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, 2017
Business Overview: The Partnership owns and operates a fleet of offshore shuttle tankers under long-term time and bareboat charters with major oil and gas companies. As of September 30, 2017, the fleet consisted of 14 vessels. The Partnership is a Marshall Islands limited partnership.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2017) | Value (USD in thousands) |
|---|---|
| Total Revenues | 157,615 |
| Operating Income | 70,326 |
| Net Income | 49,423 |
| Net Income Attributable to Common Unitholders | 45,121 |
| Diluted EPS (Common Units) | $1.455 |
| Cash Provided by Operating Activities | 158,421 |
| Cash and Cash Equivalents (Sep 30, 2017) | 38,118 |
| Total Debt (Current and Long-term) | 1,009,162 |
| Total Assets | 1,702,311 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 23% to $157.6 million for the nine months ended September 30, 2017, compared to $128.7 million in the prior year period. This was primarily driven by the inclusion of three new vessels (Raquel Knutsen, Tordis Knutsen, and Vigdis Knutsen) acquired during the period.
- Profitability: Net income rose 19% to $49.4 million from $41.6 million year-over-year. Operating income increased 16% to $70.3 million.
- Expense Increases: Vessel operating expenses increased 36% and depreciation increased 23%, largely due to the expanded fleet size. Interest expense rose 41% to $21.5 million due to additional debt incurred for acquisitions and refinancing.
- Derivative Gains: The Partnership recorded a net gain of $1.8 million on derivative instruments for the nine months ended September 30, 2017, compared to a loss of $2.7 million in the prior year, driven by unrealized gains on interest rate swaps.
- Insurance Recoveries: The Partnership recognized $3.4 million in loss of hire insurance recoveries related to the Raquel Knutsen, which was off-hire for repairs from February to May 2017.
Guidance, Outlook, and Risks
- Acquisitions: The Partnership acquired the Lena Knutsen on September 30, 2017. Subsequent to the period end, on November 9, 2017, the Partnership sold 3 million common units raising $65.7 million in net proceeds.
- Refinancing: The Partnership entered into a term sheet for a new $100 million facility to refinance the Torill Knutsen loan, expected to close in January 2018.
- Operational Risks: The Carmen Knutsen experienced a technical default with its propeller during a drydocking in Q4 2017, resulting in extended off-hire time. The Partnership expects the vessel to return to hire in late December 2017 or early January 2018. Costs are expected to be covered by insurance.
- Taxation Risk: The Norwegian government is negotiating changes to the Tonnage Tax regime. Proposed restrictions could disqualify subsidiaries owning vessels under bareboat charters from the regime, potentially subjecting them to corporate income tax. The Partnership is evaluating alternatives to avoid disqualification.
- Liquidity: As of September 30, 2017, available liquidity was $50.1 million (cash plus undrawn revolving credit). Management believes current resources are sufficient to meet obligations for the next 12 months.
Investor Verification Checklist
- Acquisition Valuation: Verify the purchase price and fair value allocation for the three vessels acquired in 2017 (Tordis, Vigdis, Lena) and the impact on future depreciation.
- Debt Covenants: Confirm compliance with financial covenants across multiple loan facilities, specifically the minimum book equity ratio (30%) and EBITDA to interest ratio (2.50).
- Insurance Claims: Monitor the status of the insurance claim for the Carmen Knutsen propeller damage and the Raquel Knutsen loss of hire to ensure expected recoveries are realized.
- Tax Regime Changes: Track the finalization of the Norwegian Tonnage Tax negotiations to assess potential future tax liabilities on bareboat chartered vessels.
- Charter Expirations: Review the charter expiration dates for the fleet, noting that several vessels have extension options exercisable by the charterer.