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, 2019
Business Overview: The Partnership owns and operates a fleet of 16 shuttle tankers under long-term time and bareboat charters with major international oil companies. As of June 30, 2019, the fleet operates under contracts expiring between 2019 and 2032.
Key Financial Metrics
| Metric (USD in thousands) | Three Months Ended June 30, 2019 |
Six Months Ended June 30, 2019 |
|---|---|---|
| Total Revenues | $70,922 | $141,471 |
| Operating Income | $31,928 | $64,293 |
| Net Income | $8,176 | $21,045 |
| Net Income Attributable to Common Unitholders | $6,258 | $17,123 |
| Earnings Per Unit (Basic) | $0.191 | $0.524 |
| Cash Provided by Operating Activities | N/A | $82,021 |
| Cash and Cash Equivalents | $42,429 | $42,429 |
| Total Debt (Current + Long-term) | $1,036,965 | $1,036,965 |
| Undrawn Revolving Credit Capacity | $28,700 | $28,700 |
Note: Total Debt calculated as Current portion of long-term debt ($83,285) + Long-term debt ($953,680).
Material Changes vs. Prior Period
- Revenue: Total revenues increased 2% ($1.7M) for the quarter and 4% ($4.8M) for the six months compared to the prior year periods. Increases were driven by full earnings from the Brasil Knutsen (which was drydocked in the prior year) and the inclusion of the Anna Knutsen in the six-month comparison.
- Net Income: Net income decreased significantly, dropping 62% for the quarter and 60% for the six months. The primary driver was a reversal in derivative instrument performance.
- Derivative Instruments: The Partnership recorded a realized and unrealized loss of $10.3M for the quarter and $16.2M for the six months ended June 30, 2019. This contrasts with a gain of $2.0M and $11.9M, respectively, in the prior year periods. The loss was primarily due to a decrease in US swap interest rates affecting the fair value of interest rate swaps.
- Operating Expenses: Vessel operating expenses increased 9% for both periods, largely due to the absence of insurance recoveries recorded in the prior year related to the Carmen Knutsen propeller repairs.
- Interest Expense: Increased 5% for the quarter and 16% for the six months, attributed to higher LIBOR rates and increased leverage.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes current resources, including $42.4M in cash and $28.7M in undrawn credit facilities, are sufficient to meet working capital requirements for the next 12 months. The Partnership maintains a net current liability position of $52.3M, primarily due to short-term loan obligations.
- Charter Extensions: On July 16, 2019, Shell exercised an option to extend the time charter for the Windsor Knutsen by one year until October 2020. The vessel had been operating under a suspension arrangement since March 2019.
- Distributions: The Partnership paid a quarterly cash distribution of $0.52 per common unit on August 14, 2019. Distributions exceeded net income for the period, resulting in under-distributed earnings.
- Regulatory Risk: The Republic of the Marshall Islands (where the Partnership is domiciled) was placed on the EU list of non-cooperative jurisdictions for tax purposes in March 2019. While the Marshall Islands expects removal from the list following legislative changes, the Partnership faces potential risks including increased monitoring, withholding taxes, or penalties if compliance with new economic substance requirements is not met.
- Capital Expenditures: The Partnership estimates approximately $42.6M in drydocking and classification survey costs for 12 vessels between 2019 and 2023.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of interest rate fluctuations on the $571.5M notional amount of interest rate swaps and the resulting mark-to-market losses.
- Debt Covenants: Confirm continued compliance with financial covenants across multiple loan facilities, specifically the minimum EBITDA to interest ratio (2.50) and minimum book equity ratio (30%).
- Charter Concentration: Review the concentration risk where seven customers accounted for substantially all revenues, with Shell and Transpetro being significant charterers.
- Regulatory Status: Monitor the status of the Marshall Islands on the EU non-cooperative jurisdictions list and the Partnership's compliance with new economic substance laws.
- Cash Flow vs. Distributions: Assess the sustainability of the $0.52 per unit quarterly distribution given that net income for the six months ($21.0M) was significantly lower than total distributions paid ($39.7M).