KNOT Offshore Partners LP — FY2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a separate fourth-quarter filing; the provided filing does not give a clear standalone Q4 income statement or cash-flow value. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Business context
The Partnership owns and operates shuttle tankers serving offshore oil production, primarily in Brazil and the North Sea. Its fleet comprised 18 vessels at year-end. Revenue is principally earned under time and bareboat charters; several vessels were between charters, on spot voyages, or employed by KNOT affiliates at reduced rates.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $268.6 million | $281.1 million |
| Operating income | $66.2 million | $73.6 million |
| Operating margin | 24.7% | 26.2% |
| Net income | $58.7 million | $53.9 million |
| Net cash from operating activities | $100.9 million | $166.4 million |
| Cash and cash equivalents at year-end | $47.6 million | $62.3 million |
| Interest-bearing debt at year-end | $1,062.6 million | $974.6 million |
Time-charter and bareboat revenue declined 2% to $262.8 million. Operating costs rose: vessel operating expenses increased 19% to $86.0 million, reflecting inflation, crewing and logistics costs, drydock-related voyages and the addition of Synnøve Knutsen. Depreciation rose to $107.4 million, partly because the estimated vessel life was shortened from 25 to 23 years. No impairment was recorded in 2022, compared with a $29.4 million impairment charge in 2021.
Net income increased despite lower operating income, supported in part by a $35.5 million realized and unrealized derivative gain, including a $38.5 million unrealized mark-to-market gain on interest-rate swaps. Interest expense rose to $42.6 million from $28.1 million, principally reflecting higher LIBOR, revolving-credit borrowings and the Synnøve acquisition. The derivative gain is not equivalent to operating cash generation.
Operating cash flow fell 39% to $100.9 million. Investing activities used $35.5 million, mainly for the Synnøve Knutsen acquisition; financing activities used $80.0 million. Year-end net current liabilities were $304.1 million. All revolving facilities were fully drawn, with no remaining borrowing availability.
Material changes and distributions
- On July 1, 2022, the Partnership acquired Synnøve Knutsen from KNOT for a stated vessel purchase price of $119.0 million, subject to debt and working-capital adjustments. The vessel has an Equinor charter through February 2027.
- In June 2022, the Partnership completed a ten-year sale-and-leaseback of Torill Knutsen for gross proceeds of $112.0 million and net proceeds of $39 million after repaying the prior loan and transaction costs.
- On January 11, 2023, the Partnership reduced the quarterly common-unit distribution to $0.026 per unit for Q4 2022, from the prior $0.52 quarterly level. It said it intended to direct internally generated cash toward working capital, debt reduction and strengthening the balance sheet. Series A Preferred Units rank ahead of common units and carry cumulative distributions at an 8% annual rate on their $24 liquidation preference.
Outlook, risks and unusual items
- Refinancing is the key near-term risk. Approximately $371.9 million of debt was scheduled to mature in 2023, including substantial balloon payments; additional facilities mature in early 2024. Management was negotiating with lenders and expected refinancing on similar terms, but provided no assurance. The Partnership stated that it would not have sufficient liquid funds to repay maturing debt if refinancing were unavailable. Its liquidity outlook assumes timely refinancing.
- Management reported compliance with debt covenants at December 31, 2022. Credit agreements include liquidity, working-capital, equity-ratio, interest-coverage and vessel-collateral tests; debt is secured by vessels. Failure to refinance or comply with covenants could restrict distributions or trigger acceleration.
- Charter renewal and utilization remain material concerns. The filing describes North Sea shuttle-tanker oversupply and multiple 2023 charter expirations. Bodil, Hilda and Torill had charters to a KNOT affiliate at reduced rates; the Partnership was marketing vessels for third-party work. New or expected contracts include three-year Transpetro charters for Fortaleza and Recife and three-year Shell charters expected for Tordis and Lena. The Recife and some other contract details were still pending as of the report date.
- Management expected Brazil shuttle-tanker demand to strengthen as offshore projects started, while North Sea market weakness could persist through 2023. It also expected inflationary and supply-chain pressures to continue. These are forward-looking expectations, not assurances.
- LIBOR-based facilities and swaps required transition arrangements ahead of LIBOR cessation. A 1 percentage-point change in short-term rates was estimated to affect annual interest expense by about $3.7 million, after considering the disclosed exposure and swaps.
- Six vessels incurred about 387 scheduled-drydock off-hire days in 2022; at least 156 days were anticipated for five vessels in 2023. The filing reports $17.6 million of 2023 drydock spending and $2.2 million for a ballast-water system installation.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The auditor highlighted acquisition valuation and vessel impairment recoverability as critical audit matters. Two vessels were tested for impairment indicators in 2022; management concluded their carrying values were recoverable, and no impairment was recorded.
Most important facts for investors to verify
- Whether the 2023 and early-2024 debt maturities were refinanced on acceptable terms, and the resulting rates, amortization, collateral and covenant requirements.
- Current cash, working-capital needs, covenant headroom and any later changes to debt or liquidity disclosures.
- Actual charter commencement, rates and duration for vessels with 2023 expirations, including whether expected Shell and Transpetro contracts were completed.
- How many vessels remain on reduced-rate KNOT-affiliate charters, and the timing and economics of third-party re-chartering.
- Whether operating cash flow can cover debt service, maintenance and preferred distributions while the common-unit distribution remains at $0.026 per quarter.
- The cash-versus-noncash components of earnings, especially derivative valuation gains, and the assumptions underlying vessel useful lives and impairment tests.