KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended September 30, 2023
ABERDEEN, Scotland–(BUSINESS WIRE)–
Financial Highlights
For the three months ended September 30, 2023 (“Q3 2023”), KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):
- Generated total revenues of $72.7 million, operating income of $20.6 million and net income of $12.6 million.
- Generated Adjusted EBITDA1 of $48.1 million
- Reported $58.2 million in available liquidity, which included cash and cash equivalents of $53.2 million at September 30, 2023.
Other Partnership Highlights and Events
- Fleet operated with 98.8% utilization for scheduled operations in Q3 2023, and 97.4% utilization taking into account the scheduled drydockings of the Brasil Knutsen and the Hilda Knutsen, which were completed around the beginning of Q3 2023.
- On October 12, 2023, the Partnership declared a quarterly cash distribution of $0.026 per common unit with respect to Q3 2023, which was paid on November 9, 2023, to all common unitholders of record on October 26, 2023. On the same day, the Partnership declared a quarterly cash distribution to holders of Series A Convertible Preferred Units (“Series A Preferred Units”) with respect to Q3 2023 in an aggregate amount of $1.7 million.
- On November 15, 2023, the Partnership successfully closed the refinancing of the second of its two $25 million revolving credit facilities, with the facility being rolled until November 2025 on similar terms.
- On September 13, 2023, a 100-day extension to the existing bareboat charter party for the Dan Cisne was signed with Transpetro, extending the vessel’s fixed employment to late December 2023. The Partnership anticipates receiving the Dan Cisne and Dan Sabia back via redelivery in December 2023 and January 2024 respectively, following expiry of the existing bareboat charter parties. The Partnership is continuing to market both vessels for new, third-party employment and is in active discussions with both existing charterers and others, including the Partnership’s sponsor, Knutsen NYK Offshore Tankers AS (“Knutsen NYK”).
- On October 30, 2023, Shell exercised its option to continue its charter of the Windsor Knutsen through to the first quarter of 2025. On September 26, 2023, the Partnership signed a new time charter contract for the Windsor Knutsen with an oil major to commence within the window from February 1, 2025 to May 1, 2025. The new charter is for a fixed period of two years and will see near-continuous employment for this vessel through to the first half of 2027, subject to the exact dates for completion of the above charter to Shell and the start of this new charter.
- In order to make the Windsor Knutsen available for the above contract commencing in 2025, the Partnership sought and reached an agreement with Equinor to substitute the Brasil Knutsen into the time charter previously due to employ the Windsor Knutsen commencing in the fourth quarter of 2024 or the first quarter of 2025. This time charter is for a fixed period, at the charterer’s option, of either one year or two years, with options for the charterer to extend the charter, in either case, by two further one-year periods. The Brasil Knutsen is consequently now employed until around the end of 2025 and, if all the charterer’s options are taken, the vessel will be fixed until the end of 2028.
- The Hilda Knutsen and the Torill Knutsen each continued to operate on separate time charter contracts with a subsidiary of Knutsen NYK at a reduced charter rate, with the contracts expected to continue on a rolling 30 day basis, subject to relevant negotiation and the approval of the Partnership’s Board and Conflicts Committee. The Partnership is continuing to market both vessels for new, third-party time charter employment and is in active discussions with potential charterers, including Knutsen NYK.
- The Bodil Knutsen continued to operate on a reduced rate time charter contract with Knutsen NYK, which will expire in time for delivery of the vessel to Equinor in March 2024, for an initial fixed time charter contract of two years, with charterer’s options to extend the charter by two further one-year periods.
- On October 2, 2023, the Partnership signed an agreement with Shell to extend the current time charters for the Tordis Knutsen and Lena Knutsen by one year each, which will see these vessels employed until mid-2027.
- This Earnings Release does not make an assumption around the exercise by Repsol of their extension option on Carmen Knutsen in relation to an initial period of 1 year commencing mid-January 2024. This is under active discussion with Repsol at the time of this Earnings Release.
Derek Lowe, Chief Executive Officer and Chief Financial Officer of KNOT Offshore Partners LP, stated, “We are pleased to report another strong performance in Q3 2023, marked by safe operation at over 98% fleet utilization for scheduled operations; consistent revenue and operating income; and completion of the refinancing required in 2023.
| ______________________________ | |
|
1 |
EBITDA and Adjusted EBITDA are non-GAAP financial measures used by management and external users of the Partnership’s financial statements. Please see Appendix A for definitions of EBITDA and Adjusted EBITDA and a reconciliation to net income, the most directly comparable GAAP financial measure. |
Including those contracts signed since September 30, 2023, we now have 70% of charter coverage in 2024 from fixed contracts, which rises to 79% if charterers’ options are exercised. Having executed a number of new contracts, we remain focused on filling the remaining gaps in our charter portfolio.
In Brazil, the main offshore oil market where we operate, the supply/demand balance is continuing to improve, with robust demand and increasing charter rates. Driven by Petrobras’ continued high production levels and FPSO start-ups in the pre-salt fields that rely upon shuttle tankers, we believe the world’s biggest shuttle tanker market is tightening materially. Our secondary geography, in the North Sea, is taking longer to re-balance, where we anticipate progressive improvement during and beyond 2024. With only five new shuttle tankers set to deliver globally, and currently none after 2025, we believe that growth of offshore oil production in shuttle tanker-serviced fields across both Brazil and the North Sea is on track to outpace shuttle tanker supply growth in the coming years.
As the largest owner and operator of shuttle tankers (together with our sponsor, Knutsen NYK), we believe we are well positioned to benefit from such an improving charter market. We remain focused on generating certainty and stability of cashflows from long-term employment with high quality counterparties, and are confident that continued operational performance and execution of our strategy can create unitholder value in the quarters and years ahead.”
Financial Results Overview
Total revenues were $72.7 million for Q3 2023, compared to $73.8 million for the three months ended June 30, 2023 (“Q2 2023”). Revenues in Q3 2023 were lower compared to Q2 2023 owing to revenues from spot voyages and loss of hire insurance recoveries in Q2 2023, which was partly offset by an increase in time charter and bareboat revenues in Q3 2023.
Vessel operating expenses for Q3 2023 were $23.2 million, a decrease of $2.1 million from $25.3 million in Q2 2023. The decrease is mainly due to the costs related to various upgrades and services on the Brasil Knutsen in connection with her scheduled drydocking, the bulk of which took place in Q2 2023.
Depreciation was $27.5 million for Q3 2023, a decrease of $0.6 million from $28.1 million in Q2 2023.
There was no impairment recognized in Q3 2023, compared to $49.6 million in impairments in Q2 2023 in respect of the Dan Cisne and the Dan Sabia. General and administrative expenses were $1.1 million for Q3 2023 compared to $1.8 million for Q2 2023.
As a result, operating income for Q3 2023 was $20.6 million, compared to an operating loss of $31.2 million for Q2 2023.
Interest expense for Q3 2023 was $18.5 million, an increase of $0.4 million from $18.1 million for Q2 2023. The increase is mainly due to an increase in the US dollar LIBOR and Secured Overnight Financing Rate (“SOFR”) rates.
The realized and unrealized gain on derivative instruments was $4.4 million in Q3 2023, compared to $8.1 million in Q2 2023. Of these amounts, the unrealized (i.e. non-cash) elements were gains of $0.5 million in Q3 2023 and $4.6 million in Q2 2023.
As a result, net income for Q3 2023 was $12.6 million compared to a net loss of $40.4 million for Q2 2023.
By comparison with the three months ended September 30, 2022 (“Q3 2022”), results for Q3 2023 include:
- an increase of $4.9 million in operating income (to $20.6 million from $15.7 million), driven primarily by higher utilization;
- an increase of $13.9 million in net finance expense (to net finance expense of $13.4 million from net finance income of $0.5 million), due to higher interest rates; and
- a decrease of $3.4 million in net income (to $12.6 million from $16.0 million).
Fleet utilization
The Partnership’s vessels operated throughout Q3 2023 with 98.8% utilization for scheduled operations, and 97.4% utilization taking into account the scheduled drydockings of the Brasil Knutsen and the Hilda Knutsen, which were offhire for 11 days and 12 days respectively in Q3 2023.
Financing and Liquidity
As of September 30, 2023, the Partnership had $58.2 million in available liquidity, which consisted of cash and cash equivalents of $53.2 million and $5.0 million of capacity under one of the revolving credit facilities. Following their refinancings, the revolving credit facilities mature between August 2025 and November 2025. The Partnership’s total interest-bearing obligations outstanding as of September 30, 2023 were $984.1 million ($977.3 million net of debt issuance costs). The average margin paid on the Partnership’s outstanding debt during Q3 2023 was approximately 2.29% over LIBOR or SOFR, as applicable.
As of September 30, 2023, the Partnership had entered into various interest rate swap agreements for a total notional amount of $431.8 million to hedge against the interest rate risks of its variable rate borrowings. As of September 30, 2023, the Partnership receives interest based on three or six-month LIBOR, or three-month SOFR, and pays a weighted average interest rate of 1.9% under its interest rate swap agreements, which have an average maturity of approximately 2.0 years. The Partnership does not apply hedge accounting for derivative instruments, and its financial results are impacted by changes in the market value of such financial instruments.
As of September 30, 2023, the Partnership’s net exposure to floating interest rate fluctuations was approximately $317.6 million based on total interest- bearing contractual obligations of $984.1 million, less the Raquel Knutsen and Torill Knutsen sale and leaseback facilities of $181.5 million, less interest rate swaps of $431.8 million, and less cash and cash equivalents of $53.2 million. The Partnership’s outstanding interest-bearing contractual obligations of $984.1 million as of September 30, 2023 are repayable as follows:
|
(U.S. Dollars in thousands) |
Sale & Leaseback |
Period repayment |
Balloon repayment |
Total |
||||
|
Remainder of 2023 |
$ |
3,395 |
$ |
22,657 |
$ |
— |
$ |
26,052 |
|
2024 |
|
13,804 |
|
76,651 |
|
63,393 |
|
153,848 |
|
2025 |
|
14,399 |
|
68,581 |
|
181,583 |
|
264,563 |
|
2026 |
|
15,060 |
|
51,596 |
|
219,521 |
|
286,177 |
|
2027 |
|
15,751 |
|
26,481 |
|
— |
|
42,232 |
|
2028 and thereafter |
|
119,120 |
|
13,241 |
|
78,824 |
|
211,185 |
|
Total |
$ |
181,529 |
$ |
259,207 |
$ |
543,321 |
$ |
984,057 |
On August 16, 2023, the Partnership closed the refinancing of the first of its two $25 million revolving credit facilities, with the facility being rolled over with NTT Finance Corporation. The new facility will mature in August 2025, bears interest at a rate per annum equal to SOFR plus a margin of 2.23% and has a commitment fee of 0.5% on the undrawn portion of the facility. The commercial terms of the facility are substantially unchanged from the facility entered into in June 2021 with NTT Finance Corporation.
On November 15, 2023, the Partnership closed the refinancing of the second of its two $25 million revolving credit facilities, with the facility being rolled over with SBI Shinsei Bank, Limited. The new facility will mature in November 2025, bears interest at a rate per annum equal to SOFR plus a margin of 2.0% and has a commitment fee of 0.8% on the undrawn portion of the facility. The commercial terms of the facility are substantially unchanged from the facility entered into in November 2020 with SBI Shinsei Bank, Limited.
On September 15, 2023, the loan facility secured by the Dan Cisne was repaid in full with a $10.2 million payment. The Dan Sabia facility is due to be paid down with a final scheduled balloon payment of $6.5 million on maturity in January 2024. There are no plans to incur additional borrowings secured by these two vessels until such time as the Partnership has better visibility on the vessels’ future employment.
Assets Owned by Knutsen NYK
Pursuant to the omnibus agreement the Partnership entered into with Knutsen NYK at the time of its initial public offering, the Partnership has the option to acquire from Knutsen NYK any offshore shuttle tankers that Knutsen NYK acquires or owns that are employed under charters for periods of five or more years.
There can be no assurance that the Partnership will acquire any additional vessels from Knutsen NYK. Given the relationship between the Partnership and Knutsen NYK, any such acquisition would be subject to the approval of the Conflicts Committee of the Partnership’s Board of Directors.
Knutsen NYK owns the following vessels and has entered into the following charters:
In February 2021, Tuva Knutsen was delivered to Knutsen NYK from the yard and commenced on a five-year time charter contract with a wholly owned subsidiary of the French oil major TotalEnergies. TotalEnergies has options to extend the charter for up to a further ten years.
In November 2021, Live Knutsen was delivered to Knutsen NYK from the yard in China and commenced on a five-year time charter contract with Galp Sinopec for operation in Brazil. Galp has options to extend the charter for up to a further six years.
In June 2022, Daqing Knutsen was delivered to Knutsen NYK from the yard in China and commenced on a five-year time charter contract with PetroChina International (America) Inc for operation in Brazil. The charterer has options to extend the charter for up to a further five years.
In July 2022, Frida Knutsen was delivered to Knutsen NYK from the yard in Korea and commenced in December 2022 on a seven-year time charter contact with Eni for operation in North Sea. The charterer has options to extend the charter for up to a further three years.
In August 2022, Sindre Knutsen, was delivered to Knutsen NYK from the yard in Korea and commenced in September 2023 on a five-year time charter contract with Eni for operation in the North Sea. The charterer has options to extend the charter for up to a further five years.
In May 2022, Knutsen NYK entered into a new ten-year time charter contract with Petrobras for a vessel to be constructed and which will operate in Brazil where the charterer has the option to extend the charter by up to five further years. The vessel will be built in China and is expected to be delivered in late 2024.
In November 2022, Knutsen NYK entered into a new fifteen-year time charter contract with Petrobras for a vessel to be constructed and which will operate in Brazil where the charterer has an option to extend the charter by up to five further years. The vessel will be built in China and is expected to be delivered in late 2025.
Management Transition
As previously announced on August 4, 2023, Mr. Derek Lowe became the Partnership’s new Chief Executive Officer and Chief Financial Officer, taking office on September 13, 2023.
Mr. Lowe joined the Partnership from Telford Offshore, a provider of accommodation, construction and pipelay in the global offshore energy services industry. He served as the Group Company Secretary of Telford Offshore since its formation in 2018, having provided consultancy services to its predecessor since 2015. He worked from 2011 to 2015 for the debt capital markets group of Pareto Securities, and from 1994 to 2010 for the equity capital markets group of UBS.
Outlook
At September 30, 2023, the Partnership’s fleet of eighteen vessels had an average age of 9.4 years, and the Partnership had charters with an average remaining fixed duration of 1.9 years, with the charterers of the Partnership’s vessels having options to extend their charters by an additional 2.0 years on average. The Partnership had $645 million of remaining contracted forward revenue at September 30, 2023, excluding charterers’ options and excluding contracts agreed or signed after that date.
The Partnership’s earnings for the fourth quarter of 2023 will be affected by the scheduled ten-year special survey drydockings of the Europe-based Torill Knutsen and Ingrid Knutsen, which are being carried out in Europe during November and December 2023.
The market for shuttle tankers in Brazil, where fourteen of our vessels operate, has continued to tighten in Q3 2023, driven by a significant pipeline of new production growth over the coming years, a limited newbuild order book, and typical long-term project viability requiring a Brent oil price of only $35 per barrel. While the Dan Cisne and Dan Sabia stand out among the Partnership’s fleet as being of a smaller size than is optimal in today’s Brazilian market, the contract that we signed for the Brasil Knutsen in August 2023 demonstrates that market tightening in Brazil is underway. We remain in discussions with our customers and continue to evaluate all our options for the Dan Cisne and Dan Sabia vessels, including but not limited to redeployment in the tightening Brazilian market, charter to Knutsen NYK (subject to negotiation and approvals) and sale.
Shuttle tanker demand in the North Sea has remained subdued, driven by the impact of COVID-19-related project delays. We expect these conditions to persist for several more quarters until new oil production projects that are anticipated come on stream.
Looking ahead, based on supply and demand factors with significant forward visibility and committed capital from industry participants, we believe that the overall medium and long-term outlook for the shuttle tanker market remains favorable. Notably, the current shuttle tanker orderbook consists of only five vessels, all of which are scheduled to deliver by the end of 2025, while any future new orders would be expected to deliver in 2026 or thereafter.
In the meantime, the Partnership intends to pursue long-term visibility from its charter contracts, build its liquidity, and position itself to benefit from its market-leading position in an improving shuttle tanker market.
About KNOT Offshore Partners LP
KNOT Offshore Partners LP owns, operates and acquires shuttle tankers primarily under long-term charters in the offshore oil production regions of Brazil and the North Sea.
KNOT Offshore Partners LP is structured as a publicly traded master limited partnership but is classified as a corporation for U.S. federal income tax purposes, and thus issues a Form 1099 to its unitholders, rather than a Form K-1. KNOT Offshore Partners LP’s common units trade on the New York Stock Exchange under the symbol “KNOP”.
The Partnership plans to host a conference call on Thursday December 14, 2023 at 9:30 AM (Eastern Time) to discuss the results for the third quarter of 2023. All unitholders and interested parties are invited to listen to the live conference call by choosing from the following options:
- By dialing 1-833-470-1428 from the US, dialing 1-833-950-0062 from Canada or 1-404-975-4839 if outside North America – please join the KNOT Offshore Partners LP call using access code 119607.
- By accessing the webcast on the Partnership’s website: www.knotoffshorepartners.com.
December 13, 2023
KNOT Offshore Partners LP
Aberdeen, United Kingdom
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
|||||||||||||||
|
Three Months Ended |
Nine Months Ended |
||||||||||||||
|
|
September 30, |
June 30, |
September 30, |
September 30, |
September 30, |
||||||||||
|
(U.S. Dollars in thousands) |
|
2023 |
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
Time charter and bareboat revenues |
$ |
72,188 |
|
$ |
69,924 |
|
$ |
67,738 |
|
$ |
205,045 |
|
$ |
196,713 |
|
|
Voyage revenues (1) |
|
10 |
|
|
1,585 |
|
|
— |
|
|
8,849 |
|
|
— |
|
|
Loss of hire insurance recoveries |
|
— |
|
|
1,424 |
|
|
— |
|
|
2,335 |
|
|
— |
|
|
Other income |
|
485 |
|
|
891 |
|
|
78 |
|
|
1,458 |
|
|
258 |
|
|
Total revenues |
|
72,683 |
|
|
73,824 |
|
|
67,816 |
|
|
217,687 |
|
|
196,971 |
|
|
Vessel operating expenses |
|
23,164 |
|
|
25,287 |
|
|
23,127 |
|
|
67,894 |
|
|
66,212 |
|
|
Voyage expenses and commission (2) |
|
375 |
|
|
159 |
|
|
— |
|
|
5,230 |
|
|
— |
|
|
Depreciation |
|
27,472 |
|
|
28,107 |
|
|
27,638 |
|
|
83,308 |
|
|
79,634 |
|
|
Impairment (3) |
|
— |
|
|
49,649 |
|
|
— |
|
|
49,649 |
|
|
— |
|
|
General and administrative expenses |
|
1,083 |
|
|
1,838 |
|
|
1,366 |
|
|
4,571 |
|
|
4,492 |
|
|
Total operating expenses |
|
52,094 |
|
|
105,040 |
|
|
52,131 |
|
|
210,652 |
|
|
150,338 |
|
|
Operating income (loss) |
|
20,589 |
|
|
(31,216 |
) |
|
15,685 |
|
|
7,035 |
|
|
46,633 |
|
|
Finance income (expense): |
|
|
|
|
|
||||||||||
|
Interest income |
|
932 |
|
|
861 |
|
|
289 |
|
|
2,476 |
|
|
350 |
|
|
Interest expense |
|
(18,493 |
) |
|
(18,107 |
) |
|
(12,220 |
) |
|
(53,969 |
) |
|
(27,246 |
) |
|
Other finance expense |
|
(228 |
) |
|
(112 |
) |
|
(213 |
) |
|
(413 |
) |
|
(525 |
) |
|
Realized and unrealized gain (loss) on derivative instruments (4) |
|
4,361 |
|
|
8,124 |
|
|
12,374 |
|
|
10,175 |
|
|
33,847 |
|
|
Net gain (loss) on foreign currency transactions |
|
14 |
|
|
109 |
|
|
237 |
|
|
(13 |
) |
|
139 |
|
|
Total finance income (expense) |
|
(13,414 |
) |
|
(9,125 |
) |
|
467 |
|
|
(41,744 |
) |
|
6,565 |
|
|
Income (loss) before income taxes |
|
7,175 |
|
|
(40,341 |
) |
|
16,152 |
|
|
(34,709 |
) |
|
53,198 |
|
|
Income tax benefit (expense) |
|
5 ,466 |
|
|
(49 |
) |
|
(180 |
) |
|
5,663 |
|
|
(558 |
) |
|
Net income (loss) |
$ |
12,641 |
|
$ |
(40,390 |
) |
$ |
15,972 |
|
$ |
(29,046 |
) |
$ |
52,640 |
|
|
Weighted average units outstanding (in thousands of units): |
|
|
|
|
|
||||||||||
|
Common units |
|
34,045 |
|
|
34,045 |
|
|
33,923 |
|
|
34,045 |
|
|
33,839 |
|
|
Class B units (5) |
|
252 |
|
|
252 |
|
|
375 |
|
|
252 |
|
|
459 |
|
|
General Partner units |
|
640 |
|
|
640 |
|
|
640 |
|
|
640 |
|
|
640 |
|
|
(1) |
Voyage revenues are revenues unique to spot voyages. |
|
(2) |
Voyage expenses and commission are expenses unique to spot voyages, including bunker fuel expenses, port fees, cargo loading and unloading expenses, agency fees and commission. |
|
(3) |
The carrying value of each of the Dan Cisne and the Dan Sabia was written down to its estimated fair value as of June 30, 2023. |
|
(4) |
Realized gain (loss) on derivative instruments relates to amounts the Partnership actually received (paid) to settle derivative instruments, and the unrealized gain (loss) on derivative instruments relates to changes in the fair value of such derivative instruments, as detailed in the table below. |
|
Three Months Ended |
Nine Months Ended |
||||||||||||||
|
(U.S. Dollars in thousands) |
September 30, 2023 |
June 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
||||||||||
|
Realized gain (loss): |
|||||||||||||||
|
Interest rate swap contracts |
$ |
3,963 |
|
$ |
3,538 |
|
$ |
(304 |
) |
$ |
10,506 |
|
$ |
(3,707 |
) |
|
Foreign exchange forward contracts |
|
(79 |
) |
|
— |
|
|
— |
|
|
(79 |
) |
|
— |
|
|
Total realized gain (loss): |
|
3,884 |
|
|
3,538 |
|
|
(304 |
) |
|
10,427 |
|
|
(3,707 |
) |
|
Unrealized gain (loss): |
|
|
|
|
|
||||||||||
|
Interest rate swap contracts |
|
352 |
|
|
4,667 |
|
|
13,482 |
|
|
(252 |
) |
|
38,772 |
|
|
Foreign exchange forward contracts |
|
125 |
|
|
(81 |
) |
|
(804 |
) |
|
— |
|
|
(1,218 |
) |
|
Total unrealized gain (loss): |
|
477 |
|
|
4,586 |
|
|
12,678 |
|
|
(252 |
) |
|
37,554 |
|
|
Total realized and unrealized gain (loss) on derivative instruments: |
$ |
4,361 |
|
$ |
8,124 |
|
$ |
12,374 |
|
$ |
10,175 |
|
$ |
33,847 |
|
|
(5) |
On September 7, 2021, the Partnership entered into an exchange agreement with Knutsen NYK, and the Partnership’s general partner whereby Knutsen NYK contributed to the Partnership all of Knutsen NYK’s incentive distribution rights (“IDRs”), in exchange for the issuance by the Partnership to Knutsen NYK of 673,080 common units and 673,080 Class B Units, whereupon the IDRs were cancelled (the “IDR Exchange”). As of September 30, 2023, 420,675 of the Class B Units had been converted to common units. |
Contacts
Questions should be directed to:
Derek Lowe via email at ir@knotoffshorepartners.com
