KNOT Offshore Partners LP (KNOP) Q4 2021 Earnings Report, Transcript and Summary

Hello, everyone, and thanks for joining the KNOT Fourth Quarter 2021 Earnings Results Conference Call. My name is Derris, and I’ll be moderating call today. Before handing you over to your host, Gary Chapman, I would like to remind you that if you would like to ask a question during the Q&A session and at the end of the call. [Operator Instructions] I now have the pleasure of handing you over to Gary Chapman. Please go ahead, Gary.

Thank you and welcome everybody to our fourth quarter 2021 earnings call. As usual, our earnings release and this presentation are available on our website at knotoffshorepartners.com. Moving straight in, slide 2 provides important information concerning the nature of our presentation today, and in particular that our presentation includes forward-looking statements that we make in good faith, but which contain risks and uncertainties, meaning that actual results may be materially different. Please do take this on board; noting that the partnership does not have or undertake a duty to update any forward-looking statements, and you may also wish to consider our annual and quarterly SEC filings for further details and information. Please also be aware that our presentation includes mention of certain non-US GAAP measures of distributable cash flow and adjusted EBITDA, although our earnings release does include the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. On to slide 3. The partnership maintained very high fleet utilization during the fourth quarter of 2021, in fact, 100% for scheduled operations, and we generated strong cash flow all resulting in solid coverage for our distribution. Good progress has also been made in terms of employment contracts for a number of our vessels coming into the market. And, of course, we remain highly focused on securing further coverage for the quarters ahead. Although we are not directly affected by short or mid-term oil prices, the current high levels certainly further incentivize oil production, and we may also see general tanker charter rates improving, both of which we see as positive for our shuttle tankers in our markets. In the fourth quarter of 2021, we generate a total revenues of $72.1 million, operating income of $26 million, net income of $23.1 million and adjusted EBITDA of $52 million. The partnership had $560 million of remaining contracted forward revenue, excluding options at December 31, 2021, and $117.3 million in available liquidity including cash and cash equivalents of $62.3 million. In the quarter, we were able to announce our 26th consecutive quarterly cash distribution of $0.52 per common unit and this is our 35th consecutive distribution under our 1099 tax structure since the partnership first listed in 2013. There was no refinancing activity in the quarter as our next tranche is not due until the third quarter of 2023. In the medium-term and beyond with Brazil and Petrobras in particular committing extensive CapEx to the FPSOs that will serve as the basis for the deepwater expansion, we believe that KNOP remains very well-positioned to service the significant growth that we expect in the shuttle tanker service to offshore oil fields where we operate. Slide 4 shows that in the fourth quarter of 2021, and to-date we have made progress on a number of vessel employment contracts. Although Galp Sinopec did not take up that option on the Anna Knutsen, we subsequently agreed commercial terms for a new time charter contract for the vessel with a major oil company to commence in the second quarter of 2022. This new charter is for a fixed period that the charter has option of either, A, one year with options for the charter to extend the time charter by up to full further one-year periods; or B, two years with options for the charter to extend the time charter by up to three further one-year periods. The partnership also entered into a new time charter contract with for the Tordis Knutsen with Petrobras and this commenced on February 23, 2022 for a fixed period of five months, with an option for the charterer to extend the charter by one month. This is an example of the type of shorter term contract that we hope to replicate for the gap periods between our longer-term charters. We also secured two future dated charters for the Windsor Knutsen and Bodil Knutsen with Equinor. Windsor Knutsen charter commence in the fourth quarter of 2024 or the first quarter of 2025 and is for a fixed period, at the charterer’s option, of either one year or two years, with options for the charterer to extend the charter, in either case, by two further one-year periods. The Bodil Knutsen charter commences in the fourth quarter of 2023 or the first quarter of 2024, and is for a fixed period, at the charterer’s option, of either one year or two years with options for the charterer to extend the charter, again in either case, by two further one-year periods. It's worth mentioning here that through the charter rates, we offer for the various options. We do often try to incentivize the charter to take the longer fixed charter periods, but ultimately it's the charters choice. And finally, the Bodil Knutsen continues to operate under a rolling charter contract with its sponsor, Knutsen NYK; which currently expires in April 2022, but with to further one-month extensions of the charter as option, which would take the vessels fixed employment to June 2022. We continue to seek long-term employment for the vessel and the time charter with Knutsen NYK can be terminated early should an opportunity arise. Slides 5 through 8 summarize our financial results. For the fourth quarter of 2021, revenues were robust affected only by the scheduled drydocking of the Tordis Knutsen and the installation of the VOC plant on the Bodil Knutsen. Vessel operating expenses for the fourth quarter were again slightly higher than previous quarters as crew and crew-related costs remains challenging due to the continuing impact of COVID issues around travel quarantine and logistics costs in particular. Coming into 2022, we have seen that some of those COVID pressures may be starting to reduce slightly, whereby crew changes are occurring with a little more ease, travel restrictions are being wound back and more flights are available. However, with other global challenges, such as inflationary pressures, we do remain cautious about the coming year. And as you might expect, we will be closely monitoring our cost base. As stated, adjusted EBITDA showing on slide 6 for the fourth quarter was a strong $52 million. On slide 7, you can see our healthy cash balance at the end of 2021 of $62 million, which balance is actually higher than at the end of 2020, partly in anticipation of the drydocks that are upcoming in early 2022. Our debt continues to be repaid each quarter on schedule, and in 2021 we repaid almost $96 million in scheduled repayments. Distributable cash flow on slide 8 was $23.2 million with a solid coverage ratio of 1.28 times for the quarter. Slide 9, provides an update on our contracted revenue and charter portfolio. At the end of the fourth quarter, we had $560 million of contracted forward revenue, excluding charter options held by our customers, an average remaining charter period of two years and our customers have options to extend these charters by further 2.7 years on average. The Windsor Knutsen and Bodil Knutsen are now respectively on charter to PetroChina and KNOT or Knutsen NYK has been referred to KNOT in the earnings release. In respect to the new charters announced today for the Windsor Knutsen, the Bodil Knutsen and the Anna Knutsen, the chart here shows initial one year fixed charter periods whereas actually these charters may become two-year fixed contracts in due course once the charter is declared their preference. We've been able to take a first step with the Tordis Knutsen and enclosing some of the gaps related to the Tordis Knutsen, Vigdis Knutsen and Lena Knutsen, before they commence their next long-term charters in 2023. And we are seeing a modest upturn in market activity, which provides us with some optimism that whilst bumpy, new opportunities will present themselves during this year, in addition to those longer-term opportunities that we continue to anticipate. What is also foreseeable is that our first quarter 2022 revenue will be impacted by the scheduled drydock works related to three vessels; the Tordis Knutsen, Vigdis Knutsen and Anna Knutsen. This concentration of drydock work impacting one quarter, whilst unusual is anticipated by the partnership and an impact on revenue on coverage for our first quarter 2022 should be expected. However, aside from these planned drydocks works, it is important to note that all of the partnerships vessels are otherwise employed on contracts during the first quarter of 2022. And the partnership does not mechanically link our quarterly distribution to any single quarters results or coverage ratio. Slide 10, shows our Sponsor, KNOT continues to have six vessels that could be acquired by the partnership with an averaged fixed contract period of 5.3 years from charter commencement and with an average of a further 7.3 years extension options. Growth through the acquisition of new vessels remains a source of strength and diversification for the partnership and we continue to assess our options despite our cost of common equity today. We're constantly looking to further strengthen the partnerships contracted revenue stream through a further acquisition and one of the available vessels from KNOT. Any such acquisition would need to be in the interest of the partnership overall. Avoid any undue financial risk to the wider business and should be expected to strengthen our coverage. Absent that, we're not compelled to grow for growth sake, and we'll provide further information on due course, as our ideas and plans develop. On Slide 11, we wanted to provide some supply data on the current global shuttle tanker fleet in response to questions we often receive. You can see it is very concentrated among the three largest market participants with KNOP and KNOT as the largest of those. Beyond that, I would just make a few points. As you can see in the upper rows of the grid at the bottom, there are a total of 12 vessels currently on order. But clearly the absolute number here is not the kind of figure that you would see in the far larger conventional tanker sector. These 12 ships are scheduled to come into the market, primarily into Brazil in 2022. And all of those are going on to charter contracts that are already in place. This is not speculative tonnage. Additionally, following the high level of scrapping and the shuttle tanker market in 2021, and the fact that shipyard order books are typically full of LNG and container vessel orders, such that we think no new shuttle tankers can now be delivered before 2025, except for the ones on the chart here. Taking all of that, against a backdrop of significant demand growth in the medium-term, which I'll come to in a moment, we believe the marginal oversupply we see today is still a situation that is transitory in nature. Then on Slide 12, as I've mentioned before, Brazil is where we expect to see the majority of shuttle tanker demand growth moving forward. And we're showing here the extent of anticipated expansion over the next decade or so in the largest Brazilian basins, which is significant growth. We've also added some commentary from Petrobras here on the right side of the slide that should provide helpful color. First of all in the Pre-salt fields, which are serviced by shuttle tankers, Petrobras expects its average marginal lifting cost to be $3.50 per barrel, pre-tax and leasing between 2022 and 2026, which very strongly supports continued production from existing platforms in almost any market environment. And as a matter of interest, the equivalent average figure across the period 2016 to 2020 was still only $3.70. From 2022 to 2026, Petrobras is planning to significantly increase their total production of oil and the proportion of that oil that is sourced from the shuttle tanker service to pre salt fields. And moving forward, Petrobras expect to be able to establish breakevens for oil production at $20 per barrel, putting them in a position to confidently pursue expansion projects that can compete with almost any other international project, whether onshore or offshore. Finally, I'll point out, the Petrobras in 2021 made their largest ever reserve additions of nearly 2 billion barrel equivalents or 219% of what they produce during the year, even after that asset sales. There are also a couple of further extracts in the appendices to this presentation, that you may wish to take a look at, getting a little more on Petrobras' FPSO order book and some further details on what is widely anticipated to be the largest producing field in Brazil, the Búzios field for which 10 FPSO’s are currently expected to be in operation by 2026. Of course, we're not in the business of FPSO’s and Petrobras is not our only customer, but we do think of these metrics and this activity as closed proxies for future shuttle tanker demand offshore Brazil. Then, coming back to our near term priorities on slide 13. For those that follow KNOP more closely, there will be no surprises on this slide. We remain absolutely committed to safety in all that we do. And then beyond that, is the maintenance of our distribution through high utilization and our high operational standards. We need to take care of the several drydocks that are coming in and around the first quarter of 2022 in particular, and be aware of the temporary impact that that concentration of work will have. And of course, our immediate focus also remains on securing further charters for our vessels, as they forge you in the coming near term quarters, in anticipation of the growth that we see coming as previously outlined. We still expect that 2022 will be bumpy for our business compared to previous years. But we remain confident that this is a temporary situation and that the business will be rewarded over time. As I stated previously, as an MLP, we're always looking at potential growth and the acquisition of another vessel. And whilst we have a supportive sponsor and no obligation to grow, we will still take an opportunity if the conditions and timing are right for the partnership as a whole. So in summary for this quarter on slide 14, we reported utilization of 100% for scheduled operations. Distributable cash flow of $23.3 million with solid coverage of 1.28. We paid quarterly distribution of $0.52 for the 26th consecutive quarter and had $560 million of remaining contracted forward revenue, excluding options at the end of the year. We are no refinance due until the third quarter of 2023. And our operations are not exposed to short term fluctuations in all prices, volume of oil transported or global oil storage capacity. Nine shuttle tankers were removed from the market in 2021 and there are no new shuttle tankers entering the market on a speculative basis. And although softness in short-term demand for shuttle tankers seems likely to persist through at least the majority of 2022, we’re discussing several opportunities with our customers and remain optimistic that we can secure further profitable charters for our vessels in the immediate and intervening periods. Then finally, as outlined above, we continue to expect mid to long-term expansion of offshore oil production in Pre-salt Brazil, unless, but still some growth in the North Sea/Barents Sea, supported most notably by the large number of FPSO orders and low marginal costs of oil production. We therefore remain very positive with respect to the mid-to-long-term outlook. And on that, that concludes today's formal presentation, and I'll be happy to take any questions.

Thank you, Gary. [Operator Instructions] The first question comes from Liam Burke from B. Riley. Please go ahead, Liam.

Thank you. How are you today, Gary?

I'm very well, Liam. I'm very well. How are you?

I'm fine. Thank you. On the -- obviously, the price of oil has made investment in the offshore by the offshore producers more attractive. Have you seen additional interest in fixing short term charters for the fourth term for the four vessels that are up for -- that need to bridge until the long term charters? Is there any more interest there, or is it pretty much the same?

Yes. Liam, we -- even before the recent shooting up of oil prices, we were actually seeing a modest increase in activities and inquiries. I think certainly with the oil price, where it is, I'm pretty sure that all of our customers and everybody involved is trying to produce as much oil as they can, based on their current outputs and production levels. And we think that will probably filter through to shuttle tankers. We're not seeing an immediate change. I think, if you look at conventional tankers, those rates have increased considerably. Whether they stay high, we're not sure at the moment, but if they do stay high, then certainly that will help shuttle tankers. And it will make shuttle tankers more credible in terms of longer journeys. So I think the oil price in the short term can help us in that way. But to answer your question, we haven't seen a direct corollary just yet in our market from the very recent increases in price.

And on slide number 10, you highlight the vessels that are potential drop down candidates from your sponsor, understanding that you do have some capital constraints, you mentioned that the price -- the price of your units right now, but I mean, realistically, how many? I mean, do you think you could add, not specifically how many, but do you think you could add vessels over the next 18 months or so?

Yes. I think, we are deleveraging every quarter and as I mentioned in the formal part of the presentation, we repaid over $90 million of debt in 2021. And that opens up the possibility of us using debt at sensible levels for an acquisition. And, yes, we will still consider other options, to the extent they're available, whether that's common equity, maybe that's not available pref units, maybe those are available. But I think the possibility of using debt and maybe a little bit of cash, if need be, to the extent that we can do that at a sensible price, that is positive for the partnership then, yes, we do think that's realistic in this year. And, obviously, we need to pick the right time and we need to negotiate with the sponsor. Luckily, as I said before, they've been very supportive. They've been very flexible, and they understand our situation. So if it's not right like if we didn't feel it was right in quarter four, 2021. But if we feel it's right, and we feel that we've got the -- the depth capacity to do it that way, then absolutely we will try to do that because we believe very strongly that by growing the partnership and getting more diversification in our charter income stream that can only be good for the business.

Great. Thank you, Gary.

Thank you, Liam.

Our next question comes from Richard Diamond from Castlewood Capital. Please go ahead, Richard.

Hey, Gary, I have two questions. One is just, sort of, a global question. But is there any impact from the Russian-Ukrainian conflict, either on KNOP or the shuttle tanker market in general?

Sorry, Richard. I thought you were going to give me both questions at once, no problem. Let me cover that first.

The second question is less global. What is the number of shuttle tankers that have Norwegian continental shelf capabilities? In other words, if I wanted a shuttle tanker today to work, the NCS versus a KNOP -- existing KNOP unit. How much more would it cost roughly in percentages? And how long would it take to get delivery of such a vessel?

Yeah, let me address the first question. Yeah, I mean, obviously the Ukraine-Russia situation is terrible. But luckily our business is not directly affected. Either KNOP or we believe in the wider shuttle tanker market. I think, you know, we have around 60 crew members that are either Ukrainian or Russian nationals. And you know, we're trying our best to look out for them and make sure they're fine. But that's a small proportion of our overall crew. So the short answer is, there's really no impact that we're seeing at the moment. On your second question, if I understand it, you're asking for how much more does a North Sea vessel cost? Is that am I understanding that right?

Yes. I think -- if you have, if you want to go out and buy a new unit, how much more would it cost versus an existing KNOP and NCS capable shuttle tanker?

New build versus existing?

Right?

Yeah, I think because we've seen quite significant increases in new building prices at the yards. You know, we're probably talking 30%, 40% increases over the last 12 months. And also you can't get today. We think a shuttle tanker before perhaps the middle of 2025. So, regardless of the price you're willing to pay for it, the yards are full with container and LNG vessels. So, I think, in a way, it's a bit of a moot question because you can't compete with a newbuild today, you have to really look at the existing charter fleet and I think when you start to do that, it makes our existing vessels pretty competitive, obviously, because A, they exist already, so you have no construction risk. And you also don't have to wait. Plus the costs are just going up for the newbuilds. So, I think, today, with newbuild prices being 30% more than they were even just 12 months ago, it puts our entire existing fleet in a much better place when it comes to discussing with our customers and going into tender opportunities.

Thank you very much, Gary. Also, congratulations on an excellent quarter. Thank you.

Thanks Richard. Thanks. Nice to talk to you.

Our next question comes from Jim Chou from Aviation [ph] Advisory Service Bank. Please go ahead Jim.

Good afternoon. Thanks for taking my call. Couple of questions relating to the vessels that -- for which we see a gap on the -- was it slide nine. First of all, when -- what Vigdis and Lena, both of them they're scheduled for an anticipated drydocks, so when they go to the drydock -- as soon as they go to drydock, they're off revenue, right? We're not generating revenue?

That's right.

Okay. When will Vigdis and Lena go to drydock?

We've got the dates -- well, you can see roughly the dates on the slide there. The Vigdis is around sort of spring and Lena is more summer -- European summer -- Northern Hemisphere summer, sorry, of 2022.

Okay.

Is that -- for you?

So, it looks -- yes -- because what -- and which was sorry -- yes Bodil will also -- the short-term rolling charter with Knutsen NYK does not go beyond June. So, it appears that there's the potential for up to three of the vessels to be not generating revenue in the third quarter. Is that correct?

Yes, I think as has been the case for some quarters now, we are finding that our customers are taking time to make decisions and the Petrobras charter for the Tordis Knutsen that we've just announced that happened quite quickly. And it was a -- in shuttle tanker terms, it was a quite last minute in terms of getting that arranged. But our customers, as I say, are taking time due to the uncertainties that they themselves are facing, but equally, their CapEx requirements in the projects are not waiting forever. So, I think we'll find that whilst they may want to leave it till the last moment, they can't wait forever to make decisions on that tonnage. And we've secured three or four charters in the last three to six months, as we've announced today, and some of those, as I say happened quickly and some took more time to close. So, I think in terms of what you're talking about in terms of the second half of this year, we absolutely admit that the timing here is unpredictable. But that doesn't mean to say that things won't happen by that time. So, we don't make guarantees. Of course, we can't do that. But I think what we're trying to explain here is, as I say that the timing is far more unpredictable at the moment for us due to the uncertainties and complexities that some of our customers themselves are trying to grapple and cope with.

Understood, and I've been an investor long enough to have developed considerable tremendous respect for your ability to manage the fleet and place it, but the basic rule of investing always look out for the downside. Let's assume that in the third quarter, two of the vessels are not generating revenue. Two of those three are not generating revenue. I'm not saying that's going to happen. But let's suppose it does happen. What would be -- can you give me an estimate of what the impact on distributable cash flow, and EBITDA would be just given a ballpark figure?

Yeah, I appreciate where you going with this. But we don't generally like to give forward guidance like that. And I think in that situation, perhaps what I can say is, as we always have done, we look at the facts and circumstances and the longer term outlook and, regardless of any one quarter or one vessel or one month, we try very hard not to make short-term hasty decisions. We've got a strong balance sheet today. We intend to maintain our distribution based on the positive, mid and long-term outlook that we've outlined. And whilst we can't predict the future, we work close to our customers, we operate critical infrastructure that they need, and actually it's a small tight niche market. As I've shown on the fleet slide today, there are 67 vessels okay. Some are coming into the market, but they're already on contract. Our imbalance, if you like, is not huge, and it won't take an awful lot for the market to tighten right back up and with high oil prices and with the difficulties that we're facing in the world today. We're optimistic that we'll find business for them. So, I appreciate your idea of sort of debating what if. We prefer to look at it the other way round and think that actually there's a lot in our favor here that -- although the timing is unpredictable, we’re optimistic that we can do something. Obviously, as I said before, without guarantee but we were the main player in this market and we understand it very well and we will do our very best.

Well, understood. And I don't want to hog the conversation or ask you to disclose any granular information just from my – let me look at it another way. Is it reasonable to assume that the each individual's – the individual ships have roughly comparable contributions to EBITDA and cash available for distribution, if I mean, if it's – if they're roughly comp like my own estimates of the impact of having a couple of ships or higher?

I mean, obviously, we're talking to different customers about different vessels at different times. And the result of that is that we have different charter rates. So I think it's – I can't give you any individual rates. But I think it's not – it's not entirely reasonable to assume that they're all the same. No, they are different. And obviously –

No. That will be same – all the same within the same – within the same ballpark. Just from coming up with a rough back to envelope estimate –

Not, not necessarily so because obviously they – they were – the various time charters were all fixed at different times as well. So, the markets were different at each of those periods. And also as well, you just need to bear in mind the four bareboat charter vessels. The rate for those vessels, obviously, we don't provide crew and an OpEx. So those rates that we receive for those four vessels are definitely lower by – by definition.

Okay. Well, I appreciate your – given me so much time and information. Thank you, as always. Thank you very much.

Yeah. Thank you. Thanks for your time as well, Jim.

Our next question comes from Robert Silvera from R.E. R.E. Silvera & Associates Marine Surveyors. Please go ahead, Robert.

Hey, Gary, thanks for taking my call.

Hi, Robert.

You touch – you touched on the situation with Russia, Ukraine the sanctions that exists today. You don't see as you said, very much of an effect on you at all at this point. Do you anticipate that, if these sanctions became more severe and the China, Russia relationship being what it seems to be with China being very supportive of Russia? Do you see any implications because China is one of our customers? Do you see any implications along that angle that might hurt us?

Robert, that's a very, very big question.

I know.

Right now, where we are today, we're our biggest concern, if you can – if you can call it a – if you can call it that is, our crew members and making sure that, they're – they're looked after. Beyond that, we've got some small suppliers that may be affected that we have alternatives. So, right now, as we see it, and to the extent that this is a Russia/Ukraine issue, and it's kind of confined to – to that part of the world and those types of organizations, then our vessels don't sail anywhere near that location, that geography and we don't have suppliers or drydocks in those parts of the world. So I think it would be wrong of me to start thinking further ahead as to what might happen I mean, if you start involving other global powers into this situation, then I'm sure lots and lots of people are going to be affected. But primarily, we drydock our vessels in Europe and our vessels operate in Brazil, Uruguay, South America, if you like and Europe. So most of our finances is European based. Obviously, we have US investors. So at the moment, we're Americas and Europe. So to the extent that, that remains our business, and those are the areas that we would be worried about, if things started to impact there.

Okay. So then it does not -- what's going on really does not impact our demand or demand for our vessels very much. Because…

No, we don't think so.

The price of oil being as high as it is, I would think the demand for oil is going to get greater and greater, which would put a greater demand on us to be able to provide vessels to supply.

Yes. In general terms, we agree with that state.

Good. Okay.

Yes, in general terms we agree with that state.

Great. Well, thank you very much for reducing the debt the way you are. And I hope you will be able to keep on doing that, until we're in a position where we make decisions about drop downs, et cetera so we use less equity and more of our accumulated cash. And will be in much better shape if we have rising interest rates, if we have reduced our debt significantly, which you have done in the past and I heartily approve that you continue to do that getting that debt load down as fast as possible. Thank you very much, Gary for a good job.

Yes. Appreciate your comments. Thank you. Thank you, Robert.

Okay.

It appears, we have no further questions at this moment. So I'm going to hand it back to Gary for any final remarks.

Now I'd just say thank you very much for everybody who's taking the time to join us today and wish you a good day.

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