KNOT Offshore Partners LP (KNOP) Earnings Call Transcript & Summary

Hello, and welcome to today's KNOT Fourth Quarter 2022 Earnings Results Conference Call. My name is Bailey, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Gary Chapman, CEO and CFO. Gary, please go ahead.

Thank you, and welcome to our fourth quarter 2022 earnings call. The earnings release and this presentation are available on our website at knotoffshorepartners.com if you want to view them. Slide 2 gives guidance on the inclusion of forward-looking statements in today's presentation, which are made in good faith, but which contain risks and uncertainties, meaning that actual results may be materially different. The partnership does not have or undertake a duty to update any such forward-looking statements. And for further information, please consult our annual and quarterly SEC filings. Today's presentation also includes certain non-U.S. GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures. On Slides 3 and 4 are highlights from the fourth quarter 2022 and subsequent. We announced a cash distribution of $0.026 per common units under a 1099 structure, which although reduced, was the 39th consecutive distribution overall since the partnership first listed in 2013. Our fleet in the fourth quarter operated with 96.1% utilization for scheduled operations and 94.9% utilization taking into account the scheduled drydocking of the Carmen Knutsen. Since we last reported, we've been busy. On November 29, 2022, Repsol Sinopec, the charterer of the Carmen Knutsen, confirmed its option to extend the existing time charter of the vessel by 1 further year. The vessel is now fixed until January 2024, with Repsol Sinopec holding options to extend the time charter by 2 further 1-year periods. And since the end of the fourth quarter, we have signed 6 new contracts or extensions, including a new 10-month contract with Altera for the Ingrid Knutsen, contract extension to the Tordis Knutsen and the Lena Knutsen, a new contract with our sponsor, Knutsen NYK for the Bodil Knutsen, the Hilda Knutsen and the Torill Knutsen. The 3 contracts with our sponsor were approved by the partnerships independent Conflicts Committee and provide a level of certainty to the partnership. And in respect to the Bodil Knutsen and the Ingrid Knutsen, these vessels are now contracted to at least fourth quarter of 2025 and 2026, respectively. In addition, during the fourth quarter or -- since 3 of our vessels, the Windsor Knutsen, the Torill Knutsen and the Ingrid Knutsen have operated for at least some time in the spot market, either performing conventional tanker voyages or offshore loading voyages, and each has been able to generate positive contribution from those activities. The Windsor Knutsen was also successfully delivered to Shell on January 11, 2023, commencing on a fixed 1-year charter, with Shell also having option to extend the charter by 1 further year. And then finally, we have agreed commercial terms for a new multiyear time charter contract for each of the Fortaleza Knutsen and Recife Knutsen with Transpetro to commence directly upon expiration of the existing bareboat charters, and we are now awaiting the charterer's management approval, which we anticipate will follow shortly. The increased market activity in our main market Brazil continued in the fourth quarter, and to date, and we expect this will persist based on current market parameters and conditions. The North Sea time charter market where currently 4 of our 18 vessels operate, remain subdued, taking longer to return to the predicted higher levels of oil production and shuttle tanker demand. However, we have secured a level of income for all of these 4 vessels in 2023, with the Bodil Knutsen and the Ingrid Knutsen secured until the fourth quarter 2025 and 2026, respectively, as I mentioned. At December 31, 2022, the partnership had $47.6 million in available liquidity, and the fleet had an average age of 8.7 years, with each vessel having an estimated useful life of 23 years. Slides 5 through 7 are our last summary of financial results, and as usual, I will just mention a few points. On slide 5, our revenues were strong in the fourth quarter, and indeed, there may be over $1 million more in loss of hire insurance to come, resulting from insurance claims for the Windsor Knutsen and the Synnove Knutsen. But under U.S. GAAP, we are not allowed to recognize in the accounts as we are not yet sure of the final amount. Operating expenses were lower in the fourth quarter, largely reflecting higher bunker fuel costs in connection with multiple vessel drydocks in both the second and third quarters, recalling that when time charter vessels are on-hire, fuel is a cost for our customers, but these vessels are off-hire during their drydock. Crew. Crew-related costs and logistics remain somewhat elevated compared to historic averages ever since the COVID-19 pandemic, and which level we believe is probably now the new normal as we move forward. As we have mentioned before, with the wide and geographically spread crew and supply base to draw upon, we believe we have some protection against the inflationary pressures that are occurring in many countries just now. However, this is something that we like all companies are keeping under close review. Higher LIBOR, higher utilization of our revolving facilities and having an 18th vessel from July 1 2022, have all increased interest expenses during 2022, and this trend continued in the fourth quarter. However, this has not had any impact and are continuing and schedule debt repayments made during the year. At December 31, 2022, the partnership's net exposure to floating interest rate fluctuations was $372.5 million or 35% of our total interest-bearing debt. In other words, 65% was fixed by interest rate swaps, were effectively fixed by our 2 sale and leaseback financings. On Slide 6, you can see our cash and cash equivalents balance at the end of the quarter of $47.6 million. And we are working on the upcoming debt refinancing, the first of which falls due in August 2023. And today, we have no reason to believe that they will not be refinanced on acceptable and similar terms and in good time prior to maturity. At present, we are not targeting to borrow more. That is, we do not currently plan to increase our leverage on any of the facilities. On slide 7, you can see the overall adjusted EBITDA result for the fourth quarter was very solid, and indeed it was the highest achieved in 2022. Slide 8 is an update on our contracted revenue and charter portfolio. As before, we have covered many of the contractual updates already, and they are also set out in the earnings release. So I won't repeat them here, other than to say that we are pleased with the progress we have been able to make in the fourth quarter of 2022 and subsequent. We are in a position where we have contract coverage for almost the whole of 2023 and several vessels are now under contract for much longer periods. It's still a work in progress, but we have certainly made progress. Including contracts and extensions signed since December 31, 2022, we have remaining forward contracted revenue of $715 million. This figure excludes options, but it does include contracts and extensions signed since December 31, 2022. And as we have agreed commercial terms, though we have not yet signed, we have included the anticipated charters on a bareboat basis for the Fortaleza Knutsen and Recife Knutsen. Of our firm charters, these have 2.1 years remaining on average, and charters had options to extend these charters by further 2.2 years on average. On Slide 9, we are showing our contract coverage in a different way. This slide is not saying that utilization in the first quarter of 2023 will be 100%, but rather than for this quarter, there are not further outstanding days still to be covered by a charter contract. This slide perhaps most clearly demonstrates where our work and focus is needed to restore forward visibility of earnings, to which we have very frequently referred to in the past. Then on slide 10, we have the potential dropdown vessels held by our sponsor KNOT, that the partnership may choose to purchase in the future. It remains the partnership's target to acquire these vessels from the sponsor when suitable opportunities arise. However, there is, of course, no guarantee that this will actually be possible. Slide 11, we have included a similar slide in previous presentations, but we believe this remains a very valuable source of independent information that speaks to the future of shuttle tanker demand in Brazil. Indeed, the number of new FPSOs to be deployed in Brazil through to 2027 equates to approximately 50% of the world's total FPSOs. And with a low carbon score and low marginal cost of oil production, we remain very positive with respect to the mid to long-term outlook here. We have also included a further slide in the appendix to this presentation to give some more detail. On Slide 12, as we've highlighted previously, despite the forecast growth in demand for shuttle tankers in the mid and long-term, only a very small number of new shuttle tanker orders have been placed for deliveries in 2023, 2024 and 2025, constituting approximately 8% of current shuttle tankers in service. Given this, and with the main shipyards having very limited or no capacity due to containership and LNG carrier orders through 2025, the total order book for shuttle tanker is likely to remain very muted. Hence, we continue to expect that the market will meaningfully tighten potentially to the point of shortage. There does remain some uncertainty around forecasting the specific timing of such market developments. New build shuttle tanker prices, indeed, the prices of any new ship today, remain elevated, up over 30% since the second half of 2021, as a result of tight shipyard capacity and higher input prices for steel and labor, all of which continues to help the competitiveness of our existing fleet. So in summary for this quarter, on Slide 13, we had good utilization of 96.1% scheduled operations. We paid a quarterly distribution for the 39th consecutive quarter, albeit at a reduced level, and we have commenced discussions with lenders for our upcoming refinancings. And since December 31, 2022, we have signed 6 new charters and extensions and agreed commercial terms for multiyear charters for 2 further vessels. Overall, we've made good progress and important progress towards restoring visibility of earnings and a sustainable path forward. And of course, there remains more to do. In the near term, as always, our focus is on safe operations, both on board and on shore and to take care of our crew, whilst maintaining our high standards and utilization statistics. Our other main focus is on, the refinancing is due in 2023, and we are well underway with these processes and hope to be in a position to have each closed well in advance of each maturity date. After the Carmen Knutsen drydock, which is already completed, there remains 4 further scheduled drydocks in 2023 to take place in Europe, and which we are planning for. 3 of these vessels are European based, so mobilization costs will be lower than for the Brazilian based vessels. And hopefully, it goes without saying that we are talking to our customers and proactively monitoring the market to ensure we can respond flexibly as charter or even spot opportunities arise. Then on Slide 14, we have just put this in here to promote our newly refreshed website. We've tried to add a little more background content on shuttle tankers, and we will try to continue to do so over time. And hopefully, people will find it useful and provide an improved experience. Thank you for listening and following this more formal part of the call. I'll be very happy to answer any questions.

[Operator Instructions] The first question today comes from the line of Liam Burke from B. Riley.

Gary, a lot of your discussion on the market is Brazil. You have 4 vessels in the North Sea. If I look at the new building schedule, that's all slated for Brazil. Could you either give us color on the North Sea market? Or does it make more sense to move capacity to Brazil?

Yes, the North Sea market, as we said, is a little bit soft, and it's still the overhang from the project delays that we've seen historically. In terms of moving vessels down to Brazil, we certainly haven't ruled that out. The timing is everything. And we would obviously also incur not insignificant costs in moving the vessels down to Brazil. So we would want to be really sure that if we did that, it would be a successful move. And so I come back to my first point that timing is everything there to do that. But it's certainly something we haven't ruled out.

Obviously, your contracting outlook looks a lot better with what you've done in the fourth quarter. Does that help? And you are in negotiations for your debt refinancing?

Yes, absolutely. We think we will be able to successfully close all of those anyway regardless. But of course, all of our institutional lenders clearly are interested in us being a successful business. But yes, of course, it helps. But nonetheless, we were confident that we would be able to get all of these refinancing we've done on a timely basis regardless. But yes, of course, it helps.

And that also includes the 2 revolvers that are up for renewal in -- later in the year?

That's correct. It includes those, yes.

Our next question today comes from the line of Richard Diamond from Castle wood.

I want to commend you on the progress you've made in -- since the beginning of the year. And I have a quick market question. Our charters where today you have [Technical Difficulty] market, if for example...

Sorry, Richard. Very quiet.

Okay. Can you hear me?

That's much good. If you wouldn't mind starting again.

Okay. One, I want to commend you on making a lot of progress. It's not easy. Hats off. Secondly, are charters aware that you have or we have significant choices in the marketplace? If you were a conventional tanker company, you could charter out your vessels and your stock price would likely double. I understand our strategy, I buy into it. I'm just wondering if the charters understand how vulnerable they are, if shuttle tankers leave for conventional shipping?

Yes, Richard, it's a great point and a great question. And absolutely, we're very much aware of that, and we make sure our customers are aware of that, if they're not already aware of it by their own analysis. I mean, certainly, our shuttle tankers are irreplaceable. So -- and there are only so many of them. And with the yards full up, supply isn't going to suddenly increase in the next few years. So I think it's something that we're continually impressed with our customers, that perhaps they need to take a close look at what's going to be available when they need it. So -- and I think we've seen a little bit of that with Equinor fixing some of the vessels, Windsor and Bodil -- for example, in the North Sea for Bodil. So I think there is a little bit of movement there. And I think we're increasingly seeing that certainly in Brazil, for sure.

[Operator Instructions] The next question today comes from the line of Poe Fratt from Alliance Global Partners.

I had a couple of questions more in the micro level. Do you have the mix of operating days broken out by charter versus what days worked in the spot or voyage market? And then what -- how many days were idle including the loss of hire days?

Yes, of course, we've got all of that data. I think we obviously try to strike a balance in what we publish in terms of giving people enough to understand the business and to make good decisions, but not opening ourselves up too much in terms of our competitors and our customers. But certainly, we can take a look at that information, if that going forward is something that is of interest to people, as to whether or not we can publish some of that data in future quarters.

Yes. I guess it's less interesting from a standpoint of -- moving forward, you're going to have all the ones that worked in the voyage or spot market in the fourth and first quarter to date. We'll be moving on to charters with Knutsen NYK. So I was just trying to get a flavor for what happened in the fourth and the first? And to that end, what -- can you highlight the decision to move those back to time charters with Knutsen NYK? And why you didn't stick with the tanker market because of -- as the previous questioner said that the tanker market looks pretty good, but nonetheless, you're moving that capacity back into the shuttle market?

Yes. So I think there's a few little points in there. But I think the Conflicts Committee had to look at it and what we've done is on an arm's length basis. And I think the overall point is that it provides us with the certainty, which I think is important for us at this point in time. Of course, we may look back with hindsight and realize that we could have perhaps got higher rates. We may look back and think we could -- we've done well. But I think what we're trying to do is understand that certainty is valuable to KNOT right now in terms of coverage and cash flow. And also, as we've suggested a little bit in the past as well, headline tanker rates don't necessarily easily translate into cash in the bank, and also our vessels are heavier and will require a discount on that rate when we do put them into the conventional market. So I think when you look at the objectives of what we're trying to do at this moment, I think the Board and the Conflicts Committee felt that this was the right balance to strike, where these are relatively short-term arrangements. And in particular, the Hilda Knutsen is essentially on a rolling contract. So we have 1 vessel that we can take away or take back from KNOT, and if the market was to suddenly spike for a period of time, we would have some exposure there if we wanted to take that. So I think, overall, the board just felt that the balance between certainty and what is achievable net, at the end of the day, this was the right balance for us to strike with the 1 vessel where we could move it around a little bit, if the market moved very, very positively.

And when you look at the 3 that are under the time charter with Knutsen NYK, are all of those rates the same across the 3 shale tankers? And then, was there any change from the month-to-month previous arrangement to the new arrangement where you're essentially creating some certainty into the end of the year?

Yes. The -- I think the process that we go through and the Board goes through and the Conflicts Committee goes through, looks at the rate. And I think it's an appropriate rate once that analysis has been done. And I think the process involves looking at what the market's doing what we think is achievable, and to a degree, information from KNOT side that we are able to access, which is not actually all of it, because, clearly, that's KNOT's business. But it's -- we're able to make an assessment on those charter rates such that the Conflicts Committee and the Board get comfortable that it's the fair arm's length rates under the circumstances. So I think clearly -- whilst I'm not answering your question in numbers terms, the charter rates across the vessels are similar. They're not wildly different. One isn't double the other, for example. They are very, very similar.

And then I should mention congratulations on closing some of the charter windows that you had. Can you just talk about the outlook for the other 2 bareboat charters in Brazil? One actually is -- I think the Dan Cisne is up in June. Can you just talk about on the Sabia -- the Dan Sabia, the Dan Cisne, sort of your outlook there, and your expectations will be also clipped to time charters versus bearboats? And then if you could also just expand on the difference, what we're going to see from the standpoint of your income statement impact on the change from bareboat to time charter?

Yes. Well, certainly, the Fortaleza, Recife and the Cisne, Sabia, they're 2 sets of 2 sister vessels. So it makes sense that Transpetro or Petrobras are talking to us in these 2 pairs, rather than all 4 vessels at once, for example. And the Fortaleza, Recife have obviously come up first, and that's why we're talking to them about those. I think normally we would much prefer that we have these contracts signed earlier, and the same with the Cisne, Sabia as well. But we obviously can only go at the speed of our customer, and they have a lot of internal arrangements and things to sort out themselves. I think at the moment, on the Cisne, Sabia, we will start those discussions with Petrobras, Transpetro, as soon as we finished with the Fortaleza and Recife, and that's our current expectation. So I'm afraid I'm not giving you too much information there, but we're essentially having to follow our customers lead.

And then when you look at sort of the time charters you have in place that started in January of 2024, can you just maybe give us a flavor for whether -- on the Tordis, the Lena, the Ingrid, as you move on to time charters with either Shell or Eni, what's the change? Is it up, down or neutral? Just directionally, if you give us an idea of sort of how those rates as they kick in, in early 2024 forward look relative to what the current environment is?

Yes. I mean, I think the rates on vessels are very much a factor of when those agreements were reached. And I think the net situation for 2024, for the vessels that you mentioned there, I haven't done the math, so you're going to have to, I'm afraid, just bear with me. But my expectation would be that the rates on a net basis would probably be neutral across all of those vessels.

And again, Gary, that's relative to what they're currently working at?

That's a level of detail that I'm going to struggle to answer on the phone. I think it's -- the rates, as I say, are a function of when the charters were agreed. And certainly, some of those charters were agreed a while ago. So I think we've got some positive numbers in there, and we've got some numbers that pass today, perhaps not so positive. And therefore, on a net basis, you're perhaps looking at a neutral figure for 2024, for those vessels today. But obviously, if we're fixing new charters for existing vessels, right now, those rates might be might be better given the outcome in the market in Brazil.

And should I read anything into the -- you're not talking about DCF or distributable cash flow. Do you have a figure for fourth quarter 2022? And is that something you're going to be talking about going forward? Or it gets in the context of if you're going to be talking about distributable cash flow in 2023, sort of what you would be using for your maintenance CapEx?

Yes. I think with the reduced distribution, we felt that it didn't make a lot of sense to continue with it. And so it's really not a metric we focused on at Q4. Clearly, it was helpful when people were monitoring the risk or the future outlook for the distribution. But I think we've reached the conclusion that perhaps it's not so helpful going forward, and that's really why we've not continued with it. We feel cash flow and liquidity is a clearer and more understandable position for our investors to look at.

So in the span of any possible change in the distribution, you would be looking more to traditional payout ratios on earnings as opposed to distributable cash flow. Is that fair to say? Or can you just sort of expand on that?

I think unfortunately, we cut the distribution, but it was only in January. So that's not at the moment something that we've focused on looking at. I'm not saying that the DCR and DCF would never come back or what else we might do in its place. But yes, I think right now, [ Poe ], I don't really have an answer to that.

Just if I could squeeze one last one in. There's a lot of turmoil -- There's obviously a lot of turmoil in the financial industry right now. Can you just talk about your interest rate hedges and when they roll? You have 65% of your debt currently hedged or fixed. And those don't last forever. Can you just give us a sort of an aging on the interest rate swaps and when they roll?

Yes, I don't have that information. We'll be putting out our 20-F very shortly and I suspect all of that detail will be in there. Is that something that you can wait for though?

Absolutely. No, I was just wondering, I mean, my -- as I recall, I think there's 3-year tenors or maybe they're remaining like 2.5, 3 years left on them as…

There's a real mixture. And typically, they follow the debt profiles typically, but not always. So -- but I think the best thing to do, if you're not urgently waiting for that information is to get our 20-F and I suspect you'll find it in there.

[Operator Instructions] The next question today comes from the line of [ Rohit Jindal from Quality Point ].

And Gary, my question was along the similar vein related to the interest expense, right? Do we find the hedging that we are doing by of way these derivatives, is that as effective as was anticipated? Clearly, the interest expense right now is our biggest exposure and kind of keeping on target with the profit. So I just wanted to understand if you had any other clarity beyond the additional detail you'd be providing later?

Yes. I mean, we've always taken the view throughout the history of this business that it's prudent to hedge a good proportion of our floating debt. And by taking on to effectively fixed term sale and leaseback transactions, that's also helped the percentage that is effectively fixed. I think we haven't entered into new swaps recently because of the rising interest rate environment. I think a lot of those forward pricing has already been factored in, and so the swaps were not so attractive. So I think we may see some of our coverage percentage wise for over time. But it's something we keep under constant review. If there is an opportunity and we feel it's the right thing to do, then there are opportunities for us to enter into new hedges. I think the Board mandates and gives management some leeway to -- so that we can act quickly on this within certain parameters, because obviously, if you wait too long, you kind of miss the boat. But it's something that we've constantly got under review. And like most of the companies, interest rate increases are not particularly welcome after low interest rates for so long. But we've only got 35% open today. So we're not in a bad position.

[Operator Instructions] There are no additional questions waiting at this time. So I'd like to pass the call back to Gary Chapman for any closing remarks. Please go ahead.

Yes. Thank you everybody for listening. And we'll hopefully be back in touch for our first quarter in May. Have a good day.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.