KNOT Offshore Partners LP — FY2019 Form 20-F
Reporting period: Year ended December 31, 2019; filed March 19, 2020. This is an annual report, not a standalone fourth-quarter earnings filing. Unless noted otherwise, amounts are U.S. dollars.
Business context
The Partnership owns and operates 16 shuttle tankers, principally under long-term time and bareboat charters to energy companies. It reported under U.S. GAAP. The fleet had an average age of 6.5 years at year-end. The Partnership’s strategy is to grow through accretive vessel acquisitions and long-term charters, while distributing available cash.
Financial and operating metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $282.6 million | $279.5 million |
| Operating income | $127.7 million | $128.7 million |
| Operating margin | 45.2% | 46.0% |
| Net income | $59.0 million | $82.2 million |
| Net margin | 20.9% | 29.4% |
| Basic earnings per common unit | $1.554 | $2.251 |
| EBITDA | $198.7 million | $220.1 million |
| Adjusted EBITDA | $217.6 million | $217.4 million |
| Cash from operating activities | $165.7 million | $148.6 million |
| Cash and cash equivalents at year-end | $43.5 million | $41.7 million |
| Gross debt at year-end | $1,002.8 million | $1,087.3 million |
Revenue grew 1.1%; vessel operating expenses increased 6% to $60.1 million, while depreciation was $89.8 million. Interest expense was $50.7 million. Net income fell 28%, primarily reflecting an $18.7 million unrealized derivative loss in 2019 versus a $1.8 million unrealized gain in 2018; the filing states these unrealized amounts do not affect cash flow. Adjusted EBITDA was essentially flat.
Cash used in financing was $163.8 million, including $84.5 million of debt repayments and $79.3 million of distributions. Investing cash flow was zero, with no vessel acquisitions in 2019. The Partnership reported $72.2 million of available liquidity at year-end, including $43.5 million of cash and $28.7 million of undrawn revolving credit capacity. It also reported net current liabilities of $51.2 million. Management said existing resources were sufficient for working capital needs for at least 12 months, assuming current charter rates.
Common-unit distributions were $2.08 per unit for 2019, or $0.52 per quarter; a $0.52 distribution for the quarter ended December 31, 2019 was paid February 13, 2020. Series A preferred units carry cumulative distributions at an 8% annual rate; $7.2 million was paid to preferred holders in 2019. Preferred distributions have priority over common-unit distributions.
Changes versus the prior period
- Revenue increased modestly, helped by a full year of the Anna Knutsen’s contribution and fewer planned drydockings than in 2018. Lower daily charter revenue from the Bodil Knutsen and 18 off-hire days for the Raquel Knutsen partly offset the increase.
- Operating income was slightly lower, while net income declined substantially because of the year-over-year swing in derivative valuation results.
- Operating cash flow increased by $17.0 million. Debt declined by about $84.5 million through scheduled repayments; no acquisitions were made.
- The Partnership extended its $25 million unsecured revolving credit facility to August 2021. Shell, Equinor and ENI exercised one-year charter extensions for the Windsor Knutsen, Bodil Knutsen and Torill Knutsen, respectively.
Outlook, risks and unusual items
- Outlook: Management described the medium- to long-term shuttle tanker outlook as positive, citing an aging fleet and offshore projects under development, with tendering activity expected in 2020. This is forward-looking commentary, not quantified financial guidance.
- COVID-19 and oil prices: The report, dated March 19, 2020, said the impact of the Coronavirus outbreak and the sharp early-2020 oil-price decline was uncertain and could materially affect earnings, cash flow, customer activity, crew changes, port access and newbuild deliveries. Management said operations had not yet been affected at that time.
- Debt and distributions: Debt agreements impose liquidity, working-capital, collateral-value, equity-ratio and interest-coverage tests and can restrict distributions. All debt covenants were reported in compliance at December 31, 2019. Most borrowing bears interest at LIBOR plus margins of 1.8%–2.4%; after swaps and cash, reported floating-rate exposure was about $397.5 million. A 1% interest-rate move would change annual interest expense by about $4.0 million.
- Refinancing and repayment profile: Contractual debt repayments include $85.9 million in 2020 and balloon repayments totaling $688.4 million across maturities. Vessel mortgages and related earnings, charter contracts and insurance proceeds secure debt. Liquidity, refinancing access and vessel valuations are important sensitivities.
- Asset values: Charter-free broker valuations were approximately $130 million below the $1.677 billion carrying value of vessels at year-end. The Partnership recorded no impairment, citing existing fixed-rate charters and no identified impairment indicators.
- Customer concentration: Eight customers accounted for substantially all revenue. Shell contributed 23%, ENI 16%, Transpetro 16%, Galp 13%, and Repsol 13% in 2019. Charter expirations, non-renewals or customer financial stress could affect cash flow.
- Costs and regulation: Estimated annual maintenance and replacement capital expenditure was $61.0 million; projected drydocking and classification costs for the 12 time-chartered vessels were about $47.2 million during 2020–2024. IMO 2020 low-sulfur fuel requirements and ballast-water treatment systems may increase costs; estimated treatment-system costs were $1.5–$2.0 million for seven identified vessels not yet listed as equipped.
- Other considerations: Related-party management and administrative services are provided by KNOT affiliates; 2019 related-party expenses included $6.95 million in technical and operational management fees. The filing identifies potential dilution and priority claims associated with convertible preferred units. No material litigation was identified. The auditor issued unqualified opinions on the financial statements and internal controls; management also reported effective controls.
Important facts for investors to verify
- Whether customer charter extensions and renewals support contracted revenue, particularly for vessels with expirations in 2020–2022.
- Current liquidity, debt maturities, covenant headroom and access to refinancing, including the large scheduled balloon payments.
- Actual operating, drydocking and environmental-compliance costs versus the reported estimates, and the impact of IMO 2020.
- Whether preferred-unit distributions remain current and how conversion or redemption terms could affect common-unit dilution and distributions.
- Subsequent developments after March 19, 2020 regarding COVID-19, oil prices, customer credit and vessel operations; the filing does not quantify their eventual impact.