KNOT Offshore Partners LP (NYSE:KNOP) Q1 2023 Earnings Call Transcript

KNOT Offshore Partners LP (NYSE:KNOP) Q1 2023 Earnings Call Transcript May 26, 2023

Operator: Ladies and gentlemen, thank you for standing by for the KNOT Offshore Partners’ First Quarter 2023 Earnings Results Conference Call. My name is Candice, and I will be your moderator for today’s call. . I would now like to hand the conference call over to our host, Gary Chapman, CEO and CFO to begin.

Gary Chapman: Thank you and welcome to our first quarter 2023 earnings call. The earnings release and this presentation are available on our website at knotoffshorepartners.com. Slide 2, gives guidance on the inclusion of forward-looking statements in today’s presentation that are made in good faith and reflect management’s current view, involve known and unknown risks and are based upon 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 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 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 Slide 3, 4 and 5 are highlights from the first quarter of 2023 and subsequent. We announced our 40th consecutive quarterly cash distribution since our IPO in respect to the first quarter of 2023, and which was paid in May 2023 under our 1099 structure. Our fleet in the first quarter operated with 100% utilization for scheduled operations, and 96.6% utilization taking into account the scheduled drydocking of the Carmen Knutsen. We secured credit approval on similar terms for the $320 million senior secured credit facility and the $55 million revolving credit facility, which mature in September 2023, and which debt finances six of the Partnership’s vessels.

We’re anticipating to close this in June 2023, subject only to execution of documentation and other customary closing conditions. It’s worth noting that the $172.5 million senior secured loan facilities maturing in September 2023 and January 2024 secured by the Dan Cisne and Dan Sabia, respectively, will be fully repaid on maturity. So there is no need for a refinance plan at this stage, and we have no immediate plans to incur additional borrowings secured by these two vessels until such time as the Partnership has better visibility on their future employment. Finally, we’re discussing with our lenders concerning the two $25 million unsecured revolving credit facilities that mature in August 2023 and November 2023, and based on conversations so far, we believe that both facilities will be refinanced on acceptable and similar terms prior to maturity.

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We would expect to provide further news on these in our second quarter 2023 earnings release. And in terms of charter and contract developments, we have now signed and closed new three year time charter contracts for both the Fortaleza Knutsen and the Recife Knutsen with Transpetro. Meaning these vessels are now contracted to March and August 2026, respectively. Then following, for the recent vessel developments listed on Slide 4, I don’t plan to read through this. I’m sure you can all do that for yourself, but what I can say is that the combination of all of these charter developments has left us almost entirely covered in 2023, and for several vessels, we have now achieved charter coverage well beyond this year, and we’ll see that when we look at the charter diagram shortly.

And finally on this slide, the Carmen Knutsen successfully completed her ten-year drydock taking a total of 74 days spread across the end of the fourth quarter of 2022 and into February 2023. On Slide 5, the Partnership had $52.4 million in available liquidity at the end of the first quarter, $688 million of remaining contracted forward revenue excluding charterer’s options, but including the new charter for the Recife Knutsen, which was signed on April 11, 2023, and our fleet had an average age of 8.9 years, with each vessel having an estimated useful life of 23 years. We saw great utilization for scheduled operations in the first quarter at 100% and the trends and shuttle tanker long-term fundamentals assisted us in securing the credit approvals we needed for the refinancing.

And the encouraging trends that we have previously highlighted in Brazil, where 14 of our 18 vessels operate, are continuing to exert positive pressure on the shuttle tanker charter market. We expect that the limited global fleet orderbook of only five vessels between now and 2026, combined with significant new offshore oil production volumes coming online, will drive charters and rates both in Brazil and in the North Sea, but we do recognize that the North Sea market where currently four of our 18 vessels operate, may still take longer to rebalance, meaning it may yet take several more quarters to filter into the Partnership’s results. Nonetheless, as stated, we continue to believe that the overall supportive fundamentals of vessel supply set against the faster pace of new offshore oil production implied by continuing FPSO ordering for shuttle tanker-serviced fields, will leave the Partnership well placed over the coming years.

Slide 6, 7 and 8 are our summary of financial results and as usual, I will just mention a few points. Combined with voyage revenues, our total revenues were strong in the first quarter and this was further boosted by over $900,000 in loss of higher insurance claims, related to issues that occurred in prior quarters. Operating expenses were broadly in-line with both our expectations and the fourth quarter of 2022, and voyage expenses being the other side of voyage revenues also remained consistent. As we had mentioned before with a wide and geographically spread, crew and supplier base to draw upon, we believe we have some protection against the inflationary pressures that are occurring in many places, however, this is something that we like all companies are keeping under close review.

Higher LIBOR and higher utilization of our revolving credit facilities have all increased interest expenses in recent quarters, and this first quarter of 2023 is no different. However this has not had any impact on our operations or on our continuing and scheduled debt repayments. On Slide 7, you can see our cash and cash equivalents balance at the end of the quarter of $52.4 million and the current portion of long-term debt is naturally elevated as this relates to the ongoing refinancing that we have already spoken about. On Slide 8, you can see the overall adjusted EBITDA for the first quarter was again solid consistent. Slide 9, shows how significant portion of our total debt is hedged through to the end of 2024 and into 2025, meaning that the majority of our debt during that period is not affected by changes in interest rates as we have swapped a portion of our variable interest rate debt for fixed interest payments, therefore providing greater certainty of interest expense and cash flow.

At March 31, 2023, the Partnership’s net exposure to floating interest rate debt was approximately $353 million, or around 34% of our total interest-bearing debt. In other words, 66% was fixed via our interest rate swaps or effectively fixed via our two sale and leaseback financings. You will see that we anticipate that more than 50% of our debt will remain fixed or effectively fixed for the next few years, and we’re always monitoring the situation to look for new opportunities that could allow us to benefit. Then onto Slide 10, as we have seen many of the contractual updates already and they are also set out in the earnings release, I won’t repeat them here. But as of March 31, 2023, excluding charterer’s options, but including the new charter for the Recife Knutsen signed on April 11, 2023, we had $688 million of forward contracted revenue, and of our firm charters, these had 2.2 years remaining on average, and charterers had options to extend these charters by a further 2.2 years on average.

On Slide 11, you will see that we have now contract coverage for almost the entirety of 2023, and several vessels are now under contract for much longer periods as you could see on Slide 10. As a result, most of our focus has moved onto the vessels that are yet to be fixed in 2024 and this is where our efforts are being directed. We believe it helps that only five new shuttle tankers are expected to come into the market between now and 2026. Therefore, the total supply of shuttle tanker is likely to become tight and with new build shuttle tanker prices remaining elevated, this all helps the competitiveness of our existing fleet. Just before we move on, please do be reminded that this slide does not talk to vessel utilization, it refers to future charter contract coverage.

Then on Slide 12, we list the potential dropdown vessels currently owned by our sponsor KNOT. As stated, the acquisition by the Partnership of any such vessel in the future would be subject to approval of the Partnership’s independent Conflicts Committee, as well as the Board of Directors of each of KNOP and KNOT and there can be no assurance that any potential acquisitions will actually occur. As we have said, our top priorities are securing additional contract coverage, forward visibility of our existing fleet and rebuilding our liquidity position. Slide 13, we have kept this slide in our presentation from previous quarters, given we have a lot of new investors and as we continue to believe this remains a very value source of independent information that speaks to the future growth of shuttle tanker demand in Brazil.

The number of new FPSOs to be deployed in Brazil through to 2027 equates to approximately 50% of the world’s total FPSOs, and with a low carbon score and low marginal cost of oil production, we remain very positive with respect to the mid-to-long-term outlook here. We have also retained a further slide in the appendix to this presentation that gives some more detail. So, in summary for this quarter on slide 14, we had excellent utilization of a 100% for scheduled operations. We paid a quarterly distribution for the 40th consecutive quarter albeit at a reduced level. We have secured credit approval for $375 million of refinancing due later this year, and we concluded two new three-year time charters for two of our vessels. In terms of going forward, we continue our absolute focus on safe operations, both onboard and onshore, and to taking care of our crew while us maintaining our high standard and utilization statistics.

We’re working to close out the refinancings as set out, planning for the remaining drydocks this year, three of which are for vessels that are European based, so mobilization costs will be lower than for the recent Brazil based vessels. And of course, we’re working towards securing charter coverage for all of our fleet in 2024 and beyond. Finally, (ph) it is not written on the slide, I do want to point out our press releases of April 5 and April 10, which give details of the changes and upcoming changes to our Board of Directors and also to my own position within the Partnership. The same details are also contained within the earnings release issued after closing yesterday. Then finally, Slide 15, we again want to promote our newly refreshed website where you can find more information on the shuttle tanker market, our fleet and of course investor related information, including a frequently asked questions section.

Hopefully, people will find this a useful resource. Thank you very much for listening. And following this, I’ll be happy to answer any questions.

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Q&A Session

Operator: Thank you, Gary. . So, our first question comes from the line of Liam Burke of B. Riley. Your line is now open. Please go ahead.

Liam Burke: Thank you. Hi, Gary, how are you?

Gary Chapman: Hello, Liam. I’m very well. Thanks. How are you?

Liam Burke: I’m fine. Thank you. You successfully re-chartered the Cisne and the — I am sorry the Fortaleza and the Recife with Transpetro. You have two more vessels that are up for re-charter. Do you anticipate the re-charter timeline to be similar as the first two vessels? Or do you anticipate any problems on the re-charter?

Gary Chapman: Yes. You’re talking about the Cisne and Sabia, I guess.

Liam Burke: Right. Yes.

Gary Chapman: Yes. Yes. I mean, it’s difficult for us to predict, obviously to come to a contractual agreement requires both parties to work towards that. And we’re not in control of Transpetro and Petrobras’ timeframe there. Obviously, the first vessel runs through to September, so we’ve got some time. I guess history may suggest that they perhaps leave it down to the wire a little bit. So, that is also possible. But we are trying to talk to them, as we always do to move it on and do this as early as we can, but it’s a distinct possibility that those conversations may go right down to the wire. In terms of where we finish up with them, at this stage, I can’t say anything really. We don’t have anything to report, but given perhaps the history that we saw on the Fortaleza and the Recife, at this stage, we believe we’ve still got plenty of time.

Liam Burke: Okay. Fair enough. I mean, yes, they did push the other ones down to the wire. And then you talked about the $172.5 million that’s up for – that’s due, Cisne and Sabia. Where is the source of the debt pay down there? I know you have $54 million plus in cash, but where would the rest of the capital come from to repay that loan?

Gary Chapman: Yes, the balloons on those are only $8 million. So, that’s pretty small and we factored those into our cash flow forecast. So, yes, those are kind of naturally maturing if you like rather than being a significant balloon, if that answers your question.

Liam Burke: Yes, it does. Thank you, Gary.

Operator: Thank you. Our next question comes from the line of Poe Fratt of Alliance Global Partners. Your line is now open. Please, go ahead.

Poe Fratt: Good morning or good afternoon, Gary.

Gary Chapman: Hi, Poe.

Poe Fratt: Hi. I was wondering if you could help us understand that you’ve chosen to move on and there’s a search underway. Do — would we anticipate the dual roles of the CEO and CFO staying remaining sort of under the current structure?

Gary Chapman: I’ll be totally honest. I’m not being kept in fully in the loop, in terms of the recruitment process. I think that’s natural. But yes, I’m not aware of any move to sort of restructure my role, as things stand. But as I said, I’m not fully in the loop with all of the discussions, but I do know that the Board has already started a process. So — and there is progress being made in that respect already. So, it’s probably as much as I actually know, and am I able to tell you, Poe, sorry.