Knot Offshore Partners LP (KNOP) 2014 Q2 法說會逐字稿

Hello, and welcome to the KNOT Offshore Partners' second-quarter earnings 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. Please go ahead, sir.

Thank you very much. We are happy to welcome you all to our second-quarter results presentation. And I think I'll go straight to the presentation. We would like to just remind you on page 2 where we say something about the forward-looking statements. And following that, I'll go straight to page 3 to talk about the highlights for this quarter.

The quarter has been an active one for the MLP, where we have refinanced our debt and secured longer maturities. We have done an acquisition -- the acquisition of two vessels, and we have done an equity issue. And from that, we will see that there has been certain costs related to the -- affecting these transactions. And so our net income is $2.5 million. However, our operating income is $9.6 million, which is well in line with our initial assumptions and an improvement in relation to the previous quarter.

This is also reflected in the general -- generated adjusted EBITDA, which is $16.3 million. And our generated distributable cash flow is also slightly lower than it would've been if we had not done all these transactions. And further, in the second bullet point, you'll see that we had $1.6 million of unrealized derivative losses, obviously due to movement in the interest rate. And further, there is about $2.2 million in various transaction costs related to the refinancing acquisition and equity offering that we have been undertaking.

We paid today the second-quarter distribution of $0.435 per unit. And, as we have previously advised, the management has recommended to the Board that there will -- should be an increase for the third quarter, up to $0.49 per unit.

As mentioned, we have completed the acquisitions of Hilda Knutsen and Torill Knutsen. That was completed at the end of the quarter, the last day of the quarter, meaning that these vessels does not have any income or cost effect on the numbers that we are presenting today. But they're obviously -- have an effect on the balance sheet.

In order to finance the equity portion of the acquisition, we sold 4.6 million units in June, raised $125.7 million net, and the general partner also injected $2.7 million to maintain its 2% ownership in the -- in our partnership. And subsequently, the underwriters have also taken the option to buy 640,000 units as a green-shoot, which has, of course, added to the Company's liquidity. However, of course, that happened after end of the quarter.

As previously advised as well, we have also rechartered, so to say, the Windsor Knutsen to BG, starting up in fourth-quarter 2015 at rates in line with current market, and for two fixed years and then three optional years. And in line with the obligation under the Omnibus Agreement, KNOT is then, through its time charter party, ensuring that the Windsor Knutsen will have same earnings as it would've had in the existing charter. And we have refinanced the loan portfolio at an interest rate of 2.12%, which I'll come back to.

Going to page 4, as mentioned, we have $2.5 million in the net result. Our top lines are well in line with what we would expect, anyway. And our operating expenses are somewhat down compared to the previous quarter. As mentioned, the two new vessels have no effect on these numbers. And as mentioned, the other numbers worth noting is related to the general and administrative expenses where we have had costs related to the activity that we have undertaken during the quarter. And there is also interest -- additional costs and other interest expense which relates to us having to expense previously accrued loan fees. And as mentioned, there is the realized and unrealized gain on the derivatives, of which $1.6 million is unrealized and $0.7 million is the realized loss.

Going to page 5 and looking at our balance sheet, we have a strong balance sheet. And there is total unrestricted cash now of $34.4 million. We have, as mentioned, agreed to new credit facilities in the total amount of $380 million. And we have grown the first one of these, which is $220 million and a $20 million revolver. And there is another facility remaining to be drawn during the third quarter.

We have managed to extend the loan profile. And once the full refinancing has been completed, the balloons will be stable in 2019. And as mentioned, the credit margin is down on these facilities of 2.12% versus the previous average under the facilities we had of 2.74%. And, as an effect of that, the average credit margin for this quarter has been 2.5%. And, of course, this sponsor has been used to refinance existing debt. And we have also refinanced the previous seller credit, which was taken up in connection with the acquisition of Carmen.

After our total debt of $545 million of total bank debt, $350 million is secured through swaps with duration -- and which close to four years, and an average rate of 1.38%, giving us then, going forward, a net interest cost well below 4%, which was our estimate when we did the IPO.

Going to page 6, on the distributable cash flow, that is somewhat lower than last quarter, due to the fact that we have had these additional costs related to the activity that we have been undertaking. If we calculate the coverage ratio straight-out in relation to the number of units outstanding, it would be in the range of [0.82]. If we calculated in relation to the owed number of units outstanding, it would be [1.07.] And obviously, as the equity that's been taken in to fund the new acquisitions, obviously, that has not generated any income for this period.

So, we would expect that we would be back in the [1.20] range, which we have been previously. That would be a normal quarter for us. So, that's, as mentioned, there are a few exceptional items in relation to this one.

And as you see on page 7, our adjusted EBITDA reflects that we have had an excellent operation with almost no off-hire during the period. And so well in line with what the -- what we would expect.

On page 8, Petrobras has accepted innovation of the bareboat charters. And that means that this transaction will go ahead between KNOT and Knutsen shortly. And, as mentioned or advised before, we then assume that the Dan Cisne and Sabia will be offered to the Partnership under the terms of the Omnibus Agreement. And, as mentioned, these vessels are on long-term charters in Brazil, and we believe they would be excellent assets to include in the MLP.

That brings us then to page 9. On page 9, you will see the contract structure where we now have an average remaining fixed period of five years. And obviously, the bareboat is [8.8] remaining, time charter is [3.8]. There is, as you will see from the Windsor Knutsen in the interim there, where the vessel is being charted out to our sponsor, which is then marketing this vessel on various cargoes during that period. And it will then enter the new BG charter some time in the last quarter in 2015. And otherwise, the fleet is in line with what you have seen before.

And if we then go to page 10, we have now indicated here also the Dan Cisne and Dan Sabia where it's -- well, I see we have recently had approval from the charter. There is a line there which can be deleted. So, obviously, now we expect this transaction to be consummated quickly. And that would then mean that the contract period for the dropdown fleet is now about 10 years on a fixed basis, and 12 years on an optional basis.

So, in summary, we have had [two] -- second-quarter, the operation as forecasted, excellent in terms of off-hire. We have a solid contract base. The backlog is mentioned 5.1 years plus that we have the identified acquisition candidates. And we have seen that the Windsor Knutsen goes back to BG when their demand for shuffle tankers is again coming to a level where they can assume both the new vessels they got from our friends and ourselves.

So, that has brought us to a total fleet of seven vessels. And we feel we are in line with the growth plan that we have lined out. We continue to see that the industry dynamics are strong. We see that there are ongoing activity from the charter side. And we fully expect to see that there will be shuffle tankers or contracts for shuffle tankers included in the near future.

So, that sums up the -- my presentation. And, as always, we would be happy to take any questions.

(Operator Instructions) Andy Gupta, Hite Hedge.

Thank you for taking the question. I've got a couple for you. First, if you could give us some color on EBITDA from the two vessels, the Dan Cisne and the Dan Sabia, and the potential timing? That will be very helpful.

Yes. Well, we haven't specifically given that information. But obviously, what we have said is that we will look to do dropdowns in the range of pricing at 10 times EBITDA. So, obviously, these vessels are a bit smaller and that will then be reflected there. In terms of the timing, we -- obviously, we're just on an equity issue, so obviously we are now considering what is the optimal timing. And we have not decided whether this will alter the original order of dropdowns that we've set out with.

Understood. And how about the additional two dropdowns, Hull-524 and Ingrid Knutsen? Can you give us some guidance on those two?

Yes, well, I think the guidance is to some extent the same. I mean, we said when we set out that we will do the drops within 18 to 24 months. And that means that we will look to spread these opportunities out over the next -- yes, I think now probably we should say 12 to 18 months maybe. And I think that when it comes to those vessels, they are on the expensive side due to their high specifications -- well, but on the other hand, I think if you look at the -- if you average out the numbers that we have in our existing accounts, I think that you will get a pretty good idea of how this EBITDA levels would look like.

Understood. And the final question for me is, while we see, of course, your assets are contracted for a very good period here, could you give us some perspective on what are you seeing generally in the industry for shuttle tankers and for rates? What are you seeing in terms of competition out there?

Well, I think that what we see now is that the period is -- continues to be in line of between 5 to 10 years. We don't think that would become shorter because the oil companies using the vessels also need the security that they have offtake when they actually plan an expensive offshore oil operation, which were actually the shuffle tanker cost. This is not the major cost element for them.

As we have said, and we cannot say any more, there are a continuing -- there are activity out there now in the market. This is tender activity. We have seen that newbuilding prices, of course, to some extent sets the level in terms of what the investment is. And we have been looking to have about 10% IRR unlevered on our project. And I believe that would be -- our competitors would be thinking sort of mainly along the same lines.

Understood. Well, thank you. Congratulations on a good quarter.

Thank you.

Sunil Sibal, Global Hunter Securities.

My question was really a follow-up from the previous caller, trying to just get a little bit more color on the market for shuttle tankers. I was wondering if you could talk about where -- which markets are you seeing the most tender activity, whether it's Brazil or not see? And it seems like all over the past few months, some vessels have retired. So, how do you see the demand/supply balance in the next, say, 12 to -- per month, 13 -- 24 months?

Well, I think it's still Brazil, which is where we see most of the activity, although we know there is some activity coming up in the North Sea as well over the next couple of years. I think that the situation is that there isn't really today any modern -- there is a delay, as we have seen, for example, in Goliad, meaning that the [three] ENI vessels are effectively operated by Statoil. However, once they go into the ENI project, we don't see that there will really be any surface capacity. And that means that new projects will need new vessels.

And we don't see anyone contracting speculatively. So we continue to see this very much in the same way that we have done for a while, that there are projects coming up and there will be -- then be tender processes to meet those demands. And fundamentally speaking, I think we see the same overall demand over the next five years in the range of 60 vessels that we saw some time ago.

What's been holding back, of course, is delays in production both in Brazil and in Norway. We feel that we see some improvement in the activity in Brazil. And they have now managed to increase their production over the last quarter. So we think these things are going in the right way. And they are going slowly, but I think in one way that fits us as well. Because that means that we can adjust our investment activity in line with actual demands and don't have to -- and don't want to take speculative positions.

Okay, that's very helpful. Thanks. That's all for me.

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

Hey, just -- most of my questions have been answered, but just have a couple of questions here. Can you just give a little bit more background around the conversations you had with BG with the Windsor Knutsen kind of rechartering there? I think the next contract up is with the Bodil Knutsen with Statoil.

Do you -- at this point, I know it's a little bit further out when that contract is up for -- or potentially expiring before the option for extension, but is there potential for that contract to be something similar to the BG contract, where there's -- you know, they didn't do the renewal, but then you were able to potentially re-contract there? Just any insight around the conversation you had with BG, and then the potential of that potentially happening with Statoil.

Yes. I mean, first, to talk about the process with BG. I mean, they are expanding massively in the area. And -- however, they had production delays in getting the FPSOs coming onstream. And, of course, after having taken four vessels from our competitor, they needed some time to assimilate that.

And in combination, that led to them not needing the Windsor Knutsen. But on the other hand, we had a -- continue to have very strong dialogue with them. And then they always liked the vessel. And, of course, that's now demonstrated by the fact that they took her back. And I think we believe that there will be further demand for vessels from BG. So, that situation was because of the delay, and that's how we ended up in this -- the vessel was not -- was really -- it was a matter of money for BG that they had a period where they actually felt they couldn't pay for it.

When it comes to Statoil, I think that situation is a bit different. There is not any sort of overcapacity or modern tonnage in the North Sea. And it's too early to talk to them about what's going to happen in 2016, but our idea still is that we believe that vessel will be needed for North Sea operations. It is in many ways, besides the two ENI vessels, the most sophisticated vessel available for harsh North Sea conditions.

Yes, I appreciate the color. (multiple speakers)

(multiple speakers) At that time, we also assume that there will be no temporarily low capacity in the market as well, in general.

Got it. Got it. Okay. And then appreciate the color there. Just last one from me is just on consolidation within the shuttle tanker market. So how are you guys looking at third-party M&A? And in particular, just are there certain opportunities there you're trying to avoid, just giving certain contract lengths? Or are most of the opportunities out there well-contracted and you see plenty of opportunity for potentially third-party acquisitions?

Well, I mean we have completed one third-party acquisition and it takes time. So, it's really up to the -- there needs two to tango, as they say. And I think that we'd be interested.

On the other hand, it would have to be meaningful pricing. And we still believe the main business philosophy is to grow organically and to develop new projects. Because we know that we are always on -- have a seat at the table when there are new contract coming along. We -- through the position we have with the sponsor, we have more critical mass in order to be in that position. And we are not dependent on M&A to grow for the time being.

But, yes, of course. That's something -- we watch the market, and there could be opportunities. It's really all I can say about it.

Got it. Thanks, Arild. Thanks, Bjorn. Appreciate it.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Vik for any closing remarks.

Yes, thank you very much. Thank you all for listening and giving us the opportunity to present the Partnership and our ideas and results for you. And we look forward to talking to you again in three months' time.

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