Knot Offshore Partners LP (KNOP) 2021 Q1 法說會逐字稿

Good day, and welcome to the KNOT First Quarter 2021 Conference Call. (Operator Instructions) I would now like to turn the conference over to Gary Chapman, Company's CEO. Please go ahead.

Thank you, and welcome, everybody, to our first quarter earnings call for 2021. You can, as always, find our earnings release and this presentation on our website at knotoffshorepartners.com. Our call today includes certain non-U.S. GAAP measures of distributable cash flow and adjusted EBITDA. And although our earnings release includes a reconciliation of those non-GAAP measures to the most directly comparable GAAP measures, please remember that any forward-looking statements made during today's call are subject to risks and uncertainties.

This presentation and our other publicly available information contains forward-looking statements. Actual events and results can materially differ from those statements, and the partnership does not have or undertake a duty to update any forward-looking statements. I refer you to Slide 2 and our annual and quarterly SEC filings for further details.

Slide 3, first quarter and subsequent highlights. The partnership is able to report another strong and stable set of quarterly results. Total revenues in the first quarter were $71.5 million, operating income, $27.6 million and net income, $28.1 million. Adjusted EBITDA was $51.3 million. Distributable cash flow was $21.7 million and our coverage ratio was 1.20.

Available liquidity at the end of the first quarter was $115 million, which included cash and cash equivalents of $60 million. Scheduled fleet utilization was 91.6% in the quarter, noting that if we were to include the Windsor Knutsen that received insurance proceeds equivalent or higher during the quarter, then that utilization figure increases to 97.5%.

We announced our 23rd consecutive quarterly distribution of $0.52 per common unit, which is, in fact, paid today. Our crew and our operations remained materially unaffected by the COVID-19 pandemic to date, and we continue to establish and maintain strict procedures and protocols around our operations to do all we can to keep our colleagues safe despite the many challenges that have arisen and are continuing. At the end of the quarter, the partnership had $670 million of remaining firm contracted forward revenue, excluding options.

In respect to the Windsor Knutsen, you may recall, we explained previously that the vessel was found to have a crack in her main engine block back in December 2020, and she was placed off-hire. The partnership's insurance is covering the cost of repairs and providing income at approximately the level earned during the vessel's prior long-term charter, accepting a 14-day deductible period under the policy until such time as the vessel is repaired and fully operational, which is expected to be in or around June 2021. The incidents in the repair are not expected to result in any future loss of hire, and the repairs are progressing well on time and on budget.

We closed the sale and leaseback agreement for the Raquel Knutsen in January 2020, and further details on this transaction can be found in our fourth quarter 2020 earnings release.

Slide 4. In March, the Tove Knutsen developed a technical fault due to a leakage from its controllable pitch propeller. The vessel was repaired and returned to operation on April 15, 2021. And net insurance recoveries, the partnership currently estimates that the aggregate cost of this incident will be approximately $0.3 million.

During the first quarter, the Bodil Knutsen successfully completed its scheduled second renewal survey dry docking. And the partnership took advantage of the dry docking to also install a Ballast Water Treatment system on the vessel, which further builds the vessel in our fleet screen credentials. Based on the timing and sequencing of events, the Bodil Knutsen was effectively redelivered to the partnership from Equinor on February 22, 2021, at the start of the vessel's dry dock. We are now actively marketing the vessel, the new time charter employment.

In the interim period, went to provide support to the partnership, our sponsor, Knutsen NYK Offshore Tankers AS, KNOT, has agreed to time charter the Bodil Knutsen from the partnership on a flexible rolling 3-month basis, possibly for the remainder of 2021, commencing on a date to be agreed in May 2021. The charter rate payable will be lower than the rate the partnership would normally look to achieve in the market, reflecting the short-term situation in the North Sea at this time, yet providing the partnership with valuable support and certainty of income.

As a related party transaction, this charter proposal has been reviewed and approved by the partnership's independent Conflicts Committee.

In May 2021, the partnership reached an agreement with the VOC Industry Cooperation Norwegian sector, or VOCIC Norway, whereby VOCIC Norway agreed to fund loss of hire at a reduced rate during and costs related to the installation of the VOC, volatile organic compound recovery plant on the Bodil Knutsen. The work is expected to be carried out in the third or fourth quarter of 2021 and take around 1 month. This will be the second material improvement made to the vessel in 2021 after the addition of the Ballast Water Treatment system. The VOC system will significantly improve the operating attractiveness of the vessel in the North Sea and Norwegian sectors going forward, as well as virtually eliminate the non-methane VOC released into the atmosphere arising from the vessel's cargo.

Finally, the Tordis Knutsen is due to undergo her first planned 5-year special survey dry docking in the fourth quarter of 2021 and which is expected to be carried out in Europe. The vessel is expected to be off-hire for approximately 50 to 55 days, including mobilization to and from Europe, and this is expected to have a scheduled impact on our fourth quarter earnings.

To Slide 5, where we set out some of the unique aspects of our business. In brief, we are a market leader with more than 30 years of experience. We're classified as a corporation for U.S. federal income tax purposes and issue a 1099. Our vessels have specialized assets with limited replacement risk. Most of our vessels have operational flexibility and are capable of servicing many different fields.

There are high barriers to entry due to the specialist nature of our vessels and crude. We have a diverse set of financially strong contractual counterparties. Our contracts are fixed rate in typically 1 year to 7 years. And once in operation, they don't depend on oil prices and our customers bear the risk of vessel utilization and operational fuel costs.

Our management strategy remains to operate the business with a focus on long-term stability as far as possible. And as we have seen in 2021 so far, a combination of strong coverage and diversification is serving us well as we maintain good coverage even as more vessels transition between contracts than has been the case historically.

And finally, our debt repayment profile means we expect to pay down around $90 million this year.

Slide 6 through 9 are our main financial results, and I will highlight just a few relevant points. For the first quarter of 2021, we were able to maintain revenues broadly in line with previous quarters at $71.5 million, notwithstanding the Bodil Knutsen dry dock and some of the one-off technical issues already outlined. Vessel operating expenses for the quarter were slightly higher, partly due to bunker costs related to the Bodil Knusten dry dock and also due to higher costs, crew costs arising from COVID-related issues, but we do expect some of this crew cost overshoot will fall back over the course of the year.

Adjusted EBITDA, on Slide 7, came out at $51.3 million, another very consistent quarter. Distributable cash flow on Slide 8 was 1.2x in the quarter, reflecting slightly lower fleet utilization, mainly related to the Bodil Knusten dry dock and expected increase in our estimated maintenance and replacement CapEx adjustment and the impact of an increased realized loss arising from our interest rate swap contracts due to lower LIBOR and the nonrecurring item related to the Raquel Knutsen sale and leaseback refinance.

We've spoken previously about targeting stability, and we consider this to be an example whereby our strong coverage has given us room to maneuver when we have experienced a degree of turbulence. Maintaining our coverage at 1.2x despite our turbulence shows the extent to which our current contracts and diversification of revenue streams has provided us with depth of cover. And we currently expect our contract portfolio to continue to provide cover throughout this current year.

On Slide 9, I would just note here the increase in our current liabilities, which principally represents the refinancing we have to do in the coming year, with the first significant tranche due in November 2021. We are already in detailed negotiations with our lending group in relation to this, and all indications so far are very positive. We plan to report more on this in the next quarter.

Slide 10 gives an update on our contracted revenue charter portfolios. At the end of the quarter, we had $670 million of contracted forward revenue remaining to the partnership, an average remaining charter period of 2.5 years, and our customers have options to extend these charters by a further 2.8 years on average.

For the Windsor Knutsen, we're showing here a small gap around the end of the second quarter 2021, where there could be a small open period between the end of the repairs and the anticipated commencement of the new charter. Ultimately, this may not occur, but until we get closer to the time and agree a precise delivery date with the charter, then there is this possibility.

For Bodil Knutsen, we are showing the time charter to (inaudible) in the middle of the year, which is on a rolling 3-month basis, to allow flexibility for when a third-party time charter is found. Thereafter, you will see that our remaining fleet is contracted for the remainder of the year.

Now as mentioned, Tordis Knutsen is scheduled for its first planned 5-year special survey dry docking in the fourth quarter. As disclosed in our fourth quarter 2020 results, the partnership secured new fixed contracts for the vessels, Tordis, Vigdis and Lena Knutsen that will commence between May and December 2023.

On Slide 11, our sponsor KNOT continues to have 6 vessels that could be acquired by the partnership, with an average fixed contract period of 5.3 years and with an average of a further 7.3 years extension options. Although we have seen a welcome increase in our unit price, still today, we have no firm plans for acquiring the vessel. However, at this time, we are actively considering our options for later in the year. New vessels that provide further diversification and cash flow coverage would further insulate the partnership from any headwinds.

Our sponsor, KNOT, continues to provide flexibility in respect to the timing of any acquisitions, and we will continue to take a prudent approach, taking into consideration the long-term interest of the business. And as always, the acquisition by KNOT, as any drop down vessels in the future, will be subject to the approval of our independent Conflicts Committee as well as the Board of Directors of each of KNOT and our sponsor, KNOT.

Slide 12 is to demonstrate how our stable fixed rate businesses performed over the last several years, particularly in the face of volatile oil prices. I won't dwell on this. You can certainly see for yourself.

Slide 13. We included this slide in our fourth quarter presentation just recently, but I wanted to keep it in here to reiterate that with our customers' CapEx schedule shifting to the right, we see the headwinds we're now facing very much as a timing issue and we continue to expect the market, overall, to normalize and grow substantially. We see both Brazil and the North Sea market is not only maintaining but growing in the coming years.

On Slide 14, we're looking at the same time line, but with a focus on shuttle tankers. Although we've plotted the supply demand on here and it looks very precise, actually, the picture changes a little all the time, but there are 2 messages we'd like to present. The first is that the market is still relatively balanced even over the next year or more, as the vast majority of shutter tankers are on long-term contracts, and therefore, it never takes much for the market to tighten up.

And secondly, we then expect to see growth and the many, and very sizable FPSO activities announced by Petrobras in Brazil is a source that evidences this assumption. And with oil prices perhaps rebounding faster than was predicted and showing less volatility, that growth may yet come earlier than you are anticipating and showing on this slide today.

Slide 15, ESG. The first thing to say is that we're committed to playing our part in driving each of the ES&G headings, and one way that we demonstrate that is to report both new initiatives and our progress on the many orders that we are already undertaking, and we published our first ESG report in respect of 2019, and we are working on our 2020 report just now. You can find the 2019 report on our website.

I've already mentioned the Ballast Water Treatment system installed on the Bodil Knutsen and the VOC plant that will be installed later this year. And as well, our sponsor has ordered 2 next-generation LNG-fueled shuttle tankers. These are just a couple of the most obvious items, but there are many others.

We also take health, safety and quality very seriously, and we regularly monitor a large number of operational KPIs to maintain and understand how our fleet is operating, and constantly improve where we can. One outcome is that throughout 2020 and to date in 2021, our fleet experienced no serious incidents or casualties.

And finally, but not least, as our ESG activities could be a presentation in themselves, we have robust anticorruption practices and policies and a Supplier Code of Conduct in place among several other government documents.

Slide 16. So our near-term priorities for this coming quarter and beyond must continue to operate our vessels safely and efficiently and ensure the health and safety of our crew and employees, and we make no apology for repeating this statement every quarter. Continue to progress our ongoing discussions with our lenders for refinancings due in August and November 2021, and we anticipate we will give an update on that as part of our second quarter. All indications, so far, are positive and progress is being made in line with our time line and expectations.

We are, of course, working to secure new long-term employment for the Bodil Knutsen, following the KNOT charter, and we expect to finalize our 2020 ESG report shortly. We continue to explore options and possibilities for a further internally financed drop-down later in 2021, and possibly in the fourth quarter. And we are, as always, continuing our ongoing close dialogue with our customers concerning operations, chartering and rechartering options and opportunities.

Slide 17. So in summary, we believe we have delivered another strong quarter with high utilization, strong cash flow and good coverage, which has enabled us to maintain our distribution. We had $670 million of forward contracted revenue at the end of the quarter, and we are not exposed to short-term oil price fluctuations.

Recent effects of COVID on our customers' CapEx schedules have created near-term headwinds for shuttle tanker demand, but other than the specific vessels listed, our fleet is fully contracted for the remainder of 2021, and we believe we can deliver solid coverage throughout the remainder of the year. And then in the mid to long term, as we have shown in the presentation, oil production in Brazil and the North Sea area from shuttle tanker service fields is expected to grow significantly. And as a result, we believe the shutter tanker market's fundamentals and growth prospects, overall, continue to remain strong.

Thank you very much for listening, and that concludes the presentation, and I'll be happy to take questions.

(Operator Instructions) And the first question comes from Liam Burke with B. Riley.

You mentioned the Bodil Knutsen would be chartered by your sponsor on a rolling 90-day period. And then you touched on the fact that there's bleak challenges related to the North Sea, or could I get some clarification on how the North Sea ties into this?

Yes, sure. The Bodil is an ice-class vessel, and it's suited to North Sea operations as opposed to Brazil. And I think at the moment, there are -- with the vessels coming off charter, we're looking to various options for the vessel to seek new employment. And at the moment, we've got this as an example -- sorry, of the headwinds that we've explained previously, with various projects shifting to the right. There's a little softness in the market at the moment, and that has meant that we've been discussing with the parents about how we can deal with that in the immediate term until we find alternative employment. And I think the solution we found, I think, gives KNOT what it needs, which is certainty the of income. And I think that's really what we've been focused on.

Okay. That's fair. And then you mentioned -- there's many, I mean, I guess, prepared comments, 4 new builds on a drop-down schedule. 2021, you're looking at one. How many realistically could you look at over a period of time? Or could you actually drop down over a period of time?

Yes. There's actually 6 sitting at the sponsor at the moment. And we're looking at plans to purchase a vessel if we can in Q4, as I mentioned. I think at this stage, today, the traditional equity issuance is perhaps still not there for us. We are likely to put in place an ATM facility, such that if an opportunity arises for us to go down an equity issuance that way, then at least we have that opportunity. But obviously, an ATM or any equity issuance is only useful if we have an accretive use for those funds, as you mentioned.

So at the moment, we are looking at an internally financed drop down, similar perhaps to how we did the one in December 2020. But we are constantly assessing all of our options. I think, realistically, this year, we're targeting what we might be able to do, too. But I think one is a more realistic target. And then we go from there. I think further out than that, it becomes harder for us to anticipate at this point, but I'm sure we'll get more clarity as we go through the year.

(Operator Instructions) The next question comes from Richard Diamond with Castlewood.

Gary, Appreciate the steady hand. According to TradeWinds news this morning, steel prices of new builds are up 11%, and the price has risen from $90 million to $100 million in the last 2 months. Assuming the price of shuttle tankers are also going up, can you discuss the implication of higher new build prices on rates and any other implications for KNOT?

Yes. Thank you, Richard. Good question. I think in terms of higher new build prices for us and new projects, there are no speculative orders for shuttle tankers. So to the extent that new build prices go up, that would get plugged into our financial modeling in terms of when we're putting tenders forward for new business. So that ultimately is passed on to our charter. I think what's very interesting is that when new build prices go up it allows our existing fleet to become more competitive at times of rechartering. So that when you have the higher new build price, clearly, an existing vessel is able to command a higher charter rate at rechartering as well. So an actual fact for us with vessels coming off-charter in the next sort of 12, 18 months, we actually will welcome higher new build prices. I think that -- it's helpful for us as an existing vessel owner.

Given the shortage of birth now until 2024 because of all the containership and other type of vessel ordering, will that cause charters who want new vessels to look more aggressively to make sure you can get the slots?

I'm sure it will. It may very well bring forward some of our customers' decision-making if they look around at the slots [in yard] that are available and realize that if they don't get in soon, then maybe they won't. But I think that's an issue for KNOT, our sponsor, primarily, but obviously, ultimately, has a knock-on for us.

I think our focus is on the rechartering rate. And hopefully, as I've mentioned, the increase in new build prices will have a positive effect on rechartering rates. And that's really the main benefit for us. And the sponsor already has 6 vessels with contracts that's either delivered or being constructed today that we'll be able to purchase. So I think for our sponsor, I think, yes, it can help with new business and, therefore, ultimately, growth for us at the MLP. But at the moment, yes, we've got 6 vessels that we can already look forward to.

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Gary Chapman for any closing remarks.

Thank you very much, everybody, for your time, and have a good day.

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