Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2015
Business Overview: The Partnership owns and operates a fleet of eight offshore shuttle tankers under long-term time and bareboat charters with major oil and gas companies. As of March 31, 2015, the fleet included the Windsor Knutsen, Bodil Knutsen, Recife Knutsen, Fortaleza Knutsen, Carmen Knutsen, Hilda Knutsen, Torill Knutsen, and Dan Cisne. The Partnership is not under common control with its sponsor, Knutsen NYK Offshore Tankers AS ("KNOT"), following its initial public offering.
Key Financial Metrics
| Metric (in thousands, except per unit) | Q1 2015 | Q1 2014 |
|---|---|---|
| Total Revenues | $36,220 | $21,774 |
| Operating Income | $16,945 | $9,354 |
| Net Income | $7,186 | $6,424 |
| Net Cash Provided by Operating Activities | $22,131 | $12,215 |
| Cash and Cash Equivalents (End of Period) | $32,746 | $25,338 |
| Total Debt (Current + Long-term) | $604,642 | $613,221 |
| Earnings Per Unit (Common) | $0.297 | $0.367 |
| Cash Distributions Per Unit | $0.510 | $0.435 |
Note: Distributions per unit for Q1 2015 were declared subsequent to the period end.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 66% to $36.2 million, driven by the inclusion of the Hilda Knutsen and Torill Knutsen (acquired in mid-2014) and the Dan Cisne (acquired in late 2014) in the results of operations.
- Expense Increases: Vessel operating expenses rose 48% and depreciation increased 68%, primarily due to the expanded fleet size.
- Derivative Losses: The Partnership reported a realized and unrealized loss on derivative instruments of $5.6 million, compared to a gain of $46,000 in the prior year. This was caused by a decrease in long-term swap rates and the weakening of the Norwegian Krone (NOK) against the U.S. Dollar.
- Net Income: Despite higher revenues and significant derivative losses, net income increased 12% to $7.2 million.
Guidance, Outlook, and Risks
Recent Developments and Outlook
- Equity Offering: On June 2, 2015, the Partnership completed an underwritten public offering of 5,000,000 common units, raising net proceeds of $116.3 million.
- Acquisition: Proceeds from the offering were used to acquire the Dan Sabia for a net purchase price of $103.0 million (June 15, 2015).
- Debt Repayment: The Partnership used offering proceeds to repay its $20.0 million revolving credit facility, the $12.0 million Seller's Credit, and $7.5 million of the Dan Sabia facility.
- Charter Amendment: The time charter for the Windsor Knutsen with BG Group was amended in June 2015, reducing the rate by 3.4% but extending the contract with additional options and delaying the next drydocking to 2017.
Risks and Contingencies
- Market Risk: Exposure to interest rate fluctuations (hedged via swaps) and foreign currency exchange rates (hedged via forward contracts).
- Liquidity: Current liabilities exceeded current assets by $23.3 million as of March 31, 2015, largely due to mark-to-market valuations of derivative liabilities. Management believes resources are sufficient for the next 12 months.
- Concentration Risk: Five customers accounted for substantially all revenues. Major customers include subsidiaries of Petrobras, Eni, Statoil, Repsol, and BG Group.
- Regulatory/Environmental: Ongoing costs for environmental compliance and drydocking are expected to increase as the fleet matures.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of the $5.6 million derivative loss on future earnings and the effectiveness of current hedging strategies against interest rate and currency volatility.
- Debt Covenants: Confirm continued compliance with financial covenants (e.g., minimum liquidity, book equity ratio, EBITDA to interest ratio) across all loan facilities, particularly given the recent debt repayments and new acquisitions.
- Charter Renewals: Monitor the status of the Windsor Knutsen charter commencement in Q4 2015 and the terms of the amended agreement with BG Group.
- Capital Expenditures: Review the estimated $15.3 million budget for drydocking and classification surveys for 2016-2018 and assess funding sources.
- Distribution Sustainability: Analyze the relationship between net income ($7.2M) and cash distributions ($12.1M) to understand the reliance on non-cash items (depreciation) and debt financing to fund payouts.