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KNOT Offshore Partners LP (NYSE:KNOP)
Q4 2019 Earnings Call
Mar 12, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the KNOT Offshore Partners' Fourth Quarter 2019 Earnings Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Gary Chapman. Please go ahead.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Thank you. Welcome everybody. The earnings release and slide presentation are both available on our website.

By way of a recap, KNOT Offshore Partners, KNOP, focuses on the shuttle tanker segment, whereby, our ships transport oil from production units to shore side often loosely described as a mobile pipeline business, and they form an essential part of the supply chain for our customers.

As before, on today's call, our review will include non-U.S. GAAP measures, such as distributable cash flow and adjusted earnings before interest, taxation, depreciation and amortization, EBITDA. The earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

Please remember that any forward-looking statements made during today's call are subject to risks and uncertainties and these are discussed in our annual and quarterly SEC filings. Actual events and results can differ materially from those forward-looking statements and the Partnership does not undertake a duty to update any forward-looking statements and I refer you to Slide 2 for further details.

Today, I'd like to run through the numbers on where we are today and then move on to try to give more details about our market and our outlook that I hope will be useful. So turning straight on slide 3, Q4, 2019 financial highlights and recent events. KNOP's results were very strong and much in line with expectations. Total revenue of $70.1 million, operating income of $31 million, net income of $23.8 million and adjusted EBITDA of $53.6 million.

Distributable cash generated of $26.4 million, giving a distribution coverage ratio at the end of the quarter of 1.46 times and a continuation of the cash distribution of $0.52 per unit, returning an annual yield of some 13% based on a $16 unit price.

During the quarter, the fleet operated with 99.7% utilization for scheduled operations, and since our IPO in 2013, we've operated with an average of also 99.7% excluding all scheduled maintenance and dockings. The planned drydocks of the Raquel Knutsen originally scheduled for early 2020 was brought forward as it was commercially advantageous to do so. But as a result, this impacted the results in December through having 18 offhire days.

The impact of the drydocking in 2020 will, therefore, of course be reduced having taken some of this in 2019. There are no more drydocks planned in 2020 and the Raquel returned to service on March 5th, 2020.

We mentioned during the last call that Shell agreed to take up the next one-year option on the Windsor Knutsen, meaning this vessel, the first put into the MLP is now contracted through October 2020. In October 2019, Equinor exercised its option to extend the time charter with Bodil Knutsen by one additional year until May 2021. And again in October, 2019, Eni exercised its option to extend the time charter at Torill Knutsen by one additional year until November 2020.

On Slide 4, the income statement. Again, you'll see total revenues of $70.1 million for the fourth quarter, compared to $71 million for the third quarter. The decrease mainly relate to the advanced timing of the Raquel Knutsen drydock as explained before.

Vessel operating expenses for the fourth quarter of 2019 were $15.4 million, an increase of $0.5 million over the third quarter. The increase was mainly due to some additional repair costs for the Lena Knutsen, additional expenditures for planned maintenance and spare parts and higher-related costs for forwarding air freight and handling costs.

Admin and general expenses were essentially unchanged from the third quarter at $1.2 million, depreciation was slightly up at $22.6 million as compared to $22.4 million caused by an accelerated charge due to the change of timing of the Raquel Knutsen drydock. Overall, this caused operating income to fall slightly to $31 million, compared to $32.4 million in the third quarter.

Interest expense for quarter four was $11.4 million, a decrease of $1.1 million from $12.5 million in quarter three. The decrease mainly being due to lower LIBOR, on average across all credit facilities that are not hedged.

Gains on derivative instruments was $4.2 million for quarter four compared to a loss of $5.7 million in the third quarter, most of this was unrealized and due to changes in long-term interest rates. As a result of all of the above, net income for the fourth quarter was $23.8 million compared to $14.1 million for the third quarter.

Slide 5, adjusted EBITDA. In quarter four, KNOP generated adjusted EBITDA of $53.6 million compared to $54.8 million for Q3. Adjusted EBITDA refers to earnings before interest, taxation, depreciation, amortization and other financial items and it provides a proxy for cash flow. I refer you to the notes at the bottom of the slide that explain a little bit more about this non-GAAP measure.

Slide 6, distributable cash flow or DCF. This is another non-U.S. GAAP financial measure. And again I'll refer you to the notes at the bottom of the slide. DCF was $26.4 million in the fourth quarter in comparison to $28 million in the third quarter and the distribution cover at the end of Q4, as mentioned, was 1.46 times. In the quarter we made a -- in the quarter, we maintained our distribution level at $0.52 per unit equivalent to an annual distribution of $2.08.

Slide 7 on the balance sheet. At the end of Q4, the Partnership had $72.2 million in available liquidity, which consisted of cash and cash equivalents of $43.5 million and $28.7 million of capacity under its revolving credit facilities. The revolving credit facilities mature in August 2021 and September 2023 and KNOP has no further refinancing falling due until 2022.

The Partnership's total interest-bearing debt outstanding at December 31, 2019 was $1.002 billion, down from $1.027 billion at the end of the third quarter and the average margin paid on the Partnership's outstanding debt during Q4 was approximately 2.1% over LIBOR; also 2.1% in Q3.

As of the end of Q4, the Partnership had entered into various interest rate swap agreements for a total notional amount of $562 million to hedge against the interest rate risk of its variable rate borrowings. Based on this, in the quarter, we received interest based on three or six-month LIBOR and paid weighted average interest rate of approximately 1.87% under the interest rate swap agreements, which have an average maturity of approximately four years.

As we don't apply hedge accounting for derivative instruments, our financial results are impacted by changes in the market value of such financial instruments. However, cash flow is stabilized, mitigating the interest rate risk on distributable cash flow. All-in-all, our 2019 results are, as we expected and they're very solid.

Slide 8; turning to our long-term contracts with leading energy companies. For the Windsor Knutsen, the partnership agreed with Shell as the charterer to suspend the vessel's time-charter contract. The suspension period commenced March 4th, 2019 and is expected to end April 3, 2020.

During the suspension period, the Windsor Knutsen has been operating under a time charter contract with Knutsen Shuttle Tankers Pool AS on the same terms as the existing time charter contract with Shell; meaning, no financial loss has arisen to KNOP as a result of this arrangement. The vessel is fixed until October 2020.

Bodil Knutsen is our largest shuttle tanker operating in the North Sea. It's, ice- class and on charter to Equinor until 2021, having recently taken a one-year option. They now have three further one-year annual extension options.

Torill and Hilda Knutsen operate on the Goliat field, which is the first field developed in the Barents Sea. After an initial five-year term on both vessels, the Hilda time charterer extended for four more years and Eni has three one-year options remaining to extend the time charter on Torill Knutsen up until November 2023.

Dan Sabia, Dan Cisne, Fortaleza, and Recife Knutsen are on long-term bareboat charters through to 2023 with Petrobras Transpetro. Carmen and Raquel Knutsen are on charter to Repsol Sinopec until 2023 and 2025 respectively and with options to extend until 2026 and 2030, respectively.

The Ingrid Knutsen is on time charter until 2024 with Var Energi with charterer's options to extend by up to five more one-year periods. Tordis, Vigdis, and Lena Knutsen are on five-year charters to Brazil Shipping I, a subsidiary of Shell. These will expire in 2022 and the charterer has options to extend for a further 10 years on each vessel.

The Brasil and Anna Knutsen are on charter to Galp Energia until 2022 with charterer's options to extend until 2028. The KNOP fleet has an average remaining fixed contract duration of 2.8 years and an additional 4.3 years on average in charterers' options, all with very, very strong credit counterparties.

It's perhaps worth reiterating here that these charter renewal decision points, as firm fixed periods come to an end, are a natural element of KNOP's business. Typically a new build vessel charter contract will contain a fixed charter period of between five and perhaps 10 years, plus charterer's options for additional periods of say, five to- 15 years depending on the charterer's production profile, volumes, etc.

This allows the charterer to control access to the vessel for a long period of time, while potentially giving them balance sheet and some operational flexibility. These option renewals are hence a normal part of our business and the gradual reduction of the average fixed contract period that we're seeing is to be expected.

We do however have several important elements that we believe differentiate us from other more typical types of shipping and which provides us with more stability and more comfort.

Indeed our sponsor has been managing with such optionality for many years and given, particularly, our customer's essential need for these assets;, the niche market, there are only three main operators; our customer relationships developed over many years; our strong operating record; the age of the fleet and DP2 technology; the supply demand balance of shuttle tankers, plus our willingness and ability to be flexible for our customers' needs; all mean we believe we are in a strong position to see the options taken as they fall due or in the worst case, if not to find alternative employment.

There are other factors, for example that only certain vessels can service certain fields, giving us more assurance that those vessel options will be taken up as they fall due. We can of course never guarantee and our business is certainly not risk-free, but we do believe that there are -- there can be some misunderstanding as to the risk profile of KNOP's charter options. And hopefully, we are helping with that by sharing some of these features with you. As further comfort, to-date, we have seen some options already taken on four of our vessels being Windsor, Bodil, Torill and Hilda Knutsen.

Slide 9, at this time, the sponsor KNOT has five vessels that could be dropped into the MLP beginning from Q3, 2020. These have an average fixed contract period of 5.8 years with an average of a further 9.2 years extension options. The acquisition by KNOP of any drop-down vessels in the future is of course subject to the approval of the Board of Directors of each of KNOP and KNOT, and therefore, please be reminded that there can be no assurance that any potential drop-downs will actually occur. Given these opportunities, we're looking at all options as to how we might finance these new vessels, maybe even doing one without needing to go to market.

But given the timing and severe market volatility we see, now is not the time to conclude on that. But we want to say that we haven't ruled anything out at this stage, including to do nothing for the time being. We're monitoring and working to see what's best for the Partnership and we'll report further on this when we can.

Slide 10, as a further market overview, we believe our market is still concentrated in nation- based on long-term contracts and long-term customer relationships. There are around 69 vessels on the water today with 25 on order. Each new vessel is almost always built for an individual charterer, not speculatively or to replace an old vessel and this helps to keep the market tight.

KNOP and KNOT and sponsor together are the largest by size. Altera Infrastructure is the Teekay business rebranded. The global fleet is 11.5 years old and so KNOP's compares favorably at 6.5 years and all of KNOP's vessels have DP2 technology that we believe will remain the benchmark for the foreseeable future.

The shuttle tanker market remains extremely tight and we believe that although 17 vessels will be over 20 years old by 2022, we continue to expect demand and utilization of these vessels to hold firm.

Slide 11, around 85% of the fleet is contracted for business in Brazil and the North Sea and there are a few vessels that operate in very specific circumstances such as in the Arctic and under the Jones Act. The Barents Sea perhaps has the greatest growth potential, as it is estimated that approximately half of the undiscovered resources on the Norwegian Continental shelf are in the Barents Sea. And with the opening up of the Brazilian market, we are seeing more international companies operating fields there, which in turn generates demand for tonnage. In addition, Petrobras themselves remain very active in Brazil.

The final graph with the red banner at the bottom of the page is included to help support our view that older shuttle tankers will be in demand in the future. You can see that based on these estimates, if the industry was to move to a 20-year life, there would be a shortage of tonnage and this suggests to us that there will be continued demand for vessels over 20 years.

What we are seeing is that oil production is moving further offshore into new fields with new licenses, particularly in Brazil, where there is a strong need to use modern DP2 shuttle tankers, such as those operated by KNOP. It's also worth noting that pre-sell projects in Brazil are typically competitive in terms of average breakeven prices and payback times making them attractive to developers. There are also other areas such as the Barents Sea that we have mentioned above that we expect will provide more future opportunities.

Slide 12; so in summary, we've reported yet another strong performance in this final quarter and across the whole year with excellent utilization figures, steady cash flows and good coverage. We have a pipeline of new business now accumulating and with the expectation of more to follow.

Given what we've seen over the last days and weeks, we would like to reiterate that our ship charter contracts do not rely or depend on the volume of oil produced by the field, nor on the underlying price of oil.

Of course, a long-term or permanent market shift could affect the number of new offshore projects and the overall outlook for the production of oil, which could eventually and in turn impact the demand and pricing for shuttle tankers. But at this time, we are not seeing this. Equally, wherever you sit on the carbon spectrum, we think the world still needs oil for the foreseeable future.

A question that's asked often relates to the regulatory changes in fuel specifications. So to confirm, fuel is a cost for our customers just like when you hire a car and if fuel becomes more expensive such as through the new low-sulfur fuel emissions regulations, this is not a cost of KNOP.

Finally, our yield is above 15% right now and with our unit price today, we have actually paid out more in distribution, since our IPO seven years ago in 2013 at $13.42. Some momentum back into midstream stocks or in fact any stocks would be good, but this could be some way off at the moment.

So 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:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Igor Levi with BTIG. Please go ahead.

Igor Levi -- BTIG -- Analyst

Thank you, guys. So, you have two vessels set to roll off before the end of the year, the Windsor and the Torill. So, how likely would you say based on your current conversations with Shell and Eni, are these options to be exercised? And if they're not to be exercised, could you talk about whether you would expect to recontract these vessels and how market rates today compare to what these vessels are currently earning?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Sure. I think that commercially, if you speak to our chartering department and commercial department they're very confident, particularly for the Windsor. It's a very good vessel for Shell. It's operating in a particular way on a particular field. It's the right size for them.

We see no reason why they wouldn't carry on taking it and wouldn't carry on taking the options. And actually the same goes for Torill. Both of those vessels have recently been extended. And as we sit down today, we've got no reason to believe that they won't carry on doing that, given the operational profile that those vessels have and where they're operating.

Igor Levi -- BTIG -- Analyst

And what would you say the rates are today compared to what these vessels have been earning, if they were to be recontracted?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Well, we've seen charterers taking rates that are in line with the option pricing that is currently in the charters that we've got. It's actually quite difficult to give a market rate for a shuttle tanker, because it depends on its size and where it's operating and the specification and the value to the charterer.

So to some degree, we're not in a homogenous market where one shuttle tanker is directly comparable to another. And actually that works in our favor, because when you have a, like with the Windsor, a vessel operating in a particular field and doing very, very well, there's a cost involved for the charter to start changing that.

And what we're finding typically is that we don't get huge amounts of pushback on rates provided we're operating properly and the vessel is performing. So, clearly, that's a generalized statement. But I'm afraid I can't give you particularly numerical answer to your question.

Igor Levi -- BTIG -- Analyst

Great, thank you. And then, just as a follow-up on the topic of your drop-downs. I know you mentioned that you may not take drop-downs at all. It's just based on where the market will be. Based on the current dividend yield, assuming you don't use -- you don't issue equity to finance drop-downs, do you have alternative forms of financing that you're looking to pursue, if you determine that drop-downs are an attractive option for you?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

At the moment, I don't think it's a surprise if I say that it's difficult in the market today. The volatility that we're seeing at the moment is terrible for everyone. I think, we're hoping that things will at least settle down. And by the time we have to do anything, which is, not before the third quarter, we'll be in a different position, both globally and for us as an entity and as a business.

But we are looking into alternative options. And we're, obviously, talking a lot with the sponsor about what they are prepared to do. And they're quite happy as a sponsor to be flexible on timing. So that is very helpful for us, so that we're not forced into making decisions before we're ready or the market's ready.

And at the moment, again, it's probably not a particularly satisfactory answer. It's a very difficult question to answer, where we are today. We're looking at everything that's open to us. And that, as I say, could be from doing nothing for the whole of 2020 through to seeing what other alternative options there might be that our investment bank friends can be creative about.

But, obviously, the numbers need to work for the partnership as well as for the sponsor and the whole thing needs to be accretive for the Partnership and the right strategic timing and decision as well. So, I don't think there's an easy answer to your question right now. I'm hoping that as the year progresses and we get closer to Q3 that we'll have more clarity on what options we've got and maybe one of those options will start standing out as being the right one.

Igor Levi -- BTIG -- Analyst

Great. Appreciate your color on this, especially, given the circumstances today. Thank you and I'll turn it back.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

The next question comes from Richard Diamond with Castlewood Capital. Please go ahead.

Richard Diamond -- Castlewood Capital Partners, LLC -- Analyst

Good morning, Gary. I actually started buying KNOP at these levels back in 2016. And I think the current market price is a gift to long-term investors. I just want to check if some of the original work I did still holds true. And I know -- right now, my understanding is that there are MLP owners who are getting margin calls. And they're just selling what they can, as opposed to what they want to.

But if you look at the fundamentals of the business, the cost of producing from an existing platform is -- the marginal cost is in the mid-single digits, because a lot of the capital has been spent in building the platform. So I just want to confirm that's still true.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Yes. I mean, certainly, Richard, thanks for the question. We're not obviously entirely party to our customers' individual positions, but that does sit with our understanding as well.

Richard Diamond -- Castlewood Capital Partners, LLC -- Analyst

And one of the -- I'm just curious, VLCC rates are going through the roof right now. And I understand a ship was chartered at WorldScale 170. And there is really a shortage of storage. Has anyone approached you about using one of KNOP's ships just to hold product? Is that a possibility given the...

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

It's a possibility. But to the best of my knowledge, no one's approached us. And actually we don't have any spare vessels. So particularly, our vessels have charters and options attached to those charters. So the charters have control of them even the shorter-term ones. So, I guess that's more possible for our sponsor KNOT that has some older vessels as well. But no, to the best of my knowledge, that's not something that has come across KNOP at this stage.

Richard Diamond -- Castlewood Capital Partners, LLC -- Analyst

Thanks for the great job.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

But it's an interesting idea.

Richard Diamond -- Castlewood Capital Partners, LLC -- Analyst

Well, a lot can change in a week?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Yes, completely. Exactly.

Richard Diamond -- Castlewood Capital Partners, LLC -- Analyst

Thank you.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Thank you, Richard.

Operator

Our next question comes from Robert Silvera with R.E. Silvera. Please go ahead.

Robert Silvera -- R.E. Silvera & Associates -- Analyst

Hello, gentlemen. I wanted to thank you very much for very well-run company during this past year. And my question is, at the point, we are with coverage of over 1.4 on the existing dividend. Has the Board given any thought in this crazy market to buying in some of the preferreds and some of the common? I can't see a better investment in our own Company than buying our own shares back right now. Has that been addressed at all?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

We have talked about that. And at the moment, I mean, part of the difficulty Robert, to some degree, is the share price is all over the place [Speech Overlap].

Robert Silvera -- R.E. Silvera & Associates -- Analyst

Right now it's $10.70 on the common units. So I mean, this is crazy, down a $1.92 today as I look at my screen, and it's selling at $10.70 a unit. And that to me is bizarre, to say the least, we should be scooping this stuff up. What a return for us, this is well close to 20% return for our investment, if we buy our own stock back not to sell what the preferred is. I don't know, what the preferred is selling for. I don't have the symbol for that so.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Well, it's not listed. It's private.

Robert Silvera -- R.E. Silvera & Associates -- Analyst

That's what I thought. That's why I could never find it. We need to strike while the iron is hot, the Board needs to take positive quick action by looks of it and grab as much as we can at a level like this what a return for us.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Yes. And I hear you, Robert, and thank you for your comments. I will take it back and I'll discuss it with the Directors and we need to move fast, if we're going to do it.

Robert Silvera -- R.E. Silvera & Associates -- Analyst

Good. I'd love to see that. I mean I think that's one of the smartest investments you can make investing in yourself. You've done a great job. The future is good for us regardless of the price of oil. I mean, this is, literally to me, it's like if I want $1, I can spend $0.50 to get $1. That's what it amounts to. So, it's crazy just think of it in those terms. Literally, I can spend $0.50 to get $1. So with this kind of a yield. Okay, that's it for me. I'm so pleased with the way you've performed, the way you guys have navigated through this market.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Thank you.

Robert Silvera -- R.E. Silvera & Associates -- Analyst

That's it for me.

Operator

The next question comes from Jim Altschul with Aviation Advisory Service. Please go ahead.

Jim Altschul -- Aviation Advisory Service, Inc. -- Analyst

Good afternoon, gentlemen, and thank you for this informative call and also thank you for my call -- my question. Actually, I got a couple of questions. First of all, I don't -- I mean, I don't doubt anything you're saying but particularly in times like these you want to look at the absolute worst case. So with regard to the two ships that are currently -- the current charters are scheduled to terminate this year.

A couple of related questions. First of all, if the oil price remains at the current level or even drop some more, is there any chance that the operator of the offshore fields in question would choose to shut in or temporarily suspend production and therefore not want to exercise the option just because I wouldn't need a ship?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Jim, thanks for the question. We don't believe that's likely at all, first of all. And even, if it was to happen, we believe there are alternative uses for those vessels. So, at the moment, even under a worst-case scenario we're not actually particularly concerned, given the market volatility and all that we're seeing with oil prices.

As a Company, we had our Board meeting yesterday, and to be honest, the oil price wasn't a big deal for us. I think if it persists and there's a fundamental shift in the market somehow, we may see some longer term changes. But I don't think we're expecting that at the moment, who's to say.

But short-term we're really not expecting any changes. And I think a lot of the fields that are using our vessels will carry on because I think, as I think one of our previous calls Richard was mentioning that the marginal cost of producing is so low. And so there's -- it seems unlikely to us that our customers would decide to stop producing in a particular field when they've invested billions of dollars to do so.

Jim Altschul -- Aviation Advisory Service, Inc. -- Analyst

Okay.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

It's easier to take the oil out and store it than it is to sort of cut the field and try to come back later, in my understanding.

Jim Altschul -- Aviation Advisory Service, Inc. -- Analyst

Okay. Continuing along in the similar vein let's assume that -- I mean, I don't think and I'm not doubting the accuracy of what you just said. But let's assume in fact that with regard to the two ships for which the current contract terminates this year. If the option were not exercised, what kind of alternatives I guess I'll give you both questions.

What alternatives would you have without being too specific? And second assuming really the worst case namely you don't find a new customer. If both, circa by the end of 2020 Windsor Knutsen and Torill Knutsen were offhire, what would be the impact on EBITDA?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Well, unfortunately I'm sorry I don't have the -- I can't give you figures off the top of my head. But I think -- first of all, I'll repeat my point before that we don't think that's likely at all. And secondly, our next port of call would be to find another use for the vessels.

We're receiving requests from charterer -- for potential charterers on a very regular basis either for tender opportunities for new vessels or questions around taking shorter term charters to cover other vessels while they're in drydock for example which is always a difficult thing for our customers because there are no free vessels really in the shuttle tanker market. So, it's -- that would be our second.

And the third option could be that we charter it to the sponsor to use in their pool in the North Sea. So, we've got options on some of these vessels. But to be honest and I appreciate it's easy for me to say and I'm asking for you to believe is we don't believe it's likely that we're going to be in a position where we have to do either of the alternatives. We do believe the charterer is going to take those vessels.

The EBITDA on a vessel is significant. And if your worst-case did come about, then clearly we'd have some maths to do very quickly. But the nature of the market and for some of the reasons that I outlined before, we believe we're somewhat protected from this rechartering risk for all kinds of different reasons.

And a lot of things would need to fall against us for those sorts of scenarios that you described to actually come about. That's not to say they can't and they won't, but equally we feel that we're relatively protected.

Jim Altschul -- Aviation Advisory Service, Inc. -- Analyst

Okay. Well, I mean I don't doubt the -- actually I just -- particularly in these times you want to look at the worst case. I don't want to take too much -- hog the floor but just one more thing in a more positive vein, since you have a good chunk of your debt is floating rate and not subject to swaps. If interest rates remain where they are, are we going to see a meaningful impact on the bottom-line as a result of the drop in interest rates?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Yes, certainly. We're -- we constantly have a discussion about our hedging strategy and what we ought to be doing and what we think is right. I mean clearly interest rates are not going to go up in the near-term far from it.

So, I think we will benefit if rates continue to fall and we have done in this quarter. And I think you'll probably see -- I'd expect to see a benefit in Q1 of 2020 as well given rates have fallen even further. So, yes, we will benefit.

Whether it's hugely material, I guess, it depends how long they stay low we'll benefit if -- on a quarterly basis, it's important and interesting, but it's not going to move the needle too much on just one quarter. But if they stay low for an extended period of time, then clearly that's very good for us.

Jim Altschul -- Aviation Advisory Service, Inc. -- Analyst

Thank you very much for giving me so much time and such detailed answers.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

No problem Jim. Thank you for asking. Thank you for your interest.

Operator

Our next question comes from Marc Solecitto with Barclays. Please go ahead.

Marc Solecitto -- Barclays PLC -- Analyst

Hi, good morning. Gary, just wanted to ask with respect to capital allocation and the distribution policy. Just wondering if you could provide an update on how you're thinking about that with units yielding close to 20%? Is there any thought of maybe recycling some of that into buybacks or conserving cash to fund future drop-downs? Just curious how you're thinking about that.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Yes. That's a very good question. I think when we think about this, we are very concerned about the yield that we're generating. It's very expensive for us. But equally we understand what our unitholders bought the box for, principally interest, and hopefully, some growth. Growth sounds like a long way at the moment when you're down at $10. But I guess, hopefully, the only way is up.

I think at this stage, we're clearly not about to increase the distribution in the near term, given the yield and given the market and that would be probably the wrong thing to do. At this time, we've always tried to run the company in a very stable and predictable fashion. And so we've seen what some other MLPs have done when they've cut their distribution. And where we sit today, we don't want to do that.

I think it's an interesting time that we live in at the moment. But what we're trying to do is run this Company as responsibly and as stably and as securely as we can. But there are opportunities that come up like stock buyback as the other caller mentioned and we're looking at it. But at this stage, we were tending to prefer that we keep the stability and the predictability of the MLP more than trying to surprise people by doing something clever that perhaps may or may not work, particularly given that we could do something and then find three to six months later our yield is back where we started.

So while we're considering all the alternatives, if we don't come out with a consensus of the Board where we believe that we are definitely going to get something out of a certain action, then to be honest, we tend to fall back on the stability and the predictability of what we're doing. Given the fact that we've got a long-term business and given the fact that we are trying very hard to run a very good and stable operation both financially and operationally.

Marc Solecitto -- Barclays PLC -- Analyst

Got it. Thank you.

Operator

[Operator Instructions] Our next question comes from William Watson [Phonetic], who is a Private Investor. Please go ahead.

William Watson -- Private Investor

Hi there Gary. How are you today?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Hello, I'm very well. Thank you very much. Although, I could be better for.

William Watson -- Private Investor

My question is that there has been some bantering around of a potential IDR buyout in this market. Why are you -- is that in our future or has there been any discussion of it?

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

There has -- we discuss that on a very regular basis. We've seen what other MLPs have done in terms of eliminating their IDRs. I think we understand that it's probably a drag on us as a business. However, the amount of money that is going out through IDRs today is not huge. We're not in the top-tier of pay-out. So there's an acknowledgment that I think we need to do something.

I think it's really about timing and about the combination of maybe the IDR with something else. I'm thinking about cash flow and how we do it and discussing with the sponsor, but it's very, very much on our radar to address as a point.

But I guess over the last three to six months, it's probably admittedly not been the top of our agenda simply because as I say, we're not paying out huge amounts into the IDR and we weren't sort of having any further drop-downs about to happen. But over this 2020 and into 2021 if we do have more drops, then I think that might be the time where we try to do something about it.

William Watson -- Private Investor

Okay, thank you. That's very helpful. We've seen this move before in 2016. I hope that folks can allocate some capital to buy the units and throw [Indecipherable] a few shares. Please have a great day. Thank you.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Thank you very much. Thank you.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Gary Chapman for any closing remarks.

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Yeah, thank you everybody that's listened in and some really good questions there and some things for us to think about. And let's hope for some stability. I'm not sure we'll get it just yet, but thank you very much and good day to everybody.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Gary Chapman -- Chief Executive Officer and Chief Financial Officer

Igor Levi -- BTIG -- Analyst

Richard Diamond -- Castlewood Capital Partners, LLC -- Analyst

Robert Silvera -- R.E. Silvera & Associates -- Analyst

Jim Altschul -- Aviation Advisory Service, Inc. -- Analyst

Marc Solecitto -- Barclays PLC -- Analyst

William Watson -- Private Investor

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