Knot Offshore Partners LP (KNOP) 2022 Q2 法說會逐字稿

Hello, and welcome to today's KNOT Offshore Partners Second Quarter 2022 Earnings Results Conference Call. My name is Bailey, and I will be your moderator for today's call. (Operator Instructions)

I would now like to pass the conference over to our host, Gary Chapman, Chief Executive Officer, with KNOT Offshore Partners. Gary, please go ahead.

Thank you, Bailey, and welcome, everybody, to our second quarter 2022 earnings call. The earnings release and this presentation are also available on our website at knotoffshorepartners.com, if you want to view them.

Slide 2 reminds about the nature of today's presentation, in particular, as regards to the inclusion of forward-looking statements, which are made in good faith, but which contain risks and uncertainties, meaning that actual results may be materially different. The partnership does not have or undertake duty to update such forward-looking statements. And for further information, please consult our annual and quarterly SEC filings.

Today's presentation also includes certain non-U.S. GAAP measures, and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures.

On to Slide 3 of the presentation highlights of the second quarter and subsequent. We announced a cash distribution of $0.52 for the quarter for the 28th consecutive time at this level under our 1099 structure, which was the 37th consecutive distribution made since the partnership first listed in 2013. We maintained 100% scheduled fleet utilization during the second quarter, 90.5%, taking into account the scheduled dry dockings of the Lena, Anna, Vigdis and Windsor Knutsen vessels.

We were able to conclude a further sale and leaseback agreement with respect to the Torill Knutsen, generating net proceeds of approximately $39 million after fees and expenses. And we used the majority of these funds to purchase the Synnove Knutsen from our sponsor, Knutsen NYK, or as we refer, KNOT. The total purchase price of the Synnove Knutsen was $119 million, including taking on the debt associated with the vessel.

We've been able to conclude or nearly conclude a number of charters this quarter, including that in return for accepting an early redelivery of the vessel under the existing contract, we closed a new 3-year deal with Eni for the Ingrid Knutsen to commence in January 2024 for a period of 3 years and with 3 further years of charterer's options.

The Vigdis Knutsen took over the time charter contract for PetroChina, and PetroChina also exercised their first option for an additional period of 12 months, taking the vessel's employment to at least September 2023.

Tordis Knutsen is expected to go on charter to TotalEnergies in September 2022 for a fixed period of 3 months, with charterer's options to extend by up to 9 further months, subject to agreement of customary operational terms.

Lena Knutsen has also secured a charter with TotalEnergies and this commenced on August 21, 2022, for a period of 6 months with charterer's options to extend 5 to 6 further months.

Windsor Knutsen is expected to be chartered to a major oil company from around January 2023 for a fixed period of 1 year with a charterer's option to extend the charter by 1 further year. Again, this remains subject to agreement of customary operational terms.

Finally, we remain in discussions with an oil major for the Brasil Knutsen for a 1-year time charter contract with options to extend to commence in or around September 2022, and we're hopeful that this can be concluded soon.

Slide 4. In April 2022, Anna Knutsen commenced on a charter with TotalEnergies for 2 years with options for the charterer to extend the time charter by up to 3 further 1-year periods. The Bodil Knutsen is continuing to operate on a time charter with Knutsen NYK at a somewhat favorable rate to Knutsen NYK that with options could last until June 2023. And this is all pending finding other new employment for the vessel.

We received news that Eni would redeliver the Hilda Knutsen to us around September 2022. And following her dry dock, the Windsor Knutsen will, absent other employment, be available until the end of this year. They were working hard to secure further charters for these vessels. We, of course, continue to discuss with our customers other opportunities, and we have seen the upturn in market activity in Brazil continuing into the second quarter.

The North Sea market, where 4 of our vessels operate, is taking longer to return to the higher levels of production we're predicting, mainly following the delays caused by the initial onset of COVID, and we think this could take several more quarters to resolve itself. In particular, we await the large Johan Castberg field in the Barents Sea coming on stream, the FPSO for which has suffered delays during COVID and also with some construction issues.

We continue to take precautions against COVID in our business, and we have been able to avoid any serious or sustained operational impacts from the pandemic. And there have been no effects on the partnership's contractual position.

At June 30, 2022, we had $487 million of remaining contracted forward revenue, excluding options, and $123.5 million in available liquidity, which included cash and cash equivalents of $88.5 million of which we utilized around $32 million on July 1, 2022, in connection with the acquisition of the Synnove Knutsen.

Slides 5 through 8 are a summary of our financial results, and I will allow you to read these for yourself, but mentioning just a few points. On Slide 5, whilst we generated good numbers across scheduled operations, our revenue, operating income and adjusted EBITDA were all predictably affected by the off-hire incurred due to the vessel dry docks that were taking place. Five of the 6 vessels due for dry dock in 2022 have now completed or nearly completed them with the sixth vessel due late in the fourth quarter of 2022 into the first quarter of 2023.

Our operating expenses were also higher this quarter, partly as a result of increased bunker costs related to our time chartered vessels that needed to transit to and from their dry docks. When time chartered vessels are on hire, fuel is a cost for our customers, but these vessels are off hire during their dry dock and with fuel costs increasing, this has impacted here.

Crew and crew-related costs remained challenging due to the continuing impact of COVID issues around travel, quarantine and logistics costs. We have seen further easing in some parts of the world, so hopefully, such cost increases have peaked.

With a wide and geographically spread supplier base to draw upon, we believe we have some protection against certain elements of inflation that is occurring in many countries just now. However, this is something that we, like all companies, are keeping under close review. Our interest expenses are up this quarter, mainly due to increased LIBOR related to the proportion of our debt that is floating rate.

On Slide 7, you can see our cash and cash equivalents balance at the end of the quarter of $88.5 million, which, when you deduct the approximate $32 million we utilized on July 1 for the acquisition of the Synnove Knutsen, is a little down on the first quarter balance. Again, this is predictable given the planned dry docks that have occurred. The distribution coverage ratio was 0.51 for the second quarter of 2022. And as we have disclosed previously, although there is a tendency to focus heavily on this figure each quarter, the partnership and the Board instead takes a longer, wider and more rounded view.

When deciding on the payment of the distribution, we do not mechanically link to the distribution coverage ratio for that quarter. Rather, we consider many factors, including our liquidity position, the outlook for the business and our market, our strategic interests and anything else that we consider to be relevant. We feel this allows us to operate in the best interest of our unitholders and serve the long term. And we continue to try to encourage all of our stakeholders to think in the same way.

Slide 9 provides an update on our contracted revenue and charter portfolio. I don't intend to read through this slide as we've covered many of the contractual updates already other than to say that although it's not a smooth charter picture right now, we have had success in filling some of the gaps we had in 2022, and we are, of course, working hard on continuing our efforts. We had remaining forward contracted revenue of $487 million, excluding options. Average remaining firm charters of 1.7 years, and charterers had options to extend these charters by a further 2.4 years on average.

I've included the Synnove Knutsen on here, even though we did not purchase the vessel until July 1, as I think this is more useful for readers of the presentation.

Then on Slide 10, we have the potential drop-down vessels held by our sponsor, KNOT, that the partnership may choose to purchase in the future. There are no material changes to this slide this quarter compared to the previous quarter other than the removal of the Synnove Knutsen given the partnership's purchase on July 1.

Slide 11, the delivery schedules for FPSOs, many of which were delayed due to early pandemic CapEx reductions, have seen overall time lines normalize, particularly in Brazil. I can also refer you to Appendix C of this presentation, a slide we've used previously and which shows the many FPSOs Petrobras have ordered for operation in Brazil.

Current high oil prices against project-level breakevens at or below $35 per barrel and producer optimism about continued high prices are further encouraging investments in additional production capacity, and in the shorter term, providing trading opportunities.

Importantly, new FPSO ordering activity for the Brazilian pre-salt reflects funded commitments to increase production in shuttle tanker-serviced deep offshore fields. And the more mature North Sea market saw the milestone arrival into Norway during the second quarter this year of the delayed Johan Castberg FPSO, intended for the shuttle tanker-serviced Barents Sea. The scheduled startup in late '24, early 2025. Proven volumes today are estimated between 400 million and 650 million barrels, and production is expected to run for 30 years. Once on stream, this field will be the source of much activity.

On Slide 12, following earlier CapEx program delays across the energy industry and increasing newbuild prices, we understand that only one new shuttle tanker order has been placed in 2022, thus constituting just over 1% of the current 79 shuttle tankers in service today. This limited ordering activity with the main shipyards being effectively full with container ship and LNG carrier orders through 2025 means that the total order book for shuttle tankers is quickly dwindling, with only 4 likely to deliver before 2025, all of which we understand are already assigned to long-term charters.

As a result, oil production growth in the midterm may suffer from a lack of available tonnage. And with newbuild shuttle tanker prices up around 30% since the second half of 2021, the competitiveness of the existing fleet and vessels should be highlighted.

So Slide 13, our near-term priorities, which are quite simple and consistent: continue to focus on safety; maintain high scheduled operational utilization in line with our historic track record; ensure the remaining dry docks in 2022 are successfully closed out; keep close dialogue with our customers to ensure we can respond as opportunities arise, work hard to secure employment for our vessels that remain open in 2022 and 2023, with particular emphasis on the North Sea; and we think by targeting these things, we will be keeping the best long-term interest of the partnership unitholders to the fore.

So in summary for this quarter on Slide 12. We had strong utilization of 100% for scheduled operations. We generated distributable cash flow of $9.4 million following the several dry docks in the quarter. We paid a quarterly distribution of $0.52 for the 28th consecutive quarter. We had $487 million of remaining contracted forward revenue, excluding options at the end of the quarter and no refinance due until the third quarter of 2023.

As a reminder, the partnership's operations are not exposed to short-term fluctuations in oil prices, volume of oil transported or global oil storage capacity, and our charter rates are not as volatile as you find in other segments of shipping either upwards or downwards.

Opportunities continue to be discussed with our customers, and we remain optimistic that we can secure further profitable charters for our vessels in the intervening periods. The activity we are seeing in our main market, Brazil, is very encouraging, though the speed of recovery in oil production in the North Sea is a cause for concern at this moment. Nonetheless, the significant mid- to long-term expansion of offshore oil production in pre-salt Brazil, with some growth in the North Sea/Barents Sea, continues to be supported by the large number of committed FPSO orders. And with low marginal cost of oil production, we continue to remain positive with respect to the mid- to long-term outlook for the shuttle tanker markets.

Thank you very much for listening to this short presentation. That concludes the formal part of today's presentation, and I'll be happy to answer any questions.

(Operator Instructions) The first question today comes from the line of Richard Diamond from Castlewood Capital.

Yes. I understand a tanker cannot become a shuttle tanker. But at some point, a shuttle tanker could be used as a tanker. Given that Afra and Suezmax rates are at $53,000 and $49,000 per day, at what point -- and I'm not saying KNOP, but could competitors' shuttle tankers go into tanker service?

Richard, thanks for that. Yes, obviously, the conventional market, as you say, shuttle tankers can go into the conventional market but not the other way around. Certainly, the conventional market is a fallback option for us, definitely. And with recent rates improving, as you've already mentioned there, it becomes more interesting, particularly as an alternative to ensuring that our vessels don't sit around idle.

Obviously, the most value that we see is when our vessels are operated as shuttle tankers. So that's definitely our first objective. But certainly, if rates continue the way they are going and any of our vessels, particularly the North Sea vessels, are sitting around for an extended period of time, then certainly, we will be looking at alternatives such as the conventional market.

I would caveat that a little bit. And I think it's fair to say that headline rates are not always achievable, particularly when you factor in utilization, where perhaps there are some gaps between individual voyages or charters and obviously, potentially repositioning costs.

But notwithstanding that, I think it's a very positive fallback position for our vessels if rates continue to climb as they have done, and the shuttle tanker utilization of some of our vessels is not coming as quickly as we expected.

The next question today comes from the line of Liam Burke from B. Riley Securities.

I had a question on OpEx. You pretty much explained why you had the bump sequentially from roughly $20 million to $23 million, but if I adjust for dry docking, fuel expenses and then account for higher crew costs, I mean, are we talking at a quarterly run rate of high teens or low 20s?

You're talking about rates for OpEx?

Vessel operating expenses.

Yes. Look, I think the charge for this quarter is definitely dominated by the bunker costs for the dry dock vessels, in particular because most of the vessels that have dry-docked have had to transit from Brazil back to Europe and then back again. So that is quite a sizable fuel cost there. And alongside the COVID increases that we've seen, it's certainly added on more cost than we would traditionally like to see.

But I think -- yes, if you look at the trends of our OpEx over time, I think we're certainly above where we would typically like to be. But obviously -- in the past, obviously, over the last year and now we've obviously got one extra vessel. So I think if you look back at the historic levels of our fleet OpEx, it was in the region of sort of $18 million to $19 million to $20 million per quarter. So certainly, $23 million, which is what we've reported for this quarter is definitely out of line. And we'd expect that to come back down to a more normalized trend, if you like, maybe a touch higher than previously because of COVID, but certainly not sticking up at $23 million, which is where it is this quarter.

Got it. And then on your liquidity, you had $32 million in the purchase of the new vessel. As we look into the second half of the year. You've got lower dry docking. You'll have better utilization. How do you balance your liquidity position with unit payouts with potential drop-downs?

Well, let me take that last point first. I think we saw an opportunity to do a sale and leaseback that allowed us to release money to make a purchase. And also, we kept a little bit of spare change from that as well, which has gone into our bank account.

I think in terms of balancing the future, we've obviously, as you said, had a very high concentration of dry docks, which we prepared for and were foreseeable. And we try to take a long-term view, balancing all of the things. We -- I think it's quite clear that we're fairly conservative, and we try to be a very stable business, taking a long-term view and trying to spot the differences and see the differences between something that is a temporary divergence whereas -- versus something that is slightly more fundamental in nature.

So I think when we're looking at our business, we fall back on the simple point, if you like, that we need to sign charters and that's what we're working very hard to do. And if we can do that, it keeps everything in balance.

(Operator Instructions) The next question today comes from the line of Robert Silvera from R.E. Silvera and Associates.

Gary, a tough quarter to say the least, the things you've had to deal with from COVID right on to ships that are looking for business. And obviously, the market did not like the 0.51 coverage ratio. So we're down a little bit in the market about $0.60 right now a share.

You spoke about the rates, okay. You're negotiating for rates to fill empty ships in the future. The future looks strong as you've stated because of the -- particularly the Brazilian market. What kind of balance do you see? Are you having to give concession versus our current rates? Or do you see the opportunity, even though we haven't booked them right now to get higher rates?

Yes. I think the first point to reiterate is that we don't have the same level of rate volatility in our small market that you see in the other larger, whether it be conventional tankers or other shipping markets. Our rates have stayed within a range for quite some time. And although throughout this period to date, we may be not getting the highest of rates within that band. That's just a function of supply and demand as we have been and as we are currently seeing in the North Sea. But we are always targeting with our customers the longer-term charters.

So we tend to offer when opportunities arise. We offer slightly lower rates for longer charters and slightly higher rates by definition for the shorter charters. So we operate by principal. And I think given the relatively small market in which we operate, with perhaps only a dozen customers and 2 or 3 key suppliers of tonnage, it's a market that functions, I think, quite well because there is definitely competition, but yet everybody understands that there's a need to make sure that you maintain a relationship because you have to deal with these same people tomorrow on a different deal. So I think it's -- I think we have definitely seen a situation where we haven't been able to achieve the highest rates in all circumstances.

But certainly, we're in a tight market still, even though there's softness here, we're only talking about a few vessels out of 79. And we believe that's for a temporary period. And I think some of the activity that we're seeing in Brazil, for example, now is a result of some of our customers realizing that if they don't kind of get a move on, they may be left behind in terms of available tonnage. And we've put the slide on there this quarter that shows the future supply of vessels coming into the market, and it's not a lot over the next 3 to 4 years.

So rates -- I don't wish to tell you something you don't already know, but rates are a function of supply-demand. And we do our best to get the highest rate we can without being silly. And we always push for the longer-term charters with our customers to the extent we can because that best supports what we're trying to do for our unitholders.

Yes, there is definitely a tension right now between supply and demand. So I understand that. When you do fix a rate on a contract for a period of time, there's no variability in the cash flow in that then. It's a fixed rate for that period. Is that correct? Or is there flexibility going up or down?

Some contracts will have an OpEx annual escalation increase. So part of the charter rate may increase each year or a proportion of it. Some are flat. But there's no -- we have no contracts that allow our customers to pay less unless, of course, the vessel is off hire, but that's a completely different situation.

Okay. Good. Let me ask this question. What would add to the benefit of the company to taking on additional drop-downs other than replacing older equipment?

Yes. I think it gives us diversification of income. It gives us a stronger income stream. And I would say that our average age of our fleet is still only 8.5 years. So other than a couple of outliers, particularly with the Windsor Knutsen, most of our vessels are still in very rude health in terms of their prime of their life. So -- and I think even the Windsor Knutsen as we've stated here, we've had no -- I can't say we've had no problem, but we've been able to secure employment for that vessel pretty much now out through at least sort of towards the end of 2027, '28. So -- albeit with charterer's options. So age isn't a really big factor for us in our business. And I think bringing the other vessels in, size and economies of scale help.

Will it affect positively income that, that will grow, leading to the possibility that the stock price would rise and the dividend would rise?

I think that's probably looking a bit too far into the future at this stage. I mean -- and I certainly can't predict what our unit price will do. Otherwise, I'd be very rich. But I think certainly, when we look at it from our perspective, we think drop-down at the right price from our sponsor should add value to what we're doing. And in particular, through diversification and more income streams, we're spreading our risk over more assets. Whether that leads to changes in the distribution or not, I think that's too early and would be a little bit foolish for me to start commenting on that right now. We're not close to doing the drop-down right now.

Good. The last thing I have is a suggestion. I know in the past, you have not done anything like this, but I know it's not a big factor, but it would be a confidence builder factor if we would start, as a company, selling put options on the price of the stock, say, $16 a share, $15 a share, wherever they're available, out 2, 3 months and thereby use the existing cash we have as a backup to the purchase price of the shares if the puts are exercised. It shows confidence of the management in the nature of the business and what the future should hold for the business. And at the same time, would give us a small amount of positive cash flow. Would you guys begin to consider that?

We regularly consider all kinds of thoughts. And I think in that situation, I think we're unlikely to do it on the basis that we like to have confidence from our investors coming from our business and our operations rather than from a financial aspect. Now if we get our business and our operations, right, then the finances take care of themselves and the unit price will take care of itself and it will do whatever the market thinks it needs to do.

So I think it's unlikely that we would go down that kind of route. I think we would rather focus our efforts on signing more profitable charters than spending time, in a way, kind of artificially providing financial support to the unit price. So -- while I fully understand what you're saying, I don't think it's something that we're probably going to look at.

I think what it would show, though, is that you have great confidence in the future of the company and the plan that you have in place and the executableness of this plan, and it shows the market that you have that confidence, and at the same time, it uses some idle cash, which I'm sure you're not getting much money interest-wise on that, to add to the cash flow in a positive way and thereby just increasing your earnings a little bit.

So I wish you would review that and perhaps do a study on it and show just how much you can do because those put options are out there, and they pay reasonable amounts of money. And that would really identify the management as being, so to speak, putting your money where your faith is and you have faith in the business, and you have a basis for that faith, which we have proven over the years. And you have continued opportunity to show the marketplace that yes, we do have this confidence in our business, and we're willing to put our money to work to prove it in a way that gets you some nice cash.

Yes. And look, I don't -- I fully understand what you're saying. I think in terms of having an investment in the business, our sponsor holds 26%, depending on how you want to measure it, 26% to 29% of this business. So clearly, they are invested in it and have confidence in it. So I think there are different ways of showing that.

And whilst I will give it a second thought once we get off this call, I would say that we're unlikely to go down that route. As I say, we would rather our business, in a way, speak for itself. But I understand your point. I do understand.

Yes. I think it would be a good idea to just do a little research on it and see, does it make sense? You can't do it on a large scale. You can't do millions of shares. The market is not that big, but it's there. And it -- as I said, it sends a confidence message on your part and the management's part.

And right now, for instance, if you go to a -- October, which is only 57 days away, October 21, $15 put option, you can get $0.30 a share, which means that if it was put to you, the company would be buying its own shares at $14.70, commissions not being considered in that. And chances of it being exercised at $15 are not very good, but if you do 1,000 shares, there's an extra $300 in the coffers and that is against the standing capital that we just have in our check account, so to speak.

Anyway, give it some research and go from there. I think it's worth taking a look at it. If you go out to January, $15 January, as you can -- the last trade was at $0.90 a share. So there's covering 1,000 shares, there is $900. And that's just against your cash in the bank for 149 days. That's a nice yield. I'm glad you're willing to take a look at it afterwards and do a study of it. I think it would be beneficial in a number of ways, not just cash flow because that can't be too many. But you can easily do 10,000 shares, 100,000 shares in the put...

I'll take a look, Robert, after the call.

Good, Gary. We'll talk the next time. So keep up the good work. I am very proud and very pleased to be a shareholder, our company, as a shareholder of KNOP. I'm not the owner of the company, I'm just the analyst in the company, but we are marine surveyors, and we've seen what you have done and you take care of the ships. And now that's another point. We've had so many dry dockings for examinations that we're not going to have any for a long time. So that gives us a nice runway into the future, which is good. Will talk to you the next time.

There are no further questions registered. So I'd like to pass the conference back over to Gary Chapman for closing remarks.

Thank you, everybody, and I wish you a good day, and thank you very much indeed for your time listening today.

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.