Knot Offshore Partners LP (KNOP) 2024 Q3 法說會逐字稿

Good morning, and thank you all for joining. I would like to welcome you all to the KNOT Offshore Partners Third Quarter 2024 Earnings Call. My name is Brika, and I will be your moderator for today. (Operator Instructions)

I would now like to pass the conference over to your host, Derek Lowe, Chief Executive Officer and Chief Financial Officer at KNOT Offshore Partners. Thank you. You may proceed, Derek.

Thank you, Brika, and good morning, ladies and gentlemen. My name is Derek Lowe. I'm the Chief Executive and Chief Financial Officer of Knot Offshore Partners. Welcome to the Partnership's earnings call for the third quarter of 2024. Our website is knotoffshorepartners.com, and you can find the earnings release there along with this presentation.

On slide 2, you will find guidance on the inclusion of forward-looking statements in today's presentation. These are made in good faith and reflect management's current views known and unknown risks and are based on assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied in forward-looking statements, and the Partnership does not have or undertake a duty to update any such forward-looking statements made as of the date of this presentation. And for further information, please consult our SEC filings, especially in relation to our annual and quarterly results.

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

On slide 3, we have the financial and operational headlines for Q3. Revenues were $76.3 million, operating income of $17.2 million, and there was a net loss of $3.8 million. Adjusted EBITDA was $45.1 million. We closed Q3 with $77 million in available liquidity, made up of $67 million in cash and cash equivalents, plus $10 million in undrawn capacity on our credit facilities.

We operated with 98.8% utilization, and the vessel time available for scheduled operations was not impacted by any planned dry docking. Following the end of Q3, we declared a cash distribution of USD 0.026 per common unit, which was paid in early November.

On to slide 4. Our outlook remains positive on both industry dynamics and the partnership's positioning to participate fruitfully in our markets. Significant growth is anticipated in production in fields, which rely on service by Shell tankers. We see around 11 new builds on order, including for our sponsor, Knutsen NYK. And we expect to see further newbuild orders placed in order to service the large new production volumes coming online in the years ahead. A measured amount of new Shell tanker ordering is unavoidable, and in fact, necessary, as the shortage Shell tanker capacity remains projected in the coming years.

The partnership remains financially resilient, with a strong contracted revenue position of $980 million at the end of Q3 on fixed contracts, which averaged 2.8 years in duration. Charters options are additional to this, an average of further 2.4 years.

Our pattern of cash generation and liquidity balance is sufficient for our operations and the significant paydown rate for our debt, which is in the region of $90 million per year for installment payments. And our near term chartering exposure has reduced to Dan Sabia, where we are maintaining our marketing focus. She has secured some conventional cargoes and to his operating commercially while we seek shuttle tanker deployment.

On slide 5, a number of developments in Q3 were announced already in the previous earnings call, including charter extensions for Torill Knutsen and Tuva Knutsen. The most important development in Q3 is on slide 6. And showing the swap of Dansys for Tuva Knutsen. Tuva brought seven years of fixed or guaranteed future charter revenue and a significant step in fleets and pipeline growth without the need for new funding.

On slide 7, our most recent developments include the Ingrid Knutsen beginning her charter with ENI in October for two years plus two options each of one year. Signature over charter for the Hilda Knutsen for one year fixed, commencing March 2025. Commencement of the Torill Knutsen total connections time charter via ENI for three years fixed plus three options each of one year, exercised by Repsol of their one-year option on Carmen commencing Q1 2025 and some short-term deployments for the Dan Sabia unconventional tanker work.

On to slide 8. You can see the consistency of our revenues over the quarters and years. This consistency applies also to our operating income when the effects of vessel impairments is removed.

Slide 9 similarly reflects the consistency of our adjusted EBITDA, and you can find the definition of this non-GAAP measure in the appendix.

On slide 10, there are two notable changes in the balance sheet over the first nine months of 2024. The first is a slight increase in overall liabilities. While we continue contractual debt repayments in the area of $90 million per year, liabilities increased with the completion of the Tuva acquisition on the third of September.

The second is that two of our debt facilities have moved up from long term to current liabilities because of their upcoming maturities. These can be seen on slide 11, which sets out the maturity profile of our debt facilities. On Line 1, the first of our revolving credit facilities is due to mature in August 2025. And and on Line 2, around half of the loan secured by Tuva Knutsen and Torill Knutsen matures in September 2025. The remainder of that facility matures in October 2025 and the second revolver matures in November 2025.

The highlighted column shows how the outstanding balances of each facility have been reducing because of the repayments we've been making in line with scheduled repayment terms. The current installments are the amounts of capital repayment due over the next year which do not include interest or the final balloon payments due on the maturity dates. Of note, $96 million in current installments is due to be paid over the 12 months following September 30.

Our typical pattern is for our vessels to provide security for our debt facilities, and that applies to 17 out of 18 vessels in the fleet as of September 30. At present, Dan Sabia is the only vessel free of debt, and we do not have any plans to incur additional borrowings secured by Dan Sabia until we have better visibility on here future employment. $907 million out of $947 million in debt facilities are secured by vessels, while the two revolving credit facilities totaling $50 million of capacity are unsecured.

Slide 12 shows the contracted pipeline in chart format, reflecting the developments I set out earlier. Similarly, slide 13 highlights the focus of our commercial efforts on adding near-term contracts for Dan Sabia. We've made good progress in increasing our fixed charter coverage, and we intend to remain active in that regard.

On slide 14, we see our sponsors' inventory of vessels, which are eligible for purchase by the partnership. This applies to any vessel owned by or on order for our sponsor, where the vessel has a firm contract period of at least five years in length, for present five existing vessels and five under construction fall into this category. There is no assurance that any further acquisitions will be made by the partnership and that any transaction will be subject to the Board approval of both parties, which includes the partnership's Independent Conflicts Committee. As we have said, our top priorities remain securing additional contract coverage for our existing fleet and fostering our liquidity position.

On slides 15 and 16, we provided some useful illustrations of strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras materials directly. The web page is shown there. Primary takeaway from each of these slides is consistent. There's very significant committed demand growth coming in the Brazilian market in the form of new FPSOs that will require regular service from shuttle tankers.

We believe that reports earlier this year of additional vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term. Five outstanding newbuild contracts are for our sponsor, Knutsen MIK and due for delivery over 2026 and '27. We would expect to see further newbuild orders placed in order to service the large new production volumes coming online in the years ahead, and a material shortage of shuffle tanker capacity remains projected in the coming years.

In the trend that also applies to oil production globally, you'll see that even in the years ahead where aggregate production growth slows, deep offshore production, in this case, Brazilian presalt, continues to outpace the overall market and take market share.

On slide 17, we provide information relevant to our US unitholders, in particular, those seeking of Form 1099. Those holding units via the custodians or brokers should approach those parties directly. Those with directly registered holdings should contact our transfer agent, Equiniti Trust Company, whose details are shown there.

On slide 18, we include some reminders of the strong fundamentals of our business, in the market we serve, our assets competitive landscape, robust contractual footprint and resilient finances.

And I'll finish with slide 19, recapping our financial and operational performance in Q3 2024 on the subsequent time and our current outlook. We're glad to have delivered high and safe utilization, which have generated consistent financial performance. We're pleased with the new contracts and extensions we've secured during the quarter and since, along with our ability to navigate our refinancing needs and periodic capital expenditure. We're delighted to have taken the growth step of swapping down system for Tuva Knutsen. And our continued commercial focus remains on filling up third-party utilization for the coming months while looking further forward to longer-term charter visibility and liquidity generation.

In total, though, we're making good progress and are pleased to have established positive momentum against an improving market backdrop.

Thank you for listening. And with that, I'll hand the call back to Brika for any questions.

(Operator Instructions) Liam Burke, B. Riley.

This seems -- your OpEx jumped about $2 million sequentially. How much of that was related to the Torill repair, or if any?

Pretty limited amount, well under half of that amount off the top of my head, probably a quarter, quarter, at most.

There was some expense baked into that number related to the repair.

That's right. We are due to receive the insurance claim proceeds during this quarter. And until we receive it, we don't recognize it. So you don't have the offsetting income to correspondent and reduce the defect of the net cost to us.

Great. You announced four charters or extensions beginning this quarter, which included the total Torill. Can you give us a sense -- I know you don't give specifics on the contracts, but can you give some color generally how they look vis-a-vis where you've been sitting on the charter levels?

All the new ones, the new news as it were for this quarter, you mean, or the Torill specifically?

No, all of them or just a sense as to actually have a --

Well, the rates reflect the market conditions at the time they were they were contracted. So on Ingrid, I don't have -- I'm just looking at them in order here on page 7. And on Ingrid, I don't have the signature date in front of me, but it would be -- it would reflect that. On Hilda, the signature date was October this year, so that will reflect a current market. Torill is close to current because that signature was in July this year. And then Carmen will go back to the timing of the original contract, which was, I think, some years ago. So Ingrid and Carmen will be older and Hilda and Torill will be close to current.

Your next question comes from Jim Altschul.

Couple of things. First of all, in response to -- in your response to the previous question, you're talking about how a couple of the new charters made it to current market conditions. Does that mean that the rate is -- the rate in the current market conditions are somewhat lower than they would have been a couple of years ago. Am I correct me in thinking that?

It's the other way around.

Well, it's fair to say that market conditions have been strengthening reasonably steadily over that time. So we don't have particular numbers to give you on those contracts, but it's a more recent would typically imply better rates or higher rates.

Okay. And with regard to the operating expenses, because you -- again, in your answer to the previous question, you said part of it relates to this repair, and you're expecting to get to at least some of that back from the insurance company. But what are some of the other factors that have increased operating expenses year-on-year?

It's general operating costs level. So we see increased costs of crewing, particularly relating to travel, and increased cost of supplies as well. It's a general inflationary environment, unfortunately, for our work.

We now have Poe Fratt with Alliance Global Partners.

I was just wondering can you just ensure that the presentation is up on the website. I mean I'm trying to -- I've been trying the whole call to access it, and it's just not up there yet. So you're getting the same feedback from other investors, I think you should be aware.

I'm sorry that it was approved for publication. So Yes.

No, I know, and you're referring to it the whole call, so I assume that you thought it was up there, but I haven't been able to access it. Maybe it's just -- maybe it's just technology, but you talked about the higher OpEx. So there's a little bit of repair from -- in the third quarter, very -- with 15 days or so. What -- is the run rate that we saw in the third quarter, would that -- maybe another way to ask it is, would that be an appropriate run rate for the fourth quarter? Or will there be any other changes in OpEx when you look at fourth quarter and into 2025?

It's probably a good guide or somewhere between the second and third. I don't have a sort of a fine-tuned comment for you on that, but it's not a bad guide.

Okay. And then I'm not sure if I heard it, but have you quantified the amount that you expect to recover in insurance in the fourth quarter?

We haven't done that -- well, we -- in our discussion with the insurance company, we are close to that, but we haven't disclosed that in our release. That's a matter for a fourth quarter report -- a report in the quarter when we receive it, and we expect that to be the fourth quarter.

And -- but essentially, it's the differential between what the time charter contracted rate was when the -- when it was impaired operationally, it is still operating, but it wasn't at full capacity, right? So it's just the differential for that, I think it was the 6-day period?

It's the difference for a number of days, less the deductible that applies to that policy as well. But because she was able to operate on, as you say, an impaired basis rather than not able to operate at all, there's a discussion around how many days should be recognized. But that discussion is substantially complete.

Okay. And then you sort of mentioned the revolvers. Can you just talk about how the discussion on the revolvers? Do you expect them to get renewed? What sort of time frame you're also -- we should also be expecting those to be if they will be renewed within?

We certainly expect to seek to renew them. And that discussion with our lenders would normally be over the course of the first half next year. And we're typically, at least in the earlier one, expect to be complete with that discussion by the end of the first half. The second one is do that a little bit later in November so that might get into Q3 for that conclusion. And of course, you're aware of our pattern of results and news flow. So it's likely that you'd hear about it on the earnings release date that followed any conclusion to those.

Understood. So maybe possibly in late May or even as late as August, September of next year?

Yes, those are the likely dates of our earnings releases. So we'd expect to include news within that. They aren't -- renewals of those would not be material enough to warrant a separate announcement, I expect.

Understood. And then just to clarify, you talked about like the Carmen, the exercise of the option, was that original contract was done at an environment where rates were lower. And now rates are -- have improved. You've been talking about this, especially in Brazil, the counter, the market improving. Can you quantify or give us sort of a range, percentage range on how much rates have improved vis-a-vis like the Carmen option? Is it 10% --

Yes, I don't think we can do that. I mean we -- as you're aware, we generally don't give too specific guidance on rates that the vessels are earning. You've obviously got an average rate that can be found from our revenues for the quarter.

And then to talk about that, how many actual down days were there during the quarter, Derek?

In other words, you're operating -- what was your operating days ex the idle base of the repair days?

Yes. We don't have that specific number available. It's quite complex because partial earnings were possible. And we're looking at the difference between rates and not just total day rates. So it's too complex to go into on the call and for putting into a model, I'm afraid.

But -- and to clarify, the Dan Sabia did come off of bareboat and go into the conventional market. Hopefully, it will get into what it's higher use potentially is, but that was -- I think I heard you say about three-quarters of the increase in the OpEx in the third quarter.

That will be part of the increase in the OpEx.

we now have Pavel Oliva with RockHill Global.

Great quarter. I just wanted to really thank you for all this hard work that you and your chartering department have done securing great charters and getting great coverage. So I have a few questions sort, so some more specific and some sort of bigger picture. On the more specific side, the Dan Sabia is, if you look on the map there, going to Panama on a conventional voyage. What -- is there a top bill to do a swap with the -- similar to the Dan Cisne to do a drop down? Or Panama is halfway to Brazil or there is opportunities in Brazil?

And just as a color, speaking to some of the clients in Brazil, the day rates now are hovering around $65,000. So even a smaller ship may be able to earn some very good daily rates. Can you maybe walk us through your thinking on the Dan Sabia?

Yes. So we are marketing, we're in any market that she's capable of operating and obviously, that includes Brazil and with some modifications would include the North Sea for shuttle work as well. So yes, we continue to market directly. She is, as you say, rather smaller than is preferred in Brazil. So despite the high current day rates that -- it's still difficult to get it deployed. And in fact, that's the reason soda Brazil in the first place once the -- that charter comes to an end last summer.

In terms of the potential for a swap similar to the Cisne Tuva swap a few months ago, yes, that's absolutely a potential outcome for her. It obviously relies on the discussion and negotiation between us and Knutsen NYK, and it needs to be commercially fitting for both parties. It would be reviewed by our Independent Conflicts Committee. So the potential is there. And the -- I guess, the commercial thing to be aware of a little bit is that by her sister vessel Dan Cisne going to the -- what's effectively the North Sea pool, that's used up, that's provided some supply into that market. So that market position, the ability of Sabia to be deployed there is somewhat impaired by the fact that the Cisne is there. So the concept of a drop-down absolutely is there. It's got the usual governance process to follow, but the market commercial background to it is a little different from what we had with Cisne last summer.

Understood. That makes a lot of sense because the legal work should be pretty similar to the Cisne. You can even Xerox or copy the papers. And as long as the independent committee is fine with it, that should be helpful. Maybe on the Hilda, the one year is -- there's tightening in the North Sea. Obviously, the production is going up. Johan Castberg is -- should be starting any day now. What's your projection on -- or expectation on the North Sea side, especially since there are no new builds?

Yes. Well, we'll continue to market Hilda for the period beyond the charter that we've just signed. So that will be from Q1 2026 onwards. And we're certainly very optimistic about market conditions in the North Sea. But as we saw during the course of this year to actually get from the -- our view on the market to signature took rather longer than really anybody anticipated. And what we don't see yet is whether that will change or whether charterers will be signing further in advance than they chose to this year?

Understood. Okay. Can I ask a sort of broader and bigger picture question, and that is, I've been investing for a long time, but I've probably never seen a bigger disconnect between the cost of debt and cost of equity than in your company. The cost of debt is SOFR plus $220 million. You guys have refinanced everything immediately. Zero problems with any refinancing or anything like that. Knock on wood, but you have a very stable through the ownership as well as track record in financing. So funding costs are very low, yet the cost of equity is, I would call it infinite, with the NAV of your -- or the replacement cost of the ships in mid- to high teens, there is an incredible value gap between what the fleet is worth and how you have improved the performance with the share price.

We -- there has been a good pickup in the cash available and the free cash flow even with the repayments. Can you give us the color a little bit on the dividend, thoughts on dividend and especially buyback restarting the dividend gradually. Because as shareholders, we have not been remunerated almost at all. and for the Board members that are listening, it would be good to hear that they're also -- because they're getting their board fees if we could get the dividend restarted.

Yes, I do understand all of what you set out there, and I do appreciate it. The experience that we've had over the last, well, at least the last couple of years has been that we really needed to rebuild the visible charter pipeline. You may remember, two quarters ago, we said that four vessels concerned us. Last quarter, we said that two vessels concerned us. And now we're saying effectively that it's one plus wanting to renew on the Hilda, so Dan Sabia is the one that concerns us at the moment. So that's progress that we're very pleased with. And we're pleased also that, that's been noted and recognized as well among our unitholders.

The issue is that the Sabia still needs to be deployed, whether on charter or sold or swapped whichever the best option is that arises. And we need to continue reviewing the -- what's visible is our forward pipeline. The partnership has always grown through drop-downs, and I appreciate that the swaps are very efficient and strategically very useful way of doing it, but there's any one further opportunity for drop-down -- for swap coming up.

And -- but as I say, growth in the past has always been through the drop-down schedule of which there're five candidates available on the water at the moment. And so we would -- what the directors are going to be doing is looking at their own capital (technical difficulty) considering which is the better route to be taking, whether it's (technical difficulty) or distribution increase or a combination of the two.

Well, one just pointing out that this is the smallest ship where 1 out of 18 now, and we have been waiting for a long time. It would be helpful if the Board of Directors and a sponsor, which also owns 30%, would recognize what an incredible opportunity this is to, for example, buy back stock at 30%, 40% of replacement cost and not a big amount, but just it would be helpful to have the Board and the sponsor sort of acknowledge that they also have shareholders that should reap some of the rewards as the operations have improved. And you have an opportunity with the declaration of dividend in January to kind of send a signal that you are -- you care about shareholders as well.

Yes, thank you. I do understand that and the directors are that to. Thanks, Pavel.

And you guys have done an incredible job on all the fronts, except one. And I think I would urge the Board to really reevaluate given the amount of cash flow that you are bringing in every quarter to send a signal to shareholders that you had there for them as well.

[Clement Mullins, Value Investor's Edge].

Most has already been covered, but could you do compete about your current hedging strategy? You increased the average maturity on your swaps quarter-over-quarter. And I was wondering, looking ahead, do you expect to maintain the rate you have hedged versus a hedge that more or less constant? Or are you willing to lower it a bit given the higher interest rate environment?

Thank you for the question. We certainly expect a beat to have in mind the current interest rate levels at the time we enter into any future interest rate swaps. So it's not simply a matter of maintaining the percentage of our debt that is fixed or effectively fixed. We have quite a wide range of hedging policy available to us. So it's between half and three-quarters of our outstanding debt, and as I say, that includes debt that's effectively fixed or actually fixed.

At the moment, we are on the higher side of that, but we expect that to reduce quite significantly during the course of 2025, which you'll see just from the average maturity of our interest rate swaps that we have disclosed. But we aren't going to be swapping where we think that there's -- that the rates are too high to do that. That's just -- there's no point economically in doing that. So we don't expect it. But we have capacity within our hedging policy to allow existing swaps to mature without putting new ones on at rates that we don't like.

We have a follow-up question from Jim Altschul with Aviation Advisory.

Really -- this isn't really a question, it's more of a comment, just following up on next the previous comment about the overworn the shareholders. Obviously, we don't like to see an increase in both dividends and the stock price, but -- and I don't have any specific numbers in mind, but I would urge you to continue to look at all these decisions were the conservative bank. I grew up in the airline industry. And I mean this is a different catalyst first, but not one intended. I look at all the airlines went bankrupt after buying back stock in heavily much more heavy level than you are. But part of shareholder value is preserving the value for the long term. So although I'd certainly like to see the dividends go back to where they were, I also want this company to survive and be strong for the long term.

Okay. Thank you, Jim. Thanks for your input.

Thank you. I can confirm we currently have no further questions. (Operator Instructions) We now have a question from [Frederik Debod with Fermi Securities].

Congratulations doing a great job with the backlog of the company. Just on Dan Sabia, we left the option extension with [high dinem]. And then you have an upcoming firm period on Raquel, which expires at closer to the summer. Can you give more color on timing timing wise, when you expect an option extension to be caught?

On the Racal.

Yes.

We generally find that extensions get chosen pretty late. So there is the chance that it's as late as within the month before commencement of the option period. Ideally, it's longer than that, but we -- because it's a charter option, and we generally don't have much influence over the timing.

Okay. And now with Hilda getting a contract from March, it will exit the [80th in tune]. Won't that make it more attractive to [cod sell down saber] as your sponsor and call it in the [tule] replacing Hilda with the [saber]?

Yes, that certainly helps the demand supply dynamics, yes.

I would now like to hand it back to Derek for some final closing comments.

Well, thank you all again for joining this earnings call for Connect Offshore Partners third quarter in 2024. And apologies for those who couldn't get into the presentation on the website, it certainly was uploaded and approved for public viewing. So -- and I'll be looking into that. Otherwise, I look forward to speaking with you again following the fourth quarter results.

Thank you all for joining. I can confirm that does conclude today's call. Please enjoy the rest of your day, and you may now disconnect.