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, 2015
Business Overview: The Partnership owns and operates a fleet of nine offshore shuttle tankers under long-term time and bareboat charters with major oil and gas companies. As of September 30, 2015, the fleet included the Windsor Knutsen, Bodil Knutsen, Recife Knutsen, Fortaleza Knutsen, Carmen Knutsen, Hilda Knutsen, Torill Knutsen, Dan Cisne, and Dan Sabia.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2015) | Value (USD in thousands) |
|---|---|
| Total Revenues | $112,487 |
| Net Income | $22,875 |
| Operating Income | $47,751 |
| Net Cash Provided by Operating Activities | $63,770 |
| Cash and Cash Equivalents (Sep 30, 2015) | $67,197 |
| Total Long-Term Debt | $610,252 |
| Current Ratio (Current Assets / Current Liabilities) | 1.18 ($74,236 / $63,145) |
| Earnings Per Unit (Common, Basic & Diluted) | $0.850 |
| Cash Distributions Per Unit (Nine Months) | $1.510 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 44% to $112.5 million for the nine months ended September 30, 2015, compared to $78.2 million in the prior year. This growth is primarily attributable to the inclusion of earnings from the Hilda Knutsen, Torill Knutsen, Dan Cisne, and Dan Sabia following their acquisitions.
- Net Income: Net income increased 6% to $22.9 million from $21.5 million in the prior year period. This increase occurred despite a significant non-cash goodwill impairment charge of $6.2 million recognized in the second quarter of 2015.
- Derivative Losses: Realized and unrealized losses on derivative instruments increased significantly to $11.8 million (nine months 2015) from a loss of $1.2 million (nine months 2014). This was driven by a decrease in long-term swap rates and realized losses on foreign exchange forward contracts.
- Depreciation: Depreciation expense rose 49% to $35.4 million due to the expanded fleet size from recent acquisitions.
- Operating Expenses: Vessel operating expenses increased 20% to $19.9 million, largely due to the inclusion of new vessels, partially offset by lower costs resulting from the strengthening of the U.S. Dollar against the Norwegian Kroner.
Guidance, Outlook, and Risks
- Recent Acquisitions: On October 15, 2015, the Partnership acquired the Ingrid Knutsen for a net cash consideration of approximately $10.4 million. The vessel is under a ten-year time charter with Standard Marine Tønsberg AS (ExxonMobil subsidiary) expiring in 2024.
- Charter Extensions: Statoil ASA exercised an option to extend the time charter for the Bodil Knutsen by one year until May 2017. The Carmen Knutsen charter was amended in September 2015 to extend the duration by five years, though with a 6.2% reduction in the average charter rate.
- Capital Allocation: The Partnership authorized a common unit repurchase program in August 2015 for up to 666,667 units. As of December 2, 2015, approximately 9,280 units had been repurchased.
- Liquidity: The Partnership maintains $67.2 million in cash and cash equivalents and has an undrawn $20.0 million revolving credit facility. Management believes current resources are sufficient to meet working capital requirements for the next twelve months.
- Risks: Key risks include fluctuations in oil prices affecting charter rates, interest rate volatility (partially hedged via swaps), foreign currency exchange risks (hedged via forwards), and the ability to secure long-term charters for vessels upon contract expiration.
Investor Verification Checklist
- Goodwill Impairment: Verify the impact of the $6.2 million non-cash goodwill impairment charge on net income and its effect on future earnings projections.
- Derivative Exposure: Review the $11.8 million loss on derivatives and the notional amounts of outstanding interest rate swaps ($412.3 million) and foreign exchange forwards (NOK 194.8 million) to assess future volatility in earnings.
- Debt Covenants: Confirm compliance with financial covenants, specifically the minimum book equity ratio (30%) and EBITDA to interest ratio (2.50), across all loan facilities.
- Charter Expirations: Monitor the status of the Windsor Knutsen (commenced new charter Oct 2015) and other vessels with upcoming charter expirations to ensure re-chartering at favorable rates.
- Acquisition Integration: Assess the financial contribution of the newly acquired Dan Sabia and Ingrid Knutsen to future cash flows.