Knot Offshore Partners LP (KNOP) 2014 Q4 法說會逐字稿

Good morning, and welcome to the KNOT Offshore Partners fourth-quarter earnings conference call. All participants will be in a 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.

Thank you very much. Good morning and welcome to KNOT Offshore Partners fourth-quarter result presentation. And I would like to go through the presentation that is online. And I think let's just go straight into -- well, page 2 is the notice for recipients in relation to forward-looking statements. And then I will go straight into page 3, which is the highlights and recent events for that fourth quarter.

The fourth quarter has been a strong quarter for the partnership. We generated net income of $5.9 million; that is affected by $4.2 million of unrealized derivative losses. So you will seem in our numbers that all of the top-line results are well in line with and actually above expectations. So we generated operating income then of $15.9 million, which is a strong result. We generated adjusted EBITDA of $26.5 million, and we generated distributable cash flow of $15.1 million.

During this quarter, we have completed refinancing of Fortaleza and Recife Knutsen, reducing loan margins. And we have acquired the Dan Cisne vessel, bought by [KNOT], our sponsor from Lauritzen in Denmark. This vessel is operating under a 12-year bareboat contact with Transpetro, and this acquisition has taken place without taking up any new equity. So it's fully debt-financed, although there is a $12-million seller credit from KNOT.

In terms of market activity, shuttle tanker market continues to be active. We must remember that it's a small market, so it's not that many contracts that's done every month. But our sponsor's been made one long-term contract with an international oil company, to be disclosed, and the vessel will be built at Cosco Zhoushan in China. So we will, after this, have six defined vessels eligible for acquisition.

We have further informed the market that myself, the CEO, will step down to pursue other interests. And however, I shall be available to work for the partnership throughout July 2015, and the Board is working to find a replacement for my position. Finally, we have then paid as, the previous advisement, a cash distribution of $0.49 for each unit, corresponding then to an annual distribution of $1.96.

Turning to page 4, as you can see, from the three months ended December this quarter, top lines are well in line with expectations. This pretty much the same as the third quarter. And the Dan Cisne, which was acquired, did not really have any material effect on the PL for this period, as it was acquired pretty close to year end.

We had uptime of 99.6%, and also just to mention that revenues, as it has done previously, does include some non-cash items that amounts to $0.9 million for the fourth quarter, related to contractual income, which has been -- where the cash has been received previously.

Of course, the item which then is important here is the derivatives, where we have interest swaps and also and also forex hedging, which has led to non-realized loss of $4.2 million. So in total, including realized losses, this brings our realized losses in with $5.2 million, and this brings our result down to $5.9 million for this period.

On page 5, we continue to maintain strong balance sheet. We hold cash of $30.7 million. We now hold interest-bearing debt of $613 million, including then the sellers credit of $12 million. And after having refinanced the Fortaleza and Recife Knutsen with a nine-year remaining profile, you will see that we do not have any major refinancing activity until 2018. And we have secured part of our interest, obviously following from the fact that we have losses on interest swaps, so that we have now an average duration of about 4.5 years, or an amount of $382 million. And our equity position is then about 40%, as you can see.

We have on page 6, we are showing the calculation of distributable cash flow. As you can see, that amounts to $15.1 million, and that gives us a coverage ratio of 1.32; that's a high number. Part of the reason that it's that high is that we have the effect of the interest -- of the loan amounts, which has short-term interest, obviously, and we can't [say] what we think we should retain. We normally use a higher number, but this is how it comes out in looking strictly at the accounting numbers.

And on page 7, we show the adjusted EBITDA, which then comes out to $26.5 million, after adding back the non-cash items, including then the realized and unrealized -- the realized losses -- or the unrealized losses on currency and derivatives.

Turning then to our -- the business as it now appears, on page 8, we have continued to build a strong contract base by acquiring vessels as previously advised to the market. And you will see that we have a fixed contracted duration of 5.3 years remaining. And obviously, adding the Dan Cisne increases the contract duration, so that we are very comfortable now having long-term visibility on our earnings.

As mentioned, referring to page 9, KNOT has boarded one new shuttle tanker in January for an international oil company. That is a contract that could be between 5 to 20 years, depending on options. And it will be built in China and the rest will operate in Brazil, and we believe this is showing the visibility of the new business within this market.

And following this, on page 10, we are showing our drop-down inventory, and you will see that that fleet -- those six vessels have an average of 7 years in fixed contracts, 14 years if we include the options. And as you will see, it is a strong group of charters, which then is basically using this as part of their logistics in order to lift off of the oil from their off-shore production units. So basically, we continue to stay in the mainstream of what we call floating pipeline business.

On page 11, I'm going to come a little bit into the market situation and risks, which is there and which is not there in a sense. Obviously, in Brazil, it's the main area of activity. There has been a lot of unrest and speculation on the Brazilian situation.

Now, we have now seen that there is a new management in Petrobras, obviously being the main company there. And we see that in their updated information, which is still new, it appears to us very clear that all existing projects, that is under construction and order, will continue in order for them to prioritize securing cash flow. Which takes us up to 2017 and actually also into 2018 with new projects which will, in our opinion, lead to further demand. Then, of course, oil price over time will be important, but as we will come to the oil price, breakeven, for these projects, are generally below shale. So we are, in spite of the uncertainty that has been shown, we are optimistic and comfortable that existing business, and business which is already well underway, will continue to be developed. And that there will be a consequence of that business, opportunities for us. So this is what you'll see on page 11.

On page 12, we see also the Petrobras old management view on their cash-flow situation, basically with their new plan, where they will reduce CapEx on expiration and development of new projects, but they will maintain the development of the existing projects already underway. We see that they see, as we are informed, no need for additional funding of Petrobras; and there are many people analyzing this. We are not better than anyone else, but we do, based on this continue, to believe that they will give priority to keeping ongoing business active, and by that really securing their long-term cash flow.

On page 13, as you know, we some time ago secured contracts with BG -- or KNOT did, which is now in our portfolio of drop-down candidates. And this shows the uptake of production where they have already reached103,000 barrels per day. And they have some units on plateau, and they have new startups. And my understanding is that they continue to see progress, as set out here, and they continue to see flow rates exceeding expectations, indicating that the BG development in Brazil is on track.

On page 11, we really continue that -- the same line of thinking where we have indicated from their own presentation what is their activity, how they are going about this. And in summary, we see from this that they are continuing that high activity and they are confident that this will be successful. And really, the same impression is what you get when you look through further the page 12, or page 15 in our presentation, where we see that they are continuing with the work on the units in Asia. And we know that they are also considering further options for vessels that they have under the contract with KNOT, which hopefully could be concluded within this year.

So on page 16, in summary, what are the effects of lower oil prices for Knutsen Offshore Partners, existing projects are continuing. There are very low-lifting costs on the existing fields, as the former, or the initial investment is [on] cost. So it is profitable and shuttle tanker service will be required as planned.

And in terms of deliveries in 2017 onwards, which is now what is available on the shipyards, we do see in our discussions with several of the majors, mainly in Brazil, but also in the North Sea, that there is activity and that both, due to new fields and due to facing other existing vessels, we expect to see activity of new contracting during this year.

We are in the process of revising our growth scenario; we do not think it is materially changed from what we had initially, except that we see that northern part of Norway, Arctic business seems to be a bit delayed, And obviously, waiting for oil prices that are maybe higher than today. But in Brazil, I think we have previously advised that the breakeven level is around 40, which is basically below a lot of the shale business. So we continue to see that as valuable, and therefore we believe in the increased activity also in the period from 2017, 2018, 2020 onwards. And that is -- in combination with the fact that we already have a very strong portfolio of drop-down candidates, we think we should pass through this period of, let's say, some uncertainty relation to the offshore expiration in a good way.

On page 17, we are just summarizing the numbers quarter by quarter. As we see in the fourth quarter, we now of course, have full effect of Hilda and Torill Knutsen, which we had in the third quarter as well. And we do not really have an effective system yet; that will come in the first quarter of 2015. And we see that we have had a consistently good coverage ratio in the range of 1.3, except for second quarter of 2014, when we had the situation that there was no effect of this acquisitions that was made very late in the quarter and didn't affect our cash flow.

So operation has been better than forecasted. Earnings on the [EBITDA] level has been stable for our fleet, and we accordingly then see strong performance in terms of [low offhire]. And therefore, stable top-line results and really it is the -- there is some, let's say, unstability created by the hedging activity that we have done. But that evens out over time.

On page 18, we're just showing the development in distributions and coverage, and as that really reflects what I said on the former page, we have now recommended, management has recommended, increased Q1 distribution between $0.01 and $0.015 per quarter, with effect from the first-quarter 2015. And so we are well within the expected distribution growth, which we advised at the time of IPO.

That concludes my presentation. So from then on, I'd be happy to take any questions.

(Operator Instructions)

Spiro Dounis, UBS.

Good afternoon, Arild. Sorry to see you go, but just wanted to wish you best of luck in whatever you end up doing.

Thank you. Thank you.

So, first question, just wondering if you could talk to the tendering activity, and maybe frame it relative to the level of activity that you saw before the global E&P CapEx cuts? I realize that your business is largely locked in, but just trying to get a sense of how quickly the drop-down inventory can grow in this current market.

Well, I think that if we look at the projects that we were expecting to bid for the next couple of years, they're already ongoing. So I don't really see that there is a huge difference in what's going to happen over the next couple of years. It's more, of course, the long-term growth that is to be affected if the oil price should stay at low levels.

I'm not really sure if current level which -- is that low anymore. I think we are expecting a fairly -- we are expecting some volatility on the oil price, and obviously the oil companies would then spend some time thinking through this.

So -- but really in terms of what we would expect for the next couple of years, I don't really see that this will affect us substantially. But then obviously, we'll need to see what -- where the offshore oil business goes over the years. But even the replacement requirement is quite substantial and remembering that this is a small market. It -- we're pretty confident that the growth in new project will be sufficient to sustain the good-sized growth here.

Great. Makes sense. And I was just wondering, how should we be thinking about the timing and pace of dropdowns, realizing it's somewhat unit-price dependent. Unit price, with the oil price drop, took a hit, but now has bounced back pretty nicely. Just wondering if it's come back to a level where you'd feel comfortable issuing equity again to fund dropdowns. And maybe how aggressive you'd be and how many dropdowns you'd do per year at the current price -- or unit price environment.

Well, I think this is something we follow closely. We do -- let's say unless we step backwards in terms of pricing, we do envisage that something will happen during this year. But it's obviously a continuing assessment that we are making, and I think that if you look at the six that's now there, I suppose the best way of looking at that is that it will be spaced over the next couple of years.

Got it. Thanks, Arild.

(Operator Instructions)

Theresa Chen, Barclays Capital.

Hi, Arild. Just also wanted to echo and say thank you for your service and partnership, and I wish you luck on all your future endeavors.

Thank you.

Going back to slide 16 of your presentation, when you talk about revising your long-term growth scenario, when do you think you'll have an update more quantitatively on your growth projection for cash distribution?

Well, I think the issue now is that, since the oil price move came pretty quickly -- or moved quite quickly end of last year, we are seeing that the oil companies are now reassessing their -- some of their long-term activities. Meaning that, okay, for the next couple of years, I don't see a lot of change. But obviously, I think, if the oil price stabilizes at levels 70 plus, just to pick a number, then we will not really be that affected.

And we are counting through now the number of vessels that we believe will -- we can rely on, based -- using same methodology as we used when we did the IPO. And, so far, the number doesn't look that different to us. But, of course, there are -- there is some more uncertainty, especially when you come to the oil fields that are far north and is more expensive to take out.

So, we don't see any, as I said, any -- there is not a hole in the activity for the next couple of years. I think that's the most important thing to say. And then, we will be, based on when we get feel for what the oil companies are thinking in terms of their longer -- in the longer view, we will come up with that. And I would imagine we would come up with something within the summer or something like that.

Got it. That's very helpful. And then, in the same line of thought, with backdrop of lower crude price environment, has this affected the market for third-party acquisitions at all?

That's a good question. There are only so few -- there are only a few -- we would be on the buying side, I think to put it like that.

Okay.

We're not on the selling side, and basically you have to ask the other guys. As you can see when you look through the market space, there are very few there. And whether they feel now that it's going to take longer for them to actually gain traction in this space, I really don't know. That's -- I think that's the best answer I can give you.

Hi, Theresa, this is Bjorn. I just want to add that, based on our view that we're not really hit by this oil price. We see activity continuing as normal, we see the next couple of years expanding as expected. And when we say we're going to revise our projections going forward, that's more to do with the growth from 2018 and onwards, how large the growth will be. We're quite sure there will be growth. So we don't see that this will tilt in the oil price; it really opens up a lot of discussions in the market.

Got it.

Of course, we will always be interested, as we've stated earlier.

Understood. Thank you very much, gentlemen.

Thank you.

At this time, I see no further questions. I would like to turn the conference back over to Arild Vik for any closing remarks.

Yes. Thank you very much. We appreciate that you've taken your time to be with us to go through our fourth-quarter results. And we remain -- as Bjorn says, we remain very confident that the shuttle-tanker market is going to stay reasonably strong in the short run. We don't see any major issues in the longer term. We are also -- it's more the level of growth than anything else that we would be looking at. And, again, thank you very much, and we look forward to talking to you all again in three months' time.

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