Knot Offshore Partners LP (KNOP) 2014 Q1 法說會逐字稿

Good day, and welcome to the KNOT Offshore Partners first-quarter 2014 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Arild Vik. Please go ahead, sir.

Thank you very much, and welcome to KNOT Offshore Partners' first-quarter earnings call 2014. With me here today is Bjorn Bakkevig, who is the Chairman of our GP. I think I will just go straight into the presentation. There is a notice to recipients, which you will all be familiar with.

We have had a steady quarter with no surprises, really; and for this first quarter we generated net income of $6.4 million, operating income of $9.4 million, adjusted EBITDA of $16.1 million, and distributable cash flow of $8.9 million. I see that there is -- somehow there has been a bit of mistake there, because the actual number in the distributable cash flow page is $9.1 million. So there is unfortunately a mistake that popped up in our presentation. Sorry about that, but it is $9.1 million. So based on this, we expect to pay a quarterly distribution, as announced earlier, tomorrow at $0.435 per unit, corresponding to an annualized distribution of $1.74 per unit.

During the period, we have previously advised that BG Group will not exercise its option to extend the Windsor time charter. The process of reemploying the vessel is ongoing, and KNOT are looking at specific options for this. But it's too early to give any more information on it.

Further to that, we continue to see the growth potential, in addition to the fact that we remain to have four dropdowns. We have -- KNOT is in the process of acquiring the two Lauritzen vessels, which then will be eligible for drop down to the MLP. And we also see now that oil companies are starting to move in relation to new projects, which we will have to come back to further.

In terms of the actual numbers on page 4, I think the most relevant comparison is to the three months ended December 31 of 2013. Gross earnings are slightly down; that is basically due to the fact that there are 10 less earning days in this period. OpEx is slightly up, although we have throughout -- since the IPO had very -- we have had very low or met the forecast well. And if we adjust for the fact that one more ship has been added to the fleet since we did the IPO, our OpEx levels are still lower than forecasted levels.

We have -- we here show stable interest costs. Since we have done certain derivatives on the interest side, there are unrealized losses which then are offset by unrealized gains, which is then the reason why we have close to zero on net realized and unrealized gain in the result -- giving us, then, a net income of $6.4 million.

In terms of the balance sheet, there is no major developments in the balance sheet. We have continued to reduce debt in our interest-bearing debt of $342 million, $343 million. We pay average credit margin of 2.7%, and as mentioned, we have secured $250 million of interest rate risk. We are in compliance with all covenants, and we are also starting the process to discuss the refinancing for the Group, extending maturities and lowering credit margin. And we will hope to conclude this within the next month.

In terms of the distributable cash flow, as mentioned, unfortunately there is a slight mistake there. But we show there $9.1 million as distributable cash, which is in line with the projections. And there are really no changes to the way that comes about. And the same applies for the adjusted EBITDA, which is $16.1 million. So we, on a general level, feel that we are meeting the forecasted levels with good margin.

As mentioned before, KNOT, our sponsor, is in the process of acquiring the Lauritzen tankers, the three Lauritzen tankers, of which two will be eligible for dropdown to the MLP. And that is ongoing. We are awaiting charterers approval, but we expect that is something that will be finalized fairly soon, and then there will -- the vessels will at the suitable time be offered to the MLP.

In terms of our contract structure, there is nothing new to our contract structure -- except, of course, we then -- as noted, the Windsor Knutsen is now not extended, although it is still going for BG and will do so until sometime during this summer. And in case the rechartering shows it's down at the lower time charter rate than the existing one, the guarantee from KNOT will apply. So based on this, we have an average contract duration of 6.1 years for the existing fleet.

And on page 10, where we have the dropdown, identified dropdowns, excluding in this the Lauritzen vessels, as they have still not been formally taken over. We then have 7.2 years fixed and 12.2 years including options, which is the long-term contract backlog which we expect to include in the MLP at the right time.

So in summary, on page 11, the Q1 is as forecasted. And we continue to have, as I mentioned, a solid contract base. We have now secured interest risk, swapping dollars into fixed rate for $250 million. KNOT has entered into this contract and expect to finalize soon the purchase of the shuttle tankers from Lauritzen. And we mentioned BG, where we are continuing to look for reemployment. And in any case, there is a KNOT guarantee.

Then, as mentioned, we see now that the oil companies are starting to move in relation to new business activity. And therefore, we expect to see more activity in the near future. And I'll leave it to Bjorn to say a little bit about the expectations that we have going forward.

Thanks, Arild. We get a lot of questions from investors that are aware of the negative trends in the financial markets regarding the offshore sector. And in general, the oil companies have announced that they are going to watch carefully their spending going forward. And we have seen repricing in the rig sector.

Our view of the outlook for our business is a bit different. We think we have a much better visibility, given that it takes a long time to mature these offshore oilfields. The effect of that is that we -- what you see with the exploration drilling sector these days is going to be business for us in 5 to 8 years going forward. That means that we haven't been as optimistic as we are now for the last two years.

So going forward, we will assume that there will be a lot of new contracts coming into the market. And we expect those to be concluded in the near future. We think this is an important point, because we really differ from the general rig drilling business in a lot of ways.

Thanks. I think with that, we can open for questions.

(Operator Instructions). Matthew Phillips, Clarkson.

On the Windsor Knutsen, I was wondering if you could use that as an opportunity to speak about Brazil in general. The production lags there are well known. Do you expect that this is more of a blip? Do you think that this gets -- that BG ends up taking this vessel in the future? What market dynamics are you seeing down there currently?

Well, I mean, it's not the blip, because it's been going on for a while. I think that Transpetro and Petrobras has had some issues, which they have actually recognized themselves. We think that they have put efforts into changing -- to make changes. They have done things in the management; they have done things in the way they operate; and they have drawn in more international partners. And I think that when we look at the -- on their production statistics recently, they have managed to actually get a number of their units going over the last few months. So, we do continue to believe in Brazil. It's been, I think, tougher for them than expected, but from what we hear and see now, we know that there are new activity coming, and we know that that will lead to the requirements which we have predicted. So I would say that we are 12 to 18 months later on than we expected it would be, but I think we are now actually coming to a point when things are picking up again. And this will -- it will be possible for us to be more specific on these issues within the next quarters, I think.

Yes, I mean, that makes sense. It seems that they are still certainly taking rigs down there. They are just pushing much harder on rates. So the demand, it seems like, is still there. So that does make sense.

On the three vessels acquired by the GP from Lauritzen -- the two that are potentially dropdowns for the MLP, would they move to the front of the line compared to the prior-identified newbuildings? What would you expect the timing there?

We haven't sort of established the order in that sense. So, we will come back to that when we are -- and we will announce that as we go with it. I mean, the good thing, of course, is that it increases the overall backlog for us.

Indeed. Okay. Thank you.

(Operator Instructions) There appears to be no further questions at this time, so this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Yes. Thank you all for listening to us, and we would like to welcome you all back in three months' time to talk about the second quarter. Thank you.

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