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, 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 June 30, 2017, the fleet consisted of 13 vessels. The Partnership is not under common control with its sponsor, Knutsen NYK Offshore Tankers AS ("KNOT"), and accounts for vessel acquisitions from KNOT as business acquisitions.
Key Financial Metrics
| Metric (in thousands, except per unit) | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Total Revenues | $99,397 | $85,089 |
| Net Income | $28,344 | $22,241 |
| Net Income Attributable to Common Unitholders | $26,198 | $21,740 |
| Earnings Per Unit (Basic) - Common | $0.886 | $0.810 |
| Operating Cash Flow | $98,021 | $52,485 |
| Cash and Cash Equivalents (Ending) | $64,501 | $25,667 |
| Total Debt (Gross) | $912,010 | $745,649 |
| Current Ratio (Current Assets / Current Liabilities) | 0.80 | 0.40 (Dec 31, 2016) |
Note: Current liabilities exceeded current assets by $18.9 million as of June 30, 2017, primarily due to the classification of short-term loan obligations.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17% to $99.4 million for the six months ended June 30, 2017, compared to $85.1 million in the prior year. This was driven by the inclusion of three new vessels (Raquel Knutsen, Tordis Knutsen, and Vigdis Knutsen) acquired from KNOT during the period.
- Profitability: Net income increased 27% to $28.3 million. Operating income rose to $43.6 million, aided by higher charter revenues and $3.4 million in loss of hire insurance recoveries related to the Raquel Knutsen.
- Expenses: Depreciation increased 19% to $33.1 million due to the expanded fleet. Interest expense rose 34% to $13.5 million, reflecting additional debt incurred for acquisitions and higher LIBOR rates.
- Derivatives: The loss on derivative instruments improved significantly, decreasing from a $6.4 million loss in the prior year to a $1.0 million loss, primarily due to favorable movements in interest rates and foreign exchange contracts.
Guidance, Outlook, and Risks
- Capital Raising: The Partnership raised significant capital in the first half of 2017, including $54.9 million from a common unit offering and $87.4 million from two private placements of Series A Convertible Preferred Units. Proceeds were used to fund vessel acquisitions and repay debt.
- Acquisitions: The Partnership acquired the Tordis Knutsen (March 2017) and Vigdis Knutsen (June 2017). A subsequent agreement was signed in August 2017 to acquire the Lena Knutsen, expected to close by September 30, 2017.
- Liquidity: As of June 30, 2017, available liquidity was $69.5 million, comprising $64.5 million in cash and $5.0 million in an undrawn revolving credit facility. Management believes resources are sufficient for the next 12 months.
- Tax Risk: Proposed changes to the Norwegian Tonnage Tax (NTT) regime could disqualify subsidiaries owning vessels under bareboat charters from the tax regime, potentially subjecting them to standard corporate income tax starting January 1, 2018. This could materially increase tax expenses and reduce cash available for distribution.
- Dividends: A cash distribution of $0.52 per common unit was declared for the quarter ended June 30, 2017.
Investor Verification Checklist
- Debt Maturity Profile: Verify the schedule of debt repayments, noting significant balloon payments due in 2019 and 2021, and ensure refinancing plans are in place.
- Tax Regime Status: Monitor the finalization of Norwegian Tonnage Tax negotiations to assess potential impact on future cash flows and distributions.
- Acquisition Integration: Confirm the closing and financial integration of the Lena Knutsen acquisition and the performance of recently acquired vessels (Tordis and Vigdis).
- Charter Expirations: Review the charter expiration dates for the fleet, particularly the Windsor Knutsen (2018) and Hilda/Torill Knutsen (2018), to evaluate renewal risks.
- Series A Preferred Units: Understand the terms of the Series A Preferred Units, including the 8.0% cumulative distribution rate and conversion/redemption features starting in 2019.