Knot Offshore Partners LP (KNOP) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the KNOT Offshore Partners fourth-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. We ask that you please stand by. The presentation will begin in a moment.

Today's discussion and the presentation materials include non-US GAAP measures such as DCF and adjusted EBITDA. The presentation materials include reconciliations of these non-US GAAP measures to their most directly comparable GAAP financial measures.

Any forward-looking statements made in the presentation materials and during today's discussion are subject to risks and uncertainties, and these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results may differ materially from these forward-looking statements, and the Partnership does not undertake a duty to update any forward-looking statement.

My lawyer told me to say that. KNOT Offshore Partners focuses on the shipping tanker segment. Consequently we have only one report to use.

And Knutsen NYK Offshore Partners LP is in essence a midstream mobile pipeline business, with fully contracted revenue streams. And the market is expanding, so supply should [lime] irrespective of the oil price.

The shuttle tanker transports oil from the offshore oil production unit to shore side. It provides a vital mobile pipeline service, and it therefore operates in the premium midstream space.

The forthcoming offshore developments are deep sea oil fields, where the traditional MLP investment and fixed pipelines are not an option. Before ordering a new vessel, KNOT will always agree on a long-term employment contract with the vessel.

There is no speculative ordering, so our MLP will yield both stable and sustainable revenues. The difference to the large conventional tanker market was illustrated in 2013, when we did the initial public offering, which was heavily oversubscribed, and the full green [shoe] was taken up.

The LCC and Suezmax tanker earnings at that time were achieving time [shelter] equivalent earnings below operating costs. Now turning to our presentation.

So, slide 3. In the fourth quarter we have achieved the highest ever revenues of $42.5 million; our highest ever adjusted EBITDA, which is a proxy for cash flow, of $33.8 million; our highest ever net income of $17.6 million; our highest ever earnings per unit of $0.62 a unit; and our highest distributable cash flow of $18.1 million. We declared a stable distribution of $0.52 per unit for this fourth quarter, with a coverage ratio of 1.2.

We had excellent operational performance with 99.9% utilization, in line with year-to-date figures. In October, the Windsor Knutsen commenced a two-year time charter with BG Group. The charter also includes six one-year extension options.

And the revenues for the Windsor Knutsen is also guaranteed by the sponsor unit April 2018. In October, we completed the acquisition of Ingrid Knutsen, which is on time charter to Exxon until 2023, with options to extend until 2028.

In November, Statoil ASA exercised its option to extend the time charter on Bodil until May 2017. Following this declaration, Statoil has two additional extension options until May 2019, with the revenues for Bodil being guaranteed by our sponsor until April 2018.

The income statement. Total revenues, as I said before, were $42.5 million for the fourth quarter compared to $39.3 million for the third quarter. This is due to the inclusion of Ingrid Knutsen in our fleet from mid-October.

All 10 of the partnership vessels operated well through Q4, achieving 99.9% utilization. That is the 0.8 days of hire over the 6 time charter ships. Vessel operating expenses for the fourth quarter were $7.6 million compared to $5.9 million for the third quarter.

The increase was mainly due to Ingrid Knutsen being included in our overall result operations from October of 2015 and a one-off reduction in the third quarter of $0.7 million due to receipt of insurance proceeds. Operating income for Q4 was $20.4 million, compared to $19.7 million for Q3.

And income for Q4 was $17.6 million compared to $8.8 million for Q3. Affecting net income was a recognition of realized and unrealized gain on derivative instruments of $2.2 million in the fourth quarter, compared to a loss of $6.5 million in the third quarter.

Though our long-term interest rates are beneficial as they have increased the present value of our contacted revenues, affecting the 2015 net income of $40.4 million, was realized losses of $4.4 million on [forest] contracts NOK to US dollar, and a one-off of $6.7 million for the write-off on goodwill.

Adjusted EBITDA. We generated adjusted EBITDA of $33.8 million. Adjusted EBITDA refers to the earnings before interest taxation depreciation. It provides a proxy for our cash flow.

Adjusted EBITDA is a non-US GAAP measure used by our investors. With a wasting asset like a vessel, younger fleets in theory should produce lower EBITDAs for every dollar invested. The annuity affect reduces the volume loss in the early years. Younger fleets are assets that hold to have a longer -- to enjoy any MLT correction.

KNOT's fleet has an average age of around 4 years compared to the rest of the industry average of slightly over 10 years. Distributable cash flow was $18.1 million for the fourth quarter compared to $16.1 million for the previous quarter.

We maintained our highest distribution level, which for the quarter was $0.52, equivalent to an annual distribution of $2.08. This was the distribution. We have a coverage of 1.20 in the fourth quarter. We have a stable and predictable cash development. Looking at the cash development in the fourth quarter, we utilize $37.5 million of available cash to acquired Ingrid Knutsen. In the fourth quarter, the partnership repurchased 180,000 common units utilizing $2.3 million of cash. The change in cash, excluding these transactions, is very small, but generated EBITDA covering servicing of our debt and the distribution payments.

The balance sheet. At the end of December we had a solid treasury position; cash and cash equivalents $23.6 million and an undrawn credit facility of $20 million. We have about $44 million of available liquidity, which we think is very comfortable given our predictable cash flow.

Slide 10. Balance sheet liabilities. Total interest-bearing debt outstanding is $672 million. We did not have any loan maturities before the second half of 2018, and our cash flows indicate we will maintain our current distribution level until that time. The cover ratio has been normalized in the fourth quarter at $1.2 million with the acquisition of Ingrid Knutsen.

Total partnership equity stood at $521 million at the end of December in the MLP balance sheet. This is equivalent to a unit price of $18.78. Despite a straight line of depreciation of our assets in the accounts, not the annuity MLP model, we are still trading at a very significant discount to book value. Given our growth prospects our young yet, technically advanced fleet, and our long-term contracts, we feel this is a very attractive investment opportunity.

Stable operational performance. Since the formation of the MLP, we have had a very high level of vessel utilization, which means continually high and increasing predictable revenues, adjusted EBITDA, and discounted cash flow as more vessels are added to the fleet. Following the Ingrid Knutsen acquisition in the fourth quarter, we have a distributable cash flow of $18.1 million, and made our highest distribution of $15 million.

Long-term contracts. Since July 2014, the Windsor has been employed under a contract -- under a time charter with NYK. This has since been replaced by a two-year time charter from the 13 of October, 2015 effective with PG, which is now a subsidiary of Royal Dutch Shell, with options to extend for a further 6 years. This relationship is broadening, as PG now a part of Royal Dutch Shell have agreed to charter three further vessels, all new builds that have sponsors contracted with [Randai].

Our flagship vessel, Bodil Knutsen, is the largest shuttle tanker operating in the North Sea, and Statoil has been given permission to develop the Johan Castberg oil field in the Barents Sea. This should provide medium-term employment security for the Bodil. Four of our assets are on long-term fair boat charters to Petrobras. These vessels are amongst the youngest in the Petrobras fleet, and therefore these slide by the charter.

The Carmen Knutsen has been popular with Repsol Sinopec, and in September 2015 the partnership agreed an amendment to the existing time charter, extending the duration for a further 5 years until 2023. The Hilda and Torill Knutsen are going to start work in the Goliat field in the -- north of the Arctic Circle.

They were built and chartered specifically for this Eni project, and the Torill is scheduled to lift the first cargo around March 2016. Never before have shuttle tankers had to meet such strict environmental requirements as our two vessels are ice classed and heavily winterized.

The most visible difference to normal shuttles is the enclosed deck space [sorting] fore to aft, so the vessel can operate in temperatures down to minus 30 degrees C. Currently these two vessels have been relet to Statoil as they -- once production starts, the shuttle tankers' environment off sea will tighten significantly.

The Ingrid Knutsen is on charter until the first quarter of 2024 to a subsidiary ExxonMobil. The charter has further extensions -- or further options to extend another five years.

When we did the IPO, our fleet of four vessels had an average age of about three years. Now three years later, we have a fleet of 10 vessels with an average age of four years. So we are aging gracefully. All our backed by long-term charters. This, combined with a strong balance sheet, makes us very well placed to extend the medium term as the MLT market recovers. As I said previously, younger assets appreciate more per dollar invested as the MLP yield reduces.

Or put another way, the rate of discounting and cash flows reduced back end cash flows from younger assets appreciate the most. The acquisition of West Ingrid together with the recent time charter extensions on three of our five ships has been very positive this year for the partnership, as they increased the average fixed employment to about 5.5 years.

Our drop down [eventually] today, we have potentially five further vessels, same as when we did the IPO even though we've added six vessels to the fleet. The fixed contract periods for the drop down fleet is a minimum of 5.9 years on average. It could be longer depending on which series of options the charters like to take on delivery.

So in summary, we have a very solid and highly profitable contract base, with a revenue backlog of $850 million and an average contract duration of 5.6 years. We have a modern fleet of shuttle tankers well placed and highly focused on expanding in the median term, as both the MLP and the oil markets recover. No one has more experience in operating these tankers than Knutsen Offshore, and we operate these assets with real expertise.

We have had minimal off hire, with 99.9% utilization in the last quarter, and 99.6% since the IPO. We have a large sponsor asset base with an ability to capture significantly a good proportion of the expanding markets.

That is end of the presentation. If anyone has got any questions, please free to ask.

(Operator Instructions)

Our first question will come from Hillary Cacanando of Wells Fargo.

Hello. Thanks for taking my question.

I wanted to get your thoughts on, just given the tough market, what your thoughts are on counterparty risk? I know you have very well-known counterparties, but just given the tough market and you have four charters with Petrobras and they've had their own set of problems recently. So just wanted to know how -- I just want to get your thoughts. Just given everyone is so concerned about counterparty and credit risk these days.

With being the shipper of the cargo we are a midstream mobile pipeline company rather than -- we've seen more probably upstream space where contracts are shorter and renewals are -- the asset base has dropped a lot in the upstream space. There are short time charter periods and there is scope for the charter to be negotiated in these situations.

Where we're positioned is rather different. We have long-term financial leases, which run through to 2023, which are governed by UK law. And also we have a strategically important asset for the charter generally because we are the pipeline business for them.

Typically the Petrobras vessels take about a 16-day round voyage to deliver the cargo shore side, which effectively means the cost of delivery for each cargo is probably less than $1 million. The cargo typically is worth, even at $20 a barrel, is worth probably about $15 million, $16 million.

So you can see that there is significant risk if anyone tries to disrupt the contracts to the oil flow and monetizing the assets. I'd also like to point out at this stage we've had no issues with any of our charters and we've had no pushback from any of them.

We don't see any problems going forward. But obviously, you can never say never in this world, but I think we're in a very strong position in terms of -- more in terms of what we're actually doing here and the position the assets occupy in relation to the business of Petrobras

Okay. Great, good to know.

Just one more question. I read that KNOT has an FSO and another FSO in conversion. Is that something that is available for a drop down? Or if it is, do you have any plans to diversify your fleet from just shuttle tankers to something like an FSO?

We haven't really talked about expanding the MLP right now. We have quite a lot of ships to drop in and the FSO markets aren't really open for business at the moment.

I think we have to see how the MLP evolves and what the sponsor's appetite is for dropping in assets. I'm sure that the MLP will be prepared to look at any transactions a sponsor puts towards it.

But at this stage we tend to be a pure player on shore tankers. Those actually keep the business quite simple and relatively easy to understand, as well. FPSOs, they are more complex in how you account for them, and what you do about residual risk on them is more difficult than a tanker.

Okay. Great. Thank you very much for taking my questions.

No problem.

(Operator Instructions)

And showing no further questions, this will conclude the question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

Thank you very much for listening to that, I appreciate it. I'm surprised there are so few questions. I'm relieved.

I think it that closes the earnings call session then. Somebody had -- sorry. Go ahead, please.

(Technical difficulty) that might otherwise be used with different projects?

So what you are saying, in a low oil price environment how will it impact our business? Well, as far as the existing fields that have been developed are concerned, the cost of development is already there and the cost of basically the actual monetizing of the asset, the oil is probably about $10 to $15 a barrel typically.

The main cost is in setting the field up and getting the flows going in the first place. Once the flows are in place, then effectively you have to get a pretty low oil price to close a field down.

I think as far as future developments goes, logically you would expect it to slow the pace of development down. But I don't necessarily see that as a disadvantage to the shuttle tanker market, because as I said previously, if the pace of development does slow down, then we get more manageable growth of the world's shuttle tanker fleet.

Two years ago when we did the IPO, there was an expected incremental demand for shuttle tankers by 2020 of a further 60 ships. I think when Verners give their presentation you will have a better idea what they feel the impacts will be of this slowing down.

But with the shuttle tanker market, if you get a lower oil price you will get slower growth. But I don't see that it's going to choke off demand, increasing demand for these tankers. And in the medium term, the oil will eventually be exploited. It is not like in the North Sea today Statoil have announced the Johan Castberg development. And that's going to go ahead about -- is it 2020? Yes, 2020.

So we are seeing even in the North Sea new shuttle tanker areas opening up. And certainly in Brazil, I mean BG are not scaling back -- sorry, Royal Shell are not scaling back on their Brazilian involvement. I doubt that much would have gone ahead if the oil flows hadn't been good and they weren't looking to develop those fields very soon.

And you've got the Libra field, as well in Brazil, which is another 12 to 15 shuttle tankers. So there is a lot of potential demand for these tankers, plus there are quite a lot of older ships which will need replacing. We could put a question mark over when these tankers will stop trading as shuttles, because obviously in Brazil they could potentially go out. There's nothing to stop them going out another five years.

But it doesn't make that much impact on the actual demand for ships. But I think Verner is quantified it at about five to seven. I don't actually see -- I actually see the low oil prices not a risk for this market, and in many ways it will stop too much over ordering of ships.

Does that help?

Hi, this is Chintan Desai from UBS. I just had a couple questions. First one is on unit buybacks.

I see that the cash balance has come down a bit following the acquisition. Can you just talk about Management's appetite for further unit buybacks?

Well, it's all price dependent. We have a matrix and we will stick to it. I think at this level we both back out; it's very attractive for us. I think as you hopefully go pricing of the unit and you get to that $14 or $15 that we probably will stop around that level.

We will put it under review; we don't really have a hard and fast view of it. Today we think the unit's intrinsically quite heavily undervalued. We have to measure that against actually taking units off the market. Because obviously you do compress the liquidity a little bit.

The positive is it does actually reduce the unit price volatility a little bit, I feel, in the worst days when we can buy some of units back. And we have seen -- I think it's reduced a little bit before that we see. But it's difficult to say because the Safe Harbor rules are quite onerous and we can't actually buy that much quantity back in any one day. And we can never buy above the prevailing market price.

We've always got to buy at a price lower than the maximum achieved. So it does restrict you. As well as the volume restrictions, there are price restrictions on the buyback.

Thank you. That was helpful.

One question on the North Sea. There's been a lot of talk about vessels (technical difficulty). Can you talk about what your outlook is there?

Today we have is it four or five ships -- five in the North Sea, isn't it? KNOP's vessels are contracted long term and they're young ships. It's highly unlikely that there would be any problems with these vessels. Though the older shores like the 15-year, 20-year old vessels then, if supply weakens in the North Sea they are the ones that are more at risk where they've got COA business.

But with the long-term time charters on young ships, which are specifically designed to the fields, then we don't see any risks to these vessels. We see them trading through.

Today the North Sea supply is starting to tighten up a little bit. And say when the NE contract starts, so probably in the Goliat field, it's just starting up this month, that will take two short tankers out of the North Sea market, which have been basically relet to Statoil by NE. That should help.

On a general note about the North Sea market, the North Sea market is actually really tight. Today there are only 69 shuttle tankers sailing. Five of them are out of the market, four of them are in lay up, and one is trading as a conventional tanker.

So there hasn't been that many investments, and right now oil companies are a bit hesitant about giving long-term charter, which means that demand for existing vessels is pretty good. So North Sea market for [offsis] is actually is quite good, and the [winton] is going to present a view on the North Sea production volume.

They have actually upgraded the assumed production from North Sea offshore oil field. So yes, there are some issues, but in general it's fairly stable production. And of course if you have done all the investments in an offshore oil field, you are definitely going to try to maximize production in this environment because cash cost is still way below the [glen] price.

Final question (technical difficulty). I read that one of the tankers ran aground in Brazil. Could you give any guidance on any off hire associated with that?

First of all, there is no off hire commission because this is a financial lease. So it's if you lease a car and you've dented the car or do -- make an incident, you cannot go to your leasing company to get a claim from off hire. This is a financial lease, there is no off hire. This year is a leap year, which means we'll get paid 366 days rather than 365.

So what happened there was that was that Recife was about to enter the discharging terminal. The [Gradsor] turned, so we got a message from the terminal that we had to cancel the discharging. And we canceled the berthing, we hooked up to three of the four tugs, but due to heavy wind and current the vessel was grounded.

However, most importantly there was no personal injuries, there was no injuries to the boat. We have been in cooperation with charter who is responsible, of course, for the vessel since they have it on a financial lease and the [port space] authorities.

So what we are doing today is to do a ship-to-ship transfer of cargo in order to lighten the vessel. And then when the tide comes we're going to take her out of the grounding and take her to terminal for some further inspection. There is no injuries, there's no damage to the boat, and we absolutely see no economic consequences for KNOT given the fact that this is a lease.

Any more questions? That concludes the earning call then.

This is the operator, we do have another question from the phone line. Would you like to take it?

Yes, I will take it.

David Starkey, Morgan Stanley.

Thanks for doing the call. Quick question just regarding the longer term debt situation for the Company.

I guess there's nothing big due until 2018. How are your relationships with your existing banks regarding the longer term nature of the loans that you've got?

As we said these loans are maturing in second half of 2018. I don't like to pay bankers more than I have to, so why refinance. These vessels are on contracts.

DNI has options to extend them, and if you look in our filings you also see that they have some options earlier than 2018. These vessels will start loading on the Goliat SPSO in March.

The Goliat SPSO project has an investment of NOK50 billion, which is about $7 billion. So this is a huge CapEx commitment.

There are only three vessels in the world that can load from this field because it is in the Barents Sea, where temperatures can drop to minus 30 degrees centigrade. So they are going to need this vessel.

This field is going to produce for more than 15 years probably. So we are fairly comfortable about this, and we are going to wait to refinance this loan until probably 2017 or 2018.

Because once you refinance you have to pay all of the fees, the bankers and lawyers. We'd rather keep that money for our partners.

I understand. Can you compare yourself to a company like Nordic American Tankers?

You want us to compare ourself to Nordic American Tankers? (multiple speakers)

Just to get an idea of the different structures.

What do you mean by different structure?

The relationship to a parent company. They're like wholly owned; I'm just trying to get an idea of what the differences are. I don't mean that -- (multiple speakers)

We are quite a different company than NAT, I can promise you. First of all, we are not in commodity shipping. We are in the mobile pipeline company where we are delivering transportation of oil from the offshore filter terminal so that oil companies can monetize the oil there.

As I mentioned there are 69 shuttle tankers in the world. That's a lot of Suezmaxes. If you have a Suezmax you are competing on pricing.

We are competing on much other things than just pricing. If you look at NAV, a lot of people are doing that today. Even though, of course, it could be a lower bond on your share price, but if you look at NAV we look at lot more attractive as well.

It seems like you have a lot more fixed oriented costs and contracts in place certainly that would reduce the volatility and improve your valuation.

It's the nature of this business, and it's always been this type of business. This has always been a long-term contract business.

So we don't foresee that structure changing. And fundamentally with the big tankers they have always been on a spot basis.

The good thing about oil, whatever it's big tankers or shuttle tankers is there's no financial risk. You always get paid. But there is massive contract risk with the large tankers when the market turns.

Generally, like we see in the [Cape Size] today, I know it's a different sector but you basically get paid OpEx when the market is bad. With this it's just a stable long-term business.

It's late cycle. We achieve a sensible return on investment, and that's how these deals are structured. So you expect to renew a lot of charters, as well, generally because you would never price an asset that highly and it's been designed specifically for a field.

Generally the charters don't run more than about 5 to 10 years, because effectively it would go into the CapEx of the oil major if was a 15-year lease. I think that's probably why we see quite short deals.

Likely any contract those ships were built specifically for that field and they will operate 15 years there. But they wouldn't have got 15-year charter on the ship because they would have to include it in the CapEx of the business then, and it makes it look like they made a much bigger investment.

It seems to me this is an editorial, but the Wall Street analyst should be giving you more of a premium for the many levels of stability you have built into your business right now. Thank you for your time. I appreciate it.

Thank you, David.

That was our last question.

Okay. So we'll wrap up the earnings call and start the investor day in a few minutes. Thank you.

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