Q2 2026 Knot Offshore Partners LP Earnings Call
Speaker #1: 2026 earnings call. After today's prepared remarks, we will host a Q&A session, with an opportunity for equity research analysts to ask questions. If you would like to ask a question, please raise your hand.
Speaker #1: If you have dialed in to today's call, please press *1 to raise your hand. I will now hand the conference over to Derek Lowe.
Speaker #1: Please go ahead, sir.
Speaker #2: Thank you, Derek. Good morning, ladies and gentlemen. My name is Derek Lowe, and I'm the Chief Executive and Chief Financial Officer of KNOT Offshore Partners.
Speaker #2: Welcome to the partnership's earnings call for the second quarter of 2026. Our website is knotoffshorepartners.com, and you can find the earnings release there, along with this presentation.
Speaker #2: On slide 2, you'll find guidance on the inclusion of forward-looking statements in today's presentation. These are made in good faith and reflect management's current views, known and unknown risks, and are based on assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control.
Speaker #2: Actual results may differ materially from those expressed or implied in forward-looking statements. And the partnership does not have or undertake a duty to update any such statements, made as of the date of this presentation.
Speaker #2: For further information, please consult our SEC filings, especially in relation to our annual and quarterly results. Today's presentation also includes certain non-US cap measures, and our earnings release includes a reconciliation of these to the most directly comparable gap measures.
Speaker #2: We begin on slide 3 with the Q2 financial and operational headlines. Revenues were 96.8 million, operating income 15.6, net income 3.4 million, adjusted EBITDA 57.6 million, and as of June 30, 2026, we had 143.3 million in available liquidity, made up of 95.3 million in cash and cash equivalents, plus 48 million in undrawn capacity.
Speaker #2: This available liquidity was 2.6 million higher than at March 31, and that rise is largely in line with the reducing trend in recent quarters.
Speaker #2: We operated with 96.8% utilization, taking into account scheduled dry docking, which amounts to 92.4% utilization overall, following the dry docking of Fortaleza Clemson. Following the end of the quarter, we declared a cash distribution of 7.5 cents per common unit, which was paid in August under the 1099 structure, and which represented an increase from the previous level.
Speaker #2: We're pleased to have continued the process of multiple gradual increases to our distribution, anchored in our reliable and diversified long-term cash flow, and improved balance sheet.
Speaker #2: On slide 4, we have the most significant developments since the start of the second quarter. On September 1, 2026, we purchased the head of Clemson from KNOT for a purchase price of 113 million, less than 89.4 million debt facility, plus 0.8 million of capitalized financing fees, resulting in a net cash cost of 24.4 million.
Speaker #1: Million in cash and cash equivalents, plus $48 million in undrawn capacity. This available liquidity was $2.6 million higher than at March 31st, and that rise is largely in line with the reducing trend in recent quarters.
Speaker #1: We operated with 96.8% utilization, taking into account scheduled dry docking, which amounts to 92.4% utilization overall, following the dry docking of Fortaleza Crimson. Following the end of the quarter, we declared a cash distribution of $0.075 per common unit, which was paid in August under the 1099 structure, and which represented an increase from the previous level.
Speaker #2: The transaction was negotiated by our board's independent conflicts committee. The vessel was delivered new to KNOT in October 2024 and is on time charter to Petrobras in Brazil through to November 2034, with an additional 5 years of charter resolutions.
Speaker #2: The acquisition provides fleet growth, diversifies and extends our pipeline of long-term contracts, reduces our average fleet age, and develops the fleet in the most in-demand shuttle-tanker asset class.
Speaker #1: We're pleased to have continued the process of multiple, gradual increases to our distribution, anchored in our reliable and diversified long-term cash flow and improved balance sheet.
Speaker #2: And on slide 5, we have commercial and financing developments. We list here a number of positive contractual developments since the beginning of the second quarter.
Speaker #1: On slide 4, we have the most significant developments since the start of the second quarter. On September 1, 2026, we purchased the Hedda Crimson from KNOT for a purchase price of $113 million.
Speaker #2: In addition to the various charter resolutions exercised, as expected, I would highlight the time charter for Hilda Clemson was executed with E&I, to commence in June 2027, for a fixed period of 3 years, plus 3 charter resolutions each for 1 additional year.
Speaker #1: Less than an $89.4 million debt facility plus $0.8 million of capitalized financing fees, resulting in a net cash cost of $24.4 million. The transaction was negotiated by our board's independent conflicts committee.
Speaker #2: The time charter for Recife Clemson was executed by TransPetro, to commence in Q3 2026, for a fixed period of 2 years. Agreement was reached with E&I for a time charter on Ingra Clemson, commencing October 2026, for 3 years fixed, plus 3 years options, 3 options each of 1 year.
Speaker #1: The vessel was delivered new to KNOT in October 2024 and is on time charter to Petrobras in Brazil through November 2034, with an additional 5 years of charter extensions.
Speaker #1: The acquisition provides fleet growth, diversifies and extends our pipeline of long-term contracts, reduces our average fleet age, and develops the fleet in the most in-demand shuttle tanker asset class.
Speaker #2: This is in direct continuation of the existing time charter to E&I and replaces their existing options. And we refinanced the loan secured by Tordes Vigdis, Lena, Anna, and Brazil Clemson, via a new 225 million 5-year senior secured term loan facility, arranged by DNB, with the interest rate reduced meaningfully to so for plus 165 basis points.
Speaker #1: And on slide 5, we have commercial and financing developments. We list here a number of positive contractual developments since the beginning of the second quarter.
Speaker #1: In addition to the various charter resolutions exercised, as expected, I would highlight that the time charter for Hilda Crimson was executed with E&I to commence in June 2027, for a fixed period of 3 years, plus 3 charter resolutions each for 1 additional year.
Speaker #2: Turning to slide 6 for a high-level summary of our operating momentum. In both Brazil and the North Sea, we continue to see tightening markets driven by a robust multi-year FPSO pipeline, production growth, and continuing investment in exploration and existing project expansion.
Speaker #1: The time charter for Recife Crimson was executed for Trans Petro, to commence in Q3 2026 for a fixed period of two years. Agreement was reached with E&I for a time charter on Ingrid Crimson, commencing October 2026, for three years fixed, plus three years' options—three options, each of one year.
Speaker #2: The increase in shuttle tanker service volumes across both markets has been sustained and sufficient to tighten the supply-demand balance, even as new vessels have been delivered.
Speaker #2: We have expanded our strong backlog, with 881.2 million of fixed contracts at quarter end, which average 2.5 years in duration, and charter resolutions averaging further 4 years.
Speaker #1: This is in direct continuation of the existing time charter to E&I and replaces their existing options. We also refinanced the loan secured by Tordes Vigdis, Lena, Anna, and Brazil Crimson via a new $225 million, 5-year senior secured term loan facility, arranged by DNV.
Speaker #2: At quarter end, our fleet of 19 vessels had an average age of 10.7 years, acquisition of the header reduces the average age by nearly half a year.
Speaker #1: With the interest rate reduced meaningfully, to so far plus 165 basis points. Turning to slide 6 for a high-level summary of our operating momentum.
Speaker #2: We are continuing to repay debt at around 95 million per year, which we consider prudent with a depreciating asset base. And we are well advanced in the refinancing of the 65 million facility, secured by Liva Clemson, which is due later in October.
Speaker #1: In both Brazil and the North Sea, we continue to see tightening markets, driven by a robust multi-year FPSO pipeline, production growth, and continued investments in exploration and existing project expansion.
Speaker #2: Over slides 8 to 11, we provide the financials for Q2, the highlights of which we've covered already. On slide 12 is our debt maturity profile.
Speaker #1: The increase in shuttle tanker service volumes across both markets has been sustained and sufficient to tighten the supply-demand balance, even as new vessels have been delivered.
Speaker #2: While no guarantees can be made, we have historically benefited from access to a wide pool of lenders and attractive bank finance. And we've been encouraged by our refinancing experience in recent years, including during significantly weaker shuttle tanker markets than the current one.
Speaker #1: We have expanded our strong backlog, with $881.2 million of fixed contracts at quarter end, which average 2.5 years in duration, and charter resolutions averaging a further 4 years.
Speaker #2: Notably, the average margin on our floating-rate debt during the second quarter was 2.21% over so far. Moving on to slide 14 and our charter portfolio, I believe this remains a very useful resource for investors looking to track the primary moments where change can occur in a highly stable portfolio of cash flows.
Speaker #1: At quarter-end, our fleet of 19 vessels had an average age of 10.7 years. Acquisition of the Hedda reduces the average age by nearly half a year.
Speaker #1: We are continuing to repay debt at around $95 million per year, which we consider prudent with a depreciating asset base. And we are well advanced in the refinancing of the $65 million facility, secured by Liva Crimson, which is due later in October.
Speaker #2: Based on current charter rates, we believe charter resolutions are likely to be exercised, given the strength of the charter market. On slide 15, you can see our strong forward coverage, where we're fully chartered for the remainder of 2026.
Speaker #1: Over slides 8 to 11, we provide the financials for Q2, the highlights of which we've covered already. On slide 12 is our debt maturity profile.
Speaker #2: And in 2027, we have 92% firm coverage, or 96% including charter resolutions. Likewise, for 2028, we have 65% firm coverage, or 93% including charter resolutions.
Speaker #1: While no guarantees can be made, we have historically benefited from access to a wide pool of lenders and attractive bank finance. We have also been encouraged by our refinancing experience in recent years, including during significantly weaker shuttle tanker markets than the current one.
Speaker #2: If we assume that charter resolutions are picked up, which is our current expectation, then you can see the slowly widening light-gray section at the top of the bars, as those offering upside potential for the KNOT fleet, if market momentum is sustained.
Speaker #1: Notably, the average margin on our floating rate debt during the second quarter was 2.21% above SOFR. Moving on to slide 14, and our charter portfolio.
Speaker #2: On slide 16, you can see the drop-down inventory held at the sponsor. Drop-downs have been the route to growth in the fleet throughout the life of the partnership, and remain the means of replenishing and rejuvenating the fleet.
Speaker #1: I believe this remains a very useful resource for investors looking to track the primary moments when change can occur in a highly stable portfolio of cash flows.
Speaker #2: In June 2026, the partnership decided not to pursue Frida Clemson and Cindra Clemson, and they've been removed from our drop-down inventory. At the same time, we believe that the combination of accreted drop-downs and an improving charter market should support multiple gradual distribution increases over the coming quarters and years.
Speaker #1: Based on current charter rates, we believe charter resolutions are likely to be exercised, given the strength of the charter market. On Slide 15, you can see our strong forward coverage, where we're fully chartered for the remainder of 2026.
Speaker #1: And in 2027, we have 92% firm coverage, or 96% including charter resolutions. Likewise, for 2028, we have 65% firm coverage, or 93% including charter resolutions.
Speaker #2: In addition to materially extending our long-term cash generation runway, a certain amount of vessels begin to age out in the years ahead. On slide 17 to 19, we include market commentary, particularly from Petrobras, which continues to highlight record production: a strong and expanding offshore production outlook, and continued FPSO deployment.
Speaker #1: If we assume that charter resolutions are picked up, which is our current expectation, then you can see the slowly widening light gray section at the top of the bars, as those offering upside potential for the KNOT fleet—if market momentum is sustained.
Speaker #2: We encourage you to review this as well as the copious materials that Petrobras publishes as the largest player in the Brazilian market where we primarily operate.
Speaker #1: On slide 16, you can see the drop-down inventory held at the sponsor. Drop-downs have been the route to growth in the fleet throughout the life of the partnership, and remain the means of replenishing and rejuvenating the fleet.
Speaker #2: To summarize on slide 20, during the second quarter, we had strong utilization and solid financial results, we secured additional charter coverage across key vessels, we maintained a constructive backlog and market outlook, and we paid a quarterly distribution of 7.5 cents per unit, which is an increase from 5 cents in the prior quarter and 2.6 cents per quarter for several years before that.
Speaker #1: In June 2026, the Partnership decided not to pursue Frida Crimson and Cindra Crimson, and they've been removed from our dropdown inventory. At the same time, we believe that the combination of accreted dropdowns and an improving charter market should support multiple gradual distribution increases over the coming quarters and years.
Speaker #2: Following the end of the quarter, we purchased Header Clemson, secured additional charter coverage, and refinanced the 225 million loan facility. And on slide 21, we conclude with the key things themes for KNOT and the shuttle tanker market.
Speaker #1: In addition to materially extending our long-term cash generation runway, a certain number of vessels will begin to age out in the years ahead. On slides 17 to 19, we include market commentary, particularly from Petrobras, which continues to highlight record production, a strong and expanding offshore production outlook, and continued FPSO deployment.
Speaker #2: The market remains niche and highly concentrated, offshore extraction continues to take market share from traditional onshore production, and FPSO service by shuttle tankers remain dominant compared with the construction of new pipelines.
Speaker #1: We encourage you to review this, as well as the copious materials that Petrobras publishes as the largest player in the Brazilian market, where we primarily operate.
Speaker #2: Brazilian North Sea offshore buildouts have strong momentum following a quieter stretch, while the shuttle tanker order book remains non-speculative and insufficient to meet anticipated demand levels.
Speaker #1: To summarize on slide 20, during the second quarter, we have strong utilization and solid financial results, we secured additional charter coverage across key vessels, we maintained a constructive backlog and market outlook, and we paid a quarterly distribution of 7.5 cents per unit, which is an increase from 5 cents in the prior quarter and 2.6 cents per quarter for several years before that.
Speaker #2: Looking ahead to coming quarters and years, we believe that KNOT is well positioned to pursue attractive long-term growth opportunities alongside multiple gradually increases to our sustainable distribution.
Speaker #1: Following the end of the quarter, we purchased Hedda Crimson, secured additional charter coverage, and refinanced the $225 million loan facility. And on slide 21, we conclude with the key themes for KNOT and the shuttle tanker market.
Speaker #2: With that, I'll hand the call back to Leah for any questions. Thank you.
Speaker #1: We will now begin the question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again.
Speaker #1: The market remains niche and highly concentrated. Offshore extraction continues to take market share from traditional onshore production, and FPSO service by shuttle tankers remains dominant compared with the construction of new pipelines.
Speaker #1: We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.
Speaker #1: Please stand by while we compile the Q&A roster. Your first question comes from the line of Liam Burke with B. Reilly Securities. Your line is open.
Speaker #1: Brazilian and North Sea offshore build-outs have strong momentum following a quieter stretch, while the shuttle tanker order book remains non-speculative and insufficient to meet anticipated demand levels.
Speaker #1: Looking ahead to the coming quarters and years, we believe that KNOT is well positioned to pursue attractive long-term growth opportunities, alongside multiple gradual increases to our sustainable distribution.
Speaker #1: Please go ahead.
Speaker #2: Derek, you've been a busy man this quarter.
Speaker #3: Yes, I have, thanks, Liam.
Speaker #2: In terms of drop-downs, the header financing was pretty elegant with the assumption of debt and the addition of cash. When I think about the potential drop-downs and the ability to finance them, do you anticipate a different cadence of growing the fleet, or are you just going to take it as they come along?
Speaker #1: With that, I'll hand the call back to Leah for any questions. Thank you.
Speaker #2: We will now begin the question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again.
Speaker #2: We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.
Speaker #3: Well, we respond to the offers that are made to us. And obviously, only a limited number of the fleet have been delivered of the drop-down list have been delivered at this stage.
Speaker #2: Please stand by while we compile the Q&A roster. Your first question comes from the line of Liam Burke with B. Reilly Securities. Your line is open.
Speaker #3: And so they can only be offered once they've been delivered. So it's a matter of the timing of the offers and the response that the conflicts committee wants to make to them.
Speaker #2: Please go ahead.
Speaker #3: Eric, you've been a busy man this quarter.
Speaker #1: Yes, I have, thanks, Liam.
Speaker #2: Okay, but would you envision the financing similar to Header? Which is, as I said before, it's a pretty elegant way to fund a drop-down.
Speaker #3: In terms of drop-downs, the Hedda financing was pretty elegant, with the assumption of debt and the addition of cash. When I think about the potential drop-downs and the ability to finance them, do you anticipate a different cadence of growing the fleet, or are you just going to take it as they come along?
Speaker #3: Yeah, I mean, the standard model for all of them is that they have a secured debt facility in place already, as they are offered.
Speaker #3: So the financing itself does not need to be arranged at the time that the drop-down is offered. And it's a standard term of those facilities that the guarantor or the ownership and the guarantor arrangements can be transferred over to KNOT from KNOT, so that that is straightforward.
Speaker #1: Well, we respond to the offers that are made to us, and obviously only a limited number of the fleet have been delivered of the drop-down list have been delivered at this stage.
Speaker #3: But I would say the loan on the header is very standard from the point of view of the drop-downs we've had in the past, so that those terms did not come as a great surprise.
Speaker #1: And so they can only be offered once they've been delivered. So it's a matter of the timing of the offers and the response that the Conflicts Committee wants to make to them.
Speaker #3: Nor did the approximate cash cost of the transaction, so that 24 million is fairly consistent with the cost that you'll see the net of debt, the cost that you'll see in the previous transactions we've done.
Speaker #3: Okay, but would you envision the financing to be similar to Hedda? Which is, as I said before, a pretty elegant way to fund a drop-down.
Speaker #1: Yeah, I mean, the standard model for all of them is that they have a secured debt facility in place already, as they are offered.
Speaker #2: Great. Thank you, Derek.
Speaker #3: Great, thanks, Liam.
Speaker #1: So the financing itself does not need to be arranged at the time that the drop-down is offered. And it's a standard term of those facilities that the guarantor or the ownership and the guarantor arrangements can be transferred over to KNOT from KNOT, so that is straightforward.
Speaker #1: There are no further questions at this time. I will now turn the call back to Derek Lowe for closing remarks.
Speaker #3: Well, thank you again, ladies and gentlemen, for joining us Earnings Call for KNOT Offshore Partners second quarter of 2026. And I look forward to speaking with you again following the third quarter results.
Speaker #1: But I would say the loan on the Hedda is very standard from the point of view of the drop-downs we've had in the past, so those terms did not come as a great surprise.
Speaker #1: Nor did the approximate cash cost of the transaction, so that $24 million is fairly consistent with the cost that you'll see, sort of net of debt, the cost that you'll see in the previous transactions we've done.
Speaker #3: Great. Thank you, Derek.
Speaker #1: Great, thanks, Liam.
Speaker #2: There are no further questions at this time. I will now turn the call back to Derek Lowe for closing remarks.
Speaker #1: Well, thank you again, ladies and gentlemen, for joining us for the earnings call for KNOT Offshore Partners' second quarter of 2026. I look forward to speaking with you again following the third quarter results.
