Business Context and Reporting Period
KNOT Offshore Partners LP (KNOT) is a limited partnership owning and operating a fleet of shuttle tankers primarily under long-term charters with major oil and gas companies. This Form 6-K reports unaudited financial results for the quarterly period ended June 30, 2022. As of this date, the fleet consisted of 17 vessels. The Partnership operates under a single reportable segment: the shuttle tanker market.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2022) | Value (USD in thousands) |
|---|---|
| Total Revenues | $129,155 |
| Operating Income | $30,948 |
| Net Income | $36,668 |
| Net Income Attributable to Limited Partners | $32,658 |
| Earnings Per Unit (Basic) - Common | $0.95 |
| Cash Provided by Operating Activities | $54,111 |
| Cash and Cash Equivalents (Ending Balance) | $88,474 |
| Total Debt (Gross) | $988,458 |
| Undrawn Revolving Credit Facilities | $35,000 |
Material Changes vs. Prior Period
- Revenue: Total revenues decreased by $13.3 million (9%) to $129.2 million for the six months ended June 30, 2022, compared to $142.4 million in the prior year. This decline was primarily due to increased off-hire time for scheduled drydocking and the absence of $10.3 million in loss of hire insurance recoveries recorded in the prior year.
- Operating Expenses: Vessel operating expenses increased by $7.1 million (20%) to $43.1 million, driven by higher bunker costs for vessels traveling to drydock and increased crewing/logistics costs. Depreciation increased by $4.5 million (9%) due to a change in the estimated useful life of the fleet from 25 to 23 years.
- Impairment: The Partnership recorded no impairment charges in the current period, compared to a $29.4 million impairment charge in the prior year related to the Windsor Knutsen.
- Derivative Gains: The Partnership recognized a net gain of $21.5 million on derivative instruments, compared to $5.7 million in the prior year. This was largely due to a $25.3 million unrealized gain on interest rate swaps resulting from rising interest rates.
- Net Income: Net income increased by $19.5 million (113%) to $36.7 million, primarily driven by the absence of the prior year's impairment charge and significant gains on derivative instruments.
Outlook, Commentary, and Risks
- Acquisitions: On July 1, 2022, the Partnership acquired the Synnøve Knutsen for a net purchase price of approximately $31.3 million (after debt assumption). The vessel is chartered to Equinor until February 2027.
- Charter Status: Several vessels are undergoing or approaching charter expirations. The Hilda Knutsen is expected to be redelivered in September 2022 and is currently being marketed. The Brasil Knutsen charter is expected to end in September 2022, with negotiations ongoing for a new one-year contract.
- Liquidity: Management believes current resources, including $88.5 million in cash and $35 million in undrawn credit facilities, are sufficient to meet working capital requirements for the next 12 months. Estimated drydocking costs for the fleet between 2022 and 2026 are approximately $51.5 million.
- Risks: Key risks include fluctuations in oil prices, hire rates, and vessel values; the impact of the Russian invasion of Ukraine; and the transition away from LIBOR. The Partnership maintains interest rate swaps to hedge variable rate debt exposure.
Investor Verification Checklist
- Charter Renewals: Verify the status of negotiations for the Hilda Knutsen and Brasil Knutsen to ensure no significant revenue gaps occur upon redelivery in late 2022.
- Derivative Volatility: Assess the sustainability of the $21.5 million gain on derivatives, which significantly boosted net income but is non-cash and subject to market rate fluctuations.
- Debt Maturity: Review the debt maturity schedule, noting $46.1 million due in the remainder of 2022 and $332.2 million due in 2023, to evaluate refinancing risks.
- Operating Cost Inflation: Monitor the trajectory of bunker and crewing costs, which drove a 20% increase in operating expenses year-over-year.
- Acquisition Integration: Confirm the financial impact and charter stability of the newly acquired Synnøve Knutsen.