Q4 2023 KNOT Offshore Partners LP Earnings Call
Hello, My name is Jay and I'll be your conference operator today at this time I would like to welcome everyone to the knot offshore partners fourth quarter 2023 earnings results Conference call.
Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by Chi.
Derrek Lee you May begin your conference.
Thank you and good morning, ladies and gentlemen, my name is Derrick.
The chief executives and Chief Financial Officer of knot offshore partners welcome to the Partnership's earnings call for the fourth quarter of 2023.
Our website is knot offshore partners Dot com and you can find the earnings release that along with this presentation.
On slide two you will find guidance on the inclusion of forward looking statements in today's presentation. Please amazing good faith and reflect management's current views known and unknown risks and are based on assumptions and estimates that I didn't have any subject to significant uncertainties and contingencies many of which are beyond our control actual results may differ materially from those.
As expressed or implied in forward looking statements and the partnership does not have or undertake a duty to update any such forward looking statements made as of the date of this presentation.
Further information please consult our SEC filings, especially in relation to our annual and quarterly results.
Today's presentation also includes certain non U S. GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures.
On slide three we have the financial and operational headlines for Q4.
Revenues of $73 million operating income $18 one.
That was a net loss of five 3 million after accounting for an unrealized in other words noncash loss of $8 9 million on derivatives and adjusted EBITDA of $45 7 million.
Closed Q4 with $63 $9 million in available liquidity made up only of cash and cash equivalents.
We operated with $99 six utilization of the vessels available for scheduled operations, which is equivalent to 96% of total fleet time after accounting for the planned dry dockings of Taro connects and Ingrid Knutsen.
Following the end of Q4, we declared a cash distribution of $2 six U S cents per common unit, which was paid in early February.
On slide four we have the headlines of the contractual developments since our last results call, which is on December 14 2023.
In a major market, Brazil common connection so exercise of a one year extension option by Repsol, which commenced in January perhaps I'll hold a further one year's option, which if exercised would see common conducts an employed through to January 2026.
<unk> charter to Trans petrol has been extended to early June this year.
In the North Sea Hilda Knutsen, Taro cuts and vital connection have continued to operate under time charters to our sponsor and then like Hey.
So <unk> fits in this charter will last until the end of March and delivery tobacco at all.
To commence charter two years fixed plus two years options.
For Hilda Knutsen, and total commits in the charter rates are rolling button up terms up to January 2025.
The continuing area of focus for our contracting team, especially for near term deployment is on Dan Cissna done Salvia Hilda Knutsen and total commission.
We received delivery of Dan Cessna in December 2023.
As always is more suited to the north sea market EMEA assessing how technical compatibility for shuttle tanker work in the North Sea.
In the meantime, we are deploying down system on conventional tanker bug.
Dan Sabia is due for re delivery to us in June which is the extended expiry dates if at Chaucer to transplant right.
Marketing of all four vessels continues to potential charterers, both existing clients and others, including the partnership sponsor.
On slide five our outlook remains positive on both the industry dynamics and the partnerships positioning to participate frequently in our markets.
As anticipated in production in fields, which rely on service by shuttle tankers, we see recently reported orders of around six vessels as an endorsement of confidence in the sector.
Three of these vessels have been ordered by our sponsor for delivery either 2026 and 27.
Each of these is a 10 year fixed contract with Petrobras along with our client option to extend by further five years.
We'd expect to see further newbuild orders placed in order to service the large new production volumes coming online in the years ahead.
The amount of new shuttle tanker ordering is imperative and should not be understood as some sort of negative developments in the sector.
We do also remain mindful of the near term market conditions. While we are focused on the marketing of the four vessels as I described earlier.
In the meantime, the partnership remains financially resilient with strong contracted revenue position of $699 million at the end of Q4 on fixed contracts, which average two years in duration.
Charles was options of additional to this and FHFA two one years.
I'll pass on of cash generation and liquidity balance is sufficient for our operations and the significant paydown rate for all debt.
And we've demonstrated the strength of our relationships with lending banks by several refinancings completed over the last year.
Finally, the average age of our vessels at $9 seven years places us well when compared to the useful life model at 23 years.
On to slide six you can see the consistency of revenues and operating income when comparing with those of previous quarters, including Q2 of 2023 were not just viewed without the impairment.
Slide seven similarly reflects the consistency of our adjusted EBITDA and you can find the definition of this non-GAAP measure in the appendix.
On slide eight the most notable change in the balance sheet over 2023 has been the reduction in current liabilities, which has arisen from the refinancing secured during 2023.
Long term debt has increased as a reflection of these refinancings.
The overall change in the partnership's liabilities has been a reduction by $92 million, which is reflective of the debt repayments we made during the year.
On slide nine we've expanded on the terms of the partnerships debt facilities to provide added color around the dynamics of debt repayments.
Largely column shows how the outstanding balances of each facility had been reducing because of the prepayments we'd be making enormous scheduled repayment terms.
Current assortments are the amounts of capital repayment to you over the next year, which do not include interest.
And the balloon payments are the final amounts of principal which will be due on the maturity dates.
Of note $153 million is due to be paid on these debt facilities over the 12 months. Following 31 December 'twenty three of.
Of which $57 million is a balloon repayment due in late 2004 on the loan which is secured by Hilda knutsen.
Our practice with a significant repayments such as this is to seek refinancing and our track record demonstrates the viability of this approach.
Negotiations are well advanced with potential lenders for a new facility to be secured rules about the Hilda knutsen sufficient to finance the balloon repayments of the maturing facility.
The partnership is not aware of any reasons why this refinancing will be unlikely to complete.
However, there can be no guarantees of the success of any financing exercise.
Aside from that refinancing $87 million will be repayable over the course of this 12 month period.
Of which $10 million has already formed the repayments of the Dan Sabia facility in January this leaves based on system, and then Sylvia free of debt and we don't know.
Are there any plans to incur additional borrowing secured by these vessels until we have better visibility on their future employment.
Slide 10 shows the contracted pipeline in chart format.
Selecting the developments I set out earlier.
Similarly, slide 11 highlights the focus of our commercial efforts on adding near term contracts primarily for the four vessels mentioned earlier.
On slide 12, we see our sponsors inventory vessels, which are eligible for patents purchased by the partnership with.
This applies to any vessels owned by one order for sponsor where they are.
<unk> has a firm contract periods at least five years in length.
At present, five existing vessels and five under construction fall into this category.
There is no assurance that any further acquisitions will be made by the partnership and any transaction would be subject to the board's approval of both policies, which includes the partnership's independent conflicts Committee.
As we have said our top priorities remain securing additional contract coverage for our existing fleet and fostering our liquidity position.
On slides 13, and 14, we have provided some useful illustrations of the strong demand dynamics in the Brazilian market as published by Petrobras.
Carriage use to review Petrobras should materials directly at the webpages China.
The primary takeaway from each of these slides is consistent there is very significant committed demand growth coming in the Brazilian market in the form of new <unk> that will occur on a regular service from shuttle tankers.
We believe that recent reports of up to six vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term and.
And do not think this is an excessive amount of added supply in the context.
As I mentioned earlier three of these recent newbuild contracts offer our sponsor <unk>.
And Oh Gee for delivery for 2026 and 27.
On slide 15, we provide information relevant to our U S unit holders in particular, those seeking a form 10 99.
Those holding units by their custodians or brokers should approach those policies directly.
Basically it's directly registered holdings should contact our transfer agent American stock transfer <unk>.
Come under the umbrella of <unk> Trust company.
Details are shown there.
On Slide 16, we include some reminders of the strong fundamentals of our business and the market we serve.
<unk> competitive landscape.
Bus contractual footprint and resilient finances.
I'll finish with slide 17, recapping, our financial and operational performance in Q4, 2023, and the subsequent time and our outlook for 2024.
We are glad to have delivered high and safety utilization, which have generated consistent financial performance.
We are pleased with the new contracts and extensions we've secured during the quarter <unk>, along with our ability to navigate so I'll refinancing needs and capex relating to dry docks throughout last year.
And our continued commercial focus remains on filling out utilization for 2024, well looking further forward so longer term charter visibility and liquidity generation.
Thank you for listening and with that I'll hand back the call to the operator for any questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star followed by one on your telephone keypad.
Can you change your mind, Please press star followed by Jay.
Our first question today comes from Liam Burke from B Riley. Your line is now open. Please go ahead.
Yes. Thank you hi, Derik how are you today.
Good thank you.
I'm fine thank you.
On the system, Yes savi.
Asset values in the traditional tanker market are pretty healthy.
And you've got one of those vessels currently working as a conventional tanker now anyway.
What are the priority be to sell leased two tankers for conventional use and redeploy that capital.
I wouldn't say, it's a priority.
We think.
Any shuttle tankers.
Better equipped to and high rates in the shuttle tanker market rather than in the conventional market.
And that goes for both.
Our salt pricing or potential purchaser.
Our interest is in actually operating vessels in the shuttle tanker market and we're marketing them as such.
So I mean based on the supply demand outlook do you see the earnings power of these two vessels.
<unk>.
We're forming a one time sale and redeploying that capital.
For the time being yes, obviously, we've got a gap in utilization coming up which we're seeking to fill it.
How well we secure.
Sure it contracts for them.
Okay.
And then just on your current debt you laid it out you paid $10 million, you've got a $57 million balloon. That's two in may that <unk> got a lot of you've had a long history of successfully refinancing.
So if I look at the balance in your current cash balance and your predictable cash flow.
Once you're past that refinancing.
24.
Debt service should be pretty manageable.
Eight.
It will be pretty consistent with previous years. So if you look at the reduction in debt over 'twenty, three which was $92 million.
The equivalent figure.
Slide nine is the $90 million.
Which as I say we've paid.
<unk> from that call on an additional six and a half from the balloon payment list.
Great.
Thank you Derek.
Thank you.
Okay.
Our next question today comes from <unk> <unk> from Alliance Global Partners. Your line is now open. Please go ahead.
Yes.
Good afternoon Derik.
Two questions on the quarter. If you could just highlight the increase in the sequential increase in Opex what caused that.
And then also it looks like the tax rate jumped a little bit or just there we said.
Tax payment as opposed to what you would've expected, but the loss. So can you just address those two things.
So thank you for the questions yeah.
So.
Opex is typically.
Impacted by you.
Unit costs in a major expenditure items things, particularly like.
Meaning if you if you extend that to recruiting if you extend that to cost like crew travel and so on.
On and off shift and so those that was the sort of unit pricing.
And other supplies like lube oil and so that's the major impact when Opex changes.
<unk> tax rate.
The tax item you can see the bottom of page six it's in.
Adjustment to the value recognized in Q3 as a single item there.
<unk>, which is <unk>.
Something like $4 4 million.
Great. That's helpful. And then can you talk about going into this year as far as 2024, and then Derek could you discuss the impact that the dances going to have on utilization and potentially revenues.
And as it works as the conventional tanker versus the shuttle tanker.
Sure.
Im.
We are as I said remarketing.
All four of those.
Vessels, which are either short term or limited contracts.
Of which <unk> is the most notable one because it's being redelivered to us.
We our preference is to secure medium and longer term shuttle tanker work.
So the conventional work is.
Pretty much spot market for the system, we don't see it as a.
Our strategy in anything other than the near term.
<unk> into that market.
Great should we expect any downtime on it is it.
Flips between charters and then also can you confirm that.
You don't expect any dry docking activity in 2024.
Correct.
Dry docking, we don't anticipate any dry docks in 2024.
What you'll see on <unk>.
The utilization information will come through in the first quarter results, because we received re delivery.
It was around mid December so very little impact if any on the.
Q4 figures.
Our impacts will come through in Q1 figures.
Okay, So expect a little bit of downtime.
Can you.
The other major option it seems like as the.
On the Anna with total and.
Whats the notice period on that and have you heard or when do you expect to hear on on a potential option exercise there.
Yes, I believe the notice period is.
Between one and three months.
And obviously, we're coming up to the end of the nicest periods over the next month or so.
No.
Always in active dialog with all of our clients and potential clients.
So while we don't have any news to announce there.
Not currently causing us any concern.
Okay, great. Thank you. Thank you Derrick.
Thanks, Mike.
Again, if you would like to ask a question. Please press Star then one on your telephone keypad. Our next question comes from Jim Shaw from Aviation Advisors. Kevin. Your line is now open. Please go ahead.
Good afternoon, Thanks for taking my question.
A couple of related questions.
The big things with the utilization because.
Fourth quarter.
Year, 2023, what something like 99% utilization.
I guess it wasn't there.
<unk> will be off hire for part of this quarter.
You indicated that you have.
Today charter.
Coverage.
So that's something like 70%.
A little more than 70%.
Full year what.
What is utilization what is the percentage youre going to look like for the first and second quarters based on the contracts you now have.
Well, Jim Thanks for your questions.
So the range of utilization.
Oh.
Contracting that we currently have in terms of visibility for this year, 79% fixed and 91% if thats.
If you include exercise of all client options.
Those figures.
I appreciate it when chart format.
On slide 11.
I don't have the individual numbers directly to hand, you can see the chart gives you a good good indications of those levels.
Oh Im sorry, I Didnt look at that I, just looked at the museum, sorry about that but that's what we're going to see it.
One.
Sure.
Higher.
Sure.
Sure.
This quarter.
So it's more from that.
I remember correctly and also.
Maybe maybe I wasn't listening carefully enough, but will there be much of an impact on the revenues and looks like some of the ships that will charter now on short term conventional.
Tanker contractors that can make a meaningful given the combination of all these things is that going to make a meaningful create a meaningful impact on first quarter revenues.
Well, we're only talking about one vessels so one out of 18.
So the percentage there is order of magnitude of 5%.
And Thats.
Assuming no income, but actually as we've described.
The conventional what she's been able to do there has been some income and some utilization.
So those those overall figures should feed through to the figures in Q1.
So there is no it's not a question of entirely removing a vessel from.
The performance of the fleet over this quarter and it is limited to one vessel in this quarter.
Okay is it reasonable to assume that.
Rates trading on short term conventional.
Yes.
Thank God.
Les would get tunnel.
Our medium or long term.
Charter for shuttle tanker work.
Yes, that's correct.
Obviously that modeled on a slightly different basis because of the short term nature of the conventional contracts, we're looking at as well.
Thank you very much.
Okay. Thanks, Jim.
Lastly, we have a follow up from Tayo.
<unk> partners. Your line is now open. Please go ahead.
Yes, Hi, Derek.
Hi.
You.
Can you talk about the backlog.
There was a pretty healthy increase in the backlog.
$699 million from $645 million from the time of the third quarter call.
Can you just talk about that incremental increase because it didn't seem like your contracted backlog in years went up that significantly but you did add $50 million can you just talk about the mechanics of that Derek.
Sure.
Obviously, we.
Fair enough.
Backlog each quarter as well that would be factored into it.
I appreciate that serves to reduce the number before any additions.
Additions. The main addition to the backlog with the.
Common connection with the exercise of.
The one year option.
By Repsol.
We also had the.
Sure.
Dan Sabia for an additional six months of the first half of this year as well. So those are the major changes.
Yes, it's sort of calculated that is adding about four and a half.
Years of backlog and you burn off every quarter about four and a half year back.
Backlog and so you take the $6 45, if you take out the $72 million that you recognized in the fourth quarter revenue.
And to get to the new number.
That delta is about $126 million.
And it just seemed a little bit higher than I would've anticipated given that.
The.
The Toro <unk>, which I assume are included in the backlog are working at reduced rates.
And the Carmen was really the only option that would have been expired or would have been exercised it.
A decent rate in my mind.
Yes, the comment was the.
The main headlines since we held our call in December.
And these figures relate to quarter end so.
You need to look at also the.
Additional contract secured during.
Q4.
Before December 14th so apologize for the complexity there so on slide four <unk> got.
Just a reminder, there and it will also be in our Q3 release as well so.
There was additional work secured for Windsor, Knutsen, which we announced in December.
And.
They will commit some as well and then.
A one year extension on each of the tourists and laying the connection.
Those will also being part of the addition to backlog as of that time.
Okay, Great. That's helpful. Thank you so much.
So I apologize its in two places, but we didn't want to.
We announced the same thing twice.
There are no further questions I will now hand back over to Derek Lowe for any closing remarks.
Thank you again for joining this earnings call for Clos offshore partners fourth quarter, and 2023 and I'll look forward to speaking with you again following the first quarter results for 2024.
That concludes today's call you may now disconnect your lines.
[music].
Yeah.