KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended December 31, 2021
ABERDEEN, Scotland–(BUSINESS WIRE)–
Financial Highlights
For the three months ended December 31, 2021, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):
- Generated total revenues of $72.1 million, operating income of $26.0 million and net income of $23.1 million.
- Generated Adjusted EBITDA of $52.0 million (1)
- Generated distributable cash flow of $23.3 million (1)
- Reported a distribution coverage ratio of 1.28 (2)
- Reported $117.3 million in available liquidity, which included cash and cash equivalents of $62.3 million at December 31, 2021 (compared to $121.6 million of available liquidity and $66.6 million of cash and cash equivalents at September 30, 2021)
Other Partnership Highlights and Events
- Fleet operated with 100% utilization for scheduled operations and 96% utilization taking into account both the scheduled drydocking of the Tordis Knutsen, which was offhire for 35 days in connection with her drydocking in the fourth quarter of 2021, and the offhire of 27 days related to the installation of the volatile organic compound (“VOC”) emissions recovery plant on the Bodil Knutsen.
- On February 10, 2022, the Partnership paid a quarterly cash distribution of $0.52 per common and Class B unit with respect to the quarter ended December 31, 2021 to all common and Class B unitholders of record on January 28, 2022. On February 10, 2022, the Partnership paid a cash distribution to holders of Series A Convertible Preferred Units (“Series A Preferred Units”) with respect to the quarter ended December 31, 2021 in an aggregate amount equal to $1.7 million.
- The charterer of the Anna Knutsen, Galp Sinopec, did not notify the Partnership by the due date of its intention to exercise its option to extend the time charter of the vessel and, as a consequence, the vessel was effectively redelivered to the Partnership on February 14, 2022 at the start of its mobilization trip to Europe for the vessel’s planned drydock. On February 11, 2022 the Partnership agreed on the commercial terms for a new time charter contract for the Anna Knutsen with a major oil company to commence in the second quarter of 2022 for a fixed period, at the charterer’s option, of either (a) one year, with options for the charterer to extend the time charter by up to four further one-year periods, or (b) two years, with options for the charterer to extend the time charter by up to three further one-year periods.
- The Partnership has entered into a new time charter agreement for the Tordis Knutsen with Petrobras that commenced on February 23, 2022 for a fixed period of five months, with an option for the charterer to extend the charter by one month.
- The Partnership has entered into a new time charter contract for the Bodil Knutsen with Equinor to commence in the fourth quarter of 2023 or the first quarter of 2024. The new 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 Partnership has entered into a new time charter contract for the Windsor Knutsen with Equinor to commence in the fourth quarter of 2024 or the first quarter of 2025. The new 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.
Gary Chapman, Chief Executive Officer and Chief Financial Officer of KNOT Offshore Partners LP, commented, “Even as one of our vessels underwent scheduled drydocking, the Partnership maintained very high fleet utilization during the fourth quarter of 2021, generating strong cash-flow and providing solid coverage for our distribution to unitholders. We have also made good progress in agreeing a combination of interim and longer-term employment contracts for a number of our vessels coming into the charter market, and we remain highly focused on securing further coverage for the quarters ahead. In the medium term and beyond, with high oil prices continuing to incentivize production and major shuttle tanker customers, particularly in Brazil, committing extensive capex to the FPSOs that will serve as the basis for their deep-water expansion, we believe that KNOP is well positioned to service the significant growth that we expect in the shuttle tanker-serviced offshore oil fields where we operate.”
(1) EBITDA, Adjusted EBITDA and distributable cash flow 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, Adjusted EBITDA and distributable cash flow and a reconciliation to net income, the most directly comparable GAAP financial measure.
(2) Distribution coverage ratio is equal to distributable cash flow divided by distributions declared for the period presented.
Financial Results Overview
Total revenues were $72.1 million for the three months ended December 31, 2021 (the “fourth quarter”), compared to $66.6 million for the three months ended September 30, 2021 (the “third quarter”). The increase was mainly due to full earnings for the Windsor Knutsen after starting up the contract with PetroChina in the third quarter of 2021, full earnings for the Vigdis Knutsen after a COVID-19 outbreak on board in the third quarter and loss of hire recoveries in the fourth quarter related to the Tordis Knutsen due to a technical fault on its azimuth thruster in the third quarter.
Vessel operating expenses for the fourth quarter of 2021 were $18.5 million, an increase of $0.8 million from $17.7 million in the third quarter of 2021. The increase is mainly related to increased bunkers costs for the Tordis Knutsen in connection with its voyage to drydocking.
Depreciation was $26.0 million for the fourth quarter, a decrease of $0.1 million from $26.1 million in the third quarter. The decrease is related to drydock adjustments for the Tordis Knutsen in the fourth quarter.
General and administrative expenses were $1.6 million for the fourth quarter compared to $1.7 million for the third quarter.
As a result, operating income for the fourth quarter was $26.0 million, compared to $21.1 million for the third quarter.
Interest expense for the fourth quarter was $6.6 million, a decrease of $0.6 million from $7.2 million for the third quarter. The decrease was mainly due to higher amortization costs in the third quarter for the Tordis Knutsen, the Vigdis Knutsen, the Lena Knutsen, the Anna Knutsen and the Brasil Knutsen in connection with the $345 million refinancing and the expensing of certain amortization costs related to the vessels’ previous financing.
Realized and unrealized gain on derivative instruments was $4.1 million in the fourth quarter, compared to a gain of $0.1 million in the third quarter. The unrealized non-cash element of the mark-to-market gain was $6.3 million for the fourth quarter of 2021, compared to a gain of $2.0 million for the third quarter of 2021. All of the unrealized gain for the third quarter and the fourth quarter of 2021 is related to a mark-to-market gain on interest rate swaps.
As a result, net income for the fourth quarter of 2021 was $23.1 million compared to $13.5 million for the third quarter of 2021.
Net income for the fourth quarter of 2021 decreased by $1.5 million to $23.1 million from a net income of $24.6 million for the three months ended December 31, 2020. Operating income for the fourth quarter of 2021 decreased by $4.4 million to $26.0 million, compared to operating income of $30.4 million in the fourth quarter of 2020, mainly due to lower utilization of the fleet due to offhire in connection with scheduled drydocking and the VOC recovery plant installation on the Bodil Knutsen, and increased depreciation costs for the fleet related to the Partnership’s change of the useful life estimate of the vessels from 25 years to 23 years. This decrease was partially offset by the inclusion of the Tove Knutsen in results of operations from December 31, 2020 and increased earnings from the Windsor Knutsen after starting up the contract with PetroChina. Total finance expense for the fourth quarter of 2021 decreased by $3.0 million to $2.8 million, compared to finance expense of $5.8 million for the fourth quarter of 2020. The decrease in finance expense was mainly due to an increase in unrealized gain on derivative instruments. This was partially offset by increased interest expense for the Raquel Knutsen in connection with the sale and leaseback transaction, as a result of which both the financial obligation and interest rate increased, and by including the Tove Knutsen in results from December 31, 2020.
Distributable cash flow was $23.3 million for the fourth quarter of 2021, compared to $18.6 million for the third quarter of 2021. The increase in distributable cash flow was mainly due to an overall higher utilization for the fleet due to several offhires in the third quarter and loss of hire insurance recoveries for the Tordis Knutsen in the fourth quarter. This was offset by lower contributions from the Bodil Knutsen in the fourth quarter in connection with VOC recovery plant installation which resulted in 27 days of offhire in the fourth quarter. The distribution declared for the fourth quarter was $0.52 per common and Class B unit, equivalent to an annualized distribution of $2.08.
COVID-19
The outbreak of the coronavirus (“COVID-19”) continues to affect global economic activity; however the Partnership has to date avoided any serious or sustained operational impacts, and there have been no effects on the Partnership’s contractual position. Steady progress in vaccinations and further signs of global economic recovery continue to cautiously increase optimism.
The Partnership’s focus remains on ensuring the health and safety of its employees and crew onboard while providing safe and reliable operations for its customers, and a large number of practical steps and changes have been made and taken towards this aim. While full or partial crew changes on all of the Partnership’s vessels have been continuing, the situation remains challenging for the maritime industry as a whole owing to travel restrictions and quarantine regulations that are ongoing in many countries.
Costs related to the movement of maritime personnel and vessel operational logistics, including repairs and maintenance, remain challenging. The Partnership remains vigilant to address any changes related to the health, safety and wellbeing of personnel, or to government restrictions and other matters potentially affecting operations.
Other than 17 days of off-hire incurred as a result of a COVID-19 outbreak on the Vigdis Knutsen in July 2021 and the 5 days of off-hire incurred as a result of a COVID-19 outbreak on the Raquel Knutsen in February 2022, each of which was quickly contained with no serious ill-health caused to any persons affected, the Partnership has not had any material service interruptions on its time-chartered vessels as a result of COVID-19; however the potential impact of COVID-19 on the Partnership’s business, financial condition and results of operating remains uncertain.
The closure of, or restricted access to, ports and terminals and passenger air travel in regions affected by the virus may yet still lead to further operational impacts that could result in higher costs. It is possible that a further outbreak onboard a time-chartered vessel could prevent the Partnership from meeting its obligations under a charter, resulting in an off-hire claim and loss of revenue. Any outbreak of COVID-19 on board one of the Partnership’s time-chartered vessels or that affects any of the Partnership’s main suppliers could cause an inability to replace critical supplies or parts, maintain adequate crewing or fulfill the Partnership’s obligations under its time charter contracts, which in turn could result in off-hire or claims for the impacted period.
Announced delays in new capital expenditure by many oil majors in 2020 had a negative impact on the demand for shuttle tankers and, given the uncertainty around the continuation of the COVID-19 situation, this dampened demand could continue through at least the majority of 2022. This has affected the timing and number of new offshore projects and overall oil production profiles in the short-term, which has impacted the demand and pricing for shuttle tankers. If this situation persists, the Partnership may be unable to re-charter its vessels at attractive rates in the future, particularly for vessels that are coming off charter in the next one to two years.
Notwithstanding these challenges, the Partnership remains confident in the mid to long term growth opportunities for the shuttle tanker market and that as economic activity begins to regain traction, the Partnership will be well-placed to capture new opportunities, particularly given an absence of speculative vessel ordering in the shuttle tanker sector.
Although the Partnership is exposed to credit risk associated with individual charterers, the Partnership believes that its charter contracts, all with subsidiaries of national oil companies and oil majors and Knutsen NYK Offshore Tankers AS (“Knutsen NYK”), largely insulate the Partnership from this risk. In particular, charter hire is payable in advance and the services the Partnership performs are of a critical nature for the Partnership’s customers. Notwithstanding, any extended period of non-payment or idle time between charters could adversely affect the Partnership’s future liquidity, results of operations and cash flows. The Partnership has not so far experienced any reduced or non-payments for obligations under the Partnership’s time charter contracts and the Partnership has not provided concessions or made changes to the terms of payment for customers.
Operational Review
The Partnership’s vessels operated throughout the fourth quarter of 2021 with 100% utilization for scheduled operations and 96% utilization taking into account both the scheduled drydocking of the Tordis Knutsen, which was offhire for 35 days in connection with her drydocking in the fourth quarter of 2021, and the offhire of 27 days related to the installation of the VOC emissions recovery plant on the Bodil Knutsen.
The Bodil Knutsen is currently operating under a time charter contract with its sponsor, Knutsen NYK; which expires in April 2022. The charterer has two further one-month extension options. The Partnership has also entered into a new time charter contract for the Bodil Knutsen with Equinor to commence in the fourth quarter of 2023 or the first quarter of 2024. The new 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 Partnership is still seeking short term to mid-term charter employment for the vessel and the time charter with Knutsen NYK can be terminated early should such an employment opportunity arise.
The Tordis Knutsen was redelivered from the charterer on November 26, 2021, and thereafter started on her mobilization trip to Europe for her planned 5-year special survey drydocking, The vessel completed this work and on February 23, 2022 the vessel commenced a new time charter contract with Petrobras for a fixed period of five months with an option for the charterer to extend the charter by one month.
The Anna Knutsen was redelivered from the charterer on February 14, 2022 and started on its mobilization trip to Europe in order to complete her planned 5-year special survey drydocking. On February 11, 2022 the Partnership agreed on the commercial terms for a new time charter contract for the Anna Knutsen with a major oil company to commence in the second quarter of 2022 for a fixed period, at the charterer’s option, of either (a) one year, with options for the charterer to extend the time charter by up to four further one-year periods, or (b) two years, with options for the charterer to extend the time charter by up to three further one-year periods.
The Windsor Knutsen is operating on a one-year time charter contract with PetroChina with charterer’s options to extend the charter by one one-year period and then one six-month period, for operation in Brazil. The Partnership has entered into a new time charter contract for the Windsor Knutsen with Equinor to commence in the fourth quarter of 2024 or the first quarter of 2025. The new 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.
As anticipated, the Vigdis Knutsen was redelivered by the charterer on March 5, 2022 and started her mobilization trip to Europe for her planned 5-year special survey drydocking.
Financing and Liquidity
As of December 31, 2021, the Partnership had $117.3 million in available liquidity, which consisted of cash and cash equivalents of $62.3 million and $55.0 million of capacity under its existing revolving credit facilities. The revolving credit facilities mature between August 2023 and November 2023. The Partnership’s total interest-bearing obligations outstanding as of December 31, 2021 were $974.6 million ($967.1 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the fourth quarter of 2021 was approximately 2.06% over LIBOR.
As of December 31, 2021, the Partnership had entered into various interest rate swap agreements for a total notional amount of $462.3 million to hedge against the interest rate risks of its variable rate borrowings. As of December 31, 2021, the Partnership receives interest based on three or six-month LIBOR and pays a weighted average interest rate of 1.88% under its interest rate swap agreements, which have an average maturity of approximately 3.4 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 December 31, 2021, the Partnership’s net exposure to floating interest rate fluctuations was approximately $360.8 million based on total interest-bearing contractual obligations of $974.6 million, less the Raquel Knutsen sale & leaseback facility of $89.2 million, less interest rate swaps of $462.3 million and less cash and cash equivalents of $62.3 million. The Partnership’s outstanding interest-bearing contractual obligations of $974.6 million as of December 31, 2021 are repayable as follows:
|
(U.S. Dollars in thousands) |
|
Sale & Leaseback |
|
|
Period repayment |
|
|
Balloon repayment |
|
|
Total |
|
||||
|
2022 |
|
$ |
4,960 |
|
|
$ |
85,996 |
|
|
$ |
— |
|
|
$ |
90,956 |
|
|
2023 |
|
|
5,177 |
|
|
|
79,768 |
|
|
|
225,906 |
|
|
|
310,851 |
|
|
2024 |
|
|
5,418 |
|
|
|
38,107 |
|
|
|
123,393 |
|
|
|
166,918 |
|
|
2025 |
|
|
5,640 |
|
|
|
28,372 |
|
|
|
65,506 |
|
|
|
99,518 |
|
|
2026 and thereafter |
|
|
68,010 |
|
|
|
18,822 |
|
|
|
219,521 |
|
|
|
306,353 |
|
|
Total |
|
$ |
89,205 |
|
|
$ |
251,065 |
|
|
$ |
634,326 |
|
|
$ |
974,596 |
|
ATM Program
On August 26, 2021, the Partnership entered into a sales agreement with B. Riley Securities, Inc., as the Agent. Under the terms of the at the market sales agreement, the Partnership may offer and sell up to $100 million of common units from time to time through the Agent.
From October 1, 2021 to December 31, 2021, the Partnership sold 41,940 common units under the program at an average gross sales price of $20.06 per unit and received net proceeds, after sales commissions, of $0.83 million. The Partnership paid an aggregate of $0.01 million in sales commissions to the Agent in connection with such sales.
Distributions
On February 10, 2022, the Partnership paid a quarterly cash distribution of $0.52 per common unit and Class B unit with respect to the quarter ended December 31, 2021 to all common and Class B unitholders of record on January 28, 2022. On February 10, 2022, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended December 31, 2021 in an aggregate amount equal to $1.7 million.
Assets Owned by Knutsen NYK
In October 2020, Knutsen NYK took delivery of Tove Knutsen’s sister vessel, the Synnøve Knutsen. Upon delivery, the vessel operated under a short-term contract with Petrobras in Brazil and then commenced on a 5-year time charter contract with Equinor in February 2022. Equinor has the option to extend the Synnnøve Knutsen charter for up to a further 15 years.
In February 2021, Tuva Knutsen, was delivered to Knutsen NYK from the yard and commenced on a 5-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 10 years.
In November 2021, Live Knutsen, was delivered to Knutsen NYK from the yard in China and commenced on a 5-year time charter contract with Galp Sinopec for operation in Brazil. Galp has options to extend the charter for up to a further 6 years.
Knutsen NYK has three additional newbuildings under construction, all of which are secured on long-term charters from delivery.
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.
Outlook
As of December 31, 2021, the Partnership’s fleet of seventeen vessels had an average age of 8.0 years and had charters with an average remaining fixed duration of 2.0 years. In addition, the charterers of the Partnership’s time charter vessels had options to extend their charters by an additional 2.7 years on average. As of December 31, 2021, the Partnership had $560 million of remaining contracted forward revenue, excluding options.
The Partnership’s earnings for the first quarter of 2022 will be affected by the planned 5-year special survey dry dockings of the Tordis Knutsen, Anna Knutsen and Vigdis Knutsen. The estimated aggregate off hire related to the scheduled drydocking of the above vessels will be approximately 130 days and the costs are expected to fall predominantly in the first quarter of 2022. Although the Partnership’s distribution coverage in the first quarter of 2022 will be affected by such concentrated drydocking work, the impact is both scheduled and expected.
In addition, during February 2022, the Raquel Knutsen experienced 5 days offhire related to an outbreak of COVID-19. The outbreak was quickly contained, with no crewmembers experiencing severe symptoms, and the vessel subsequently returned to service.
Shuttle tanker demand continues to reflect the delays to offshore project development timelines following from the dramatic capex reductions instituted by offshore oil producers during the early days of the COVID-19 pandemic; however recent and increasing activity by the Partnership’s customers is encouraging. Despite this and the continuing recovery in oil demand together with increasing oil prices, the lag effect introduced by the delay in capex deployment continues to impact the shuttle tanker charter market at the current time.
Vessel newbuild prices continue to be significantly above those prices that were available throughout 2019, 2020 and 2021 and the Partnership expects this to continue for the foreseeable future due to heavy ordering of other types of vessels, notably in the LNG and container vessel markets. Such higher newbuild prices assist the competitiveness of the Partnership’s fleet during charter renewal discussions, where the ordering of a newbuild vessel might otherwise be a competitively priced alternative.
Contacts
Questions should be directed to:
Gary Chapman (by telephone +44 1224 618 420, or via email at ir@knotoffshorepartners.com)
