KNOT Offshore Partners Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 21, 2025

There are 8 speakers on the call.

Operator

Hello, and welcome, everyone, to the KNOT First Quarter twenty twenty five Earnings Call. My name is Maxine, and I'll be coordinating the call today. I will now hand over to Derek Lowe, Chief Executive Officer. Please go ahead.

Speaker 1

Thank you, Maxine, and good morning, ladies and gentlemen. My name is Derek Lowe, and I'm the Chief Executive and Chief Financial Officer of Connaught Offshore Partners. Welcome to the Partnership's earnings call for the first quarter of twenty twenty five. Our website is connaughtoffshorepartners.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.

Speaker 1

These are made in good faith and reflect the 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 US 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 Q1.

Speaker 1

Revenues were $84,000,000 operating income £23,400,000 and net income £7,600,000 Adjusted EBITDA was £52,200,000 We closed Q1 with $101,000,000 in available liquidity, made up of £67,000,000 in cash and cash equivalents, plus £34,000,000 in undrawn capacity on our credit facilities. We operated with 99.5% utilization, taking into account the start of two drydockings, which amounts to 96.9 utilization overall. Following the end of Q1, we declared a cash distribution of $0.26 per common unit, which was paid in early May. On to 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.

Speaker 1

In particular, we've seen Brazilian FPSOs delivering and starting up ahead of schedule with quite a few still to come. In the North Sea, the long awaited Johannesburg FPSO started production following shortly after the Penguins FPSO back in February. On the vessel supply front, we are seeing continued newbuild orders placed in order to service the large new production volumes coming online in the years ahead. This includes for our sponsor, Knutsen MYK, whose most recent order was placed in March. The most 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.

Speaker 1

As usual for the shuttle market, we believe that all known newbuild orders are backed by firm client charters, which minimizes or even eliminates a dynamic of speculation around anticipated supply into the global fleet in two to three years' time. The partnership remains financially resilient with a strong contracted revenue position of $854,000,000 at the end of Q1 on fixed contracts, which averaged two point three years in duration. Transfers options are additional to this and average a further four point seven years. With the markets having strengthened and given expectations for tightness in the years ahead, the economic rationale for exercising these options has been strengthening, and we increasingly expect these options to be taken up. And our pattern of cash generation and liquidity balance is sufficient for our operations and a significant pay down rate for our debt, which is in the region of $90,000,000 per year for installment payments.

Speaker 1

The debt from the Lever acquisition fits in with this repayment profile also. On Slide five, a number of developments in Q1 were announced already on the previous earnings call. Most notably, our near term chartering exposure was addressed by a swap with the Dan Sarbia for the Leverknutsen. Slide six contains additional details on that vessel swap, which is explained further in our Form 20 F filing as a subsequent event in our 2024 annual report. On Slide seven, our most recent developments include the Hilde Knutsen going on hire with Shell in late March on the one year fixed charter, the addition of one vessel to our potential drop down inventory, which is the newbuild order I mentioned earlier, And the current charter for Brazil Colitsum has also been extended to September when she'll be redelivered from PetroRio and then delivered out to Equinor.

Speaker 1

On to Slide eight, you can see consistent and growing revenues over the quarters and years along with improving profitability. Slide nine similarly reflects consistent and growing adjusted EBITDA, and you can find the definition of this non GAAP measure in the appendix. On Slide 10, we show the change in our balance sheet from the end of twenty twenty four to the 03/31/2025. The main point to note there is that even after the assumption of $73,000,000 of debt from the Lever acquisition, our long term debt balance rose by the much lower figure of $47,000,000 in that period, which reflects the contractual debt repayments we make in the area of 90,000,000 per year. The debt facilities can be seen on slide 11, which sets out the maturity profile.

Speaker 1

On line one, the first of our revolving credit facilities is due to mature in August 2025. And on line two, the loan secured by Toberknutsen and Sonovaknutsen matures over September and October 2025. The second revolver matures in November 2025. We typically seek to refinance such facilities on very comparable terms, and we have a good track record of refinancing success even in less favorable market environments. 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.

Speaker 1

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 maturity dates. Of note, $96,000,000 in current installments is due to be paid over the twelve months following 03/31/2025. Our typical pattern is for our vessels to provide security for our debt facilities, and that now applies to the whole fleet of 18 vessels. In addition to the 932,000,000 of secured debt, the two revolving credit facilities, totaling $50,000,000 of capacity, are unsecured. The maturity profile of these debts is set out graphically on slide 12.

Speaker 1

As you can see, repayments are spread out over the coming years, which include material balloons in each of 2025 and 2026. Slide 13 shows the contracted pipeline in chart format, reflecting the developments I set out earlier, as well as the fact that Raquel Knutsen's option period is the only material outstanding period until Q2 of twenty twenty six. While nothing is certain until it's formally in place, we are cautiously optimistic about securing that additional coverage in the current tight market, either as an extension or under a new charter. Similarly, slide 14 highlights an encouraging 96% of fixed charter coverage for the last three quarters of twenty twenty five. We currently have 75% of 2026 fixed as well, although the open percentage does rise materially over the course of the year, which demonstrates the need for our continuing commercial efforts.

Speaker 1

On slide 15, 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 secured a firm contract period at least five years in length. At present, existing vessels and six under construction fall into this category. There is no insurance 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. We continue to believe that key components of KNRP's strategy and value proposition are accretive investments in the fleet and a long term sustainable distribution.

Speaker 1

At present, we see a compelling opportunity to increase our revenue backlog and long term cash flow while lowering our average fleet age via dropdowns from KNOT. As such, we intend to pursue long term charter visibility and accretive dropdown supportive of long term cash flow generation. On Slide 16 to 18, 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. The primary takeaway from each of these slides is consistent.

Speaker 1

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. We believe that recent reports of additional vessel construction contracts and endorsement of the strong anticipated market conditions in the medium and longer term. Six outstanding newbuild contracts are for our sponsor, Colitsyn MYK, and are due for delivery over late twenty twenty five to early twenty twenty eight. We would not be surprised to see further newbuild orders placed in order to service the large new production volumes coming online in the years ahead. In a trend that also applies to oil production globally, you'll see that even in the years ahead when aggregate production growth slows down, deep offshore production, in this case, in the Brazilian pre salt, continues to outpace the overall market and take market share.

Speaker 1

On Slide 19, we provide information relevant to our U. S. Unitholders, in particular, seeking a Form ten ninety nine. Those holding units via their custodians or brokers should approach those parties directly. Those with directly registered holdings should contact our transfer agent, the Quinity Trust Company, whose details are shown there.

Speaker 1

On Slide 20, 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 21, recapping our financial and operational performance in Q1 twenty twenty five 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 particularly pleased to have filled the contracting schedule and taken a further growth step by swapping Dansalbia for Lieberknutsen.

Speaker 1

Our continued commercial focus remains on adding to our longer term charter visibility and the cash flows that provide us with the capacity for both accretive investment in the fleet and a long term sustainable distribution. And in the coming months, we will also be addressing the four refinancings which are coming due this year. In total, though, we are making good progress and 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 Maxine for any questions.

Operator

Thank Our first question today comes from Liam Burke from B. Riley Securities. Please go ahead, Liam. Your line is now open.

Speaker 2

Thank you. Hi, Derek. How are you today?

Speaker 1

Okay. Good. Thank you.

Speaker 2

Derek, the dropdowns, there are 11 potential dropdowns from the sponsor. Any sense of timing? You have growing liquidity and financial flexibility now.

Speaker 1

Surely. Each of those potential transactions is reviewed one by one on its own merits. Although there's no guarantee that any of them will come through, clearly, it's something that we would seek to invest in on the right terms. It's a function of when those vessels are offered to us and the board's decision at the time around the terms on which the vessels are offered. So we don't have any clear timing for you.

Speaker 1

And obviously, a number of the vessels are on the water and some are still new builds. So that would guide the timing on those as well.

Speaker 2

Okay. And then you've had a pretty strong history of successful refinancings of your balloon payments. Do you anticipate being able to refinance at similar or better terms?

Speaker 1

That's what we're working towards. We've got the same pattern of refinancing as we've had in the past in that we tend to start those conversations with our lenders quite early And so the negotiations go on a fairly slow pace because there's so much time in which to do that, and there's no real urgency as we go through from either side. Those conversations are underway. We don't have any negative indications so far, but until they're signed, of course, they're not set.

Speaker 2

Sure. Thank you, Derek.

Speaker 1

Thanks, Liam.

Operator

Thank you. Our next question comes from Jim Ouchel from Aviation Advisors. Please go ahead, Your line is now open.

Speaker 3

Good afternoon. Thanks for taking my call my question, rather. The question I have is just looking at the news release, it appears that the interest the various interest rate hedges you currently have in place will all run off by sometime next year. What will be the impact on the bottom line of the end of these interest rate hedges?

Speaker 1

Thanks, Jim, for your question. The average maturity is one and a half years. And so some of them will come off earlier than that and some will roll out later. But you're right to highlight that they do all expire. We put in new interest rate hedges on a rolling basis when we see terms that we think are suitable or attractive.

Speaker 1

So it's not as if the portfolio of interest rate swaps is static and will just expire. I don't have a direct comment on bottom line impact. Obviously, you can see with each quarter's results disclosures around what we receive as realized income from those derivatives and also mark to markets on the unrealized portions.

Speaker 3

Well, but if you're putting new ones in place, it's certainly not going to be at 2.5% or 2.8% the way you have now.

Speaker 1

That's right. If you reference the swap rate versus sofa over anywhere between two and five years, that will give you an indication of the type of fixings that are currently available in the market. Obviously, that's a market level that moves around fairly quickly. And but we're in a position to put new swaps in place when we see a rate that we like.

Speaker 3

Good. But related question though. Of the I don't have the balance sheet in front of me, but I believe you have $6 or $900 6 hundred dollars odd million in long term debt or is it $900 odd million? But what are at how much of the long term debt is covered by the some of these different interest rate swaps?

Speaker 1

So that's described in, I think it's about page four of the release directly under the debt maturity profile. So you asked how much long term debt. I mean the total debt burden we've got is nine forty eight million dollars as of the March. Dollars '9 '30 '2 million of that is in the secured debt facilities, and then the remainder is what we've drawn down on our RCS. And then in the paragraph below, I won't sort of read through that, but you can see how, or two paragraphs below, you can see how our interest rate swap portfolio covers that in various portions.

Speaker 1

I would also say that the sale and leaseback facilities we've got are on fixed rate. So we treat those as being part of our effectively fixed cost portfolio.

Speaker 3

Okay. Well, thank you very much.

Speaker 1

Great. Thank you, Jim.

Operator

Thank you. Our next question comes from Pavel Oliver from Rockhill Global. Please go ahead. Your line is now open.

Speaker 4

Hi, good morning. Thank you very much for another great quarter. And it sounds like that you guys are doing sort of $40,000,000 pre debt repayment in free cash flow and sort of mid to high twenties in free cash flow afterwards. But my my question is on the refinancing that you're doing this summer. You have several packages that, you know, are potentially to be refinanced.

Speaker 4

I think it's the $345,000,000 facility for Anna, Torres, Big Diz Brazil and Lena, Pinsen. Is that correct? Is that the one that's getting kind of refinanced?

Speaker 1

No. That's September year, 2026. So on the slide on slide 11, that's

Speaker 4

So it's the Windsor, Bozil, Carmen, Portalesa, Recife, and Ingrid. Right?

Speaker 1

No. That's 2028. So if you look at slide 11 in the presentation, you got them in time order. So the we've got two revolving credit facilities unsecured that are due over the course of August to November, and that's 50,000,000 of capacity in total. And then the secured loans of October and Sunnova, and that's over September and October, and they total, at that point, a hundred and 39,000,000.

Speaker 4

I see. I see. Okay. And those how old are those ships? I'm trying to figure out.

Speaker 4

Those are one of the new ones. Right?

Speaker 1

Yeah. I'm just thinking of the off the top of my head. They were delivered around 2022. Now you need to refer to our filings just to get that Yeah. Exactly right.

Speaker 1

Not the least was

Speaker 4

'21 and

Speaker 1

so Yeah. Beginning of twenty one and over middle of twenty two.

Speaker 4

And so can I ask you in terms of what kind of loan to value are these at this point? Because we have been making pretty aggressive repayment.

Speaker 1

Yeah. I don't have that figure off the top of my head. I'm not sure if we disclose vessel valuation vessel by vessel, which would help get through that calculation. But, yes, you're right that we've been paying down per Centimeters pretty heavily over that time.

Speaker 4

Can I ask you, when you're doing loan to values and know, trying to, determine how much you can borrow against the the different assets, do you do mark to market, or, is it, the accounting value? Or the banks?

Speaker 1

Sorry. Of the bank So when you yeah. Not sure I followed the exact line of the question.

Speaker 4

Well, if if I am the bank and I'm trying to determine the loan to value, do I use the mark to market, what I think the market value of the ship is, or do I use the accounting value of the ship?

Speaker 1

Generally, use the mark to market value. So it's a broker valuation. And in fact, the covenants and the loans

Speaker 4

Is it fair to say that given the tight market in Brazil, the value of the ships has gone up?

Speaker 1

They've held pretty level the last over the last the last time we did it. I wouldn't say it's necessarily gone up, but, obviously, we've got a range of vessel ages and and specifications and so on. But they held pretty well over the last time we did that, which was for for the year end '24. And you you'll see that in the the disclosure in the portfolio. So

Speaker 4

where where I'm getting at is I'm trying to understand, you know, you may be able to negotiate with the banks as you talk to them, you know, over the next few months, and my guess is you're already talking to them, obviously. If you can get, you know, further advance on these ships and basically get some cash through refinancing to speed up the dropdowns?

Speaker 1

Yes. If that's the number of your curiosity on that topic, then yes, we think there is potential to or there can be potential to increase proceeds with refinancing. And that would obviously generate liquidity, but additional debt on the balance sheet and additional amortization rates if we do that.

Speaker 4

Right. Right. And then my other question was about the two ships that will come to for renewal early next year. They are operating in Brazil. Right?

Speaker 4

And they're probably at fairly low rates. So is it is it fair to assume that that rate that you would recharter it on would be a lot higher than where it is now?

Speaker 1

I think I need to leave you to make your own assumptions about that. I mean, the because we don't comment on individual contract rates. And the key when you're looking at that is contracts are the levels are set at the time they're signed, and of course, that can be sometime in the past or in the case of extensions, the time those extensions are signed. And we make disclosures each quarter on when new contracts have come through. So I'd have to leave you to make your own assumptions about the rates that those vessels may be on at the moment and what current or future markets might be.

Speaker 4

So if I make an assumption that the rates in the past are a lot lower than they are right now, that that's probably a fair assumption, would you say?

Speaker 1

Well, as I say, I think I need to leave you to make your own assumptions on that. If you look at the timing at which any gift contract was signed and within the next within the subsequent quarter announced, that should give you a guide as to where you want to set those levels.

Speaker 4

And one question, you mentioned that the valuations of the ships per broker quotes have been relatively stable. Does that mean as in terms of valuations year on year given the age of the fleet or even with the increase in age of the ship, the value of the ship stayed about the same?

Speaker 1

It's it's the latter. It's just the absolute numbers that came through.

Speaker 4

Okay. So basically, an older ship hasn't really depreciated in value. It has remained about the same. One year older

Speaker 1

ship It was a comment on the fleet It was it was a comment on the fleet overall for the vessels, obviously, that were in in the fleet throughout the period.

Speaker 4

And if if, the rates, especially in Brazil, have, increased, which, it seems, you know, when we talk to the your customers, that's the case. Theoretically, that should also be reflected in the value of the ships. Correct?

Speaker 1

That will certainly be in the minds of the brokers as they're looking at them, along with, any other circumstances they think are relevant.

Speaker 4

And, like, the other circumstance would be that the new ships are, you know, 20 or a 40,000,000 depending Brazil and North Sea. Right? That seems sort of the new quotes. So also given that the new ships are more expensive, that would also increase the value of the used ships. Correct?

Speaker 1

It it should do. I mean, that's that's for the brokers themselves to comment on. But those those are some of the considerations they would have as they come up with each valuation.

Speaker 4

Understood. Okay. Okay. And how long does it take in general to drop down the ship drop down the ship?

Speaker 1

What? From start to finish of the transaction process, do mean? I would say that's two two to four months.

Speaker 4

And can you comment if you have started or have done any of those right now? Because you have 67,000,000 on your balance sheet. Right? And it sounds like you will be refinancing and potentially taking some cash out of the, you know, out of these borrowings that you're doing. And hopefully, you know, even the, revolving credit facility may may be extended, etcetera, you know, this may not be a bad time to drop down some of those ships.

Speaker 4

Right?

Speaker 1

We you may see that we announce, drop down transactions at the time that they're they're agreed on, and usually that's around the closing time. And that that's the pattern of our announcements, and that's the point at which those transactions become material and obviously, so we need to announce them then. And prior to that, we don't make any other comment.

Speaker 4

Last one or two, drop downs, how much, cash, or value? You know, you did the, swaps with, then Sabia and then Cisne. But even the one before, how much cash or value did you have to provide in order to swap in order to drop down those ships? If you can remind us.

Speaker 1

Sure. You've got I think it's page six in this presentation and a similar page in the I think it's gonna be the q two or q three presentation from last year.

Speaker 4

And also in the '20 F, but I just think for

Speaker 1

It's certainly in the filings, but if you want the headlines. So those two, obviously, as you've alluded to, they were vessel swaps rather than funded purchases of the new larger dropdown vessels. And valuation of the two dams, Sarbio and Cisner, was order of magnitude 30,000,000 Clearly, you need to look at the filings for the exact numbers and even the deal summaries have got the figure set out further. But that's the approximate valuation where the cash element of the consideration was very low by comparison. So sort of 1,000,000 in either direction.

Speaker 1

I think it was in one way for one of the transactions and the other way for the other. But the cash the cash element of those was negligible compared with the Negligible.

Speaker 4

But the value was about 30,000,000.

Speaker 1

Plus or minus, I think, the you can see on page six that the Sarbia sale price was 25 and 3 quarters. And for the Cisner, it was, I think, above that memory.

Speaker 4

So it's so the but the ships going forward would be probably slightly higher. Right? So you for the three or four ships that are ready to be dropped down at the moment, you probably need 30 or 35,000,000 per ship. Correct?

Speaker 1

Yeah. We don't have a particular comment on the exact terms of those. But being that bit newer and contracted that bit more recently, wouldn't be a surprise to see a slightly high number there for the equity component.

Speaker 4

Understood. And, you know, the latest drop down came in March. So the full impact of that, we're going to see only in the second quarter, right? And, again, that was an accretive transaction. So, on the margin, the cash flow free cash flow run rate should be slightly higher in the second quarter than in the first quarter.

Speaker 4

Would that be a fair statement?

Speaker 1

Yes, as it relates to that 01/2018 of the fleet. Yes.

Speaker 4

Okay. Understood. Okay. Well, thank you very much. Great quarter.

Speaker 4

Really appreciate it.

Speaker 1

Thank you, Pavel. Cheers.

Speaker 4

Cheers.

Operator

Thank you. Our next question comes from Robert Silvera. Please go ahead. Your line is now open.

Speaker 2

Hi. Good morning, and thank you for taking my call. I was a little late to the call, and I'm trying to understand the long term debt increased significantly, about $50,000,000 and the lease liabilities increased by about roughly $3,000,000 Could you give me a wraparound as to why that took place during this last quarter?

Speaker 1

Sure. The and if you listen to the replay in due course, you'll you'll get a couple of comments on that as well, but I'm happy to repeat them here. So the the vessel swap that we did in March involved us assuming $73,000,000 of debt as part of the transaction terms. But our long term debt balance over the quarter increased by much less than that, so increased by only 47,000,000. So yes, the long term debt has gone up.

Speaker 1

It's primarily transaction related. And the fact that there is that difference of is that 26,000,000, I think, demonstrates the debt pay down rate that we have in all of our facilities where we make amortization payments. Back on Slide 11, I just refer you to the I think it's the third column of figures that add up to $96,000,000 That's our current outlook for debt amortization in cash over the next year. And we put out that figure deliberately to show that the that's our debt service capacity as far as amortization is concerned and our ability to pay it back.

Speaker 2

Thank you. That involves what, one ship dropdown?

Speaker 1

The March transaction? Yes. That's right.

Speaker 2

Was one ship drop down, one, a single ship.

Speaker 1

It was a single ship drop down, but it was a vessel swap, actually. So we sold our Dan Salvia and we bought Lieberknutsen.

Speaker 2

Good. Okay. Well, thank you very much for taking my call and looks good. And hopefully in the future, the dividend can go back toward the old days when it was $0.51 a share. We'll talk to you later.

Speaker 2

Thank you.

Speaker 1

Great. Thanks, Robert. Thanks for your question.

Operator

Thank you. Our next question comes from Mario Akkelbaum from First New York. Please go ahead Mario. Your line is now open.

Speaker 5

Hi, I was on mute. Sorry, can you hear me now?

Speaker 1

Yes. I can. Thanks.

Speaker 5

Okay. Thank you for the space to ask questions. I had a if you could have a question about the Raquel with Repsol. That when is that charter actually supposed to finish or the option to renew? What if you could give me I can't see the the date.

Speaker 1

The the final end of the option is in 2030. But do you mean do you mean the current

Speaker 5

Yeah.

Speaker 1

Yeah. The the well, the current fixed period finishes around the June, and then the option runs through till the the same time in 2030.

Speaker 5

Okay. So you're you're one and a half month. And and how is you you if if that gets renewed by with reps, is there does that is there a little bit of an increase in the in in in the or should we could we expect an increase in the charter rate or the usually, at the signing, they have the option on the same charter rate? Or or or if you can't

Speaker 4

talk to

Speaker 5

me about this one, but in in general, what what should happen at at renewals?

Speaker 1

Yeah. I mean, you're right that we can't comment on individual charter rates, but it is generally the case that we have a small amount of escalation in option terms.

Speaker 5

And in general, the when you when you remove the does the the the the charter tell you one month in advance or usual or is this unusually late that you have not been, known to

Speaker 1

It's yeah. It's it's not unusually late, which you can imagine is is a little bit of a frustration. I think for any for any vessel owner, any operator in in in space, they'd prefer to have more notice. But that is that is common practice that the deadline is relatively close and that a lot of clients leave it quite late on to elect their to choose whether to exercise or not. I would say that simply on the basis of current market rates and the need for shuttle service, we are I would say we're not particularly nervous about the exercise of that.

Speaker 1

But the sooner that happens, clearly, happier we'll be.

Speaker 5

Okay. And then a second thank you for that. Then the second question I had is with regard to things that you can easily see when you compare the first quarter and the second quarter, when you look at the dropdown, I mean, at the sorry, dry dockings. How would you compare first quarter dry dockings to second quarter dry dockings?

Speaker 1

Well, there were two there there there are two that are, relatively, current, and, the vast majority of their work was after the start of the second quarter. We're clearly six weeks or so or seven weeks into the second quarter now, and that much of that work, fell in, April rather than in March. I realized on page 13, the the, the current time red line is quite it's hard to see exactly when that falls. That's designed to be now rather than the end of the quarter.

Speaker 5

Okay. So when you compare second quarter to first quarter, will you expect we have an additional shift, but we have some additional dry dockings. So those are the two puts and takes when you compare the cash flow.

Speaker 1

Yes, that's fair enough. Would that be fair?

Speaker 5

Yeah. Okay. And then with the Fortaleza and Receive, this shift to that you have that are coming up in 2026, Are you engaged already with other parties in discussions of potential different types business?

Speaker 1

Yeah. I mean, we mark maybe a generic comment, but we're marketing our open contract positions all the time. And I'm glad that the next material open positions are as far out in the future as they are now. That clearly wasn't the position that we had, a year ago or even six months ago. But, yes, we are marketing that all the time.

Speaker 5

And so given the the your your description of the market being tight, I imagine that you are in you're you're enjoying these negotiations of the open marketing positions in Brazil. Would that be fair in the sense that you're in a stronger position than you've been in quite a while?

Speaker 1

It's I think it's fair to say we are in a strong position now than we have been previously. But nonetheless, until they're signed, they're not signed.

Speaker 5

Okay. And then in terms of the North Sea, it's my understanding that the Cosworth is going to ramp up quite quickly, that they have these wells that they have drilled in advance and that it should go up to its max capacity like 200,000 barrels a day sometime in the mid year to third quarter. Would that be your sense?

Speaker 1

Yeah. We do expect it to be fairly quick, that's the public domain information or news news discussion information as well.

Speaker 5

And that should be increasing significantly the number of ships in the North Sea that are needed. Between those two, what would be what would be you think the increased demand for shuttle for shuttle tankers in general in that market?

Speaker 1

Yeah. I From the from the I think that is the number.

Speaker 5

But if you help us get, I mean,

Speaker 6

you know a

Speaker 5

lot better than I do.

Speaker 1

Yeah. I mean, I'd I'm reluctant to get I'm reluctant to guess, but what what I would say is, as you're aware, we've got four vessels in the North Sea. They're all contracted, which means that they're not available for contracting in the immediate term to soak up that extra demand. I would say the next vessel that is due for that that will be open is the Hilda, and she gets open again late March next year. But the what you described means that we are reasonably confident with that open position and looking to looking to contract this in due course.

Speaker 1

But we run a time charter model, as you're aware. So it's the operators in the spots or coer markets that will experience that change.

Speaker 5

Yes. No, but I the reason I you just chartered the you chartered your most recent time charter was for one year in the North Sea. So do you expect the conditions when you rechartered that to be significantly better than what they were when you chartered that before?

Speaker 1

There is a good chance of that. I mean, I I think the North Sea is ramping up more slowly than, the conditions we got in Brazil. But, yes, those conditions ought to be ought to be better when we re contract the Hilda.

Speaker 5

Oh, okay. So I'm just getting at the fact that there there's whatever is open in the next two years, you're a lot more confident about the the the likelihood of chartering it and the price than you've been in, let's say, the last twelve to twenty four months.

Speaker 1

Yes, that's fair comment. That's fair comment. Yes.

Speaker 5

We and today, if you annualize the first half if you annualize the first quarter, you're cash flowing somewhere between around $11 50 to $2 a share of free cash flow after debt repayment. And that'll soon go out If these things between the dropdowns and those additional increased harder rates, that will go up maybe to $2, 2 dollars 20, 2 dollars 50. And I understand that getting dropdowns is interesting, but how does that compare to the return on investment of spending some of the additional cash in buying back shares? I mean, seems to me that it's impossible for those dropdown economics to match the purchase of shares at this price, at the current market price.

Speaker 1

Yes. I mean, would say at moment, the Board's focus is on growth in the fleet, improving the capital value position of the partnership overall rather than

Speaker 5

So so the board believes that it should deploy capital at a WAC of seven to eight instead of buying shares at an IRR of 25, 30 percent, one hundred percent of the capital used by the firm. Is that the that's that's what you say is the board's appropriate decision. We allocate 120% of the capital because they're gonna maybe borrow more to do the dropdowns at 7% to 8% WACC, which is, I believe, what you must be buying the ships versus a 25% to 30% IRR on the shares. Do you think that's is that what the board thinks? Is that what you're saying?

Speaker 1

The the board is interested in the longer term interest Well,

Speaker 5

what is the long term loan? This this maintains the longer term. If you if your shares appreciate, you could use the shares to do more dropdowns as far as cash if they're valid correctly. This is definitely in in the long term interest of of the shares. What is the fiduciary duty of the of the board?

Speaker 5

Is it is it maximizing the shareholder value over the long term?

Speaker 1

It's the valuation of the partnership overall, and that's, if anything, is going to be reduced if some of the units are brought in rather than spent on expanding the fleet on appropriate terms.

Speaker 5

Is it overall or is it per share? Why would they care about the whole, the size of the pie rather than the pie per shareholder for the shareholders?

Speaker 1

Well, they they consider both in the decisions that they make and Well They they're they're of the feel the ability to buy back units as well. That's one of the options that's available to them, and, they judge between those.

Speaker 5

Well, I'm I'm I'm I appreciate that I'm putting you here on the spot, but the message is really to the board that they do have a fiduciary duty to everyone, and the return on investment on on doing the dropdowns with that money is is dramatically different to buy the units. And this, in my opinion, not in the best interest of all shareholders. At least some money allocated to buybacks. And I really appreciate you, taking my questions seriously. Thank you.

Speaker 1

And I'd I, I take the point you raised at the end, and we'll, raise it with with the board. I would point also to the rather low absolute amount of trading volume in the units. So any exercise in repurchasing is likely to suffer in its effectiveness from low trading volume?

Speaker 5

Well, it might raise the value of the shares and then one can use your shares for part of your dropdowns and increase the number of shares at a better price. So that is if there's a buyback, sometimes it increases the liquidity of the shares actually because people know that if they need to sell for some other reason, they can say there's a buyer out there.

Speaker 1

Sure. No, I understand those issues as well.

Speaker 5

Thank you. No, I appreciate it.

Speaker 1

Thanks, Mario. Cheers.

Speaker 5

Thank

Operator

you. Our next question comes from Clement Mullins, Bond Value Investor's Edge. Please go ahead. Your line is now open.

Speaker 7

Hi, good afternoon. Thank you for taking my questions. Most has already been covered, but I wanted to ask a question on the modeling side. Will TOEF's dry docking take place in Q3 or Q4?

Speaker 1

Hi, Clement. Thanks for your question.

Speaker 6

Tuvah

Speaker 1

is the moment I'm seeing that in actually in do you mean oh, you mean Tova? Sorry. We've got two vessels with similar names. Tova, it's, I think, straddling the end of q three and the start of q four.

Speaker 7

Perfect. Thank you. That's helpful. Over the past couple of years, we've seen a number of new build orders, including Saco's recent transactions. And I was wondering, could you talk a bit about the cost advantage of a shuttle tanker newbuild or modern asset relative to say a fifteen year old vessel?

Speaker 1

I think that's quite hard to comment on specifically. We've obviously got a fleet with a range of ages that cover the almost new through to a good fifteen plus years old. And you can see our operating expenditure rates as well. Think to we probably can't stress anything more refined than that as to the around the differences between different vessels.

Speaker 7

Right. But like is the eco component something meaningful in the shuttle tanker market? Or given the shortage distances, is it like a smaller factor?

Speaker 1

I believe it's less of a factor, but we as I say, we we prefer for commercial reasons not to comment on differences between individual vessel cost or revenue.

Speaker 7

Understand. Makes sense. All right. That's everything for me. Thank you for taking my questions.

Speaker 1

Okay. Thank you.

Operator

Thank you. Our next question comes from Hani Hasanain. Please go ahead. Your line is now open.

Speaker 6

Hello, Derek. How are you doing?

Speaker 1

Fine. Good. Thank you. And you?

Speaker 6

Wonderful. Thank you. Congratulations for an awesome, quarter. I'm looking at it right now with the increase in revenues to around, like, $84,000,000 annualized to $35,000,000 which is about like 50,000,000 to $60,000,000 in revenue above the previous years if we annualize it further. So this is great.

Speaker 6

But looking at the operating expenses, I'm curious, I have two questions. First one on the depreciation. Currently, it's at a rate of around 28.75%. When will that depreciation drop? I mean like if we're looking at a depreciation table that we have, we have older vessels and newer vessels.

Speaker 6

When will that when will we see that depreciation drop to, let's say, 20,000,000 a year a quarter?

Speaker 1

I don't have a direct answer on when it would drop to that to the as quickly down to 20. The depreciation is generally on a straight line basis, not down to zero, but down to a disposal value. So it's only when we start having vessels leave the fleet that you would start to see any impact on that. And in fact, you're more likely to have the introduction of new vessels. So the lever only has one month of depreciation in there, for example, but we'll have the full quarter's worth for the second quarter.

Speaker 1

It's the introduction of new vessels, if we do further dropdowns, it's likely to have a greater influence on that figure. So with a higher fleet value, which would come from acquisitions, you would actually expect to see that depreciation figure to go up, not down.

Speaker 6

Okay. I understand. So does depreciation, like, say, for example, for the vessels that we just acquired, are we putting the depreciation over a period of, ten years, fifteen years? Or do we put it to end of life, like, twenty five years? I mean, like, what what what what numbers what number of years do we use in our own calculations at this stage?

Speaker 1

We've got a we've got a useful life policy of twenty three years, and so we run it to that.

Speaker 6

Okay. Alright. So that answers my question here. Right. So with regards to, the loans that we have, especially the balloon payments, I can see that we have a hundred and 50 plus this year and 280 plus next year, and I'm sure that you're working on refinancing those.

Speaker 6

Are we gonna try to refinance them with a balloon payment at the end as well or, like, get, like, a three year finance with a balloon payment or a five year finance with a balloon payment? What are we I mean, like, I'm sure you're in the middle of negotiation. I'm not sure if you if you can divulge that or not, but what are you targeting at this stage?

Speaker 1

Well, it's it's typical to replace like for like. So if we keep with the same structure of debt, then it would be typical to replace a three year with another three year. But there's no there's no particular magic to that or no particular formula or rule about it. But we would we'd still expect to have a medium to long term debt facility with debt amortizations, which you can see some of on page 11, and then a lower balloon at the end of the next period. And that's been the pattern for these facilities since the vessels were purchased.

Speaker 6

Okay. Wonderful. Just kind of I think it's just a quick typo. On item number three on the long term borrowing, it says that we have an outstanding of €15,000,000 but there's a balloon payment, 25,000,000. So I

Speaker 3

think there's I think there's just a typo here.

Speaker 1

Yes. Thank you. Sorry. For the revolvers, we yes, the outstanding amount is what's currently drawn, and you're right, it's 15 on in that last column. Thank you.

Speaker 6

Okay. All My last question is actually about dividends. Currently, we're at €0.26 per share. And I can see that we have a little bit of net profits there. Is there any discussion with the Board with regards to incremental increase in the dividends?

Speaker 6

I mean, like, raising it up to, like, $0.01 5 or €0.20 Or are we waiting until we can go back to the 52¢ that we used to get before?

Speaker 1

Well, they're not waiting for particular level targets, if you like, as you described at the end there. What I would refer you to is, the, board's thinking in the outlook section of the earnings release. So the last couple of paragraphs of that, cover the board's considerations, around how they want to deploy capital.

Speaker 6

I understand that's how they want to deploy capital. But also as shareholders, I think we're looking at a little bit better payouts, maybe not back to the full. When I mean, like, if we even get like a 20% and, like, in the capital expenditure, I guess, there's something for the board to discuss. If the capital expenditure just use 80% to what you think we need, which I agree with, I don't have a problem with, and 20% gets distributed versus what we're getting at this stage. That's my point of view to be discussed, I guess, with the board at a later stage.

Speaker 1

Yeah.

Speaker 6

Well, those are my questions. Appreciate it very much, Derek.

Speaker 1

Thanks. Thank you, Henry.

Speaker 6

Thank you so much. You have a great day.

Speaker 1

Bye. And you, bye bye.

Operator

Thank you. That does conclude our Q and A session for today. So I'll hand back over to Derek for closing remarks.

Speaker 1

Thanks, Maxine. And thank you all again for joining this earnings call for Knot Offshore Partners first quarter in twenty twenty five. And I look forward to speaking with you again following the second quarter results and also at the Marine Money Conference in New York over the June.

Operator

Thank you. This does conclude today's call. Thank you for joining. You may now disconnect your lines.

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Key Takeaways

  • Connaught reported a strong Q1 with $84 million in revenues, $23.4 million operating income, $7.6 million net income and $52.2 million Adjusted EBITDA, while closing the quarter with $101 million liquidity and 99.5% fleet utilization.
  • The market outlook remains robust as new FPSO start-ups in Brazil and the North Sea boost shuttle-tanker demand amid a forecasted capacity shortage, with most newbuild orders backed by firm charters to limit oversupply risk.
  • Connaught’s contracted revenue backlog stands at $854 million on fixed contracts averaging 2.3 years, with transfer options adding another 4.7 years—management increasingly expects these options to be exercised.
  • The partnership maintains financial resilience with $948 million of long-term debt (including $96 million annual amortization), four facilities maturing in H2 2025 and a successful refinancing track record even in challenging markets.
  • Q1 strategic moves included a vessel swap to address near-term charter exposure, a one-year charter for the Hilde Knutsen with Shell, an extension of the Brazil Colitsum charter and the addition of a newbuild to its dropdown inventory.
A.I. generated. May contain errors.
Earnings Conference Call
KNOT Offshore Partners Q1 2025
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