Earnings Labs

KNOT Offshore Partners LP (KNOP)

Q4 2021 Earnings Call· Thu, Mar 10, 2022

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Transcript

Operator

Operator

Hello, everyone, and thanks for joining the KNOT Fourth Quarter 2021 Earnings Results Conference Call. My name is Derris, and I’ll be moderating call today. Before handing you over to your host, Gary Chapman, I would like to remind you that if you would like to ask a question during the Q&A session and at the end of the call. [Operator Instructions] I now have the pleasure of handing you over to Gary Chapman. Please go ahead, Gary.

Gary Chapman

Analyst

Thank you and welcome everybody to our fourth quarter 2021 earnings call. As usual, our earnings release and this presentation are available on our website at knotoffshorepartners.com. Moving straight in, slide 2 provides important information concerning the nature of our presentation today, and in particular that our presentation includes forward-looking statements that we make in good faith, but which contain risks and uncertainties, meaning that actual results may be materially different. Please do take this on board; noting that the partnership does not have or undertake a duty to update any forward-looking statements, and you may also wish to consider our annual and quarterly SEC filings for further details and information. Please also be aware that our presentation includes mention of certain non-US GAAP measures of distributable cash flow and adjusted EBITDA, although our earnings release does include the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. On to slide 3. The partnership maintained very high fleet utilization during the fourth quarter of 2021, in fact, 100% for scheduled operations, and we generated strong cash flow all resulting in solid coverage for our distribution. Good progress has also been made in terms of employment contracts for a number of our vessels coming into the market. And, of course, we remain highly focused on securing further coverage for the quarters ahead. Although we are not directly affected by short or mid-term oil prices, the current high levels certainly further incentivize oil production, and we may also see general tanker charter rates improving, both of which we see as positive for our shuttle tankers in our markets. In the fourth quarter of 2021, we generate a total revenues of $72.1 million, operating income of $26 million, net income of $23.1 million and adjusted EBITDA of $52 million. The…

Operator

Operator

Thank you, Gary. [Operator Instructions] The first question comes from Liam Burke from B. Riley. Please go ahead, Liam.

Liam Burke

Analyst

Thank you. How are you today, Gary?

Gary Chapman

Analyst

I'm very well, Liam. I'm very well. How are you?

Liam Burke

Analyst

I'm fine. Thank you. On the -- obviously, the price of oil has made investment in the offshore by the offshore producers more attractive. Have you seen additional interest in fixing short term charters for the fourth term for the four vessels that are up for -- that need to bridge until the long term charters? Is there any more interest there, or is it pretty much the same?

Gary Chapman

Analyst

Yes. Liam, we -- even before the recent shooting up of oil prices, we were actually seeing a modest increase in activities and inquiries. I think certainly with the oil price, where it is, I'm pretty sure that all of our customers and everybody involved is trying to produce as much oil as they can, based on their current outputs and production levels. And we think that will probably filter through to shuttle tankers. We're not seeing an immediate change. I think, if you look at conventional tankers, those rates have increased considerably. Whether they stay high, we're not sure at the moment, but if they do stay high, then certainly that will help shuttle tankers. And it will make shuttle tankers more credible in terms of longer journeys. So I think the oil price in the short term can help us in that way. But to answer your question, we haven't seen a direct corollary just yet in our market from the very recent increases in price.

Liam Burke

Analyst

And on slide number 10, you highlight the vessels that are potential drop down candidates from your sponsor, understanding that you do have some capital constraints, you mentioned that the price -- the price of your units right now, but I mean, realistically, how many? I mean, do you think you could add, not specifically how many, but do you think you could add vessels over the next 18 months or so?

Gary Chapman

Analyst

Yes. I think, we are deleveraging every quarter and as I mentioned in the formal part of the presentation, we repaid over $90 million of debt in 2021. And that opens up the possibility of us using debt at sensible levels for an acquisition. And, yes, we will still consider other options, to the extent they're available, whether that's common equity, maybe that's not available pref units, maybe those are available. But I think the possibility of using debt and maybe a little bit of cash, if need be, to the extent that we can do that at a sensible price, that is positive for the partnership then, yes, we do think that's realistic in this year. And, obviously, we need to pick the right time and we need to negotiate with the sponsor. Luckily, as I said before, they've been very supportive. They've been very flexible, and they understand our situation. So if it's not right like if we didn't feel it was right in quarter four, 2021. But if we feel it's right, and we feel that we've got the -- the depth capacity to do it that way, then absolutely we will try to do that because we believe very strongly that by growing the partnership and getting more diversification in our charter income stream that can only be good for the business.

Liam Burke

Analyst

Great. Thank you, Gary.

Gary Chapman

Analyst

Thank you, Liam.

Operator

Operator

Our next question comes from Richard Diamond from Castlewood Capital. Please go ahead, Richard.

Richard Diamond

Analyst

Hey, Gary, I have two questions. One is just, sort of, a global question. But is there any impact from the Russian-Ukrainian conflict, either on KNOP or the shuttle tanker market in general?

Gary Chapman

Analyst

Sorry, Richard. I thought you were going to give me both questions at once, no problem. Let me cover that first.

Richard Diamond

Analyst

The second question is less global. What is the number of shuttle tankers that have Norwegian continental shelf capabilities? In other words, if I wanted a shuttle tanker today to work, the NCS versus a KNOP -- existing KNOP unit. How much more would it cost roughly in percentages? And how long would it take to get delivery of such a vessel?

Gary Chapman

Analyst

Yeah, let me address the first question. Yeah, I mean, obviously the Ukraine-Russia situation is terrible. But luckily our business is not directly affected. Either KNOP or we believe in the wider shuttle tanker market. I think, you know, we have around 60 crew members that are either Ukrainian or Russian nationals. And you know, we're trying our best to look out for them and make sure they're fine. But that's a small proportion of our overall crew. So the short answer is, there's really no impact that we're seeing at the moment. On your second question, if I understand it, you're asking for how much more does a North Sea vessel cost? Is that am I understanding that right?

Richard Diamond

Analyst

Yes. I think -- if you have, if you want to go out and buy a new unit, how much more would it cost versus an existing KNOP and NCS capable shuttle tanker?

Gary Chapman

Analyst

New build versus existing?

Richard Diamond

Analyst

Right?

Gary Chapman

Analyst

Yeah, I think because we've seen quite significant increases in new building prices at the yards. You know, we're probably talking 30%, 40% increases over the last 12 months. And also you can't get today. We think a shuttle tanker before perhaps the middle of 2025. So, regardless of the price you're willing to pay for it, the yards are full with container and LNG vessels. So, I think, in a way, it's a bit of a moot question because you can't compete with a newbuild today, you have to really look at the existing charter fleet and I think when you start to do that, it makes our existing vessels pretty competitive, obviously, because A, they exist already, so you have no construction risk. And you also don't have to wait. Plus the costs are just going up for the newbuilds. So, I think, today, with newbuild prices being 30% more than they were even just 12 months ago, it puts our entire existing fleet in a much better place when it comes to discussing with our customers and going into tender opportunities.

Richard Diamond

Analyst

Thank you very much, Gary. Also, congratulations on an excellent quarter. Thank you.

Gary Chapman

Analyst

Thanks Richard. Thanks. Nice to talk to you.

Operator

Operator

Our next question comes from Jim Chou from Aviation [ph] Advisory Service Bank. Please go ahead Jim.

Unidentified Analyst

Analyst

Good afternoon. Thanks for taking my call. Couple of questions relating to the vessels that -- for which we see a gap on the -- was it slide nine. First of all, when -- what Vigdis and Lena, both of them they're scheduled for an anticipated drydocks, so when they go to the drydock -- as soon as they go to drydock, they're off revenue, right? We're not generating revenue?

Gary Chapman

Analyst

That's right.

Unidentified Analyst

Analyst

Okay. When will Vigdis and Lena go to drydock?

Gary Chapman

Analyst

We've got the dates -- well, you can see roughly the dates on the slide there. The Vigdis is around sort of spring and Lena is more summer -- European summer -- Northern Hemisphere summer, sorry, of 2022.

Unidentified Analyst

Analyst

Okay.

Gary Chapman

Analyst

Is that -- for you?

Unidentified Analyst

Analyst

So, it looks -- yes -- because what -- and which was sorry -- yes Bodil will also -- the short-term rolling charter with Knutsen NYK does not go beyond June. So, it appears that there's the potential for up to three of the vessels to be not generating revenue in the third quarter. Is that correct?

Gary Chapman

Analyst

Yes, I think as has been the case for some quarters now, we are finding that our customers are taking time to make decisions and the Petrobras charter for the Tordis Knutsen that we've just announced that happened quite quickly. And it was a -- in shuttle tanker terms, it was a quite last minute in terms of getting that arranged. But our customers, as I say, are taking time due to the uncertainties that they themselves are facing, but equally, their CapEx requirements in the projects are not waiting forever. So, I think we'll find that whilst they may want to leave it till the last moment, they can't wait forever to make decisions on that tonnage. And we've secured three or four charters in the last three to six months, as we've announced today, and some of those, as I say happened quickly and some took more time to close. So, I think in terms of what you're talking about in terms of the second half of this year, we absolutely admit that the timing here is unpredictable. But that doesn't mean to say that things won't happen by that time. So, we don't make guarantees. Of course, we can't do that. But I think what we're trying to explain here is, as I say that the timing is far more unpredictable at the moment for us due to the uncertainties and complexities that some of our customers themselves are trying to grapple and cope with.

Unidentified Analyst

Analyst

Understood, and I've been an investor long enough to have developed considerable tremendous respect for your ability to manage the fleet and place it, but the basic rule of investing always look out for the downside. Let's assume that in the third quarter, two of the vessels are not generating revenue. Two of those three are not generating revenue. I'm not saying that's going to happen. But let's suppose it does happen. What would be -- can you give me an estimate of what the impact on distributable cash flow, and EBITDA would be just given a ballpark figure?

Gary Chapman

Analyst

Yeah, I appreciate where you going with this. But we don't generally like to give forward guidance like that. And I think in that situation, perhaps what I can say is, as we always have done, we look at the facts and circumstances and the longer term outlook and, regardless of any one quarter or one vessel or one month, we try very hard not to make short-term hasty decisions. We've got a strong balance sheet today. We intend to maintain our distribution based on the positive, mid and long-term outlook that we've outlined. And whilst we can't predict the future, we work close to our customers, we operate critical infrastructure that they need, and actually it's a small tight niche market. As I've shown on the fleet slide today, there are 67 vessels okay. Some are coming into the market, but they're already on contract. Our imbalance, if you like, is not huge, and it won't take an awful lot for the market to tighten right back up and with high oil prices and with the difficulties that we're facing in the world today. We're optimistic that we'll find business for them. So, I appreciate your idea of sort of debating what if. We prefer to look at it the other way round and think that actually there's a lot in our favor here that -- although the timing is unpredictable, we’re optimistic that we can do something. Obviously, as I said before, without guarantee but we were the main player in this market and we understand it very well and we will do our very best.

Unidentified Analyst

Analyst

Well, understood. And I don't want to hog the conversation or ask you to disclose any granular information just from my – let me look at it another way. Is it reasonable to assume that the each individual's – the individual ships have roughly comparable contributions to EBITDA and cash available for distribution, if I mean, if it's – if they're roughly comp like my own estimates of the impact of having a couple of ships or higher?

Gary Chapman

Analyst

I mean, obviously, we're talking to different customers about different vessels at different times. And the result of that is that we have different charter rates. So I think it's – I can't give you any individual rates. But I think it's not – it's not entirely reasonable to assume that they're all the same. No, they are different. And obviously –

Unidentified Analyst

Analyst

No. That will be same – all the same within the same – within the same ballpark. Just from coming up with a rough back to envelope estimate –

Gary Chapman

Analyst

Not, not necessarily so because obviously they – they were – the various time charters were all fixed at different times as well. So, the markets were different at each of those periods. And also as well, you just need to bear in mind the four bareboat charter vessels. The rate for those vessels, obviously, we don't provide crew and an OpEx. So those rates that we receive for those four vessels are definitely lower by – by definition.

Unidentified Analyst

Analyst

Okay. Well, I appreciate your – given me so much time and information. Thank you, as always. Thank you very much.

Gary Chapman

Analyst

Yeah. Thank you. Thanks for your time as well, Jim.

Operator

Operator

Our next question comes from Robert Silvera from R.E. R.E. Silvera & Associates Marine Surveyors. Please go ahead, Robert.

Robert Silvera

Analyst

Hey, Gary, thanks for taking my call.

Gary Chapman

Analyst

Hi, Robert.

Robert Silvera

Analyst

You touch – you touched on the situation with Russia, Ukraine the sanctions that exists today. You don't see as you said, very much of an effect on you at all at this point. Do you anticipate that, if these sanctions became more severe and the China, Russia relationship being what it seems to be with China being very supportive of Russia? Do you see any implications because China is one of our customers? Do you see any implications along that angle that might hurt us?

Gary Chapman

Analyst

Robert, that's a very, very big question.

Robert Silvera

Analyst

I know.

Gary Chapman

Analyst

Right now, where we are today, we're our biggest concern, if you can – if you can call it a – if you can call it that is, our crew members and making sure that, they're – they're looked after. Beyond that, we've got some small suppliers that may be affected that we have alternatives. So, right now, as we see it, and to the extent that this is a Russia/Ukraine issue, and it's kind of confined to – to that part of the world and those types of organizations, then our vessels don't sail anywhere near that location, that geography and we don't have suppliers or drydocks in those parts of the world. So I think it would be wrong of me to start thinking further ahead as to what might happen I mean, if you start involving other global powers into this situation, then I'm sure lots and lots of people are going to be affected. But primarily, we drydock our vessels in Europe and our vessels operate in Brazil, Uruguay, South America, if you like and Europe. So most of our finances is European based. Obviously, we have US investors. So at the moment, we're Americas and Europe. So to the extent that, that remains our business, and those are the areas that we would be worried about, if things started to impact there.

Robert Silvera

Analyst

Okay. So then it does not -- what's going on really does not impact our demand or demand for our vessels very much. Because…

Gary Chapman

Analyst

No, we don't think so.

Robert Silvera

Analyst

The price of oil being as high as it is, I would think the demand for oil is going to get greater and greater, which would put a greater demand on us to be able to provide vessels to supply.

Gary Chapman

Analyst

Yes. In general terms, we agree with that state.

Robert Silvera

Analyst

Good. Okay.

Gary Chapman

Analyst

Yes, in general terms we agree with that state.

Robert Silvera

Analyst

Great. Well, thank you very much for reducing the debt the way you are. And I hope you will be able to keep on doing that, until we're in a position where we make decisions about drop downs, et cetera so we use less equity and more of our accumulated cash. And will be in much better shape if we have rising interest rates, if we have reduced our debt significantly, which you have done in the past and I heartily approve that you continue to do that getting that debt load down as fast as possible. Thank you very much, Gary for a good job.

Gary Chapman

Analyst

Yes. Appreciate your comments. Thank you. Thank you, Robert.

Robert Silvera

Analyst

Okay.

Operator

Operator

It appears, we have no further questions at this moment. So I'm going to hand it back to Gary for any final remarks.

Gary Chapman

Analyst

Now I'd just say thank you very much for everybody who's taking the time to join us today and wish you a good day.

Operator

Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.