KNOP

Business Context and Reporting Period

Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and six months ended June 30, 2024
Business Overview: The Partnership owns and operates a fleet of 18 shuttle tankers primarily under long-term time and bareboat charters with major oil and gas companies. As of June 30, 2024, the fleet operated under contracts expiring between 2024 and 2030.

Key Financial Metrics

Liquidity: As of June 30, 2024, available liquidity was $66.6 million, comprising $56.6 million in cash and $10 million in undrawn revolving credit facilities.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4.2% year-over-year (YoY) to $151.1 million, driven by a 10.5% increase in time charter and bareboat revenues ($146.8 million) due to new contracts and higher fleet utilization.
• Profitability Improvement: Net loss narrowed significantly from $41.7 million in the prior year to $5.4 million. This improvement was primarily due to a $33.3 million reduction in impairment charges.
• Impairment Charges: Impairment expenses decreased 67% to $16.4 million (vs. $49.6 million in 2023). The 2024 charge relates to the Dan Cisne ($5.8 million) and Dan Sabia ($10.6 million) due to charter expirations and market conditions.
• Operating Expenses: Vessel operating expenses increased 18% to $52.9 million, largely due to bunker costs for drydocking voyages and increased time charter operations.
• Debt Reduction: Total outstanding debt decreased by approximately $62 million to $901.0 million, reflecting debt repayments and refinancing activities.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Going Concern: Management believes current resources, including undrawn credit facilities, are sufficient to meet working capital and cash requirements for the next 12 months.
• Future Capital Needs: Estimated drydocking and classification survey costs are approximately $46.9 million between 2024 and 2027, with $7.1 million expected in the 12 months ending June 30, 2025.
• Distributions: The Partnership declared a quarterly cash distribution of $0.026 per common unit for the quarter ended June 30, 2024.

Subsequent Events (Post-June 30, 2024):

• Vessel Swap: On September 3, 2024, the Partnership sold the Dan Cisne to KNOT for $30 million and acquired the Tuva Knutsen for a net cash payment of $1.1 million (after debt assumption). The Tuva Knutsen is chartered to TotalEnergies with a hire rate guarantee from KNOT until 2031.
• Charter Extensions: Agreements were reached to extend charters for the Tordis Knutsen and Lena Knutsen with Shell, and new charters were executed for the Torill Knutsen and Ingrid Knutsen with Eni.

Risks and Contingencies:

• Market Risk: Exposure to fluctuations in oil prices, hire rates, and vessel values.
• Refinancing Risk: Reliance on timely refinancing of maturing credit facilities on acceptable terms.
• Insurance: Potential material adverse effects if multiple claims exceed deductibles or if risks are uninsured.
• Geopolitical: Risks associated with global conflicts (e.g., Russia-Ukraine, Middle East) impacting shipping routes and operations.

Investor Verification Checklist

• Impairment Methodology: Verify the discounted cash flow assumptions (8.66% discount rate) used for the Dan Cisne and Dan Sabia impairments.
• Debt Covenants: Confirm continued compliance with financial covenants, specifically the minimum book equity ratio (30%) and EBITDA to interest ratio (2.50x) under the new Hilda Facility.
• Charter Expirations: Monitor the redeployment status of the Dan Sabia (redelivered July 2024) and vessels with charters expiring in 2025 (e.g., Windsor Knutsen, Hilda Knutsen).
• Related Party Transactions: Review the terms of the vessel swap with KNOT and the ongoing time charters with KNOT subsidiaries to ensure arm's length pricing.
• Derivative Exposure: Assess the impact of the $389.3 million notional interest rate swap portfolio on future earnings volatility.