Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and nine months ended September 30, 2016
Business Overview: The Partnership owns and operates a fleet of ten offshore shuttle tankers under long-term time and bareboat charters with major oil and gas companies. As of September 30, 2016, the fleet included the Windsor Knutsen, Bodil Knutsen, Recife Knutsen, Fortaleza Knutsen, Carmen Knutsen, Hilda Knutsen, Torill Knutsen, Dan Cisne, Dan Sabia, and Ingrid Knutsen.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2016) | Value (USD in thousands) |
|---|---|
| Total Revenues | 128,676 |
| Net Income | 41,598 |
| Operating Income | 60,577 |
| Net Cash Provided by Operating Activities | 83,110 |
| Cash and Cash Equivalents (Sep 30, 2016) | 27,382 |
| Total Long-Term Debt (Gross) | 638,469 |
| Available Liquidity (Cash + Undrawn Credit) | 62,400 |
| Earnings Per Unit (Common, Basic & Diluted) | $1.563 |
| Cash Distributions Per Unit | $1.560 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14% to $128.7 million for the nine months ended September 30, 2016, compared to $112.5 million in the prior year. This was primarily driven by the inclusion of the Ingrid Knutsen (acquired Oct 2015) and Dan Sabia (acquired June 2015) in the results of operations.
- Profitability: Net income surged 82% to $41.6 million from $22.9 million in the prior year. This improvement was significantly aided by the absence of a $6.2 million goodwill impairment charge recorded in the first half of 2015.
- Derivative Gains/Losses: The Partnership reported a net loss on derivative instruments of $2.7 million for the nine months ended September 30, 2016, a substantial improvement from a $11.8 million loss in the same period in 2015. This change was due to rising long-term interest rates and the strengthening of the U.S. dollar against the Norwegian Krone (NOK).
- Operating Expenses: Vessel operating expenses increased 17% to $23.2 million, largely due to the addition of new vessels, partially offset by favorable currency exchange rates.
Guidance, Outlook, and Recent Developments
- Subsequent Acquisitions: On December 1, 2016, the Partnership acquired the Raquel Knutsen from KNOT for a net purchase price of approximately $20.3 million (after debt assumption). The vessel is under a 10-year time charter with Repsol Sinopec Brasil, B.V., expiring in 2025.
- Equity Financing: On December 6, 2016, the Partnership entered into an agreement to issue $50 million of Series A Convertible Preferred Units in a private placement expected to close in January 2017. These units carry an 8.0% annual distribution rate.
- Charter Extensions: Statoil ASA exercised an option to extend the time charter for the Bodil Knutsen by two years, extending the firm contract period to May 2019.
- Unit Conversion: On May 18, 2016, all 8,567,500 subordinated units converted to common units on a one-for-one basis.
- Liquidity Outlook: Management believes current resources, including a $35 million undrawn revolving credit facility, are sufficient to meet working capital requirements for the next 12 months. Estimated dry-docking costs for 2017 are approximately $17.2 million.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with financial covenants, specifically the minimum book equity ratio (30%) and minimum EBITDA to interest ratio (2.50) across multiple loan facilities.
- Charter Concentration: Review the concentration of revenue from major customers (e.g., Petrobras, Eni, Statoil, Repsol, Shell, ExxonMobil), which accounted for substantially all revenues.
- Derivative Exposure: Assess the impact of interest rate and foreign exchange fluctuations on future earnings, noting the Partnership does not apply hedge accounting.
- Preferred Unit Terms: Confirm the closing and terms of the $50 million Series A Preferred Unit offering, including the 8.0% distribution obligation.
- Acquisition Accounting: Monitor the finalization of purchase price allocation for the Raquel Knutsen acquisition, currently reported as provisional.