KNOT Offshore Partners Q3 2023 Earnings Call Transcript

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Provided by Quartr
December 14, 2023

There are 4 speakers on the call.

Operator

Everyone. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the KNOT Third Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I'll now turn the call over to your host, Derek Lowe. Please go ahead.

Speaker 1

Thank you, Drew, and good morning, ladies and gentlemen. My name is Derek Lowe, and I've recently joined Connaught Offshore Partners, taking office as Chief Executive and Chief Financial Officer in September 2023. It's my pleasure for the first time to welcome you to an earnings call for the partnership. Our website is klartzoffshorepartners.com, And you can find there the earnings release for the Q3 of 2023 and also this presentation. On Slide 2, You will find guidance on the inclusion of forward looking statements in today's presentation.

Speaker 1

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. For further information, please consult our SEC filings, especially in relation to our annual and quarterly results. Today's presentation also includes certain non U. S.

Speaker 1

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 $72,700,000 Operating income, CHF 20,600,000 net income, CHF 12,600,000 and adjusted EBITDA CHF 48,100,000 We closed Q3 with $58,200,000 in available liquidity, which comprised $53,200,000 of cash and equivalents, plus CHF 5,000,000 in undrawn capacity in our debt facilities. We operated with 98.8% Utilization of the vessel time available for scheduled operations, which is equivalent to 97.4% of total fleet time after accounting for the planned dry dockings of the Brazil Knutsen and Hilda Knutsen. Following the end of Q3, completed the refinancing requirements for 2023 by rolling the second of our 2 revolving credit facilities.

Speaker 1

That continues at $25,000,000 of capacity and now expires in November 2025. Cash distribution for Q3 was declared in October at 0.2.6 to US cents per common unit, which was paid in early November. On Slide 4, we have the headlines of contractual developments with 5 vessels securing significant new firm periods through either extension or new contracts. Starting with our major market, Brazil. Windsor Knutsen has secured near continuous employment through to the first half of 'twenty seven.

Speaker 1

This is via exercise of an extension option by Shell, which will last until early 'twenty five And a new time charter commencing in the first half of 'twenty five, lasting for 2 years fixed. In demonstration of some flexibility between our vessels, The way we could make Windsor Knutsen available for that second contract was to seek substitution of Brazil Knutsen into the Windsor's existing contract with Equinor. That begins in late 'twenty four or early 'twenty five and lasts for between 1 4 years depending on the exercise of charter as options. And both Tordisk Knutsen and Leiner Knutsen saw their contracts with Shell extended by a further year, which will now employ both vessels until mid-twenty 27. In the North Sea, Bodil Knutsen has secured between 2 4 years of time charter with Equinor due to commence in March 24.

Speaker 1

The continuing area of focus for our contracting team, especially for near term deployment, is on Dan Sissne and Dan Sabia in Brazil And Hilda Knutsen and Torill Knutsen in the North Sea. We're in the process of receiving redelivery of Dansysna And anticipate the same will apply to Dansarbia in the next month. We expect Hildegnudsen and Torok Knutsen to spend some time on rolling 30 day contracts with our sponsor as 2024 begins. Marketing of all 4 vessels continues to potential charters, both existing clients and others, including the partnership sponsor. On Slide 5, our outlook remains positive on both industry dynamics and the partnership's positioning to participate fruitfully in our markets.

Speaker 1

The net supply of shuttle tankers into the global fleet appears very constrained with only 5 new vessels on order and all for delivery by the end of 'twenty five. Significant growth is anticipated in production in fields which rely on service by shuttle tankers. Both of these dynamics are positive for the future demand volume and charter rates for the partnership fleet. We are, however, mindful of the near term market conditions where we are focused on the marketing of the 4 vessels as I described earlier. In the meantime, the partnership remains financially resilient With a strong contracted revenue position of $645,000,000 at the end of Q3 on fixed contracts, which averaged 1.9 years in duration.

Speaker 1

Charter's options are additional to this and average a further 2.1 years. Our pattern of cash generation and liquidity balance is sufficient for our operations And the significant pay down rate for our debt. And we have demonstrated the strength of our relationships with lending banks by several refinancings completed over the last year. Finally, the average age of our vessels at 9.4 years places us well when compared with the useful life modeled at 23 years. On to Slide 6.

Speaker 1

You can see the consistency of revenues, operating expenses and operating income when comparing with those of previous quarters, Including Q2, and that's viewed without the impairment. For convenience, we have added here a rolling 12 month look back, which can then be compared with recent full calendar years. Slide 7 similarly reflects the consistency of our adjusted EBITDA, and you can find the definition of this non GAAP measure in the appendix. On Slide 8, the most notable change in the balance sheet has been the reduction in our current liabilities, which has arisen from the refinancings secured during the year to September. Long term debt has increased as a consequence.

Speaker 1

However, the overall change in the partnership's liabilities has been a reduction by $80,000,000 which is reflective of the debt repayments we have made during the year so far. On Slide 9, we have expanded on the terms of 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 repayments due over the next year, which do not include interest. And the balloon payments are the final amounts of principal, which will be due on the maturity dates. Of note, dollars 159,000,000 is due to be paid on these debt facilities over the 12 months following 30th September 23, of which GBP 57,000,000 is a balloon repayment due in May 24.

Speaker 1

Our practice with a significant repayment such as this is to seek a refinancing. And our track record, even in just the last year, demonstrates the viability of this approach. There are, however, no guarantees that future financing endeavors will succeed. Aside from that refinancing, dollars102,000,000 will be repayable over the course of this 12 month period. Slide 10 shows the contracted pipeline in chart format to affecting the developments I set out earlier.

Speaker 1

Similarly, Slide 11 highlights the focus of our commercial efforts on adding contracts for 2024, primarily for the 4 vessels mentioned earlier. On Slide 12, we see our sponsor's inventory of vessels which are eligible for purchase by the partnership. This applies to any vessel Owned by or in order for our sponsor, where the vessel has a firm contract period at least 5 years in length. At present, Five existing vessels and 2 under construction fall into this category. There is no assurance that any further acquisitions will be made by the partnership And any transaction will be subject to the Board approval of both parties, which includes the partnership's Independent Conflicts Committee.

Speaker 1

As we have said, our top priorities remain securing additional contract coverage for our existing fleet and fostering our liquidity position. On Slides 13 and 14, we've provided some useful illustrations of the strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras' materials directly at the web page as shown there. The 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.

Speaker 1

On Slide 15, we provide information relevant to our U. S. Unitholders, and particularly those seeking a Form 1099. Those holding units via their custodians or brokers should approach those parties directly. And those with directly registered holdings You should contact our transfer agent, American Stock Transfer, who come under the umbrella of Equiniti Trust Company, whose details are shown there.

Speaker 1

On Slide 16, 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. I will finish with Slide 17, recapping our financial and operational performance in Q3 'twenty three and the subsequent time and our outlook for 'twenty four. 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 have secured, along with our ability to navigate our significant refinancing needs and CapEx relating to dry docks throughout the year. And our continued commercial focus remains on filling up utilization for 2024, while looking further forward to longer term charter visibility and liquidity generation.

Speaker 1

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

Operator

Thank you. We will now start today's Q and A session. Our first question today comes from Liam Burke from B. Riley. Your line is now open.

Operator

Please go ahead.

Speaker 2

Hello, Derek. How are you today?

Speaker 1

Good. Thank you. And you?

Speaker 2

I'm fine. Thank you. I wanted to ask you about the Cisne and Sabia. They're both in the offshore Brazil, which is Looks like to be a really, really fast growing market, but the size of the vessels are not ideal for Brazil. How do you reconcile that?

Speaker 2

Is there a fit in that market at all?

Speaker 1

Well, we continue to market the vessels both there and In the North Sea. And I think there's a function of supply and demand. So if demand for Vessel capacity reaches a sufficient level, then that's the source of circumstance in which we might see the vessels contracted there. We're mindful, yes, that they are smaller than ideal for that market.

Speaker 2

And you also talked about Possibly repositioning, I guess that would be in the prepared in your press release, You mentioned repositioning as well.

Speaker 1

Yes. So As I say, we're marketing the vessels to both our major markets. And if we anticipated client demand And certainly, if there's a clear contract in a different location, then we'd consider moving them.

Speaker 2

Okay. And then just on the other two vessels, the Hilda and the Toro, are you seeing any interest out of that market? Well, what's the degree of

Speaker 1

Yes. I mean, it has been it's clearly slower than Brazil. I don't want to comment on specific conversations that we're having with our clients, but clearly, our contracting team are marketing the vessels Pretty heavily in the North Sea market and in Brazil at the moment. We expect The requirement for shuttle tankers to pick up in the North Sea rather later on during next year once Johan Casper comes increasingly online. And it could well take during the course of next year for contracts for that work to come through.

Speaker 2

Great. Thank you, Derek.

Speaker 1

Thank you. Thanks,

Operator

Just to reiterate, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. Our next question today comes from Robert Silvera from R. E. Silvera.

Operator

Your line is now open. Please go ahead.

Speaker 3

Thank you very much for taking my call, Derek. Thanks, Oliver. We have not Contracted for any recent dropdowns since the end of last year. Is that correct?

Speaker 1

That's right, yes.

Speaker 3

Can you help me understand then how our long term debt from the end of last This year went from AUD686,000,000 to AUD820,000,000 plus currently.

Speaker 1

Sure. You need to look at that in so we're looking at Slide 8. You need to look at that in the context of the current liabilities at both dates as well And then also at the total liability figure at the bottom of the so this will be on the right hand side of Slide 8, at the bottom of that table as well. This is about refinancing that took place on one of our larger facilities during the first half of the year. And so The amount due for repayment then, which was a current liability at the end of 'twenty two, Got transferred into a longer liability and therefore long term debt by the time I think by the end of June actually, but certainly by the end of September.

Speaker 3

Okay. I thought that's what it might mean. So overall, we've really lowered The liability by $81,000,000 which is good.

Speaker 1

That's right. Yes. Thank you. Thank you.

Speaker 3

And I thank you. And this market seems to have liked it in the early market pricing. Could you Give me any color on what's happening in the Bering Sea?

Speaker 1

I don't have any color available on that, I'm afraid.

Speaker 3

So there's no opportunity for us up there?

Speaker 1

Well, our contracting teams are marketing in many geographies, but I don't have a specific comment on the Bering Sea.

Speaker 3

Okay. Well, that's all for me. Thank you and welcome. And I hope that you can at least Round off the dividend from 0.2.6 to 0.3 dollars make it an even number. Anyhow, thank you very much.

Speaker 2

Thanks,

Speaker 1

Robert. Appreciate it. Thank you.

Operator

It looks like we have no further questions at this time. I'll now hand back over to Derek Lowe for any final remarks.

Speaker 1

Thank you, everyone, again for joining this earnings call for KNOT Offshore Partners 3rd quarter in 'twenty three, and I look forward to speaking with you again following the 4th quarter results.

Operator

That concludes today's KNOT Third Quarter 2023 Earnings Results Conference. You may now disconnect your line.

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Earnings Conference Call
KNOT Offshore Partners Q3 2023
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