This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
KNOT Offshore Partners LP Common Units representing Limited Partner Interests
Q2 2021 Earnings Conference Call
8/26/2021
spk00: Today and welcome to the KNOP second quarter 2021 earnings results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone song. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Gary Chapman, CEO. Please go ahead.
spk04: Thank you and welcome everybody to our second quarter earnings call for 2021. As always, our earnings released in this presentation are also available on our website at notoffshorepartners.com. I have to remind you that our call includes mention of certain non-US GAAP measures of distributable cash flow and adjusted EBITDA, although our earnings release does include a reconciliation of those non-GAAP measures to the most directly comparable GAAP measures. This presentation and other publicly available information contain forward-looking statements, and as such, statements made during today's call are subject to risks and uncertainties. Actual events and results can materially differ from those statements, and the partnership does not have or undertake a duty to update any forward-looking statements. Please refer to slide two and our annual and quarterly SEC filings for further details. Straight on to slide three, we're reporting another strong set of quarterly results. Total revenues in the second quarter were $70.9 million, an operating loss of $1.2 million, and a net loss of $10.9 million. The losses arise as a result of recording a non-cash write-down in the carrying value of the Windsor Knudsen. Adjusted EBITDA was $52.1 million, Distributable cash flow was 24.0 million, and our coverage ratio was 1.32. We announced our 24th consecutive quarterly distribution of 52 cents per common unit. Available liquidity, 30 June, was $101.6 million, which included cash and cash equivalents of 51.6 million, and the average margin paid on our debt in the quarter was 2.04%. Scheduled fleet utilization was 96.9% in the second quarter, including the winds of commencing for the time the vessel received insurance proceeds equivalent to higher during the quarter. And at the end of the quarter, the partnership had 642 million of remaining firm contracted forward revenue, excluding options held by our customers. We're very pleased to be able to announce that we have entered into a new senior secured credit facility to refinance the existing term loans related to the Tordes, Figvis, Lena, Anna and the Brazil Knutson vessels. The term loans for these vessels otherwise expired between November 21 and July 22. The new facility has a balloon payment of 219 million at maturity in September 2026 and bears interest at LIBOR plus a margin of 2.05%. and we expect to close the new credit facility in September 2021, next month. In the quarter, we also extended our $25 million unsecured revolving credit facility with NTT Finance Corporation out to August 2023 on the same terms, and as a result of these refinancings, we now have no further significant refinance due until the third quarter of 2023. The partnership has also entered into a sales agreement with B Reilly Securities for an ATM program whereby the partnership may offer and sell up to $100 million of common units from time to time. Such a program is a common tool that many companies have in place and which for KNOP gives extra flexibility and another option under which we may raise growth capital for an accretive acquisition in the future. For more details, I'd refer you to the relevant documents that were filed today. Slide four. In respect to the Windsor Knutson, you may recall we explained previously that the vessel was found to have a crack in her main engine block back in December 2020. The vessel was repaired and returned to service on 10th of June, and we can confirm that the partnership's insurance is covering the cost of repairs and provided loss of higher income at approximately the level earned during the vessel's prior long-term charter, except in the deductibles under the policy shown on the slide here. As we announced last quarter, we have agreed on the commercial terms for a one-year fixed-time charter contract for the Windsor-Connaughton, with owner's option to substitute and with the charter's options to extend the charter by one one-year period and then one six-month period, with a major oil company, and we expect this will commence in September 2021. As mentioned earlier, we recorded a non-cash write-down in respect to the Windsor-Connaughton of £29.4 million 30 June. to bring the carrying value of the vessel down to its fair value in our accounts. This principally arose as a result of the vessel's unusually high carrying value, which in turn is a result of it being the sum of both the purchase cost and the cost of conversion of the vessel to a shuttle tanker from a conventional tanker. There are no other similar converted vessels in the partnerships fleet, and therefore we don't anticipate this particular issue recurring. In May 2021, the partnership agreed a new time charter contract for the vessel with a major oil company to commence in the fourth quarter of 2023 or the first quarter of 2024 for a fixed period of either one year or two years. And in either case with options to extend the charter by two further one year periods. Also in May 2021, as we reported last quarter, the partnership reached an agreement with the VOC Industry Cooperation Norwegian sector or LOCIC Norway, whereby VOCIC Norway agreed to fund loss of fire at a reduced rate during and cost related to the installation of a VAC or volatile organic compound recovery plant on Bodal Knutson. The work is expected to be carried out in the third or fourth quarter of 2021 and take around one month. This will be the second material improvement made to the vessel in 2021 after the addition of the ballast water treatment system. The VOC system will significantly improve the operational attractiveness of the vessel in the North Sea and Norwegian sectors going forward, as well as virtually eliminate the non-methane VOC released into the atmosphere arising from the vessel's cargo. We're continuing to market the vessel for new time charter employment, but in the meantime, to provide support to the partnership, our sponsor, KNAC, has agreed to time charter the Bodal Knutson initially on a three-month basis, and then on a rolling one-month basis, possibly for the remainder of 2021. Slide 5. During July 2021, the Vigdisk went off higher for 17 days due to an outbreak of COVID-19 on board. Thankfully, this was quickly contained and with no serious ill health caused to any of our crew and persons affected. The Tordisk Knutson is due to undergo her first planned five-year special survey dry docking in the fourth quarter of 2021, and this is expected to be carried out in Europe. The vessel may be off higher for approximately 50 to 55 days, including mobilisation to and from Europe, and this is expected to have a scheduled impact on our fourth quarter earnings. Then finally, whilst not impacting on the cash flow of the partnership, to reflect on prevailing longer-term market trends, we changed the accounting useful life estimate of our fleet from 25 years to 23 years, with effect from 1 July this year. The non-cash accounting depreciation charge in all future quarters, beginning in the third quarter of 2021, will therefore increase. But as this change does not prevent our vessels from being utilised beyond 23 years, we do not anticipate that this change will have a material impact on our future revenue or cash flow from operations. Slides six through nine are our main financial results and I'll just highlight a few relevant points. For the first quarter of 2021, we were able to maintain revenues broadly in line with previous quarters at 70.9 million. Vessel operating expenses for the quarter were improved compared to the first quarter in which the Bodal Knudsen had its dry dock. Our crew and associated costs such as travel and logistics remained slightly elevated overall due to COVID related issues. though we continue to expect some of this will fall back over the course of the full year. Adjusted EBITDA on slide 7 was 52.1 million, another very consistent quarter. In fact, we have reported adjusted EBITDA in the range 50 million to 56 million in every quarter since the beginning of 2018. Prior to that, it is arguable that it was only lower as our fleet was smaller. Distributable cash flow on slide 8 was a solid 1.32 times in the quarter, and we continue to target stability in our results and in our distribution, and our coverage gives us room to manoeuvre. On slide 9, I would just note here that now we have entered into our new secured credit facility. Once this closes, which we anticipate will be in September, then our current liabilities should settle back to a more comfortable figure. Otherwise, we're comfortable with our balance sheet position overall. Slide 10 gives an update on our contracted revenue and charter portfolio. At the end of the second quarter, we had 642 million of contracted forward revenue remaining, excluding options held by our customers, an average remaining charter period of 2.3 years, and our customers have options to extend these charters by a further 2.8 years on average. For the Windsor Knutson, we have seen some unemployment of the vessel in the second quarter, but we are expecting a new charter to commence in September 2021 as outlined above. For Bodle Knutson, we are showing the time chart to KNOT, which is on a rolling basis to allow flexibility for when a third party charter is found. And we have introduced here the new charter that is to commence in either fourth quarter of 2023 or the first quarter of 2024. Thereafter, you will see that our remaining fleet is contracted for the remainder of the year, though as mentioned, the Tordisk Knutson is scheduled for its first planned five-year special survey dry docking in the fourth quarter. We are, of course, already discussing with our customers to fill the other gap periods between charters, beginning with the Tordisk Knutson. However, we wouldn't necessarily expect to have firm contracts in place at this time. Slide 11, our sponsor, KNIT, continues to have six vessels that could be acquired by the partnership with an average fixed contract period of 5.3 years and with an average of a further 7.3 years extension options. We have continued to see some robustness in our unit price in recent months, though still today we have no firm plans for acquiring another vessel at this time. However, we are continuing to actively consider our options for later in the year, And our new ATM facility gives us further flexibility for considering accreted acquisitions. And as always, the acquisition by KNOP of any drop-down vessels in the future would be subject to the approval of our independent conflicts committee, as well as the board of directors of each of KNOP and our sponsor, KNOT. Slide 12. We've included this graphic previously, but we think it remains informative towards the outlook for our shuttle tanker business in Brazil. And in addition, we have added just a few points that help to demonstrate why we think this growth will arrive. Strong contracted FPSO activity, low break-even prices, low lifting costs, a strategic focus by our customers on deep water pre-salt areas that require shuttle tanker operations, and importantly, but slightly differently, due to the increase in vessel ordering across all elements of shipping recently, this has increased the price of all new build ships which is favorable for us when offering our existing ships to our customers for rechartering. Slide 13. This presentation is not really the place for a long educational piece on shuttle tankers, but I always like to put something in here to increase knowledge around what K&OP does and its wider market. This slide is very simple, but I think powerful. You can read for yourself the words issued by Petrobras in May this year, but the opportunities that we expect will come from Brazilian production are many. The Bousios field is one of several developments that are either already in production and or are scheduled to materially grow their production in the coming years. Slide 14, ESG. Just to note that in the coming days we will publish our second annual ESG report where much more information will be available. The installation of ballast water treatment systems on board our vessels, the VOC plant to be installed on Burdell, Connaughton, or the LNG-fueled shuttle tankers ordered by our sponsor are just a few significant examples of the work we pursue. But we always consider ways in which we can improve our contribution to all ESG matters, whether it's in operations, in vessel design, in the office, or in ports, large or small, and we take our responsibilities to ESG seriously. We recognize our impact and work hard with and across a number of networks, organizations, and other entities to not only comply with rules but steer and lead in areas where we can and target to be best in class, importantly not just on paper but in real-life operational environments. It remains the case that throughout 2020 and to date in 2021, our fleet experienced no serious incidents or casualties, and we review all of our government's documents at least annually to ensure they remain fit for purpose and effective. As an MLP, we understand the importance of this, Slide 15. Our near-term priorities for this quarter are to continue to operate our vessels safely and efficiently and look after our offshore and onshore staff, of course, with particular regard as to how the COVID pandemic and vaccination programs develop. We continue to target stability in our results and in our distribution and focus our efforts on securing new near-term charter contracts for the Bodal-Connaughton. We're continuing to study the options and possibilities for a further internally financed drop-down later in 2021. As mentioned, we expect to publish our 2020 ESG report shortly. We're preparing for the dry docking of the Tordisk Knutson. And of course, we continue our close dialogue with customers concerning operations and chartering and rechartering to ensure we can respond flexibly to demand opportunities as they arise. Slide 16, so in summary, We've reported another strong and stable quarter with utilization of 96.9% for scheduled operations if Windsor Knutson is included. Distributable cash flow of 24 million and a coverage ratio of 1.32. We paid a quarterly distribution of 52 cents for the 24th consecutive quarter. We had $642 million of remaining contracted forward revenue excluding options at the end of June. And with strong support from our lenders, we now have no significant refinance due until the third quarter of 2023. We're not exposed to short-term fluctuations in oil price, volume of oil transported or global oil storage capacity. And whilst the recent effects of COVID and our customers' CAPEX schedules have created headwinds for shuttle tanker demand, other than Windsor Knudsen, Bodle Knudsen and Tordes Knudsen, our fleet remains fully contracted for the remainder of 2021. We continue to firmly believe that in the mid to long term, oil production in Brazil and the North Sea from shuttle tanker service fields will grow significantly. And though we expect to continue to face softness in 2022, the shuttle tanker market's fundamentals and growth prospects, our liquidity and our market leading position allow us to remain optimistic for the future. Thank you for listening. That concludes the formal presentation and I'll be very happy to take any questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your hands up before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Liam Burke with B. Reilly. Please go ahead.
spk02: Thank you. Hi, Gary. How are you? I'm very well, Liam. How are you? Nice to hear you. Fine. Thank you. Gary, you've got three vessels in 2022 that are coming off long-term charters that will be rechartered on a longer-term basis. But how do you feel about the near-term chart market for those three vessels as you move into 2022?
spk04: Yeah, look, we've already started talking to a number of potential customers for those vessels. And, you know, some of those discussions have moved past, you know, a very light touch. But we're certainly not in a position to, you know, say anything firm at the moment. But we're not concerned right now. There's still time. We wouldn't necessarily expect to have contracts in place for those vessels. at this moment in time. Obviously, it's a jigsaw puzzle of fitting our vessels in with what our customers want and need. But at the moment, we're confident that we can find employment for those vessels. It may not be a perfect fit for those periods of time. But yeah, we've got inquiries ongoing at the moment.
spk02: Great. And you mentioned that you have potentially one drop down in 2021. Again, 2022, lots of potential acquisitions from the sponsor. How do you look at the acquisition, if any, if at all, the acquisition cadence?
spk04: Yeah, I think we managed to do the Knudsen last December. I think at the moment we would like to be able to do one more vessel either similarly or in a different way by the end of this year if we can. We obviously, as I've said many times before, we won't put the wider business at risk just for a single vessel drop-down or any drop-down. And I think we've put the ATM in place now, which gives us an extra tool to use if that becomes helpful. And we're also studying whether or not we can, in a way, replicate what we did for the Tover Knudsen last year with possibly a sale and lease back of one of our vessels, or potentially if the unit price increases, there may be an equity opportunity for us to go into the market. if the acquisition is accretive. So we've got a few options, but you're right. In 2022, you know, there are more vessels there. I think what KNOP has always been is patient, and I think we, you know, we have an existing fleet that we need to look after, and we will do that first and foremost. And, you know, there is no necessity to drop down, although obviously from an evaluation perspective, that's what we'd like to do with an MLP. But I think patience is the key. We've been patient for a few years already, and we managed to do one vessel. Hopefully, we'll do at least one more, and then we just take it from there. We see what 2022 brings.
spk02: Great. Thank you very much, Gary.
spk04: Thank you, Lou.
spk00: The next question comes from Richard Diamond with Capitalwood. Please go ahead.
spk01: Yes. Good morning, Gary. Good afternoon. Should we assume that the increase of 12% in the cost of a tanker new building is also applicable to new shuttle tankers? Or could the price of a new shuttle tanker even be higher?
spk04: I think you could probably read across from tankers into shuttle tankers. I think there have been no new orders placed recently. And actually, there are hardly any slots available now for at least a couple of years' delivery. But no, you're right. I think the cost of a new-build shuttle tanker would read across from the general market.
spk01: Secondly, Do you have any updates on a potential investor meeting in 2021 or early 2022?
spk04: Yes. We've got a tentative date in early October penciled in, and I hope once we've got this Q2 out of the way and finished, that we'll be able to turn our attention to that and get something out there in terms of notice to people very shortly. So, yeah, watch this space. We're targeting for October.
spk01: Cool. And lastly, one of your competitors has challenges in their business model, not from their shuttle tankers but from – There are SFOs that are problematic. Does that impact the competitive dynamics in the marketplace at all?
spk04: Yeah, that's a very good question. I would say not. I think at the moment, I don't think see that happening. I don't see that impacting our market dynamic too much. I think obviously volatility around our industry and around our businesses is actually not good for anybody. But no, I think at the moment we wouldn't necessarily expect that to have an impact on our business.
spk01: Thank you very much, Gary. You know, solid water and, you know, KNOP always seems to deliver. Thank you.
spk04: Yes, thank you, Richard.
spk00: The next question comes from Jim Altshul with Aviation Advisory Service. Please go ahead.
spk03: Good afternoon. Hello, Jim. Thanks for taking my question. A couple of questions. First of all, excuse me one minute. Sorry, I've got a little something in my throat. The first questioner was asking about but looking at the chart, it seems that all the ships for which the firm charter period ends next year, except for those going into dry dock, there is an option period for the charterer. Are you in discussions both with the current charters have the option and other potential customers if the current charterer chooses not to exercise the option?
spk04: Yeah, very much so, Jim. I mean, our market is very small. There's probably three suppliers and maybe a dozen customers. It's quite a well-known market to those players involved. And it's a moving target all the time. So, you know, where a customer doesn't want a vessel one week, you may go back the next week and, you know, their trading strategy or, you know, they've had a problem on another vessel and suddenly they do want the vessel. So it's a moving target, but yet to answer your question, we are talking with all of our customers all of the time.
spk03: Okay. Next thing, if I'm reading this chart, correctly, I guess next, for all or part of next year, you'll have four ships in dry dock. Am I reading that right? Yeah. Okay. Is that going to, what kind of impact is that going to have on your results? Well, those dry docks... You may have answered this question already, but anyway.
spk04: Yeah, no, no, it's a fair question. The dry dock does have an impact, definitely. Obviously, there's an off-hire period. The cost is sort of built up in advance so that we've got cash to pay for that dry dock, but it does impact our revenue to a degree because of the fact that the vessel is off-hire for a period of time. So I think it's for us It's scheduled. It obviously has to be done. The work has to be performed for the vessel to remain functioning. So I think it will have an impact, but like with all of our dry docks, it sort of skims off the top a little bit. It doesn't sort of expose us to crazy losses or anything. Usually if the dry dock is in Europe and it's a Brazilian vessel, then it's a 50-55 day off-fire period.
spk03: Oh, okay. And one more, if I may. Looking at the distributable cash flow chart, the first half of this year, first two quarters, the estimated maintenance and replacement capital expenditures are significantly, not dramatically, but significantly higher than the last three quarters of last year. Why was that? And Do you have any outlook as to what the trend is likely to be on those expenses?
spk04: Yeah. That line in the distributable cash flow, it depends on – there are two main drivers there underneath that number, or probably three main drivers. The first one is the original vessel costs. The second one is the average age of the fleet. And the third one is interest rates, because actually it's an annuity discount calculation underlying that number. So you will generally find that as the fleet ages, that number goes up. So I think what you're seeing there between 2020 and 2021 is the aging of the fleet. We recalculate once a year. But also, as I mentioned, the third element there is vessel cost. And obviously, in 2021, we've got one extra vessel as well.
spk03: Okay. This has been very helpful. Thank you very much.
spk04: No problem, Jim. Thank you.
spk00: As a reminder, if you have a question, please press star then 1 to be joined to the queue. The next question comes from Robert Silvera with RE, Silveria and Associates. Please go ahead.
spk03: Robert Silvera Yes. Thank you, Yari, for taking my call. The first item I'd like to talk about is on your total operating expenses. I am right, I think, in assuming that the write-down of $29 million for 21 is included in that top total operating expense number for the quarter. It went from $44 million to $72 million. It's approximately $30 million, so I'm assuming that that write-down is included in that total operating expense number correct yes yes the 29421 is included in the 72138 right okay that makes more sense then and um the second question i have is could you give us some more color on why you put in place this atm for about a hundred million And the reason I say that is, you know, if you were to sell 100 million units and assume an $18 sale price, which is approximately where we are now, you would, in effect, be paying 12% for that money. Because for every share, obviously, that you sell, then you're going to have $2.08 of dividend costs. And... So could you give me some reason why, with a 1.32 cover, you feel the need to put that $100 million in place?
spk04: Yeah, I mean, just bear in mind, Robert, first of all, I'd need to direct you to the filings, but the $100 million isn't actually drawn equity. It's just a facility. It's a potential for us to issue units.
spk03: Yeah, I know, but you'd be selling at an $18 price, you'd be selling sufficient numbers of units to get to the $100 million, correct?
spk04: I think what we've put in place here is a facility like a where today we haven't sold them the facility and we won't do so unless it makes sense to do that. So I think that's probably the short answer to what you're saying. The reason we've done it is because it gives us extra flexibility if in the future we do want to raise equity finance through the market.
spk03: So it's just In case you find a good reason, it's your logic.
spk04: Yeah, that's right.
spk03: Now, you've been talking about possibly at the end of the year getting another drop-down. Would this be employed to pay for the drop-down, something like that?
spk04: Only if the numbers work. we've put the ATM in place as a tool and to give us optionality. We're not making any comment about whether we will or won't use it.
spk03: Very good. But it hangs like a kind of demically sword over the price of the stock.
spk04: In any case, speaking of... I would just say, Robert, that lots of our peers have got these in place. And it's really just, as I say, it gives you the option. It's no more than that.
spk03: Yes, I understand. But when those options are exercised and the share count goes up and can be significant at times and affects the overall, depending on the condition of the business at the time, can the it can affect the price of the stock in the marketplace.
spk04: But anyhow, as far as – It can, but I think we – just to be clear, we will only be doing something – regardless of whether it's through an ATM or not, we would only be doing something if it was accretive.
spk03: Okay. Very good. I trust you. That's what you've done in the past. So anyhow, I needed a little clarity on that. Okay. Now, as far as your common units are concerned, quarter over quarter, you went up by about 90,000 common units. And can you give us a little clarity without me digging deeply into your 10Q, where those shares came into existence, for what purpose? Were they options exercised?
spk04: It was one of our private preferred unit holders. converted some of our units into common units. That's why the number of common units has gone up.
spk03: And that's coming from those convertible preferreds?
spk04: Yes. So you'll see the number of preferreds have gone down. The number of common has gone up.
spk03: Just out of curiosity, I can't look at it right now, but how many of those do we have left, the preferreds?
spk04: Sorry, the number I don't have the value. Sorry, give me one minute and I will tell you. Yeah, sorry, Robert. I don't have that number to hand, but it's OK. I can send it to you. I can let you know.
spk03: Well, okay. Obviously, they feel good about the security of the dividend if they want to go from the preferred to the common units. In any case, now, the other question I have is we have a 1.32 coverage ratio, which dropped a little bit from the past because we were up near 1.5 in the past. Have you thought about eliminating at a more rapid pace some of the debt rather than increase the dividend, which I think is a great idea if you just keep it where it is. But take this extra coverage and accelerate debt reduction. Because LIBOR and those kinds of things, at some point, depending on what this crazy United States is doing with its dollar interest rates, may just absolutely have to go up unless we turn into a Weimar Republic. So I think anticipating in the future that interest rates could rise significantly, reducing debt would seem to me a very smart move relative to extra coverage money.
spk04: What do you think? Yeah, I mean, at the moment, You know, we quite like our coverage. It gives us the flexibility quarter by quarter to the extent we have any off-hire for vessels, et cetera. And, you know, the distribution that we're paying we think is a fair rate today. We like it. But, no, I think, you know, we already pay down our debt pretty quickly, actually. And at the moment we're not really looking at accelerating that any further.
spk03: Are we ahead of depreciation rate? Well ahead of depreciation rate and paying down debt?
spk04: It's not a simple question to answer, but a little bit, yes. Yes. We tend to have 20-year tenors on our debt. And obviously our useful life depreciation is now 23 years. Okay.
spk03: Thank you, Gary. Good job. Okay. Thank you. We'll get through. Thank you.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Gary Chapman for any closing remarks.
spk04: Thank you, everybody, for listening to the call and being interested in KNOP, and I wish you a very good day. Thank you.
spk00: The conference has now concluded. Thank you for attending today's presentation.
Disclaimer