KNOT Offshore Partners (KNOP) Q1 2025 Earnings Call May 21, 2025 09:30 AM ET Speaker0 Hello, and welcome, everyone, to the KNOT First Quarter twenty twenty five Earnings Call. My name is Maxine, and I'll be coordinating the call today. I will now hand over to Derek Lowe, Chief Executive Officer. Please go ahead. Speaker1 Thank you, Maxine, and good morning, ladies and gentlemen. My name is Derek Lowe, and I'm the Chief Executive and Chief Financial Officer of Connaught Offshore Partners. Welcome to the Part ...

1Q 2025 (NYSE:KNOP) Forward-looking statements This presentation contains certain forward-looking statements (as defined in Section 21E of the Securities Exchange Act of 1934, as amended) that reflect management's current view and involve known and unknown risks and are based upon assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of KNOT Offshore Partners LP ("KNOP"). Actual results may differ materially from those expr ...

Financial Performance and Debt Management - The quarterly cash distribution was reduced to $0.026 per common unit, which may impact the company's ability to raise capital [32]. - Consolidated debt as of December 31, 2024, was approximately $909.7 million, limiting the company's flexibility in obtaining additional financing [39]. - Approximately $256.7 million of the company's debt is due to be repaid or refinanced in 2025 [40]. - The company's ability to service or refinance its debt is dependent on its current and future financial performance, which may be affected by economic conditions [41]. - Financing agreements require the company to maintain certain financial ratios, including positive working capital and a minimum liquidity [43]. - The company’s debt level may limit its flexibility in responding to changing business and economic conditions [44]. - The company can borrow money to pay distributions, which may reduce available credit for operational needs [167]. - Unitholders may have liability to repay distributions under certain circumstances, particularly if distributions exceed the fair value of assets [171]. Revenue Sources and Customer Dependence - The company relies on 13 customers for all of its time charter and bareboat revenues, indicating a lack of diversification [26]. - The company derives all of its time charter and bareboat revenues from 13 customers, with key customers accounting for approximately 24%, 17%, 14%, 13%, 9%, and 8% of revenues respectively [59]. - In 2024, subsidiaries of KNOT accounted for $28 million of the company's time charter revenues [64]. - Major customers include Shell (24%), Equinor (17%), Transpetro (14%), Repsol (13%), KNOT (9%), and TotalEnergies (8%), accounting for a significant portion of revenues for the year ended December 31, 2024 [218]. Operational Challenges and Costs - The company anticipates incurring at least 112 off-hire days due to scheduled drydockings in 2025, which could adversely affect cash available for distribution [36]. - The company must make substantial capital expenditures to maintain fleet operating capacity, which reduces cash available for distribution [35]. - The required drydocking of vessels could be more expensive and time-consuming than anticipated, impacting cash flow [36]. - The company experienced significant increases in costs for fuel, logistics, and crewing due to supply chain disruptions and inflation, impacting its financial condition [72]. - Supply chain constraints and labor shortages have led to higher operational costs, which may impact the company's ability to hire and retain crew and procure materials [72]. - The company may face operational problems with vessels that could reduce revenue and increase costs [55]. - The company anticipates ongoing supply chain pressures and inflationary impacts on its cost structure, which may affect its operations and financial results [72]. Market and Economic Conditions - The company’s growth depends on the demand for shuttle tanker transportation services, which is influenced by macroeconomic conditions and oil prices [26]. - Persistent low oil prices may adversely affect the company's growth prospects and ability to make cash distributions, with macroeconomic conditions like rising inflation and interest rates posing additional risks [68]. - Adverse economic conditions may impair customers' ability to pay for services, leading to decreased demand for the company's vessels and negatively impacting revenue [73]. - An increase in global shuttle tanker capacity without a corresponding increase in demand may adversely affect hire rates and vessel values, impacting the company's financial condition [79]. Regulatory and Compliance Risks - The International Maritime Organization (IMO) aims for a 40% reduction in carbon intensity for international shipping by 2030, compared to 2008 levels [1]. - The 2023 IMO GHG Strategy targets net-zero GHG emissions from international shipping by around 2050, with a goal of at least a 20% reduction in total annual GHG emissions by 2030 [1]. - Compliance with new climate-related regulations may increase operational costs and require installation of new emission controls [2]. - The SEC proposed rules requiring public companies to disclose material climate-related risks and GHG emissions, which could lead to increased compliance costs [4]. - The company may face reputational damage and financial impacts due to increased scrutiny on its Environmental, Social, and Governance (ESG) practices [3]. - Increased costs and risks associated with climate change regulations may hinder access to capital and affect investor relationships [3]. - Compliance with extensive environmental regulations, such as the IMO 2020 sulfur cap, may significantly increase operational expenses [112]. Corporate Governance and Ownership Structure - KNOT owns 28.4% of the company's common units and all Class B Units, creating potential conflicts of interest [137]. - The partnership agreement limits unitholders' voting rights, with only four out of seven board members elected by common unitholders [135]. - The partnership agreement allows KNOT to make decisions in its individual capacity, potentially favoring its interests over those of the company [143]. - Common unitholders are entitled to elect only four of the seven members of the board of directors, with the remaining three appointed by the general partner [1]. - The partnership agreement limits unitholders' ability to call meetings, nominate directors, and acquire operational information, which may diminish their influence [1]. Strategic Growth and Future Prospects - The company aims to generate stable cash flows and provide sustainable quarterly distributions to unitholders through strategic acquisitions and long-term charters [210]. - The company has established relationships with leading energy companies, which are expected to provide attractive opportunities for future growth [210]. - The company intends to expand operations in high-growth regions, particularly in the North Sea and Brazil [210]. - The company has a history of acquiring shuttle tankers, with significant acquisitions made from 2013 to 2025 [193][194][195][196][197][198][199][200][201][202]. Cybersecurity and Data Protection - A successful cyber-attack could materially disrupt the company's operations and lead to significant financial repercussions [130]. - Cybersecurity risks are increasing, requiring significant resources for protection and compliance with new regulations [132]. - The company is subject to evolving data protection laws, which may incur substantial compliance costs and legal liabilities [133]. - The company faces complex compliance challenges related to data privacy and cybersecurity laws, with potential penalties for noncompliance [133].

Financial Data and Key Metrics Changes - Revenues for Q4 2024 were $91.3 million, operating income was $34.7 million, and net income was $23.3 million [5] - Adjusted EBITDA was reported at $63.1 million, with available liquidity at $90 million, consisting of $67 million in cash and cash equivalents and $23 million in undrawn credit facilities [6] - The company operated at a utilization rate of 98.3% with no impact from planned drydocking [6] Business Line Data and Key Metrics Changes - The partnership has a strong contracted revenue position of $870 million at the end of Q4, with fixed contracts averaging 2.4 years in duration [12] - The recent swap of Dan Sabia for Live Knutsen is expected to bring nearly 5 years of fixed charter revenue, enhancing fleet and pipeline growth without new funding [15] Market Data and Key Metrics Changes - Significant growth is anticipated in production fields serviced by shuttle tankers, particularly in Brazil and the North Sea [8] - The North Sea's Johan Castberg FPSO is expected to start production shortly, while the Penguins FPSO has recently begun production [9][10] Company Strategy and Development Direction - The company aims to pursue long-term charter visibility and accretive investments in the fleet to support sustainable distributions [25] - The partnership is focused on filling charter coverage gaps, with 75% of 2026's capacity already fixed [23] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism regarding industry dynamics and the partnership's positioning to benefit from market conditions [7] - The company is addressing upcoming debt refinancings and is making good progress against an improving market backdrop [31] Other Important Information - The company closed an insurance claim for Torill Knutsen totaling less than $6 million [14] - The partnership's overall liabilities decreased by $29 million in 2024 despite the acquisition of Tuva [16] Q&A Session Summary Question: Capital allocation with improved liquidity - Management highlighted the importance of maintaining liquidity and prioritizing debt renegotiations while also focusing on filling charter coverage [34][36] Question: Charter coverage and vessel fit for demand - Management expressed confidence that available vessels will meet the demand profile in both the North Sea and Latin America [38][39] Question: Open windows for Fortaleza and Recife charters - Management indicated that the larger size of Fortaleza and Recife reduces concerns about rechartering compared to smaller vessels [42] Question: Impact of bareboat chartering on cash flow - Management confirmed that the bareboat terms are commercially comparable to previous time charters, extending fixed coverage for the vessel [48] Question: Time charter revenue expectations - Management noted that the increase in time charter revenue was driven by new operations starting in Q4, with expectations for continued growth in Q2 [56][60] Question: Debt repayment schedule post-acquisition - Management stated that more details on the debt facility for Live Knutsen will be disclosed in the upcoming 20-F filing [108] Question: North Sea market comparison with Brazil - Management acknowledged the strengthening of both markets but refrained from making direct comparisons regarding growth potential [111]

Financial Performance - KNOT Offshore Partners generated total revenues of $91.3 million in Q4 2024, an increase from $76.3 million in Q3 2024, driven by higher charter revenues and insurance proceeds of $5.9 million[11]. - The Partnership reported net income of $23.3 million in Q4 2024, a significant increase from a net loss of $3.8 million in Q3 2024, and an increase of $28.6 million compared to a net loss of $5.3 million in Q4 2023[11]. - Adjusted EBITDA for Q4 2024 was $63.1 million, reflecting strong operational performance and increased fleet utilization at 98.3%[4][11]. - For the year ended December 31, 2024, total revenues reached $318.6 million, an increase of 9.5% compared to $290.7 million in 2023[28]. - Time charter and bareboat revenues amounted to $306.9 million for 2024, up from $277.1 million in 2023, reflecting a growth of 10.7%[28]. - The operating income for the year was $72.9 million, significantly higher than the $25.1 million reported in 2023, marking a year-over-year increase of 189.5%[28]. - Net income for 2024 was $14.1 million, compared to a net loss of $34.3 million in 2023, indicating a substantial turnaround[28]. - Adjusted EBITDA for the year ended December 31, 2024 was $201,116 thousand, an increase from $185,687 thousand for the year ended December 31, 2023, reflecting a growth of approximately 8.5%[38]. Liquidity and Debt - As of December 31, 2024, the Partnership had $90.4 million in available liquidity, consisting of $66.9 million in cash and cash equivalents and $23.5 million in undrawn revolving credit facility capacity[12]. - The Partnership's total interest-bearing obligations were $909.7 million as of December 31, 2024, with an average margin of approximately 2.25% over SOFR[13]. - Current liabilities increased significantly from $127,577 thousand at December 31, 2023 to $287,122 thousand at December 31, 2024, an increase of approximately 125%[33]. - Long-term debt decreased from $857,829 thousand at December 31, 2023 to $648,075 thousand at December 31, 2024, a reduction of approximately 24.4%[33]. - The current portion of long-term debt rose significantly from $98,960 thousand at December 31, 2023 to $256,659 thousand at December 31, 2024, an increase of approximately 159%[33]. - Cash and cash equivalents at the end of the period increased to $66,933 thousand from $63,921 thousand at the end of the previous year, a rise of about 4.7%[35]. Operational Highlights - The Partnership secured over 94% of charter coverage for the remainder of 2025 and approximately 75% for 2026, indicating strong demand in the market[6]. - The average remaining fixed duration of charters was 2.4 years, with an additional average extension option of 4.8 years[19]. - The Partnership's fleet had an average age of 9.6 years as of December 31, 2024, with ongoing investments in fleet expansion and modernization[19]. - The company has entered into multiple long-term time charter contracts, including a ten-year contract with Petrobras for three new vessels expected to be delivered between 2026 and 2027[24]. - The company has options for charter extensions on several contracts, providing potential for future revenue growth[24]. Market Conditions - The market for shuttle tankers in Brazil is tightening, driven by robust demand and a limited newbuild order book, with a significant pipeline of new production growth expected[19][21]. - The company is monitoring market trends in the shuttle tanker industry, including hire rates and supply-demand factors[41]. Strategic Focus - The Partnership plans to pursue long-term visibility from charter contracts and build liquidity to support sustainable cash flow generation[22]. - KNOT Offshore Partners is focused on maintaining long-term relationships with major users of shuttle tonnage to enhance operational stability[42]. - The company is committed to complying with governmental regulations, including climate change regulations, which may affect operational costs[42]. - KNOT Offshore Partners aims to maximize the utilization of its vessels, including redeployment or disposition of vessels no longer under charter[42]. - The company is evaluating the financial condition of existing and future customers to ensure they can fulfill charter obligations[42]. - KNOT Offshore Partners is preparing for potential disruptions in shipping routes due to various risks, including political events and piracy[44]. - The company is aware of the increasing emphasis on climate, environmental, and safety concerns from its customers[42]. - KNOT Offshore Partners is assessing the impacts of geopolitical events, including the Russian war with Ukraine and conflicts in the Middle East, on its operations[42]. - The company anticipates future capital expenditures and the availability of capital resources to fund these expenditures[42]. Other Financial Metrics - The total operating expenses for 2024 were $246.4 million, a decrease of 7.2% from $265.6 million in 2023[28]. - The weighted average units outstanding remained stable at 34,045 thousand common units throughout 2024[28]. - The company reported a realized gain on derivative instruments of $6.8 million for the year, compared to a gain of $5.4 million in 2023[31]. - The company recognized an impairment of $16,384 thousand for the year ended December 31, 2024, down from $49,649 thousand in the previous year, indicating improved asset performance[35]. - The total partners' capital increased from $523,169 thousand at December 31, 2023 to $526,827 thousand at December 31, 2024, a slight increase of about 0.5%[34]. - The partnership plans to host a conference call on March 20, 2025, to discuss Q4 2024 results, inviting all unitholders and interested parties[27].

Group 1 - Knot Offshore (KNOP) is part of the Transportation group, which consists of 131 companies and currently ranks 16 within the Zacks Sector Rank [2] - The Zacks Rank system focuses on earnings estimates and revisions, with Knot Offshore holding a Zacks Rank of 2 (Buy) and a 6% increase in the consensus estimate for its full-year earnings over the past quarter [3] - Year-to-date, Knot Offshore has gained approximately 9.9%, outperforming the average gain of 1.1% for the Transportation group [4] Group 2 - Knot Offshore belongs to the Transportation - Shipping industry, which includes 42 stocks and is currently ranked 249 in the Zacks Industry Rank, while the average loss for this group is 12.4% this year [5] - Viking Holdings (VIK), another Transportation stock, has also outperformed the sector with a return of 10.1% year-to-date, and it has a Zacks Rank of 2 (Buy) with a 10.7% increase in its current year EPS estimate over the past three months [4][5] - The Transportation - Truck industry, which includes Viking Holdings, is ranked 236 and has experienced a decline of 18.6% this year [6]

Core Viewpoint - The article emphasizes the effectiveness of value investing as a strategy that consistently performs well across various market conditions, highlighting the importance of fundamental analysis and traditional valuation metrics to identify undervalued stocks [2]. Group 1: Value Investing Strategy - Value investing is a popular stock market trend that focuses on identifying stocks believed to be undervalued by the market [2]. - The Zacks Rank system is utilized to find winning stocks by focusing on earnings estimates and revisions [1]. Group 2: KNOT Offshore Partners (KNOP) - KNOT Offshore Partners (KNOP) is currently attracting investor attention, holding a Zacks Rank of 2 (Buy) and a Value grade of A, indicating strong value characteristics [3]. - KNOP has a Price-to-Sales (P/S) ratio of 0.72, significantly lower than the industry average of 1.21, suggesting it may be undervalued [4]. - The company also has a Price-to-Cash Flow (P/CF) ratio of 2.15, compared to the industry average of 4.83, further indicating potential undervaluation [5]. - Over the past year, KNOP's P/CF has fluctuated between 1.85 and 3.41, with a median of 2.15, reinforcing its strong cash flow outlook [5]. - The combination of these metrics suggests that KNOP is likely undervalued, supported by a strong earnings outlook, making it an impressive value stock [6].

Company Overview - Knot Offshore (KNOP) is a notable stock within the Transportation sector, which consists of 131 individual stocks and ranks 15 in the Zacks Sector Rank [2] - The company currently holds a Zacks Rank of 2 (Buy), indicating a favorable outlook based on earnings estimates and revisions [3] Performance Analysis - Year-to-date, Knot Offshore has returned approximately 13.9%, significantly outperforming the Transportation sector's average return of -3.5% [4] - Another stock in the Transportation sector, Freightcar America (RAIL), has also shown strong performance with a year-to-date return of 14% [4] Earnings Estimates - The Zacks Consensus Estimate for Knot Offshore's full-year earnings has increased by 6% over the past three months, reflecting improved analyst sentiment [3] - In comparison, Freightcar America's current year EPS estimate has risen by 3.5% during the same period [5] Industry Context - Knot Offshore is part of the Transportation - Shipping industry, which includes 42 individual companies and currently ranks 233 in the Zacks Industry Rank [5]

Core Viewpoint - Knot Offshore (KNOP) shares have experienced a significant increase of 8.1% to $5.89, following a period of 7% loss over the past four weeks, indicating a potential turnaround in stock performance driven by market optimism [1][2]. Group 1: Company Performance - Knot Offshore is expected to report quarterly earnings of $0.04 per share, reflecting a year-over-year increase of 125%, with revenues projected at $76.41 million, up 4.6% from the previous year [3]. - The consensus EPS estimate for Knot Offshore has been revised 300% higher in the last 30 days, suggesting a positive trend that may lead to further price appreciation [4]. Group 2: Market Context - The recent rally in Knot Offshore's stock is attributed to favorable conditions in the tanker market, with product tanker rates remaining healthy despite minor fluctuations, alongside a recovery in global trade as COVID-19 restrictions are lifted [2]. - Knot Offshore operates within the Zacks Transportation - Shipping industry, where another company, Star Bulk Carriers (SBLK), has seen a decline of 11.3% over the past month, closing at $15.50 [4].

Financial Data and Key Metrics Changes - Revenues for Q3 2024 were $76.3 million, with an operating income of $17.2 million and a net loss of $3.8 million. Adjusted EBITDA was reported at $45.1 million [6] - The company closed Q3 with $77 million in available liquidity, consisting of $67 million in cash and cash equivalents plus $10 million in undrawn capacity on credit facilities [6] - The partnership operated with a utilization rate of 98.8% [7] Business Line Data and Key Metrics Changes - The company announced several charter extensions and new contracts, including the Ingrid Knutsen charter with Eni for two years and the Hilda Knutsen charter for one year starting March 2025 [13][19] - The swap of Dan Cisne for Tuva Knutsen brought seven years of fixed charter revenue, enhancing fleet and pipeline growth without requiring new funding [12] Market Data and Key Metrics Changes - The company anticipates significant growth in production fields serviced by shuttle tankers, with around 11 newbuilds on order [8] - The Brazilian market shows strong demand dynamics, with significant committed demand growth expected from new FPSOs requiring shuttle tanker services [22][24] Company Strategy and Development Direction - The partnership's strategy focuses on securing additional contract coverage for its existing fleet and enhancing liquidity [22] - The company aims to maintain a strong contracted revenue position, which stood at $980 million at the end of Q3, with an average contract duration of 2.8 years [10] Management's Comments on Operating Environment and Future Outlook - Management expressed a positive outlook on industry dynamics and the partnership's positioning to benefit from anticipated market growth [8] - The company noted that while operating expenses increased due to general inflation and higher crewing costs, they expect to recover some costs through insurance claims related to repairs [50][64] Other Important Information - The company reported a slight increase in overall liabilities due to the completion of the Tuva acquisition, while continuing to make contractual debt repayments of approximately $90 million per year [15] - The partnership's debt facilities are primarily secured by vessels, with $907 million out of $947 million in debt facilities secured [18] Q&A Session Summary Question: How much of the OpEx increase was related to the Torill repair? - Management indicated that the repair accounted for under half of the OpEx increase, likely around a quarter [34] Question: How do the new charters compare to previous levels? - Management stated that the new contracts reflect current market conditions, with rates generally improving [49] Question: What factors contributed to the increase in operating expenses year-on-year? - Increased costs were attributed to higher crewing expenses and general inflationary pressures [51] Question: What is the expected run rate for OpEx in Q4? - Management suggested that the Q3 run rate could serve as a good guide for Q4 [62] Question: Will the revolvers be renewed, and what is the expected timeframe? - Management expects to seek renewal of the revolvers, with discussions likely occurring in the first half of next year [68] Question: Can you provide insight into the dividend and potential buybacks? - Management acknowledged the need to rebuild the visible charter pipeline before considering dividend increases or buybacks [95] Question: What is the current hedging strategy regarding interest rates? - Management indicated that they are cautious about entering new swaps at high rates and expect to reduce the hedged portion of debt significantly in 2025 [108]