KNOT Offshore Partners Q3 2024 Earnings Report

KNOT Offshore Partners EPS Results

• Actual EPS: -$0.11
• Consensus EPS: -$0.04
• Beat/Miss: Missed by -$0.07
• One Year Ago EPS: $0.37

KNOT Offshore Partners Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

KNOT Offshore Partners Announcement Details

• Quarter: Q3 2024
• Date: 12/4/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, December 5, 2024
• Conference Call Time: 9:30AM ET

KNOT Offshore Partners (NYSE:KNOP) is a publicly traded limited partnership formed in 2013 to own and operate shuttle tankers under long‐term charters in the offshore oil industry. Listed on the New York Stock Exchange under the symbol KNOP, the partnership specializes in the transportation of crude oil from offshore production facilities to onshore refineries. Its fleet comprises moderne shuttle tankers equipped with dynamic positioning systems, enabling safe transfer operations in harsh weather and sea conditions.

The partnership’s vessels primarily serve fields in the North Sea, Brazil and West Africa, where they operate under multi‐year contracts with major energy producers. These shuttle tankers are tailored to meet stringent environmental and safety regulations, featuring double hull construction and advanced navigation systems. Through fixed‐rate and minimum‐volume charter agreements, KNOT Offshore Partners LP seeks to provide stable cash flows and maintain high utilization across its fleet.

KNOT Offshore Partners LP is managed by KNOT Offshore GP AS, a wholly owned subsidiary of Knutsen NYK Offshore Tankers (KNOT), itself a joint venture between the Knutsen Group and Nippon Yusen Kaisha (NYK). The general partner oversees all commercial and technical management, including crewing, maintenance and compliance with international maritime standards. The board of directors and executive leadership draw on decades of combined experience in offshore shipping and project management to guide the partnership’s growth strategy.

Since its initial public offering in 2013, KNOT Offshore Partners LP has focused on selective fleet expansion and strategic fleet renewal to enhance operational efficiency and environmental performance. The partnership continues to explore opportunities for growth through additional long‐term charters and potential acquisitions of modern shuttle tankers. By leveraging its affiliation with established industry players, KNOT Offshore Partners LP aims to maintain a leading position in the global shuttle tanker segment.

KNOT Offshore Partners Q3 2024 Earnings Call Transcript

Key Takeaways

• Q3 results included $76.3 M in revenues, $17.2 M operating income, a 3.8% net loss and $45.1 M Adjusted EBITDA, while ending the quarter with $77 M in available liquidity.
• The partnership holds $980 M of contracted revenue at quarter end, averaging 2.8 years in duration plus 2.4 years of charterer options, amid a projected shuttle tanker capacity shortage and 11 new builds on order.
• A strategic swap of Down Cisne for Tuviknuten added seven years of fixed future charter revenue and expanded the fleet’s contract pipeline without requiring new funding.
• Debt obligations include $96 M in installments due over the next 12 months and two revolving credit facilities maturing in 2025, following increased current liabilities from the Tuva acquisition.

Presentation

[Operator]

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 Breaker, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. 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.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Thank you, Breaker, 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 two, 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.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

For further information, please consult our SEC filings, especially in relation to our annual and quarterly results. Today's presentation also includes certain non-GAAP measures, and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures. On slide three, we have the financial and operational headlines for Q3. Revenues were $76.3 million, operating income $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 equity, made up of $67 million in cash and cash equivalents, +$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 $2.60 per common unit, which was paid in early November.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Onto slide four, 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 shuttle tankers. We see around 11 new builds on order, including for our sponsor, Knutsen NYK, and we expect to see further new build orders placed in order to service the large new production volumes coming online in the years ahead. A measured amount of new shuttle tanker ordering is unavoidable and, in fact, necessary, as a shortage of shuttle 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. Charter extension options are additional to this, an average of further 2.4 years.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Our pattern of cash generation and liquidity balance is sufficient for our operations and the significant payout 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 so is operating commercially while we seek shuttle tanker deployment. On slide five, a number of developments in Q3 were announced already on the previous earnings call, including charter extensions for Tordis Knutsen and Lena Knutsen. The most important development in Q3 is on slide six, showing the swap of Dan Cisne for Tuva Knutsen. Tuva brought seven years of fixed or guaranteed future charter revenue, and this is a significant step in fleet and pipeline growth without the need for new funding.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

On slide seven, our most recent developments include the Ingrid Knutsen beginning her charter with Eni in October for two years, +2 options each of one year. Signature of a charter for the Hilda Knutsen for one year, fixed, commencing March 2025. Commencement of the Torill Knutsen's time charter via Eni for three years, fixed, +3 options each of one year. Exercise by Repsol of their one-year option on Carmen Knutsen, commencing Q1 2025, and some short-term deployments for the Dan Sabia on conventional tanker work. Onto slide eight, you can see the consistency of our revenues over the quarters and years. This consistency applies also to our operating income when the effect of vessel impairments is removed. Slide nine similarly reflects the consistency of our Adjusted EBITDA, and you can find the definition of this non-GAAP measure in the appendix.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

On slide ten, 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 completion of the Tuva acquisition on the 3rd 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 one, the first of our revolving credit facilities is due to mature in August 2025, and on line two, around half of the loan secured by Tove Knutsen and Synnøve Knutsen matures in September 2025. The remainder of that facility matures in October 2025, and the second revolver matures in November 2025.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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 30th of September. 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 30th of September. At present, Dan Sabia is the only vessel free of debt, and we do not have any plans to incur additional borrowing secured by Dan Sabia until we have better visibility on her future employment.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

$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 sponsor's 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 at least five years in length. At present, five existing vessels and five under construction fall into this category.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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. 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 have 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 pages 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.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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 new build contracts are for our sponsor, Knutsen NYK, and are due for delivery over 2026 and 2027. We would expect to see further new build orders placed in order to service the large new production volumes coming online in the years ahead, and a material shortage of shuttle tanker capacity remains projected in the coming years. In a 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 pre-salt, continues to outpace the overall market and take market share. On slide 17, we provide information relevant to our U.S. unit holders, in particular those seeking a Form 1099.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Those holding units via their 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. I'll finish with slide 19, recapping our financial and operational performance in Q3 2024 and 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.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

We're delighted to have taken the growth step of swapping Dan Cisne 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 Breaker for any questions.

[Operator]

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star then two. And as a reminder, when speaking, please ensure your line is unmuted locally. We will pause here briefly while questions are registered. We have the first question on the line from Liam Burke with B. Riley. Please go ahead.

[Liam Burke, Analyst at B. Riley Securities]

Thank you. Hi, Derek. How are you?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Hi, Liam. Good, thank you. And you?

[Liam Burke, Analyst at B. Riley Securities]

I'm fine, thank you. Your OpEx jumped about $2 million sequentially. How much of that was related to the Torill repair, or if any?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Pretty limited amount. Well under half of that amount, off the top of my head.

[Liam Burke, Analyst at B. Riley Securities]

Okay.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Probably a quarter of what was most.

[Liam Burke, Analyst at B. Riley Securities]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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 correspond with that and reduce the effect of the net cost to us.

[Liam Burke, Analyst at B. Riley Securities]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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

[Liam Burke, Analyst at B. Riley Securities]

No, all of them, or just a sense as to actually how they've gone?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

The rates reflect the market conditions at the time they were contracted. So on Ingrid, I don't have. I'm just looking at them in order here on page seven. On Ingrid, I don't have the signature date in front of me, but 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.

[Liam Burke, Analyst at B. Riley Securities]

Great. Thank you, Derek.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Thank you.

[Operator]

Your next question comes from Jim Altschul with, I apologize. We now have.

[Fredrik Dybwad, Analyst at Fearnley Securities]

Hello, Jim.

[Operator]

The line should be open.

[Operator]

Hello. Hello, Jim. I can hear you. Yes, please go ahead.

[Jim Altschul, Analyst at Aviation Advisors]

Good afternoon. Thanks for taking my call. A couple of things. First of all, in response to the previous question, you were talking about how a couple of the new charters were made at current market conditions. Does that mean that the current market conditions are somewhat lower than they would have been a couple of years ago? Am I correct in thinking that?

[Liam Burke, Analyst at B. Riley Securities]

It's the other way around.

[Jim Altschul, Analyst at Aviation Advisors]

Oh.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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

[Jim Altschul, Analyst at Aviation Advisors]

Oh, good. And with regard to the operating expenses, because again, in your answer to the previous question, you said that part of it relates to this repair, and you're expecting to get 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?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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

[Jim Altschul, Analyst at Aviation Advisors]

Understood. Thank you very much.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Great. Thanks, Jim.

[Operator]

We now have Poe Fratt with Alliance Global Partners.

[Poe Fratt, Analyst at Alliance Global Partners]

Great. Thank you.

[Poe Fratt, Analyst at Alliance Global Partners]

Good afternoon. Good afternoon, Derek.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Hello, Poe.

[Poe Fratt, Analyst at Alliance Global Partners]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Okay. Thank you. I'm sorry about that. It was approved for publication, so yeah.

[Poe Fratt, Analyst at Alliance Global Partners]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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.

[Poe Fratt, Analyst at Alliance Global Partners]

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?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

We haven't done that. Well, 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. We're reporting the quarter when we receive it, and we expect that to be the fourth quarter.

[Poe Fratt, Analyst at Alliance Global Partners]

But essentially, it's the differential between what the time charter contracted rate was when it was impaired operationally. It was still operating, but it wasn't at full capacity, right? So it's just the differential for that. I think it was the 60-day period.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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.

[Poe Fratt, Analyst at Alliance Global Partners]

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 timeframe we should also be expecting those to be if they will be renewed within?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

We certainly expect to seek to renew them. That discussion with our lenders would normally be over the course of the first half next year. And we would 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 due that 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.

[Poe Fratt, Analyst at Alliance Global Partners]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yeah. Those are the likely dates of our earnings releases, so we'd expect to include news within that. Renewals of those will not be material enough to warrant a separate announcement, I expect.

[Poe Fratt, Analyst at Alliance Global Partners]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yeah. I don't think we can do that. 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.

[Poe Fratt, Analyst at Alliance Global Partners]

And then to talk about that, how many actual down days were there during the quarter, Derek? In other words, what was your operating days ex the idle days or the repair days?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yeah. 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 a call for putting into a model, I'm afraid.

[Poe Fratt, Analyst at Alliance Global Partners]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

That will be part of the increase in the OpEx.

[Poe Fratt, Analyst at Alliance Global Partners]

Okay. Great. Thanks for your help.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Great. Thanks, Po.

[Operator]

We now have Pavel Oliva with Rock Hill Global.

[Pavel Oliva, Analyst at Rockhill Global]

Hi. Good afternoon, Derek. 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 of some more specific and some sort of bigger picture. On the more specific side, the Dan Sabia's, if you look on the map, they're going to Panama on a conventional voyage. Is there a thought still to do a swap with the similar to the Dan Cisne to do a dropdown? Or Panama is halfway to Brazil, or there are 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.

[Pavel Oliva, Analyst at Rockhill Global]

Can you maybe walk us through your thinking on the Dan Sabia?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yes. So we are marketing her 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 her directly. She is, as you say, rather smaller than is preferred in Brazil. So despite the high current day rates, it's still difficult to get her deployed. And in fact, that's the reason she left Brazil in the first place once that charter had come 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. It needs to be commercially fitting for both parties. It would be reviewed by our independent Conflicts Committee.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

So the potential is there. I guess the commercial thing to be aware of a little bit is that by her sister vessel, Dan Cisne, going to 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's there. So the concept of a dropdown 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.

[Pavel Oliva, Analyst at Rockhill Global]

Understood. That makes a lot of sense because the legal work should be pretty similar to the Dan 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 should be starting any day now. What's your projection or expectation on the North Sea side, especially since there are no new builds?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yeah. 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 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.

[Pavel Oliva, Analyst at Rockhill Global]

Understood. Okay. Can I ask a sort of broader and bigger picture question? And that is, I have been in 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 so far +220. You guys are refinancing everything immediately. Zero problems with any refinancing or anything like that. Knock on wood, but you have a very stable true ownership as well as track record in financing. So your 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 has worked and how you have improved the performance with the share price.

[Pavel Oliva, Analyst at Rockhill Global]

There has been a good pickup in the cash available and the free cash flow even with the repayments. Can you give us a color a little bit on the 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.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yes. I do understand all of what you've set out there, and I do appreciate it. The experience that we've had over the last, well, it's 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. The 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 unit holders. 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.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

We need to continue reviewing what's visible as our forward pipeline. The partnership has always grown through dropdowns, and I appreciate that the swaps are a very efficient and strategically very useful way of doing it. There's only one further opportunity for a swap coming up. As I say, growth in the past has always been through the dropdown schedule, of which there are five candidates available on the water at the moment. What the directors are going to be doing is looking at their own capital allocation, considering which is the better route to be taking, whether it's more distribution increase or a combination of the two.

[Pavel Oliva, Analyst at Rockhill Global]

Just pointing out that this is the smallest ship. We're one out of 18 now, and we have been waiting for a long time. It would be helpful if the board of directors and the 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. 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. You have an opportunity with the declaration of dividend in January to kind of send a signal that you care about shareholders as well.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yes. Thank you. I do understand that. And the directors are aware of that too. Thanks. Thanks, Pavel.

[Pavel Oliva, Analyst at Rockhill Global]

Thank you, guys. And great quarter. And you guys have done an incredible job on all different 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're there for them as well. Thank you.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yes. Thank you.

[Operator]

Thank you. We now have Climent Molins with Value Investor's Edge on the line.

[Climent Molins, Analyst at Value Investor's Edge]

Hi. Good afternoon. Thank you for taking my questions. Most has already been covered, but could you talk a bit 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 ratio of hedged versus unhedged debt more or less constant, or are you willing to lower it a bit given the higher interest rate environment?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Thank you for the question. We certainly expect to bear 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. We aren't going to be swapping where we think that the rates are too high to do that.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

There's no point economically in doing that, so we don't expect to. 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.

[Climent Molins, Analyst at Value Investor's Edge]

All right. That's helpful. Thank you for taking my questions.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Thanks.

[Operator]

Thank you. We have a follow-up question from Jim Altschul with Aviation Advisory Service. Please go ahead.

[Jim Altschul, Analyst at Aviation Advisors]

This isn't really a question. It's more of a comment. I'm just following up on the previous comment about the rewarding of shareholders. Obviously, we'd all like to see an increase in both dividends and the stock price, but I don't have any specific numbers in mind. But I would urge you to continue to look at all the decisions with a conservative bank. I grew up in the airline industry, and this is a different kettle of fish, but no pun intended. I looked at all the airlines that went bankrupt after buying back stock, even though they were heavily leveraged and much more heavily leveraged than you are. But part of shareholder value is preserving the value for the long term.

[Jim Altschul, Analyst at Aviation Advisors]

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.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Thank you, Jim. Thanks for your input.

[Operator]

Thank you. I can confirm we currently have no further questions, but it's star followed by one if you do wish to ask any further questions. I can confirm we now have a question from Fredrik Dybwad with Fearnley Securities.

[Fredrik Dybwad, Analyst at Fearnley Securities]

Hey, Derek. Congratulations on doing a great job with the backlog of the company. Just then, Dan Sabia left. He did the option extension with Knutsen. And then you have an upcoming firm period on Raquel, which expires closer to the summer. Could you give more color on timing and, of course, timing-wise, when you expect an option extension to be called?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

On the Raquel?

[Fredrik Dybwad, Analyst at Fearnley Securities]

Yes.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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 because it's a charter option, we generally don't have much influence over the timing.

[Fredrik Dybwad, Analyst at Fearnley Securities]

Okay. Thanks. And now with Hilda getting a contract from March, it will exit the Knutsen pool. Won't that make it more attractive to sell Dan Sabia up to sponsor and call it in the pool replacing Hilda with Sabia?

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Yes. That certainly helps the demand-supply dynamics. Yeah.

[Fredrik Dybwad, Analyst at Fearnley Securities]

Yeah. Cool.

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

Okay. Thanks, Fredrik.

[Fredrik Dybwad, Analyst at Fearnley Securities]

Thanks.

[Operator]

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

[Derek Lowe, CEO and CFO at KNOT Offshore Partners]

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

Participants

Executives

• Derek Lowe, CEO and CFO

Analysts

• Fredrik Dybwad, Analyst at Fearnley Securities
• Jim Altschul, Analyst at Aviation Advisors
• Climent Molins, Analyst at Value Investor's Edge
• Poe Fratt, Analyst at Alliance Global Partners
• Liam Burke, Analyst at B. Riley Securities
• Pavel Oliva, Analyst at Rockhill Global