Q3 2024 KNOT Offshore Partners LP Earnings Call

Speaker Change: Good morning and thank you all for joining. I would like to welcome you all to the Nut Offshore Partners third quarter 2024 earnings call.

Brika: My name is Brika and I will be your moderator for today. All lines will be muted during the presentation portion of the call with opportunity for questions and answers at the end. I would now like to pass the conference over to your host Derek Lowe, Chief Executive Officer and Chief Financial Officer at Not Offshore Partners. Thank you, you may proceed Derek.

Derek Lowe: Thank you, Brika, and good morning, ladies and gentlemen. My name is Derek Lowe. I'm the Chief Executive and Chief Financial Officer of Knott Offshore Partners. Welcome to the Partnerships Earnings Call for the third quarter of 2024. Our website is knottoffshorepartners.com and you can find the earnings release there along with this presentation.

Derek Lowe: On slide 2, you will find guidance on the inclusion of forward-looking statements in today's presentation.

Derek Lowe: 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.

Derek Lowe: For further information please consult our SEC filings especially in relation to our annual and quarterly results.

Derek Lowe: Today's presentation also includes certain non-US GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures.

Derek Lowe: On slide three we have the financial and operational headlines for Q3. Revenues were $76.3 million, operating income $17.2 million, and there was a net loss of $3.8.

Derek Lowe: We operated with 98.8% utilisation and the vessel time available for scheduled operations was not impacted by any planned dry docking.

Derek Lowe: On to slide four. Our outlook remains positive on both industry dynamics and the partnerships positioning to participate fruitfully in our markets.

Derek Lowe: Significant growth is anticipated in production in fields which rely on service by shale tankers. We see around 11 new builds on order including for our sponsor Knutson NYK.

Derek Lowe: And we expect to see further new build orders placed in order to service the large new production volumes coming online in the years ahead.

Derek Lowe: A measured amount of new shuttle tanker ordering is unavoidable, and in fact necessary, as a shortage of shuttle tanker capacity remains projected in the coming years.

Derek Lowe: The partnership remains financially resilient with a strong contracted revenue position of $980 million at the end of Q3 on fixed contracts, which averaged 2.8 years in duration. Charterers options are additional to this and average a further 2.4 years.

Derek Lowe: Our pattern of cash generation and liquidity balance is sufficient for our operations and the significant pay down rate for our debt, which is in the region of $90 million per year for instalment payments.

Derek Lowe: And our near-term chartering exposure has reduced to down Sabia where we are maintaining our marketing focus. She has secured some conventional cargos and so is operating commercially while we seek a shuttle tanker deployment.

Derek Lowe: On slide 5 a number of developments in QT were announced already on the previous earnings call, including charter extensions for Tordes Knudsen and Lena Knudsen.

Derek Lowe: The most important development in Q3 is on slide 6, showing the swap of Densisna for tuberconutrin.

Derek Lowe: Tuva brought seven years of fixed or guaranteed future charter revenue and was a significant step in fleet and pipeline growth without the need for new funding.

Derek Lowe: On slide 7, our most recent developments include the Ingrid Knudsen beginning her charter with E&I in October for two years plus two options each of one year.

Derek Lowe: Signature of a Charter for the Hilderknutsen, for one year, fixed, commencing March 2025.

Derek Lowe: Commencement of the Toral Connections Time Chart of E&I for three years fixed, plus three options each of one year.

Derek Lowe: exercised by Repsol of their one-year option on Karma Knutsen commencing Q1 2025 and some short-term deployments for the Dan Sabi on conventional tanker work.

Derek Lowe: On to slide 8, you can see the consistency of our revenues over the quarters and years. This consistency applies also to our operating income when the effect of vessel impairments is removed.

Derek Lowe: Slide 9 similarly reflects the consistency of our adjusted EBITDA, and you can find the definition of this non-gap measure in the appendix.

Derek Lowe: On slide 10, there are two notable changes in the balance sheet over the first nine months of 2024.

Derek Lowe: The first is a slight increase in overall liabilities. While we continue contractual debt repayments in the area of $90 million per year, liabilities increased with completion of the TUVOR acquisition on 3rd September. The second is that two of our debt facilities have moved up from long-term to current liabilities because of their upcoming maturities.

Derek Lowe: These can be seen on slide 11, which sets out the maturity profile of our debt facilities.

Derek Lowe: On line one, the first of our revolving credit facilities is due to mature in August 2025.

Derek Lowe: The highlighted column shows how the outstanding balances of each facility have been reducing because of the repayments we've been making in line with scheduled repayment terms. The current installments are the amounts of capital repayment due over the next year which do not include interest or the final balloon payments due on the maturity dates.

Derek Lowe: Of note, $96 million in current instalments is due to be paid over the 12 months following 30th of September.

Derek Lowe: Our typical pattern is for our vessels to provide security for our deck facilities and that applies to 17 out of 18 vessels in the fleet as of 30th of September.

Derek Lowe: 907 million dollars out of 947 million in debt facilities are secured by vessels while the two revolving credit facilities totaling 50 million dollars of capacity are unsecured.

Derek Lowe: Slide 12 shows the contracted pipeline in chart format reflecting the developments I set out earlier.

Derek Lowe: Similarly, slide 13 highlights the focus of our commercial efforts on adding near-term contracts for Dan Sarbia. We've made good progress in increasing our fixed-charter coverage and we intend to remain active in that regard.

Derek Lowe: On slide 14, we see our sponsor's inventory of vessels which are eligible for purchase by the partnership. This applies to any vessel owned by or on order for our sponsor, where the vessel has a firm contract period of at least 5 years in length. At present, 5 existing vessels and 5 under construction fall into this category.

Derek Lowe: On slides 15 and 16 we've provided some useful illustrations of the strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras materials directly at the web pages shown there.

Derek Lowe: Primary takeaway from each of these slides is consistent. There's very significant committed demand growth coming in the Brazilian market in the form of new FPSOs that will require regular service from shuttle tankers.

Derek Lowe: We believe that reports earlier this year of additional vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term. Five outstanding new build contracts are for our sponsor Knutsen MYK and are due for delivery over 2026 and 2027.

Derek Lowe: We would expect to see further new build orders placed in order to service the large new production volumes coming online in the years ahead, and a material shortage of shuttle tanker capacity remains projected in the coming years.

Derek Lowe: In a trend that also applies to oil production globally you will see that even in the years ahead where aggregate production growth slows, deep offshore production, in this case Brazilian pre-salt, continues to outpace the overall market and take market share.

Derek Lowe: On slide 17 we provide information relevant to our US unit holders, in particular those seeking a Form 1099. Those holding units via their custodians or brokers should approach those parties directly. Those with directly registered holdings should contact our transfer agent, Equinity Trust Company, whose details are shown there.

Derek Lowe: On slide 18 we include some reminders of the strong fundamentals of our business in the market we serve, our assets, competitive landscape, robust contractual footprint and resilient finances.

Derek Lowe: And I'll finish with slide 19, recapping our financial and operational performance in Q3 2024 and the subsequent time and our current outlook. We're glad to have delivered high and safe utilization, which have generated consistent financial performance.

Derek Lowe: We're pleased with the new contracts and extensions we've secured during the quarter and since, along with our ability to navigate our refinancing needs and periodic capital expenditure.

Derek Lowe: We're delighted to have taken the growth step of swapping Dan Sisner for Tuva Connection.

Derek Lowe: And our continued commercial focus remains on filling up third-party utilization for the coming months, while looking further forward to longer-term charter visibility and liquidity generation.

Derek Lowe: In total, though, we're making good progress and are pleased to have established positive momentum against an improving market backdrop.

Speaker Change: Thank you for listening, and with that I'll hand the call back to Brika for any questions.

Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question please press star followed by one on your telephone keypad now.

Speaker Change: And as a reminder when speaking please ensure your line is unmuted locally.

Speaker Change: We have the first question on the line from Liam Burke with Be Riley. Please go ahead.

Thank you. Hi, Derek. How are you?

Hi Liam, good thank you and you.

Speaker Change: I'm fine, thank you. Your OPEX jumped about two million dollars sequentially. How much of that was related to the Toro repair, or if any?

A pretty limited amount.

well under half of that amount.

Off the top of my head. Okay.

Probably a quarter quarter of it at most.

Speaker Change: There was some expense baked into that number related to the repair.

Speaker Change: That's right, we are due to receive the insurance claim proceeds during this quarter and until we receive it we don't recognise it so you don't have the offsetting income to correspond with that and reduce the effect of the net cost to us.

Great.

Speaker Change: You announced four charters or extensions beginning this quarter, which included the Toral. Can you give us a sense, I know you don't give specifics on the contracts, but do you have some color generally, how they look vis-a-vis, you know?

Speaker Change: All the new ones, the new news as it were for this quarter, you mean?

or the tolls specifically.

Speaker Change: No, all of them, or just a census to see how they're doing. Well, the rates reflect the market conditions at the time they were...

Speaker Change: They were contracted so on Ingrid, I don't have I'm just looking at them in order here on page seven and on Ingrid I don't have the signature date in front of me, but it would be it would reflect that

Speaker Change: On Hilda, the signature date was October this year, so that will reflect a current market.

Speaker Change: Torrell is close to current because that signature was in July this year and then Karlman will go back to the timing of the original contract which was I think

Speaker Change: some years ago. So Ingrid and Carmen will be older and Hilda and Tara will be close to current.

Great. Thank you, Derrick.

Thank you.

Your next question comes from Jim Hatcher with...

I apologize.

We now have

Hello Jim, I can hear you.

Speaker Change: Okay. Yes, please go ahead. Good afternoon. Um, thanks for taking my call. A couple of things. First of all, in response to, uh, in response to the previous question, we're talking about how a couple of the new, um,

Charters are made at current market conditions.

Speaker Change: Does that mean that the rate is, the rate, the current market conditions are somewhat lower than they would have been a couple of years ago, am I correct in thinking that?

It's the other way around.

Speaker Change: Well, it's fair to say that market conditions have been strengthening reasonably steadily over that time.

Speaker Change: So we don't we don't have particular numbers to give you on those contracts, but it's more recent would typically imply better rates or higher rates

Speaker Change: Oh, good. And with regard to the operating expenses, again, in your answer to the previous question, you said that...

Speaker Change: It's general operating costs level so we see increased costs of crewing particularly relating to travel and increased costs of supplies as well.

It's a generally inflationary environment unfortunately for our work.

Thank you very much.

Great. Thanks, Jim.

We now have Poe, Fratt, Wynn, Lyons, Global Partners.

Thank you.

Speaker Change: Hey, can you just ensure that the presentation is up on the website? I mean, I've been trying the whole call to access it, and it's just not up there yet. So, if you're getting the same feedback from other investors, I think you should be aware.

It was approved for publication.

Speaker Change: Maybe it's just technology, but you talked about the higher optics, so there's a little bit of repair from

Speaker Change: in the third quarter, you know, very, what, 15 days or so.

Speaker Change: I don't have a fine-tuned comment for you on that, but it's not a bad guide.

Speaker Change: Okay and then I'm not sure if I heard it but have you quantified the amount that you expect to recover in insurance in the fourth quarter?

Speaker Change: We haven't done that, well, in our discussion with the insurance company we are close to that but we haven't disclosed that in our release. That's a matter for a fourth quarter report. A report in the quarter when we receive it and we expect that to be the fourth quarter.

Speaker Change: And so essentially it's the differential between what the time charter contracted rate was.

Speaker Change: when it was impaired operationally. It was still operating, but it wasn't at full capacity, right? So it's just the differential for that. I think it was the six-day period.

Speaker Change: It's the difference for a number of days less the deductible that applies to that policy as well. But because she was able to operate on, as you say, an impaired basis rather than not able to operate at all, there's a discussion around how many days should be recognised. But that discussion is substantially complete.

Speaker Change: Okay, and then you sort of mentioned the revolvers. Can you just talk about, you know, how the discussion on the revolvers, do you expect them to get renewed? What sort of timeframe you're also, we should also be expecting those to be, if they will be renewed, renewed within?

Speaker Change: We certainly expect to seek to renew them and that discussion with our lenders would would normally be over the course of the first half next year.

Speaker Change: Q3 for that conclusion and of course you're aware of our pattern of results and news flow and so it's likely that you'd hear about it on the earnings release date that followed any conclusion to those.

Speaker Change: understood so maybe possibly in you know late May or or even as late as August.

September of next year.

Speaker Change: Understood. And then just to clarify, you talked about that, you know, like the Carmen, the exercise, the option.

Speaker Change: That original contract was done in an environment where rates were lower.

Speaker Change: And now rates have improved. You've been talking about that, especially in Brazil, the tone of the market improving.

Can you?

Speaker Change: quantify or give us sort of a range, percentage range on how much rates have improved, you know, vis-a-vis like the Carmen option?

Speaker Change: Yeah, I don't think we can do that. As you're aware, we generally don't give too specific guidance on rates that the vessels are earning. You've obviously got an average rate that can be found from our revenues for the quarter.

Speaker Change: And then to talk about that, how many actual down days were there during the quarter, Derek? In other words, your operating, what was your operating, you know, days?

Derek Lowe: Yeah, we don't have that specific number available. It's quite complex because partial earnings were possible, and we're looking at the difference between rates and not just

Speaker Change: total day rate. So it's too complex to go into on the call and for putting into a model I'm afraid.

Speaker Change: I think I heard you say about three quarters of the increase in the off X in in the third quarter

That will be part of the increase in the OPEX.

Okay, great. Thanks for your help.

Great. Thanks, Clay.

We now have Pavel Avila with Rock Hill Global.

Pavel Avila: Hi, good afternoon, Derek. Great quarter. I just wanted to really thank you for all this hard work that you and your chartering department have done, you know, securing great charters and getting great coverage.

Pavel Avila: So, I have a few questions, some more specific and some sort of bigger picture.

Pavel Avila: On the more specific side, Dan Sabia, if you look on the map there, going to Panama on a conventional voyage.

to do a drop down.

Pavel Avila: or, you know, Panama is halfway to Brazil or there is opportunities in Brazil. And just, you know, as a color, you know, speaking to some of the clients in Brazil, the day rates now are, you know.

Speaker Change: hovering around 65,000. So you know even a smaller ship may be able to earn some very good daily rates. Can you maybe walk us through your thinking on the Dan Savio?

Speaker Change: Yes, so we are marketing her in any market that she's capable of operating, and obviously that includes Brazil, and with some modifications would include the North Sea for shuttle work as well. So yes, we continue to market her directly.

Speaker Change: She is, as you say, rather smaller than is preferred in Brazil, so despite the high current day rates, it's still difficult to get her deployed and in fact that's the reason she left Brazil in the first place once that charter came to an end last summer.

swap in

Speaker Change: It would be reviewed by our Independent Conflicts Committee. So the potential is there. I guess the commercial thing to be aware of a little bit is that...

Speaker Change: what's effectively the North Sea Pool, that's used up and that's provided some supply into that market, so that that market position, the ability of Sabia to be deployed there, is somewhat impaired by the fact that the system is there.

Speaker Change: So the concept of a drop-down absolutely is there, it's got the usual governance process to follow but the market commercial background to it is a little different from what we had with Cisner last summer.

Speaker Change: Understood. That makes a lot of sense because, you know, the legal work should be pretty similar to the CISNA, you know, you know, you can even Xerox the or copy the

Speaker Change: the papers and as long as the independent committee is fine with it, that should be helpful. Maybe on the HILDA, you know, the one-year is, you know...

Speaker Change: There's tightening in the North Sea, obviously, the production is going up, Johan Casper.

Speaker Change: What's your expectation on the North Seaside, especially since there are no new builds?

Speaker Change: Yes, well we'll continue to market Hilda for the period beyond the end of the year.

Speaker Change: and really anybody anticipated and what we don't see yet is whether that will change so whether charterers will be signing further in advance than they chose to this year.

Speaker Change: Understood. Okay. Can I ask a sort of broader and bigger picture question and that is, you know, I have

Speaker Change: I've been in investing for a long time, but I've probably never seen a bigger disconnect between the cost of debt and cost of equity.

Speaker Change: than in your company. You know, the cost of debt is so for plus 220. You guys have to refinance everything.

Immediately, zero problems with any refinancing or anything like that.

Speaker Change: You know, there's an incredible value gap between what the fleet is worth and how you have improved the performance with the share price.

Thank you. Bye.

Speaker Change: You know, there has been a good pickup in the cash available and the free cash flow even with the repayments.

Speaker Change: Can you give us a color a little bit on the thoughts on dividend and especially buyback?

the dividend restorage account.

Speaker Change: Yes, I do understand all of what you set out there and I do appreciate it. The experience that we've had over the last, well it's at least the last couple of years, has been that we really needed to rebuild the visible charter pipeline. You may remember two quarters ago we said that four vessels...

Speaker Change: Concerned us the last quarter. We said that two vessels concerned us and now we're saying

Speaker Change: The issue is that the SABIA still needs to be deployed, whether on charter or sold or swapped, whichever the best option is.

Speaker Change: and strategically very useful way of doing it. Well there's only one further opportunity for a drop down, for a swap, for a swap coming up.

Speaker Change: and but as I say growth in the past has always been through the drop-down schedule of which there are five candidates available on the water at the moment and so we would what the directors are going to be doing is looking at

Speaker Change: their own capital allocation policy, considering which is the better route to be taking, whether it's a distribution increase or a combination of the two.

Speaker Change: Well, you know, one, just pointing out that this is the smallest ship, we're, you know, one out of 18 now, and, you know, we have been waiting for a long time, it would be helpful if the...

Speaker Change: you know, Board of Directors and a sponsor which also owns 30%.

Speaker Change: you know, would recognize what an incredible opportunity this is to, for example, buy back stock at, you know, 30-40% of replacement cost.

Speaker Change: And, you know, not a big amount, but just it will be helpful to have.

the board and the sponsor.

Speaker Change: acknowledge that they also have shareholders that, you know, should reap some of the rewards as the operations have improved.

Speaker Change: And you have an opportunity with the declaration of dividend in January to kind of send a signal that you care about shareholders as well.

Speaker Change: Yes, thank you. I do understand that, and the directors are aware of that too. Thanks. Thanks Pavel.

Speaker Change: Thank you guys and great quarter and you guys have done an incredible job.

Speaker Change: You know on all different all the fronts except one and I think

Speaker Change: I would urge the board to really reevaluate, given the amount of cash flow that you are bringing in every quarter, to send a signal to shareholders that you're there for them as well. Thank you.

Yes, thank you.

Speaker Change: Thank you. We now have Clement Mullins with Value Investors Edge on the line.

Hi, good afternoon. Thank you for taking my questions.

Speaker Change: Most has already been covered, but could you talk a bit about your current hedging strategy?

Thank you for the question. We certainly...

Bye.

Thank you.

Speaker Change: Hedging policy available to us. So it's between half and three quarters of our Outstanding debt and as I say that includes debt that's effectively fixed or actually fixed At the moment we are on the higher side of that But we expect that to reduce

quite significantly during the course of 2025.

Speaker Change: which you'll see just from the average maturity of our interest rate swaps that we have disclosed. But we aren't going to be swapping...

Speaker Change: where we think that the rates are too high to do that. There's no point economically in doing that, so we don't expect it. But we have capacity within our hedging policy to allow existing swaps to mature without putting new ones on at rates that we don't like.

All right, that's helpful. Thank you for taking my questions.

Thanks.

Speaker Change: Thank you. We have a follow-up question from Jim Ratchel with Avitation Advisory Service.

Please go ahead.

Speaker Change: This isn't really a question, it's more of a comment. I'm just following up on the next to previous comment about the reward in the shareholders. Obviously, we don't like to see an increase in both dividends and the stock price, but I don't have any specific numbers in mind, but I would urge you to continue to look at all these decisions with a conservative bank.

Speaker Change: I look at all the airlines that went bankrupt after buying that stock even though they were heavily leveraged or much more heavily leveraged than you are.

Speaker Change: Part of shareholder value is preserving the value for the long term. So, although I'd certainly like to see the dividends go back to where they were, I also want this company to survive and be strong for the long term.

Hey, hey, Derek.

Speaker Change: Congratulations, doing a great job with the backlog of the company. Now, just Dan Faber left. He did the option extension with KiteMan. And then you have an upcoming firm period on Raquel, which expires closer to the summer. Could you give more color on timing and, of course, timing-wise, when you expect an option extension to be called?

Speaker Change: yes we generally find that extensions get chosen pretty late and so there is the chance that it's as late as within the month before commencement of the option period

Speaker Change: Ideally it's longer than that but we because it's a Charles Rourke option and we generally don't have much influence over the timing.

Speaker Change: Okay, thanks. And now with Hilda getting a contract from March, it will exit the Eclipsen pool. Won't that make it more attractive to consult Dan Sebia, F2's sponsor, and call it in the pool replacing Hilda with Sebia?

Yes, that certainly helps the demand-supply dynamics, yes.

Yep, cool.

Thanks, Roger.

Thanks.

Speaker Change: Thank you. I would now like to hand it back to Derek for some final closing comments.

Derek Lowe: Thank you all for joining. I can confirm that that concludes today's call. Please enjoy the rest of your day and you may now disconnect.