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, 2016
Business Overview: The Partnership owns and operates a fleet of ten offshore shuttle tankers under long-term time and bareboat charters with major international oil and gas companies. As of June 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 (Six Months Ended June 30, 2016)
| Metric | Value (USD) |
|---|---|
| Total Revenues | $85.1 million |
| Net Income | $22.2 million |
| Operating Income | $39.4 million |
| Net Cash Provided by Operating Activities | $52.5 million |
| Cash and Cash Equivalents (End of Period) | $25.7 million |
| Total Debt (Gross) | $652.0 million |
| Available Liquidity | $55.7 million (Cash + $30M undrawn revolver) |
| Earnings Per Unit (Common) | $0.810 |
| Cash Distributions Per Unit | $0.520 per quarter ($1.040 YTD) |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total revenues increased 16% to $85.1 million (from $73.2 million in 2015). 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 increased 58% to $22.2 million (from $14.1 million in 2015). A significant factor was the absence of a $6.2 million goodwill impairment charge recorded in the prior year.
- Derivative Losses: Realized and unrealized losses on derivative instruments increased to $6.4 million (from $5.4 million in 2015), largely due to a decrease in long-term interest rates affecting interest rate swap valuations.
- Capital Structure: On May 18, 2016, all 8.57 million subordinated units held by KNOT converted to common units on a one-for-one basis.
Guidance, Outlook, and Risks
Management Commentary: Management expects current resources, including an undrawn revolving credit facility of $30 million, to be sufficient to meet working capital requirements for at least the next twelve months. The Partnership estimates approximately $14.0 million in dry-docking and classification survey costs for 2017 and 2018.
Recent Developments:
- Debt Facility Amendment: On June 30, 2016, the Partnership amended its $240 million senior secured loan facility, adding a $15 million tranche to the revolving credit facility (totaling $35 million).
- Share Repurchase: The common unit purchase program was extended to August 31, 2017. As of August 31, 2016, the Partnership and General Partner had repurchased 271,274 units at an average price of $12.71.
Risks and Contingencies:
- Market Risk: Exposure to interest rate fluctuations (hedged via swaps) and foreign currency exchange rates (hedged via forwards for NOK expenses).
- Concentration Risk: Six customers accounted for substantially all revenues; major clients include subsidiaries of Petrobras, Eni, Statoil, and Repsol.
- Insurance: The Partnership retains deductibles averaging $0.15 million per vessel and faces potential liability for claims exceeding association reserves.
Investor Verification Checklist
- Charter Expirations: Verify the status of charter extensions for vessels expiring in 2017 (Windsor Knutsen, Bodil Knutsen) and 2018 (Hilda Knutsen, Torill Knutsen).
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the minimum EBITDA to interest ratio of 2.50 and minimum book equity ratio of 30%.
- Derivative Valuation: Assess the impact of ongoing interest rate movements on the fair value of the $407.7 million notional interest rate swap portfolio.
- Related Party Transactions: Review ongoing fees paid to KNOT Management and KOAS for technical, operational, and administrative services.
- Capital Expenditures: Monitor actual dry-docking costs against the estimated $14.0 million budget for 2017-2018.