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KNOT Offshore Partners LP (KNOP) Q1 2019 Earnings Call Transcript

By Motley Fool Transcribers – May 24, 2019 at 2:23PM

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KNOP earnings call for the period ending March 31, 2019.

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KNOT Offshore Partners LP (KNOP 0.75%)
Q1 2019 Earnings Call
May 24, 2019, 12:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon, and welcome to the KNOT Offshore Partners LP Earnings Release First Quarter 2019 conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Mr. John Costain. Please go ahead.

John Costain -- Chief Executive Officer and Chief Financial Officer

Thank you. If any of you have not read the earnings release or the slide presentation, they're both available on the Investor section of our website. On today's call, our review will include non-US-GAAP measures, such as distributable cash flow and adjusted earnings before interest, taxation, depreciation and amortization, the EBITDA. The earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

A quick reminder that any forward-looking statements made during today's call are subject to risks and uncertainties, and these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from those forward-looking statements. The Partnership does not undertake a duty to update any forward-looking statements.

Introduction: KNOT Offshore Partners, KNOP, focuses on the shuttle tankers segment, each vessel is usually built to an individual charter specifications under non-volume based-contracts to transport oil from the shoreside production units to shoreside, effectively mobile pipeline business. The chartered vessels form an integral component of the charter supply chain.

Shuttle tankers operate in a niche space and in our sector to-date there has been no speculative ordering of tankers by vessel owners. We have a solid growth outlook also in this sector. Our sponsor Knutsen NYK has placed grasps in the MLP, all had long-term charters after construction and all remains strategically important to their respective charters.

The MLP and sponsor combined are the largest operator of shuttle tankers with 29 vessels on the water and 3 on order. Our sponsor has plenty of experience having been involved in the design and construction of shuttle tankers for well over 30 years, including being involved with the developments of the design and the pioneering days growing their fleet organically over that time.

Oil production is moving further offshore as new fields open particularly in Brazil and the Barents Sea and these tankers, therefore, operate in a space which is seeing substantial oil production growth. This should continue in the coming years in addition much of the shuttle tanker fleet is aging and will need replacing in the medium term. Our sponsor Knutsen NYK is according to Clarksons Platou Research possibly the largest shipping group in the world and NYK is major container (ph) Mitsubishi family. Since the Partnership's initial public offering in April 2013, the fleet has grown 300% to 60 investments with today an average age of just under six years.

Now, turning to the presentation. Looking at Slide 3, Q1 2019 financial highlights and recent events. For the first quarter of 2019, Q1, the Partnership generated another very solid set of results. Total revenue of $70.5 million, operating income of $32.4 million, and net income of $12.9 million, and adjusted EBITDA of $54.8 million. The Partnership generated distributable cash flow of $25.7 million, enough to declaring a cash distribution of $0.52 per unit. This gives us a coverage of 1.43 times for the quarter.

During the quarter, the fleet operated with 99.8% utilization for the scheduled operations. There were also no dry docking scheduled for any of the Partnership's fleet during the remainder of 2019.

Since our initial public offering in 2013, we declared and paid common unit distributions of $11.86. Our current distribution has remained unchanged since 2015, 11% on the unit price. On December 17, 2018, the Partnership and the subsidiary of Royal Dutch Shell agreed to suspend the Windsor Knutsen charter contract for a minimum of 10 months and the maximum of 12 months. A suspension period commenced on the 4th of March and the vessel now operates under a time charter with a subsidiary of Knutsen NYK on the same tender of the existing time charter contracts of the Shell. Remaining period is only stated at the end.

On May 14, 2019, the Partnership obtained approval to extend the charter with $25 million unsecured revolving credit facility maturing in August, 2019, on the same commercial terms. The refinancing is expected to close in June 2019. Gary Chapman will take over as CEO on the 1st of June. He has many years experience in shipping, and he will bring a fresh new perspective to the Partnership matters and further strengthen ties with NYK having worked for them over many years in various senior roles.

Slide 4, the income statement. The total revenues were $70.5 million for three months ended March 31, 2019, Q1, and this compares to $70.9 million for the three months ended December 31, 2018, Q4. The decrease was mainly related to two less operational earnings days in Q1. Vessel operating expenses for Q1 was $14.5 million, an increase of $0.3 million from Q4. The increase is mainly due to higher operating costs on average for the fleet due to a strengthening of the Norwegian kroner against the US dollar. The increase was partially offset by decreased costs for Ingrid Knutsen, which finished its schedule drydocking in Q4.

Admin and general expenses were $1.3 million for Q1 as they were in Q4. Depreciation for Q1 was $22.4 million, a slight increase from Q4. As a result, operating income for Q1 was $32.4 million compared to $33.0 million in Q4.

Interest expense for Q1 was $13.7 million, an increase of $0.3 million from Q4 due to slightly higher average LIBOR rates.

Loss on derivative instruments was $5.9 million for Q1 compared to a loss $10.9 million in Q4. Most of this was unrealized and due to changes in the long-term interest rates.

Net income for Q1 was $12.9 million compared to $8.8 million for Q4.

Slide 5, adjusted EBITDA. In Q1, the Partnership generated EBITDA of $54.8 million compared to $55.4 million for Q4. Adjusted EBITDA refers to earnings before interest, taxation, depreciation, amortization and other financial items, and it provides a proxy for cash flow. Adjusted EBITDA, of course, is a non-US-GAAP measure used by our investors to measure Partnership performance. With a wasting asset like a vessel, younger fleets tend to produce slightly lower EBITDAs for every dollar invested. The annuity effect reduces the annual loss in the early years, which is factored into the replacement CapEx calculation for the distributable cash flow.

Distributable cash flow. This is another non-US-GAAP financial measure scrutinized by investors in estimate of distribution sustainability. Distributable cash flow represents the net income adjusted for depreciation, unrealized gains and losses on derivatives and foreign exchange, also the distributions on Series A convertible pref units, and other non-cash items. There is an estimate maintenance and replacement capital for drydocking and capital expenditure, which are required to maintain long-term operating capacity of -- and therefore the revenue generated by the Partnership's capital assets.

DCF was $25.7 million in Q1 in comparison to $27.3 million in Q4, and we maintained our distribution level for Q4 at $0.52 per unit, equivalent to an annual distribution of $2.08. The distribution coverage ratio was still a healthy 1.43 for Q1.

Impacting the calculation this year, we have increased the replacement CapEx charge for fleet by six month finance as in the US. As the fleet ages, we increase the provision because of the annuity effect. By comparison, the average coverage ratio was 1.5 for the full year in 2018 with a distribution of 11% on the current unit price as they are our largest investor. Knutsen NYK would prefer increased coverage to investments and secondly deleveraging a lot of the increase in dividends distributions. The high coverage ratio gives the Partnership more flexibility regarding both capital base and distributions going forward.

Slide 7, the balance sheet. At the end of Q1, the Partnership had $71.8 million available in liquidity, which consisted of cash and cash equivalents of $43.1 million and $28.7 million of capacity under its revolving credit facilities. The revolving credit facilities, following extension, mature in August 2021 and September 2023. We have a predictable cash flow, a healthy liquidity position.

The Partnership's total interest bearing debt outstanding at the end of Q1 was $1,069 million compared to $1,059 million in the accounts net of debt issuance cost, which compares to $1.8 -- $1,087 million in the previous quarter. So we're seeing a slight repayment of about $18 million. The average margin paid on the Partnership's outstanding debt during Q1 was approximately 2.1% over LIBOR.

In Q1, the Partnership had interest rate swap agreements totaling $552 million and that compares to $556 million in Q4 -- end of Q4. The Partnership receives interest based on LIBOR and pays an average interest rate of 1.86%. These have an average maturity of around 4.7 years. Plus, the Partnership net income is impacted by changes in the mark-to-market swap valuation, the cash flow is stabilized, mitigating the interest rate impacts from the DCF. We have recently seen higher interest rates in the US and also increasing replacement capital provisions charged on our vessels as they get older. However, our coverage remains at a higher level and our full year estimates for 2019 look solid.

Slide 8, long term contracts by leading energy companies. Bodil Knutsen is our largish tanker operating in the North Sea. It is ice class and chartered to Statoil until 2020. They have four further one year annual extension options.

Torill and Hilda Knutsen operates on the Goliat, which is the first field developed in the Barents Sea. After initial five-year term on both vessels, Hilda time charter extended for four more years in October and the first of five annual extension options was exercised on Torill Knutsen.

Dan Sabia, Dan Cisne, Fortaleza and Recife Knutsen are a long term bareboat charter through to 2023 with Petrobras Transpetro.

Carmen and Raquel Knutsen are on charter to Repsol Sinopec until 2023 and 2025, respectively, for Raquel with options to extend until 2030.

The Ingrid Knutsen is on time charter until 2024 to Norwegian subsidiary of ExxonMobil. The charter has options to extend by up to five more -- one year period.

Tordis, Vigdis and Lena Knutsen are on five-year charter to Brazil Shipping I, a subsidiary of Shell. These will expire in 2022 and the charter has options to extend for a further 10 years.

The Brasil and Anna Knutsen are on charter for Galp Energia until 2022 with charters options to extend until 2028.

The KNOP fleet has an average remaining fixed contract duration of 3.4 years and an additional 4.4 years on average in charterers option.

In September 2018, the sponsor Knutsen NYK entered into newbuild long-term charters with Equinor for two Suezmax DP2 shuttle tanker. These are constructed at Hyundai Heavy Industries and will -- are scheduled for delivery in the second half of 2022. In addition, -- in 2020 sorry. In addition, in December 2018 they ordered a new Suexmax DP2 shuttle tanker to be constructed by Cosco Shipyard in China for a delivery in early 2021. This shuttle tanker will operate in the COA pool, if not contracted under a long-term charter before delivery.

Slide 10. KNOT Offshore Partners should be considered as a mobile pipeline business with fully contracted revenue streams. KNOT has an elevated yield compared to most MLPs and is focused on building coverage and deleveraging. This quarter we reported another very strong performance, revenues, EBITDA and distributable cash flow. KNOT is well placed to compete in future tenders and currently has three vessels on order. We have a solid and profitable contract base generated by our modern fleet, which by the end of March has an average age of a little under six years.

Together with our sponsor, we operate the largest fleet of shuttle tankers. Since the formation of KNOT, we have had very high levels of vessel utilization average around 99.6% and financially this translates into high and increasing predictable revenues, adjusted EBITDA, distributable cash flows and more vessels are added to the fleet. No one has more expertise in operating these sophisticated shuttle tankers than KNOT Offshore Partners, and we operate these vessels with real expertise. Today, supply is tightening, and the market is expanding. We have a large and financially strong supportive sponsor who knows this market as well as anyone.

Thank you. And that concludes the narrative for the slides. If anyone has any questions, I'll be happy to take them.

Questions and Answers:


Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Hillary Cacanando from Wells Fargo Securities. Please go ahead.

Hillary Cacanando -- Wells Fargo Securities -- Analyst

Hi. Thanks for taking my questions. So just looking at the dropdown inventory, there's two, I guess, not delivering until 2020. So the right way to think about, I guess, potential dropdown is that there -- that you're not going to purchase anything until at least 2020. So we shouldn't expect anything this year?

John Costain -- Chief Executive Officer and Chief Financial Officer

That's correct, Hillary. And also the -- obviously, the third ship that they've ordered, but that's with a view to the -- they've got the COA pull up so that you can potentially get low-time (ph) charter if somebody comes along and wants the ship. We probably will look to respond and probably look to get it covered and then maybe order another ship, but that's what I think. And now I've got enough internal cargoes to actually just order a new tanker. So potentially there are about three candidates, but today there's only two.

Hillary Cacanando -- Wells Fargo Securities -- Analyst

And then, I guess, also, in terms of potential distribution increase. I know you -- in the past, you've said that the -- I guess, that the equity with the big yield at current level is not attractive, but -- what -- is there -- at what point would you consider that -- consider increasing the distribution (multiple speakers)

John Costain -- Chief Executive Officer and Chief Financial Officer

Well, I can't really decide on the distribution policy. So I said in the last earnings call, I have not -- it's not really going to be my decision going forward as to what to do with the distribution, but my view has been that with the market the way it is and the difficulty in raising equity, we don't really want to press the distribution issue. So it's better to build coverage and keep the MLP very stable. And look, I think, we could actually add a ship or two in the future from leverage and that's really quite desirable. So I think, ultimately, when you're paying these four (ph) levels of yield, it's telling you something about markets really. And I don't think necessarily best representing while presenting good figures and a high yields and then pushing the distribution and obviously it weakens -- it will weaken the MLP in the short-term.

Hillary Cacanando -- Wells Fargo Securities -- Analyst

I mean, what's your view of the MLP market actually?

John Costain -- Chief Executive Officer and Chief Financial Officer

I mean, I think the MLP market has changed quite a lot over the last few years. I'm going to see a lot of the big companies struggle to raise equity as well. And I think genuinely just got to keep a solid vehicle, because I think if -- I mean, on some of the bigger MLPs that raise quite a lot of capital, the unit price is quite heavy, because there doesn't seem to be an awful lot of liquidity in the market. I mean a lot of the funds are closed end funds that may basically have a large slice of the MLP units and they have been struggling to attract new investors. I mean, I think a lot of conversions that the MLPs have gone through has made investors shy away from the MLP investment space generally and it has suffered over the last few years, because some of the MLPs basically migrated away and I think investors like to know what they're buying. And I think that's what -- I mean, I also think with the -- we're a bit small and also we -- that's the problem. I mean, it's hard to grow in this market.

Hillary Cacanando -- Wells Fargo Securities -- Analyst

So you think the MLP market is still viable and you don't think there are -- like, is there any chance that not could actually sometime in the future you roll it up to the parent or...

John Costain -- Chief Executive Officer and Chief Financial Officer

Yes. I think -- I mean you're thinking about intelligent, Hillary. I think there's always a chance of that, but ultimately you have to message properly. At the moment, we intend to continue as an MLP. If there was any decision to change the way the Partnership is going to operate, then it would be well signposted. So I wouldn't just be sprung on people, but I mean you can never say never with any company or any MLP going forward. What you can see from the way KNOP's operated over the last six years, the contracts are really very stable and they're very good quality through all the other issues around the MLP space. This is a very solid investment and it may not be -- you may be right, it may not be in the long run. Again, I'm not involved after this cost, so I can't really decide on exactly we'll have any say in the strategy and that something responsible have to think about going forward. But it's like every MLP you talk to, you're not going to get a straightforward answer and say no MLP for 10 to 15 years, because nobody has that level of visibility. I mean, we -- you know that the marine space MLPs are no longer included in the Alerian and that's obviously an -- interesting, because it impacts the amount of liquidity and the units of companies outside that Alerian Index.

Hillary Cacanando -- Wells Fargo Securities -- Analyst

Well. Thank you, John. It was really nice working with you for the past couple of years.

John Costain -- Chief Executive Officer and Chief Financial Officer

I knew, Hillary. Thanks. I'm fine. I'm looking forward to the -- looking forward to have a simple life. I think, it's having the two areas of shipping in my involvement it's being quite -- it's been fascinating actually. I've enjoyed it. I'm certain that you and Michael have been two of the best analysts we've had and I appreciate of how you stayed interest in this.

Hillary Cacanando -- Wells Fargo Securities -- Analyst

Thank you. We always say, KNOT has been a quite executor. You guys have been executing when everyone else has cut their distribution. And so, thank you, and good luck. Thank you. It was very (multiple speakers).

John Costain -- Chief Executive Officer and Chief Financial Officer

Thanks, Hillary.

Hillary Cacanando -- Wells Fargo Securities -- Analyst

Thank you. Bye.

John Costain -- Chief Executive Officer and Chief Financial Officer

Thank you. Bye.


(Operator Instructions) There are currently no participants in the Q&A. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Costain for closing remarks.

John Costain -- Chief Executive Officer and Chief Financial Officer

Thank you, everyone, who is listening and then I appreciate all your interest in the units. And, hopefully, you stay with us or you invest to become a bigger investor in the MLP and hopefully it goes from strength-to-strength over the coming years. Thank you, all, and I'll sign off now. Bye.


This conference is now concluded. Thank you for attending today's presentation. You may now disconnect, and have a good day.

Duration: 22 minutes

Call participants:

John Costain -- Chief Executive Officer and Chief Financial Officer

Hillary Cacanando -- Wells Fargo Securities -- Analyst

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