Knot Offshore Partners LP (KNOP) 2013 Q4 法說會逐字稿

Good day, and welcome to the KNOT Offshore Partners LP fourth-quarter earnings conference call.

(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. Welcome to our Knutsen Offshore Partners LP fourth-quarter and FY13 results presentation.

I'd like to draw your attention to the presentation material on the website. And I will briefly go through that, and ask that we will then open up for questions. With me on the call is also Bjorn Bakkevig, who is the Chairman of the General Partner of the Partnership.

I would like to go straight to page 3, and go through the highlights of the fourth quarter. In this period, we generated a net income of $7.9 million, and we had an operating income of $10 million. We generated adjusted EBITDA of $16.8 million, and we generated distributable cash flow of $9.8 million, as is in line with forecasts, and possibly slightly above.

For this period, we have paid out a quarterly distribution of $0.435 for this period, corresponding to $1.74 annualized. We have -- continue to have significant potential for future growth.

Initially from the four vessels that's already in our defined pipeline. And as our sponsor is also looking into or purchasing three vessels from J. Lauritzen, they have made a full agreement on that, subject to certain terms, which we will come back to. And obviously we're pleased that our sponsor is involved in consolidation of the business, and as has been advised from our sponsor, they will offer two of these vessels, which are on long-term bareboat charters to us under the terms of the omnibus agreement.

We are also in the situation at BG for the time being, are evaluating the extension of the Windsor time charter, and we do not have clarity on that for the time being. However, in any case, this vessel is -- the earnings of this vessel is, as you well know, guaranteed by the sponsor for a period out to 2018.

If we then may go to page 4, we have set out here the P&L for the three months ended December 31, 2013. We have had good vessel operation during this period, with literally no off hire, and also, our cost structure is in line with expectations. The main effect, of course, compared to the previous quarter, is that we actually have a full three-months earnings and costs from Carmen Knutsen during this period.

If we go on to page 5, look at our balance sheet, our balance sheet is very much same as last quarter. We have a strong cash position, with $2.8 million.

Our interest-bearing debt is $350 million, and we pay an average credit margin of 2.7, which is obviously same as before. We have, on the interest rate side, now a total of $250 million of interest rate swaps. That has the effect of fixing about 71% of our outstanding debt, for a period of between 4.3 and up to 4.5 years, and we are in full compliance with all debt covenants.

On page 6, we have set out the distributable cash flow for this period. In total, $9.8 million after the normal deductions of replacement CapEx, and adjustments for unrealized gain on interest derivatives. And if we look to page 7, our adjusted EBITDA, again adjusted in the same manner as previously, of $16.8 million.

Then I may go to page 8, to give you a little bit of color on the two large vessel investments that we expect to receive a proposal on from our sponsor, and as I said, we are pleased that our sponsor is involved in the consolidation in this market, taking this opportunity, and they have made an agreement to buy three vessels. And as you will see, the Dan Cisne and the Dan Sabia, both 60,000 deadweight tons, and built in China are on bareboat charters to Transpetro until 2023 and 2024, respectively. And those are the two vessels that we expect to be offered to the partnership.

The fourth vessel is currently on a shorter-term time charter, and is, as we see for the time being, not expected to be part of the transaction. So all these three vessels are currently trading in Brazil, and as mentioned, the purchase is dependent on technical inspection and charter's approval. And obviously, that needs to happen before any transaction can be done with the partnership, but we expect that to be within a few months.

On page 9, basically, we have set out the fleet structure of our existing fleet on the water. That is same as we have seen before. And as mentioned, Windsor Knutsen and the Bodil Knutsen are under guarantee from the sponsor, so regardless of the time charter extension that BG is looking at, the income is secured.

And on page 10, we continue to have the same drop-down fleet. The four vessels that is there respectively to ENI, ExxonMobil and Repsol. And we are maintaining our strategy and expectation that these will be dropped down during the next 6 to 18 months.

So in summary, on page 11, we have Q4 operation as forecasted, slightly better. We continue to have a solid contract base, with the fixed revenue backlog of average 6.3 years.

As mentioned, we have secured interest rate risk covering about 71% of outstanding debt, and following one transaction, that was done subsequent to the closing of the accounts. And on average, we then have 1.33% funding cost for this portion.

As advised before, the short-term production delays, both in the Brazil and North Sea continues, but is not expected to change demand picture for offshore shuttle tankers in medium or longer-term. So we do not see any change to our outlook.

We continue to expect tendering activity for new vessels for new projects in 2013. And the industry dynamics, based on the ongoing offshore development projects, is unchanged at large.

We have mentioned the consolidation effect of Lauritzen. And I mentioned the BG contract. So we continue to have the same outlook.

We continue to expect to see -- maintain the guidance we've given on 10% to 15% growth in distribution over the next years. So I think that concludes my initial presentation, and I'd be happy to answer any questions from the listeners.

(Operator Instructions)

Darren Horowitz, Raymond James.

A couple quick questions for you. The first, Arild, back to your comments around the short-term production delays, and I realize this doesn't have a material impact on your cash flow, given your contract structure, but I'm just curious how much excess vessel capacity is in those markets at present, and how quickly do you think it's going to be absorbed?

And more importantly, what impact on balance of day rate and contract duration do think it might have? I'm just trying to get a sense for what that does to the overall market, and if you still think that there could be possibly three or four tenders this year?

Yes. I think that, we are looking at the temporary surplus, it's difficult to quantify because it has to do also with the buffer that both companies require in the project, but it could be something like three to four to five vessels in each of the markets.

However, we have to remember that the fleet structure is such that the vessels that are currently constituting most of the surplus will fall away over the next few years. And we believe that when it comes to new projects, based on new buildings, we maintain that the rate structure will be based on the new building cost of these vessels, so that we will continue to see the same return, based on the investment costs that we are seeing in current contracts.

So two key things. The surplus will automatically go over go away every couple of years due to fleet structure. Third, there's -- second, there is no speculative contracting, and third, the new projects will not, as far as we can see, suffer rate wise from the current surplus of, let's say, older tonnage.

Okay. I appreciate that, and then back to your comments around those J. Lauritzen vessels. Once the acquisition is closed, and as you mentioned, should those two long-term vessels be offered to the partnership, how do you foresee the timing of those potential dropdowns, relative to the timing that you previously identified for the four vessels that were in the scope of the IPO?

Well, I think we will work that into our schedule so that we can -- obviously we need to plan for having a structured equity raising for the Company, and I think we will work that into more or less the same time schedule that we have envisaged previously.

Okay. And then regarding those four drop-down boats 2531 and 2532, those were delivered with no delays. And I assume 2575 and 574 are also tracking with no delays? Is that fair?

Yes. The only remaining vessel to be delivered now is actually the fourth vessel, from -- for Repsol and so the fleet first ones were delivered on time, and we don't expect any significant delay on the fourth one either.

Okay. Thank you very much.

Marc Silverberg, Barclays.

Related to the upcoming BG option, recognize you have the payer guarantee in place. But if that vessel were to become available, what are your thoughts around being able to redeploy that asset? And second part, if redeployed, how do you anticipate charter rates, compared to those that you currently have under contract?

Well, the redeployment will be a matter for the sponsor, so it will not affect us. We believe that this vessel, as a modern vessel, will have good long-term earning potential.

And it will really be up to the sponsors strategically to decide whether they should take a position where they live with, let's say, maybe a lower rate in a year and a half, in order to ensure that they can secure stable long-term and high long-term employment for the vessel. So it's a bit strategic issue for the sponsor.

We're not concerned for the redeployment, although of course, in the near-term, the next 12 months, it is a potential that could be at the lower rate, but it's not given. Because when you look at the fleet structure, there is not an abundance of candidates like this, which are modern shuttle tankers. The majority of the vessels that are constituting the surface today are older, and not the same quality.

All right, that's helpful. Thank you.

And then could you discuss briefly the dynamic around shipyard capacity, how long you expect that to remain full at the major yards? Really, just anything around build capacity would be helpful.

Yes. The general amount on the shipyards now is pretty high, and of course the shipyards that are relevant for building shuttle tankers are basically full out all of 2016. So that means that it's difficult to get slot for building a shuttle tanker or any other new vessels, really before beginning of 2017.

And that is, in our mind, not a problem, because if the new projects will normally have that sort of lead time anyway, and if we were lucky and they didn't have it, the sponsor would have capacity to actually entertain such contracts in the interim. So that is not a concern. And as I said, I think next deliveries would be early 2017.

This is Bjorn from the sideline. I just want to add that, of course it could be resales, it could be auctions not declared, et cetera. And you might see that there are openings also in 2016. But I mean, they're pretty full at the moment, the yards.

Got it. That's helpful. I appreciate the color.

(Operator Instructions)

Derek Walker, Bank of America Merrill Lynch.

Just wanted to ask a question based on Darren's question around the potential dropdowns of the Lauritzen assets. I believe the two potential dropdowns are DB contracts, which I believe from an accounting perspective are treated as leases.

And just understanding the timing of those dropdowns, I think too much lease income may potentially impact, I think, the MLP status. Are you looking to pair those up with dropdowns of the time charter contracts, or do you wait for the TT contracts to all be in MLP first so you get additional scale, and then potentially drop-down those DB contracts, say in back half 2015 or 2016?

We're mindful of that issue, and obviously we need to be sure that we drop in vessels in such a manner that we do not get into a passive income situation. So we will obviously make sure that we will combine these in such a way that this should create no leasing company issues for us.

Got it. And then last question from me is just around your interest rate swaps. As how should we think about that going forward, as you're looking to put assets into the MLP? Are you looking to have 70% of your outstanding debt at fixed rates, or are you looking to -- how in general should we think about the fixed versus floating interest rate, as you put assets into the MLP?

No. Given that -- we will look to have an interest-rate coverage in this range. It could go slightly lower, but we do look to maintain an interest coverage ratio around this level.

Okay. With most of that being fixed?

Yes. What we will do is that when we take in new vessels, we will ensure that we will fix, in a similar way, maintaining the overall ratio of maybe not 70, but in that range. Maybe even higher. Obviously this is something that we will follow the interest rate markets as well.

Okay. That's it for me. Thank you.

Was that answering your question?

Yes. That's fine. Thank you.

Matt Niblack, HITE.

A question on strategy. So we've seen TK offshore in particular expanded into some adjacent businesses, storage and offloading, and also even talk of floating occupancy. Is there any thought of expanding in that direction, to add further to the growth prospects of the parent company and the partnership?

No. We maintain very strongly that we believe in the growth story of the shuttle tankers, and although we have had these production delays, which is solely execution issues, we do not see that as changing the long-term growth potential. Which I think we have mentioned before we will see substantial number of new shuttle tankers required over the next three to five to seven years. So given that, we expect to see new contract, new tendering business, and accordingly new contract during this year, which tend to lead to growth two years down the road, we believe that we will maintain sufficient growth through that strategy.

Okay. And you don't see that as any kind of competitive disadvantage, that you're not offering as broad a suite of services?

No. Not really, because when the customers look for this kind of services, we do not see that there is any advantage in offering package deals. So when an oil company needs a shuttle tanker, they will do a tender for that, and if they need in FPSO, they will do a tender for that separately. We do not need to be a total supplier to our clients.

Great. Thank you.

To be specific, we do not expect our group to ever really go into the FPSO market. The SSO market is much closer to the shuttle market.

And the sponsor is already doing a contract for Total, which should start up in late 2016, early 2017. That might be the business going forward, but it's not yet defined in the strategy.

Okay. Very helpful. Thank you.

TJ Schultz, RBC Capital Markets.

As you look at the dropdowns over the next couple of years, are you targeting specific annual distribution growth, given you have some flexibility on timing of the drops, dependent on financing? Obviously just if you can say again what kind of distribution growth range you're targeting?

Yes. I think we have stated and maintained that we are looking to see -- looking to achieve between 10% to 15% growth in the distributions over the next three-year period, so that is the same -- we continue to give the same guidance.

Okay. And then on the Dan Cisne and Dan Sabia, do you have an annual EBITDA contribution from those two vessels?

I don't have that now. We're not doing that now.

Okay. Thanks.

It's too early. The deal is not yet done.

This concludes our question-and-answer session. I would like to turn the conference back over to Arild Vik for any closing remarks.

Thank you all very much for participating in this conference call. We appreciate your questions, and we look forward to being able to present our results 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.