Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Period: Quarter and Six Months ended June 30, 2023
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. The fleet operates in the North Sea, Brazil, and other offshore regions.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2023) | Amount (USD in thousands) |
|---|---|
| Total Revenues | $145,004 |
| Net Income (Loss) | $(41,687) |
| Operating Cash Flow | $72,061 |
| Depreciation & Amortization | $55,836 |
| Impairment Charges | $49,649 |
| Total Debt (Gross) | $1,016,569 |
| Cash and Cash Equivalents | $63,124 |
| Available Liquidity | $68,100 (Includes $5M undrawn credit facility) |
Material Changes vs. Prior Period
- Net Loss vs. Net Income: The Partnership reported a net loss of $41.7 million for the six months ended June 30, 2023, compared to net income of $36.7 million in the same period of 2022. This reversal is primarily driven by a non-cash impairment charge of $49.6 million and significantly higher interest expenses.
- Impairment: A $49.6 million impairment charge was recognized in Q2 2023 related to the Dan Cisne and Dan Sabia vessels. This was due to their charter contracts nearing expiry, high carrying values, and suboptimal size for the Brazilian market.
- Interest Expense: Interest expense increased by 136% to $35.5 million (six months 2023) from $15.0 million (six months 2022), driven by rising LIBOR/SOFR rates and increased debt levels.
- Revenue Growth: Total revenues increased 12% to $145.0 million, aided by the inclusion of the Synnøve Knutsen (acquired July 2022) and higher fleet utilization compared to 2022, which was impacted by multiple scheduled drydockings.
- Derivative Gains: Realized and unrealized gains on derivative instruments decreased to $5.8 million from $21.5 million in the prior year period, reflecting changes in interest rate swap valuations.
Guidance, Outlook, and Management Commentary
- Charter Extensions and New Contracts:
- Windsor Knutsen: Agreed commercial terms for a new time charter with an oil major to commence between February and May 2025.
- Recife Knutsen: Commenced a new three-year time charter with Transpetro in August 2023.
- Tordis Knutsen and Lena Knutsen: Delivered to Shell for three-year time charters in July and September 2023, respectively.
- Brasil Knutsen: Secured a one-year charter with a Brazilian operator starting January 2024 and a future charter with Equinor.
- Refinancing: Successfully closed a new five-year, $240 million senior secured term loan facility in June 2023. In August 2023, refinanced one of its $25 million revolving credit facilities with NTT Finance Corporation, extending maturity to August 2025.
- Liquidity: Management believes current resources, including $63.1 million in cash and $5 million in undrawn credit facilities, are sufficient to meet working capital requirements for the next 12 months.
- Distributions: Reduced quarterly common unit distribution to $0.026 per unit (paid August 2023). No Class B Units converted to common units in Q2 2023 as the distribution threshold was not met.
- Management Transition: Derek Lowe appointed as new CEO and CFO, effective September 13, 2023.
Investor Verification Checklist
- Impairment Rationale: Verify the assumptions used in the discounted cash flow valuation for the Dan Cisne and Dan Sabia impairments, specifically regarding future redeployment rates and residual values.
- Debt Refinancing: Monitor the status of the second $25 million revolving credit facility maturing in November 2023 to ensure successful refinancing on acceptable terms.
- Interest Rate Exposure: Assess the impact of rising SOFR/LIBOR rates on future interest expenses, noting the average margin of 2.29% over benchmark rates.
- Charter Expirations: Review the schedule of charter expirations for vessels like the Windsor Knutsen and Brasil Knutsen to evaluate re-chartering risks and potential rate resets.
- Going Concern: Confirm that the net current liability position of $123.5 million is adequately managed through the undrawn credit facilities and operating cash flows.