carmen Knutsen. And these numbers have been presented before; I shall not go into detail. Just to highlight that this has been fully funded by assuming debt and by increasing financing on existing assets in the MLP.

The seller (inaudible) has a margin of 4.5% above LIBOR and the average financing margin on the debt is -- on the bank debt is 2.8%.

On Page 9, we are showing the long-term contract status of the MLP as it appears, now with a total average contract duration remaining of 6.9 years. And this then encompasses the two bareboat vessels to Transpetro, and the three time charter vessels where Carmen Knutsen is the new one and Bodil Knutsen to Statoil and Windsor Knutsen to BG. And all o these vessels are continuing their operation and there's nothing new in relation to their chartering status.

On Page 10, we show you the drop-down fleet overview. This has been also the same as we have seen before. These contracts are being started, or they have started to deliver these vessels to the sponsor. And it is our assumption that we will come back to the drop-downs within 2014 and finally within 2015, which is in line with our previous guidance.

So, in summary, we have third quarter as forecasted. Carmen Knutsen has been delivered. We have a solid contract base, and we have taken steps to parch this particular interest rate risk on the floating debt as mentioned. We maintain the view we took last quarter that there is short-term production delays in Brazil and Norway that may affect the market in the short-term. However, we do not see this having any specific effect on this company as all the vessels are under contract, and also long-term employment is guaranteed by KNOP.

We believe that industry dynamics continue to create significant growth opportunities for the next years. And although we do not expect to see any tenders this year, we do expect to see in the range of three to four tenders next year. And as mentioned, we have raised the dividend by 16%.

So, that is the main items reflecting our operations during the third quarter. We are pleased with operations during that quarter, and obviously would like to take any questions from you as you may have to us.

At this time, we will begin the question-and-answer session. (Operator Instructions). Darren Horowitz, Raymond James.

Good afternoon. Just a couple of quick questions. The first, of the drop-down vessels that you outlined on Slide 10, were hull 2531 and 2532 delivered during July and September, like you had initially thought?

And then as a follow-up to that, are you still expecting 2575 and 574 to be delivered in the fourth quarter of this year, and then obviously a year from now the fourth quarter of 2014 respectively?

Yes. In terms of deliveries from the shipyard, there are no delays, and we expect these -- deliveries have been made as scheduled and we expect them to continue to be made as scheduled.

In terms of the timing around the drop-downs, I know you had mentioned 2014 and 2015 to wrap everything up. Has anything shifted there as to when you think those vessels and the associated contracts could be offered to the partnership?

No. We are still on the same schedule, and we assume that we will start drop-downs as we become a seasoned issuer towards summer.

Okay. Thank you.

You're welcome.

Marc Silverberg, Barclays.

Just looking ahead a bit on your base fleet, I believe the initial terms of the Windsor Knutsen is scheduled to expire early Q2 of next year. Understand you have that five-year guarantee in place, but any updates that you could provide with regards to renewing or extending that contract?

We don't have any specific updates on that. We know that the charter is making their evaluations but obviously we are not -- we do not have that information and don't expect to have their decision by before January, which is the time when they have to make a decision under the existing contract.

Got it, okay. Thank you. And then can you just provide us with an update regarding the potential of adding additional vessels to the bench? You had mentioned I think in your prepared remarks seeing upwards of three to four tenders next year. What are your thoughts around your ability to win some of those new contracts?

That's our estimate, that we expect to see three to four contracts. We do believe that our sponsor is well-positioned in order to get a good part of this action. Obviously, before the tenders are out and we know more details, it's really difficult to give any more specific guidance on this.

But I think when we look at the market structure, even though there aren't any short-term delays, there are a number of projects going on. We are confident that the oil companies will get their production issues sorted, and we are also confident that we will be competitive and our sponsor in particular will be competitive to win contracts.

That's really helpful. Thank you.

Leo Kelser, MetLife.

Great, thank you. I was just hoping to get a little more elaboration with respect to future build opportunities up at the sponsor. And it was helpful, your comments about additional tenders. But can you give us a sense of the two primary markets, the North Sea versus Brazil, where you see the greatest opportunities for those new tenders? And then with respect to Brazil, if you could just talk about the implications of the OGX bankruptcy and what that implies for offshore in Brazil?

I think both -- these are the two key markets, and we have a strong focus on developing business in both of them, and we do see business opportunities in both markets. Clearly, Brazil is the market with the highest number of oil production units coming on stream, so that's where we expect to see the highest numbers once contracting picks up again.

What has happened in the Brazilian market, as we see it, is there has been huge activity and Petrobras and the Brazilian government has opened up for international oil companies to a larger extent. And we see that from the operators being there today, being the major oil majors in a much greater extent than we saw previously when there was previously only Petrobras involved. We know that OGX was set up to become a major player. Obviously, that looks much more -- or that doesn't look to be happening right now. And we think that, if anything, should give added opportunity for international players and suppliers, including ourselves.

Thank you.

You're welcome.

(Operator Instructions). Derek Walker, Bank of America Merrill Lynch.

Hi guys. Just a couple of quick ones. You mentioned the delays in the tendering activity, and you mentioned your position to bid competitively there. I guess do you anticipate any change in sort of hire rates based on perhaps what might be increased competition based on delays, based on what you currently have for return rates?

I believe we continue to believe in our model that the rates for new vessels will be based on new building costs and interest rates. And therefore, we do not really see any fundamental changes to the rate structures. We are not really sure if we, for the time being, see increased competition. We think we see that as stable, and therefore we believe it should be possible to maintain rate levels as today. But the game -- if ship prices go down, if interest goes down, rates will go down, and the other way, if ship prices go up and interest rates go up, rates will go up.

Got it. And then just on the competitive front, do you guys see yourself as a potential consolidator within the space? I think there's a couple of players out there within the shuttle tanker business that it might be a little less strategic for them. Outside of potential drop-downs with your parent, do you guys see the opportunity for third-party M&A?

We would be interested in that. Obviously, in order to do that, there would be need to be a deal between two parties, and we have not any identified deals as such. But obviously, we would be interested to do that if the opportunity arises.

Got it. Thank you guys.

This will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you all very much. Again, we are pleased to report the results of the third quarter. We have a positive view on the partnership's future development potential, and we would like to welcome you all to our next call in three months' time.

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