Knot Offshore Partners LP (KNOP) 2016 Q4 法說會逐字稿

Let's start with the presentation. Thank you. If any of you have not seen the earnings release or the slide presentation, they're both available on the Investor section of our website. On today's call, our review will include non-US GAAP measures such as DCF and adjusted EBITDA. The earnings release includes a reconciliation of these non-US GAAP measures to the most recently comparable GAAP financial measures.

A quick reminder that any forward-looking financial statements made during today's call 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 can differ materially from those forward-looking statements. The Partnership does not undertake to update these forward-looking statements.

Now on to the presentation. KNOT Offshore Partners focuses on the shuttle tanker segment. The asset is sales specific and an Integral part of the logistics supply chain. It provides a vital service, transporting oil from the offshore production units to shore-side.

KNOT trades at a significant yield premium to the Alerian index today, our distribution is around 9.7%. It might be a little bit less now, compared to the Alerian index of 6.7%. The index represents around 85% of all MLPs by market cap.

Unlike most of these MLPs, however, we are operating in a space seeing substantial oil production growth, and consequently the supply of shuttle tankers is tightening as this demand grows. We have a young fleet, and after a record-breaking set of results in the previous quarter, today we have reported our latest best ever financial results for the fourth quarter of 2016, a very solid financial position.

We are pleased to announce another addition to the MLP fleet, the Tordis Knutsen, for an acquisition price of $147 million on March 1, 2017. The vessel was delivered in November 2016 with a five-year firm charter from Royal Dutch Shell starting in January this year. As well as being an accretive acquisition, the vessel has a time charter duration of 5 years plus 10 further years of options, increasing our MLP charter backlog and reducing the average age of the fleet.

Our sector is unique amongst many MLPs in that there has been no speculative ordering of shuttle tankers, so the Partnership should yield stable and sustainable revenues. Before ordering a new vessel, our sponsor, Knutsen NYK, has always agreed to a long-term employment contract with the charterer. Our sponsor, Knutsen NYK, according to [Clarkson Platou] research, Is part of the largest shipping group in the world, and NYK is a major Company in the Mitsubishi family.

When we did the IPO, our fleet was four vessels. At the end of 2016, less than four years later, we have a young fleet of 11 vessels, average age of about 4.75 years. Despite the disruption in the capital markets, we continue to grow at a pace which is in significant excess of most MLPs.

Now turning to the presentation slide 3, Q4 2016 financial highlights and recent events. For the fourth quarter of 2016 the Partnership generated our highest ever revenues, operating income, adjusted EBITDA and distributable cash flow. We declared a stable distribution of $0.52 for this quarter.

The coverage ratio has reduced a little this time from last quarter, but it's still 1.27%, as the 2.5 million units that were issued in January have to be included. Distribution for the second consecutive quarter remains below the accounting results, the net revenue figure.

We had a strong operational performance, 99.8% utilization in this quarter. This is in line with our strong figures ever since the IPO.

We combined the addition to the MLP fleet of Raquel Knutsen for an acquisition price of $116.5 million. This was completed on November 1, 2016. The vessel was delivered in March 2015 with a 10-year charter to [Hetrick] Repsol.

On January 10, 2017 the Partnership successfully completed an equity offering, raising net proceeds of $55.5 million. On the February 2, 2017 the Partnership further issued and sold in private placement $50 million worth of convertible preferred units at a price of $24 per unit. The net proceeds from the sale after expenses was approximately $48.5 million, and although it makes our balance sheet a little bit more complex, the preference issue enables us to raise equity at a running cost of 8%, so allowing KNOT to continue to grow through accretive acquisitions.

There are no preemptive rights, which are often common in these such instruments to the detriment of the issuer. The issue, I believe, is evidence that. KNOT is proactive in finding other sources of capital at accretive terms when constrained in the equity markets. We announced the latest addition to the MLP fleet of the Tordis Knutsen for an acquisition price of $147 million, and this will be effective from March 1, 2017.

Slide 4, the income statement. Total revenues were $45 million for the three months ended December 31, Q4. This compares to $44.3 million in the three months to September 30, an increase of $0.5 million.

Operating expenses increased by $1 million to $23.4 million over Q3. Operating income for Q4 was $21.6 million compared to $21.2 million in Q3. All the above increases are because of the addition of the Raquel Knutsen to the fleet for one month in December.

Net income was significantly impacted by realized and unrealized gains and losses on the derivative instruments, a net gain of $4 million in Q4 and a net gain of $3.6 million in Q3. It's primarily due to the long-term interest rate movements.

As of December 2016, the Partnership had interest rate swaps of around $446 million paying a weighted average interest rate of 1.57% for an average duration of 3.5 years. We had also swapped forward Norwegian kroner and USD to insulate the MLP against dollar interest and currency movements over the next three to four years. This should make our financial statements and performance more predictable.

Net income for Q4 was $19.5 million. In Q3 it was very similar at $19.4 million. This equates to earnings per unit of $0.72 based on the issuance at December 31.

The net income for the year was $61.1 million. This is 51% up from the previous year, and the MLP generated a small accounting surplus over the distribution paid.

Slide 5, adjusted EBITDA, in Q4 the Partnership generated our best ever adjusted EBITDA of $36.1 million. It compares to our previous best ever of $35.1 million in Q3. Adjusted EBITDA refers to earnings before interest, taxation, depreciation, and amortization. It is a proxy for cash flow. Adjusted EBITDA is of course non-US GAAP measure used by our investors to measure Partnership performance.

With a wasting asset like a vessel, younger fleets in theory should produce lower EBITDAs for every dollar invested. The annuity effect reduces the value lost from the early years, which is factored into the replacement CapEx calculation for distributable cash flow.

KNOT's fleet has an average age of just under 4.75 years. This will reduce to below 4.5 years with the addition of Tordis. This compares to the rest of the industry average for shuttle tankers excluding KNOT with 11.5 years. The fleet is aging, world's fleet.

Slide 6, distributable cash flow, another non-US GAAP measure to estimate distribution sustainability. Today we report our highest ever quarterly distributable cash flow of $20.8 million in Q4. This compares to our previous best ever of $20.3 million in Q3. We maintain our highest distribution level for Q4 of $0.52 per unit, driven to an annual distribution of $2.08.

The distribution coverage ratio for the quarter is a very comfortable 1.27%. This is, of course, in spite of the fact that coverage ratio has reduced from the last quarter of 2.5 million units that were issued in January before the record date had been factored in and the coverage ratio has reduced. It would have been at a level of 1.38%, ignoring these 2.5 million additional units.

Because the MLP has an elevated yield, it had rather focused on reducing and building coverage and deleveraging rather than increasing dividend as there is little benefit to the MLP in short term of term yield over 10%. We have raised funds at between $21 and $29 a unit, and many of our common unitholders have remained loyal, so we do not want to dilute them. And we see double-digit distributions as the signal that investors would rather prefer deleveraging.

That said, we have a coverage ratio of 1.27% in Q4, even with unit overhang. So there is room for an increase in distribution. This is something we will have to evaluate going forward. Keep in mind that the Board of Directors also like the distribution as a sponsor and one-third of the MLP.

Slide 7, balance sheet: at the end of December we had a solid liquidity position with cash and cash equivalents of $27.7 million, and an ongoing undrawn credit facility of $10 million. This, despite the $25 million drawn down for the Knutsen acquisition of Raquel.

The credit facility's available until June 2019. At the end of the year we also had $25 million drawn down on a seller credit. However, following on from both the preference and common user issuances together with the Tordis acquisition, the seller credit along with the revolving credit facility had been repaid. Our Treasury position is therefore extremely comfortable. With our sponsor support through the potential use of both the seller credit and revolver facilities, these may be utilized again to acquire assets in the future to further build the MLP.

We have a predictable cash flow and we do not have any loan maturities before the end of the second half of 2018. The total interest bearing debt standing was $741 million; $745.7 million net of debt issuance cost. This has increased obviously because of the acquisition of Raquel Knutsen.

Annually we currently have scheduled repayments of around $60 million. This compares to replacement and maintenance CapEx of around $31 million when computing distributable cash flow. This accounts for the current covered generated.

Slide 8, stable operational results: performance results in stable financial performance. Since the formation of KNOT nearly four years ago, we have had very strong levels 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.

In Q4 we had record distributable cash flow of $20.8 million, and we'll make a $16.4 million distribution with the January units included in this. Since our initial public offering over three years ago we had declared distributions of $7.18. So our initial investors have received a total return of over 34%. Our current yield is around 9.7%. That's a couple of days old, that figure.

Slide 9, unit price and yield performance in the MLP: since our initial public offering over 3.5 years, the KNOT yield has remained elevated to the Alerian for most of the period and also unit price has outperformed the Alerian index. This has produced a significant ownership premium when comparing us to the general investment and Alerian index.

Move onto slide 10, KNOT growth is more correlated to the Brazilian peso, but it's priced off the AMZ index. Recent volatility in the unit price has been caused by a fall in the Alerian, which is correlated to both a fall in the oil price and the Baker Hughes rig count.

As you can see on this slide, the solid graph is the Baker Hughes rig count, the blue line is the Alerian, the red line is the KNOT units, and the top line there, the step line, is the actual Rystad production figures for the pre-salt in Brazil.

So according to Petrobras, their production in December 2016 was a new monthly record set at 1.27 million barrels per day. It reached a peak of 1.34 million barrels per day on December 29, a record. This production figure at December 29 is 33% up on the average for 2016 and 75% up on the average for 2015.

Now, obviously Petrobras tend to be a bit euphoric with their figures, so I thought I'd look at the Rystad figures and ask them to provide me some data. According to Rystad, in 2016 the Brazilian pace of production grew from around 670,000 barrels a day at the beginning of 2015 to about 1 million barrels per day at the end of 2016, quite similar to Petrobras figures.

The year-on-year increase in production was about 200,000 barrels per day. A similar production increase is expected in 2017. Not quite as upbeat as Petrobras, I guess, but it's still pretty impressive.

MLP financial performance, slide 11, the extreme unit price movements in the Alerian index and by extension the KNOT unit due to market volatility has disappeared. Bought by high-end heavy industries in Korea and delivered in November 2016, the Tordis Knutsen is a Suezmax class enhanced DP 2 shuttle TimeCharter operating under a time charter that expires in the first quarter of 2022.

It is with Royal Dutch Shell and based in Brazil. There are options to extend for a further 10 years until 2032. There is escalators in the time charter of about $600 per day per year.

We have agreed with our sponsor, Knutsen NYK, to acquire the vessel for the MLP for $147 million with delivery effective the March 1, 2017. It will be part financed by commercial debt of around $95 million and also cash. The senior loan has a margin of 109 basis points with annual repayments of around $5 million a year.

The net charter rate will yield around $7.9 million of net income and approximately $16.2 million of EBITDA for the first year, from March 1, 2017. The charter has an escalator of about $600 per day, applicable annually to roughly about $1.2 million in EBITDA. With this acquisition, which again demonstrates our sponsor's strong support and commitment to the MLP, our fleet will have grown 200% since the IPO in April of 2013.

Slide 13 (sic), stable and predictable cash development: our treasury position with undrawn credit lines has remained stable throughout the period from the start to the end of the year, a stable distribution because of the cover ratio and no refinancing. In this period we have acquired Raquel Knutsen with a $25 million solid credit to part finance the transaction. Our cash flows have always been stable and predictable.

Slide 14 (sic), long-term contracts backed by leading energy companies: firstly, the Windsor Knutsen has been on a two-year contract from October 13, 2015 with Brazil Shipping I, a subsidiary of Royal Dutch Shell. We have been informed that Shell really likes this ship, so we're very confident about renewal of the option period. We have a further six years of extension options. It has commenced off hire recently for drydock on February 5, and this will be in total of 55 days off hire as we drydock the ship in Brest and Europe.

The Bodil Knutsen, the largest shuttle tanker, operating in the North Sea, is (inaudible) on charter for Statoil ASA until April 2019. There are further five years of options to extend.

Statoil has recently been given permission to proceed with the Johan Castberg field in the Barents Sea 240 kilometers north of Hammerfest. This should provide medium-term employment and security for the Bodil.

Four of our vessels are on long-term (technical difficulties) charter to 2023 with Petrobras Transpetro. These vessels are amongst the youngest in the Petrobras fleet, have been delivered between 2011 and 2012, and are heavily utilized. Dan Sabia and Dan Cisne are a unique size, and Fortaleza Knutsen and Recife Knutsen have (inaudible).

Three of these vessels have undertaken their first five-year special survey in 2016. And the last one, the fourth one, Dan Sabia, in January 2017. (Inaudible) hires are a charter's expenditure (inaudible). Delivered in 2013, the Carmen Knutsen is on charter direct to Repsol Sinopec until 2023.

The Ingrid Knutsen was delivered in December 2013 and is operating in the North Sea on a time charter for Standard Marine Tonsberg, a Norwegian subsidiary of Exxon Mobil. This will expire in the first quarter of 2024. The charter has options to extend the charter by up to five one-year periods.

The Raquel Knutsen was delivered in March 2015 and it operates under a time charter with Repsol Sinopec in Brazil. This will expire in the first quarter of 2025. There are options to extend until 2030.

Slide 15 (sic), the Goliat field in the Barents Sea: in a field in the Barents Sea nearly 300 miles north of the Arctic Circle, ending in March 2016 started to produce at the Goliat platform. Production flow will eventually reach about 100,000 barrels a day and place Eni among a select group of oil operators in that region.

Never before have shuttle tankers had to meet such strict environmental requirements as these vessels do. They are on this contract heavily winterized. The most visible difference is due to the normal shuttle, there is enclosed deck space running fore to aft, allowing the crew and hence the vessels to operate in temperatures down to minus 38 degrees C; I don't know what that is in Fahrenheit; quite low, isn't it?

Our two vessels, Hilda and Torill Knutsen have been built and chartered to Eni specifically for this project. Of the original five-year contracts on the two vessels, on average about 1.75 years remain on the firm charter period. Given their specialized nature we would expect these vessels to operate on this field throughout its life.

Slide 16 (sic), significant growth since the IPO. This is quite a nice slide. It shows how many vessels we've added to the fleet since the IPO in 2013. You have to admit we've grown quite rapidly and quite sharply.

Slide 17 (sic), the dropdown inventory: This is again outlining the three vessels we have dropping down.

There are currently three more shuttle tankers we (inaudible) from our sponsors Knutsen NYK, two similar vessels to the Tordis. These are shuttle tank -- Suezmax enhanced DP2 shuttle tanks from high-end or heavy industries, the Vigdis Knutsen in February 2017 and Lena Knutsen in June 2017. These are chartered to Shell.

One Suezmax Class DP2 shuttle tanker from [Cossgoes Ozen] which will be chartered to Petrogal. Our recent acquisitions, Raquel and Tordis, and all our dropdown inventory will operate in the pre-salt oil field in Brazil.

The fixed contract periods for the dropdown fleet is a minimum of five years on average. It could be longer, depending on which series of options the charter elects to take on delivery.

We are not in any particular hurry to put the balance of these ships (inaudible) but always are free to drop down inventory into KNOT in the near future. However, we currently have to (inaudible) consider for further acquisition.

The sponsor has already fully financed all these vessels and is in a healthy financial position, so is under no pressure. Accretive acquisitions only occur for KNOT when either we have sufficient resources or we are able to raise adequate financing at reasonable terms, no double-digit yields, as we have always said -- as we have always communicated this. One of the reasons we have expanded our capital base by issuing common and preference capital was to allow us to have a more flexible approach to raising capital, which is necessary the current environment and (inaudible) ships are having delivery.

Slide 18 (sic), in summary. KNOT Offshore Partners LP is a midstream of our pipeline business with fully contracted revenue streams. These are non-volume based.

Since being awarded the first two contracts in 1984, Knutsen has grown organically for over 30 years as the business has been built from these two shuttle tankers into a sizable fleet, currently 30 units including [Nordis]. Today's supply is timing, and the market is expanding.

We have a solid and highly profitable contract base generated by our modern fleet with an average age of around 4.75 year at the end of December based, versus the rest of the industry average of well over 11.5 years. In the fourth quarter we again achieved record revenue, adjusted EBITDA, net income and distributable cash flow. All these records were previously set in the previous quarter.

The Partnership is again well placed and highly focused on expanding in the medium term now that both the MLP and the oil markets are recovering. We completed the acquisition of Raquel, and have now entered into a share purchase agreement for the acquisition of Tordis Knutsen. No one has more experience in operating these sophisticated shuttle tanker than Knutsen Offshore, and we operate these vessels with real expertise. We have a very supportive sponsor who has a large asset base from which to build its MLP by capturing a good proportion of the expanding market.

Now, that's the end of the presentation, ladies and gentlemen. Thank you for listening. If you've got any questions, please feel free to ask now.

Thank you.

(Operator Instructions)

And the first question comes from Matt Niblack with HITE. Please go ahead.

Hello. Thanks for taking the question. So on the Goliat field, could you speak to the competition for your two vessels there? Are there any alternatives for the producers?

Not at this present moment in time. [There's no] such a thing, the way they are, they're pretty specialized. There's normal lead time for a shuttle tanker, about 2, 2.5 years between placing an order and being field ready.

We think those vessels will take even longer to manufacture than that. Really, [Eni] aren't really looking anywhere else, as far as we're concerned. We think there's really no substitution risk there at all, due to the nature of the contract and our relationship with the charter.

Great. Then similar question for the Windsor Knutsen. What's the competitive environment there for recontracting?

Interesting about the Windsor, it can work in both the North Sea and Brazil. Even if -- it's highly unlikely the way the Brazilian pre-salt's going today that any ships have moved out of that area. It's more likely to see a migration to that area from the North Sea, although I don't think that's likely either because the North Sea's pretty tight as well.

We're very relaxed about the Windsor. We get great reports back from both previously BG and Shell. They like the ship. We're very confident it will be renewed.

Bear in mind, the charter rate on that ship is a little bit less than new tonnage. It's actually relatively cheap as well. Again, we're not worried about this ship.

Great. Thank you very much.

(Operator Instructions)

Hey, John. It's Spiro Dounis from UBS. Thanks for taking the question. First just wanted to start off on the dropdowns. Went from a period of virtually no dropdowns to two in really quick succession.

Wondering if you could comment on why you thought it was important to maybe drive the two dropdowns back to back, and maybe what that means for the pace for the rest of the year? Obviously you've got a lot in front of you.

I think we saw the improvement in the capital markets environment. We were comfortable with unit price the way it was when we went to raise the block deal. We got a reasonable deal from the bank, and we thought we would like to get the unit moving again.

One of the things about our block trade is it gives the opportunity in the aftermarkets for lots of your existing unitholders to basically transact. Often you need to do common unit issuances on a regular basis so you keep the liquidity in the unit and make people comfortable, especially if they're unitholders, that they can move the stock if they want to.

What we saw with the common is, I think we saw quite a lot of activity after the placement, a lot more than the actual 2.5 million units that were bought and sold as people made the opportunity because the market was there to liquidate or build their position. So actually it's quite necessary to -- we do realize because the stock on a day-to-day basis in the past has been quite low liquidity, it's quite important to keep the common units [fully] going.

That was key. And also the preference deals was an opportunity deal. I feel that's a really good deal with good terms, no preemptive rights, $24 strike. If you were doing a common unit issuance you are looking at a $27, $28 pricing together sort of deal. So we were very happy with that one. So really those two things came together. Obviously you can't just (inaudible) you pay 9% yield. We have to draw the ships in quite quickly.

In terms of the runway for the rest of the year, how you're thinking about drops and maybe what you need to see in the market to make that happen?

I think [Russell] is going to go into more detail when he comes to the Investor Day presentation. But I think it's tight, but we could -- we've got more or less enough capacity to do another drop. Again, that's something we will consider. And I think he'll go through that more on the Investor Day.

Today the way the fleet is, it's comfortable. We can stretch it again a bit.

Got it. Second one on the distribution. Trying to figure out what you need to see specifically to have an increase here, and is it really just about the yield or is there something more to it?

I guess what I'm getting at is it seems like a circular argument. It's almost as if you pay the higher amount, maybe everyone would see the growth and the stock price would go up, the yield would go down. Right now it almost seems like the equity's not growing. It's almost like a high yield unsecured subordinated bond.

It's a high yield unsecured note. If you look at it that way, we're still paying a hell of a yield. Yes, we could grow the distribution.

We will look at it. We're not daft. The cover's going up. Because the cover is where it is today, it means we can more or less get by comfortably without having to refinance. That's quite nice, it gives us more flexibility.

We will see what the refinancing opportunities are on the ships as well because obviously the pay-down on these ships is quite a lot quicker than the amortization on the annuity basis. We like to cover it because it gives more flexibility. And we look at the yield today and think 9.7%, who wouldn't be happy with that in this [company] environment? Obviously if we look at $27, $28 a unit, than I think we probably would [construct it].

But that's just the way it is. We will -- we've got opportunities to do it, but we don't need to do it. It creates an easier pathway for us if we don't do it.

Appreciate the color.

This is Nick with Citigroup Research. Just a quick question in terms of the tightness of the market. Should we expect to see more backlog from the sponsor as a result of that tightness in terms of ship orders? If you could talk a little bit about timing of that, that would be great.

I think [Clarksons] have got a very good presentation on the shuttle tanker market. Obviously we are tendering for one or two ships, but not in Brazil. That's interesting, there's not more [seaworthy tonnage to start].

I really see this [chance] to be quite significant demand for tonnage in Brazil. I guess all the activity that's happened in the past two or three years down there and the oil price dropping off has put their plans back a little bit as far as capital investment is concerned. The Petrobras shuttles, they do tend to run short voyages.

I was talking to Spiro about it a little bit, and basically with the Shell ships and the Petrogal ships, the ones that operate on pre-salt they tend to go further afield with the discharges. The [Bravarian] ships are small and they tend to run in port a bit more.

Generally you see about 70,000 barrels a day for each Suezmax shuttle tanker. That's fantastic when you think about a 15-day voyage. When you think about the growth projections [as much] you have to be down there, it's pretty obvious they're going to run (inaudible).

We haven't seen any activity yet. I can't answer that until after we get a contract or two working.

Fair enough. What about other markets like offshore Canada? There was a tender, I think we've asked about this before, where one of your competitors actually got a bunch of ships.

Yes.

I'll take over for this. Of course, we didn't like the Canadian tender because it wasn't for (inaudible). It was the same agreement for transportation.

Not what we are used to in shipping. So in shipping you have, I would say, a [perilous] balance. In the Canadian contract we thought it was a bit more skewed towards the charterer.

So of course we bid for the contract, but we bid a higher price. Teekay took that contract. We took the contract for the Shell vessel. We're more happy with those vessels.

If you look into our financing, we're at [$353] million of bank debt, that's 190 basis points for those three vessels. Teekay managed to add $250 million of bank debt for their three shuttle tankers in Canada. I think that shows a bit how the contract have worked (inaudible) Shell versus the Canadian contract.

I guess last question will be coming back to Spiro's original contract about timing of certain things, particularly distribution growth. Is there a minimum coverage level that you're comfortable with, or do you need to see for a sustained amount of time before you will actually look to increase the distribution?

No, I'm not going to -- [there's no] need to guide on that, but I think when you look at other shipping companies, we accept that for this space at the moment deals are a bit elevated. Our unit's trading at around 9.7%. I don't think there's many with the quality of organization that we have trading at that level.

I think we want see a bit of growth in the unit price and the reason for doing it before we do it. I said before, we'd rather grow -- we'd rather reduce the gearing and not be forced into refinancing ships, and just have a more gentle approach to it until -- we don't really see the need. We think it's a pretty good story -- pretty good yield, sorry, at the moment.

I'm not convinced. We would talk about it, it's not just down to me. It's just how I feel personally. But as (inaudible) guided in his notes that we are actively discussing it. It's not something that's off the agenda by any means.

Thank you.

Frank [Granbook], [FP] Asset Management. Regarding competition and the market, you have several charters coming due, but what is the situation? Are there many more new ships coming on the market, and would that change the usage of your ships? Do you expect more competition and perhaps lower prices down the street because new ships coming in from the competition?

There aren't many contracts for delivery this year, there's five in total.

The order book is five vessels. All those five vessels will deliver the next 12 months. All of the vessels are -- six are long-term employment. Basically they are all for new contracts.

And then there's no more orders in the order books. Hasn't been a single order for a shuttle tanker in two years.

We're actually seeing a gradual increase of the fleet of the shuttle tanker. Competition, there are always competition. But the market is tightening and rates are basically going up.

That looks very good.