Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarterly period ended June 30, 2015 (Unaudited)
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 June 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 (in thousands, except per unit) | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|
| Total Revenues | $73,203 | $43,893 |
| Net Income | $14,073 | $8,921 |
| Net Income Attributable to Limited Partners | $13,810 | $8,744 |
| Earnings Per Unit (Common) | $0.553 | $0.505 |
| Cash Distributions Per Unit | $0.510 | $0.435 |
| Operating Cash Flow | $44,127 | $25,340 |
| Cash and Cash Equivalents (Ending) | $71,403 | $34,451 |
| Total Debt (Current + Long-term) | $618,832 | $613,221 |
| Working Capital | $10,354 | ($24,282) |
Note: Working capital for 2014 is negative due to the inclusion of mark-to-market derivative liabilities in current liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 67% to $73.2 million (six months 2015) from $43.9 million (six months 2014). This growth is primarily driven by the inclusion of earnings from the Hilda Knutsen and Torill Knutsen (acquired July 2014), the Dan Cisne (acquired December 2014), and the Dan Sabia (acquired June 2015).
- Net Income Increase: Net income rose 58% to $14.1 million. Despite a $6.2 million non-cash goodwill impairment charge, higher operating income from the expanded fleet offset the charge and increased interest expenses.
- Goodwill Impairment: A $6.2 million impairment charge was recognized in Q2 2015 due to a significant reduction in the price of the Partnership's common units. The charge reduced the goodwill balance to zero. No impairment was found for the vessels themselves.
- Derivative Instruments: The Partnership reported a net loss of $5.4 million on derivative instruments for the six months ended June 30, 2015, compared to a loss of $2.3 million in the prior year. This was driven by changes in long-term swap rates and foreign exchange fluctuations.
- Debt and Liquidity: Total debt remained relatively stable at approximately $619 million. However, cash and cash equivalents more than doubled to $71.4 million, bolstered by a $116.6 million equity offering in June 2015.
Guidance, Outlook, and Risks
- Equity Offering: In June 2015, the Partnership sold 5,000,000 common units, raising net proceeds of $116.6 million. Proceeds were used to fund the acquisition of the Dan Sabia, repay a $20 million revolving credit facility, and retire a $12 million seller's credit.
- Share Repurchase Program: On August 12, 2015, the Board authorized a program to repurchase up to 666,667 common units (with the General Partner purchasing up to 333,333 units). The program is scheduled to conclude by August 31, 2016.
- Charter Amendments: The time charter for the Windsor Knutsen with BG Group was amended in June 2015. The rate was reduced by 3.4%, but the charter was extended with six one-year options. The next drydocking is now estimated for the first half of 2017.
- Capital Expenditures: The Partnership estimates approximately $15.3 million in dry-docking and classification survey costs for its time-charter vessels over 2016–2018.
- Risks: Key risks include fluctuations in oil prices, interest rate volatility, foreign currency exchange rates (specifically NOK), and the ability to secure long-term charters upon expiration. The Partnership maintains interest rate swaps (notional amount $412.3 million) and foreign exchange forwards to mitigate these risks.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the fair value calculation that led to the $6.2 million goodwill write-down and confirm no vessel impairment was identified.
- Derivative Valuation: Review the $9.3 million in current derivative liabilities (mark-to-market) and assess the impact of interest rate and currency fluctuations on future earnings.
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the minimum book equity ratio (30%) and EBITDA to interest ratio (2.50x), given the recent equity issuance and debt repayments.
- Charter Expirations: Monitor the status of the Windsor Knutsen charter commencement in Q4 2015 and the extension options for other vessels expiring between 2016 and 2024.
- Related Party Transactions: Review ongoing fees paid to KNOT for technical management, administration, and the terms of the Omnibus Agreement regarding vessel acquisitions.