ABERDEEN, Scotland--(BUSINESS WIRE)--KNOT Offshore Partners LP (NYSE:KNOP):

Financial Highlights

For the three months ended June 30, 2022, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

• Generated total revenues of $64.0 million, operating income of $13.4 million and net income of $9.9 million.
• Generated Adjusted EBITDA of $39.5 million (1)
• Generated distributable cash flow of $9.4 million (1)
• Reported $123.5 million in available liquidity at June 30, 2022, which included cash and cash equivalents of $88.5 million, part of which was used to purchase the Synnøve Knutsen on July 1, 2022.

Other Partnership Highlights and Events

• Fleet operated with 100% utilization for scheduled operations in the second quarter of 2022 and 90.5% utilization taking into account the scheduled drydockings of the Lena Knutsen, the Anna Knutsen, the Vigdis Knutsen and the Windsor Knutsen.
• On July 14, 2022, the Partnership declared a quarterly cash distribution of $0.52 per common and Class B unit with respect to the quarter ended June 30, 2022 paid on August 11, 2022 to all common and Class B unitholders of record on July 28, 2022. On the same day, the Partnership declared a quarterly cash distribution to holders of Series A Convertible Preferred Units (“Series A Preferred Units”) with respect to the quarter ended June 30, 2022 in an aggregate amount equal to $1.7 million.
• On May 27, 2022, the Partnership entered into a time charter agreement with Eni Trading and Shipping S.p.A. (“Eni”) for the vessel Ingrid Knutsen. In return for the Partnership accepting an early redelivery of the vessel towards the end of 2022 under the existing contract, Eni has entered into a new time charter contract on similar commercial terms that will commence in January 2024 for a fixed period of three years, with Eni having options to extend the charter by up to three further years.
• The Vigdis Knutsen returned from her successful drydock in June 2022 and replaced the Windsor Knutsen, as she departed for her own drydock, on the time charter contract for PetroChina, for which PetroChina has also exercised its first extension option for an additional period of 12 months, extending the firm period of the charter to September 2023.
• On June 30, 2022, the Partnership through its wholly-owned subsidiary, Knutsen Shuttle Tankers 15 AS, which owned the Torill Knutsen, closed a sale and leaseback agreement with a Japanese-based lessor for a lease period of ten years. After repayment of the previously existing loan, the Partnership realized net proceeds of approximately $39 million after fees and expenses.
• On July 1, 2022, the Partnership acquired KNOT Shuttle Tankers 35 AS, the company that owns the shuttle tanker Synnøve Knutsen, from Knutsen NYK Offshore Tankers AS (“KNOT” “Knutsen NYK”). The purchase price, which was financed on a non-dilutive basis using borrowings under the separate new sale and leaseback with respect to the Torill Knutsen, was $119 million, less $87.7 million of outstanding indebtedness. The Synnøve Knutsen is operating in Brazil on a fixed five-year time charter contract with Equinor Shipping Inc.
• On July 6, 2022, the charterer of the Hilda Knutsen, Eni, notified the Partnership of its intention to redeliver the vessel and, as a consequence, the vessel is currently expected to be returned to the Partnership in or around September 2022. The Partnership is now marketing the vessel for new time charter employment.
• On August 16, 2022, the Partnership agreed the commercial terms for a new time charter contract for the Tordis Knutsen with a subsidiary of the French oil major TotalEnergies to commence in September 2022 for a fixed period of three months, with charterer’s options to extend the charter by up to nine further months. The signing of the time charter contract remains subject to the agreement of customary operational terms which are expected to be resolved shortly.
• On August 16, 2022, the Partnership entered into a new time charter agreement for the Lena Knutsen with a subsidiary of TotalEnergies which commenced on August 21, 2022. The charter is for a fixed period of six months with charterer’s options to extend the charter by up to six further months.
• In August 2022, the Partnership agreed the commercial terms for a new time charter contract for the Windsor Knutsen with a major oil company to commence in or around January 2023 for a fixed period of one year with a charterer’s option to extend the charter by one further year. The signing of the time charter contract remains subject to the agreement of customary operational terms which are expected to be resolved shortly.
• The current time charter for the Brasil Knutsen is expected to end in or around September 2022; however the Partnership is currently negotiating a new proposed one-year time charter contract, with options to extend, with an oil major, to commence in or around September 2022.

Gary Chapman, Chief Executive Officer and Chief Financial Officer of KNOT Offshore Partners LP, commented, “During the second quarter, the Partnership’s operational performance remained strong, with 100% utilization for scheduled operations, while our financial results continued to reflect the high concentration of drydocking in the first half of the year. There will be some residual impact in the third quarter as vessels complete these works and their voyages back to Brazil, but the bulk of this heavy drydocking is now behind us. We have also recently agreed multiple interim charters and extensions to increase our substantial contracted forward revenue, though it remains the case that we expect the shuttle tanker charter market to be bumpy for at least the duration of 2022, largely attributable to production ramp-up delays caused by the initial onset of COVID-19. We remain focused on securing further employment as the expected medium-term market tightening draws closer, driven by the limited shuttle tanker orderbook and the offshore production growth plans evidenced by large oil major capital expenditure outlays for new FPSOs in Brazil in particular. On the basis of these strong medium-term fundamentals, we were pleased to acquire the Synnove Knutsen on a non-dilutive basis, and we remain committed to maintaining our longstanding leadership position in the shuttle tanker sector and delivering a strong operational performance to support our quarterly distributions to unitholders.”

(1) EBITDA, Adjusted EBITDA and distributable cash flow are non-GAAP financial measures used by management and external users of the Partnership’s financial statements. Please see Appendix A for definitions of EBITDA, Adjusted EBITDA and distributable cash flow and a reconciliation to net income, the most directly comparable GAAP financial measure.

Financial Results Overview

Total revenues were $64.0 million for the three months ended June 30, 2022 (the “second quarter”), compared to $65.2 million for the three months ended March 31, 2022 (the “first quarter”). The decrease was mainly due to increased off hire in connection with the scheduled drydockings.

Vessel operating expenses for the second quarter of 2022 were $23.0 million, an increase of $2.9 million from $20.1 million in the first quarter of 2022. The increase was mainly related to bunker costs for the Windsor Knutsen, the Lena Knutsen, the Anna Knusten and the Vigdis Knutsen in connection with their voyages to drydock.

Depreciation was $26.1 million for the second quarter, an increase of $0.2 million from $25.9 million in the first quarter. General and administrative expenses were $1.4 million for the second quarter compared to $1.7 million for the first quarter.

As a result, operating income for the second quarter was $13.4 million, compared to $17.5 million for the first quarter.

Interest expense for the second quarter was $8.3 million, an increase of $1.6 million from $6.7 million for the first quarter, the increase being mainly due to an increase in the US dollar LIBOR rate.

The realized and unrealized gain on derivative instruments was $5.1 million in the second quarter, compared to realized and unrealized gain of $16.4 million in the first quarter. The unrealized non-cash element of the mark-to-market gain was $6.7 million for the second quarter, compared to an unrealized gain of $18.2 million for the first quarter. The unrealized gain for the second quarter related to mark-to-market gain on interest rate swaps of $7.1 million and a loss of $0.4 million on foreign exchange contracts.

As a result, net income for the second quarter was $9.9 million compared to $26.8 million for the first quarter.

Net income for the second quarter of 2022 increased by $20.8 million from a net loss of $10.9 million for the second quarter of 2021 to $9.9 million for the second quarter of 2022. Operating income for the second quarter of 2022 increased by $14.6 million to $13.4 million, compared to an operating loss of $1.2 million in the second quarter of 2021. This increase is mainly due to the impairment of the Windsor Knutsen and higher operating expenses in the second quarter of 2021. Total finance expense for the second quarter of 2022 decreased by $6.1 million to $3.4 million, compared to finance expense of $9.5 million for the second quarter of 2021, mainly due to an increase in unrealized gain on derivative instruments.

Distributable cash flow was $9.4 million for the second quarter of 2022, compared to $14.5 million for the first quarter of 2022. The decrease was mainly a result of lower utilization of the fleet due to offhire in the second quarter of 2022 arising from the scheduled drydockings and associated bunker costs. The distribution declared for the second quarter was $0.52 per common and Class B unit, equivalent to an annualized distribution of $2.08.

COVID-19

The Partnership has continued to date to avoid any serious or sustained operational impacts from the coronavirus (“COVID-19”) pandemic, and there have been no effects on the Partnership’s contractual position. Enhanced protocols remain in place with a focus on ensuring the health and safety of our employees and crew onboard, while providing safe and reliable operations for our customers.

Travel restrictions and shortening of quarantine periods continue to ease in various places around the world; however costs related to the movement of maritime personnel and vessel operational logistics, including repairs and maintenance, remain above their historical average and the Partnership expects these higher costs to persist for some time into the future. Although the Partnership is negatively affected by such higher costs, they are not considered a material threat to the business.

Operational Review

The Partnership’s vessels operated throughout the second quarter of 2022 with 100% utilization for scheduled operations and 90.5% utilization taking into account the scheduled drydockings of the Lena Knutsen, the Anna Knutsen, the Vigdis Knutsen and the Windsor Knutsen which, together, were offhire for 147 days in the second quarter of 2022.

On February 14, 2022, the Anna Knutsen was redelivered to the Partnership at the start of her mobilization trip to Europe for her planned drydock. The Partnership then entered into a new time charter contract for the Anna Knutsen with a wholly owned subsidiary of TotalEnergies for two years, with options for the charterer to extend the time charter by up to three further one-year periods, and this charter commenced on April 28, 2022, immediately after the vessel returned to Brazil following completion of her drydock.

The Windsor Knutsen was redelivered from her time charter with PetroChina on June 14, 2022 to start on her mobilization trip to Europe for her planned 15-year special survey drydocking. On the same date, the Vigdis Knutsen, having successfully completed her own drydocking, replaced the Windsor Knutsen on the time charter contract for PetroChina. PetroChina has also exercised its first extension option for an additional period of 12 months, extending the firm period of the charter to September 2023.

The Windsor Knutsen successfully completed her drydock, departing the yard in early August bound for Brazil.

The Lena Knutsen was redelivered to the Partnership on June 2, 2022 in advance of the commencement of the vessel’s planned five-year special survey drydocking in Europe. After drydocking, the vessel returned to Brazil in early August. The Partnership entered into a new time charter agreement for the Lena Knutsen with TotalEnergies which commenced on August 21, 2022. The charter is for a fixed period of six months with charterer’s options to extend the charter by up to six further months.

Financing and Liquidity

On June 30, 2022, the Partnership through its wholly-owned subsidiary, Knutsen Shuttle Tankers 15 AS, which owned the Torill Knutsen, closed a sale and leaseback agreement with a Japanese-based lessor for a lease period of ten years. The gross sales price was $112.0 million and a portion of the proceeds was used to repay the outstanding loan related to the vessel. The bareboat rate under the lease consists of a fixed element per day and there is a fixed-price purchase obligation at maturity. After repayment of the previously existing loan, the Partnership realized net proceeds of $39 million after fees and expenses.

As of June 30, 2022, the Partnership had $123.5 million in available liquidity, which consisted of cash and cash equivalents of $88.5 million and $35.0 million of capacity under its revolving credit facilities, part of which was used to purchase the Synnøve Knutsen on July 1, 2022. The revolving credit facilities mature between August 2023 and November 2023. The Partnership’s total interest-bearing obligations outstanding as of June 30, 2022 were $988.5 million ($981.6 million net of debt issuance costs). The average margin paid on the Partnership’s outstanding debt during the second quarter of 2022 was approximately 2.05% over LIBOR.

As of June 30, 2022, the Partnership had entered into various interest rate swap agreements for a total notional amount of $415.8 million to hedge against the interest rate risks of its variable rate borrowings. As of June 30, 2022, the Partnership receives interest based on three or six-month LIBOR and pays a weighted average interest rate of 1.85% under its interest rate swap agreements, which have an average maturity of approximately 3.2 years. The Partnership does not apply hedge accounting for derivative instruments, and its financial results are impacted by changes in the market value of such financial instruments.

As of June 30, 2022, the Partnership’s net exposure to floating interest rate fluctuations was approximately $286.5 million based on total interest-bearing contractual obligations of $988.5 million, less the Raquel Knutsen and Torill Knutsen sale and leaseback facilities of $197.7 million, less interest rate swaps of $415.8 million, and less cash and cash equivalents of $88.5 million. The Partnership’s outstanding interest-bearing contractual obligations of $988.5 million as of June 30, 2022 are repayable as follows:

Acquisition of Synnøve Knutsen

On July 1, 2022, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT Shuttle Tankers 35 AS (“KNOT 35”), the company that owns the shuttle tanker, Synnøve Knutsen, from Knutsen NYK (the “Synnøve Acquisition”). The purchase price was $119.0 million, less approximately $87.7 million of outstanding indebtedness related to the Synnøve Knutsen plus approximately $0.6 million for certain capitalized fees related to the financing of the vessel. The purchase price will be adjusted for post-closing working capital adjustments. The secured credit facility related to the vessel (the “Synnøve Facility”) is repayable in quarterly instalments with a final balloon payment of $71.1 million due at maturity in October 2025. The Synnøve Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.75%. The purchase price was settled in cash.

The Synnøve Knutsen is operating in Brazil under a time charter with Equinor, which will expire in February 2027. The charterer has options to further extend the charter for up to three two-year periods and nine one-year periods. The Partnership’s board of directors (the “Board”) and the conflicts committee of the Board (the “Conflicts Committee”) approved the purchase price of the Synnøve Acquisition. The Conflicts Committee retained an outside financial advisor and outside legal counsel to assist with its evaluation of the Synnøve Acquisition.

Distributions

On July 14, 2022, the Partnership declared a quarterly cash distribution of $0.52 per common and Class B unit with respect to the quarter ended June 30, 2022 paid on August 11, 2022 to all common and Class B unitholders of record on July 28, 2022. On the same day, the Partnership declared a quarterly cash distribution to holders of Series A Preferred Units with respect to the quarter ended June 30, 2022 in an aggregate amount equal to $1.7 million.

Assets Owned by Knutsen NYK

In February 2021, Tuva Knutsen was delivered to Knutsen NYK from the yard and thereafter commenced on a five-year time charter contract with a wholly owned subsidiary of the French oil major TotalEnergies. TotalEnergies has options to extend the charter by up to ten further years.

In November 2021, Live Knutsen was delivered to Knutsen NYK from the yard in China and thereafter commenced on a five-year time charter contract with Galp Sinopec for operation in Brazil. Galp has options to extend the charter by up to six further years.

In June, 2022, Daqing Knutsen was delivered to Knutsen NYK from the yard in China and thereafter commenced on a five-year time charter contract with Petrochina International (America) Inc for operation in Brazil. The charterer has options to extend the charter by up to five further years.

In July 2022, Frida Knutsen was delivered to Knutsen NYK from yard in Korea and will commence on a seven-year time charter contact with ENI for operation in North Sea. The charterer has options to extend the charter by up to three further years.

Another vessel, Sindre Knutsen, is planned to be delivered by the end of August 2022 from the yard in Korea and will commence on a five-year time charter contract with Eni for operation in the North Sea. The charterer has options to extend the charter by up to five further years.

In May 2022, Knutsen NYK entered into a new ten-year time charter contract with Petrobras for a vessel to be constructed which will operate in Brazil, where the charterer has the option to extend the charter by up to five further years. The vessel will be built in China and is expected to be delivered in late 2024.

Pursuant to the omnibus agreement the Partnership entered into with Knutsen NYK at the time of its initial public offering, the Partnership has the option to acquire from Knutsen NYK any offshore shuttle tankers that Knutsen NYK acquires or owns that are employed under charters for periods of five or more years.

There can be no assurance that the Partnership will acquire any additional vessels from Knutsen NYK.

Outlook

As of June 30, 2022, the Partnership’s fleet of seventeen vessels had an average age of 8.5 years and had charters with an average remaining fixed duration of 1.7 years. In addition, the charterers of the Partnership’s time chartered vessels had options to extend their charters by an additional 2.4 years on average. As of June 30, 2022, the Partnership had $487 million of remaining contracted forward revenue, excluding options.

The Partnership’s earnings for the third quarter of 2022 will be affected by the offhire related to the mobilization trip back to Brazil for the Windsor Knutsen and the Lena Knutsen, which have each completed their scheduled drydocking in Europe, and the planned redelivery of the Hilda Knutsen and the lack of firm employment for the Windsor Knutsen.

Notwithstanding the impact of the COVID-19 pandemic on the oil industry, and decisions made by our customers to delay and postpone offshore projects, Brazil continues to demonstrate increasing activity, which supports our view that demand for shuttle tankers in our main market, where 13 of our vessels typically operate, is improving. However, the delayed resumption of activity in the North Sea continues to dampen a return to high shuttle tanker demand in our secondary market, and we believe that this situation could persist for several more quarters.

Uncertainty caused by the ongoing war in Ukraine, the desire from developed economies for greater immediate and short-term energy security, continuing high oil prices and increases seen in newbuild vessel prices in 2022 are all contributory factors that could increase demand for shuttle tankers in the short and medium term. Although the North Sea market gives some cause for concern, the Partnership is working to address the gaps in vessel employment that have occurred and is looking at all commercial and financial avenues to ensure that the best interests of the Partnership’s unitholders are respected during what the Partnership believes is a bumpy, but temporary, period.

Several new contracts were recently agreed with customers and other opportunities remain under discussion. Due to the niche nature of the shuttle tanker market, the integral role that shuttle tankers play in customers’ supply chains and the absence of speculative ordering (meaning that the vast majority of the global fleet are not ‘in the market’), the Partnership believes that the mid to long-term expansion of deep and ultra-deep water offshore oil production in Pre-salt Brazil, and also some growth in the North Sea and the Barents Sea, remain fully supported by publicly announced investment decisions, production sharing agreements and production forecasts made by the Partnership’s customers, including the large number of FPSO orders intended for Brazilian Pre-salt fields.

As such, the Partnership believes that these factors will drive demand for existing and for newbuild shuttle tankers, and that shuttle tanker demand growth will outpace net shuttle tanker supply growth in the mid to long-term.

The Partnership’s financial information for the quarter ended June 30, 2022, included in this press release is preliminary and unaudited and is subject to change in connection with the completion of the Partnership’s quarter end close procedures and further financial review. Actual results may differ as a result of the completion of the Partnership’s quarter end closing procedures, review adjustments and other developments that may arise between now and the time such financial information for the quarter ended June 30, 2022, is finalized.

About KNOT Offshore Partners LP

KNOT Offshore Partners LP owns, operates and acquires shuttle tankers primarily under long-term charters in the offshore oil production regions of the North Sea and Brazil.

KNOT Offshore Partners LP is structured as a publicly traded master limited partnership but is classified as a corporation for U.S. federal income tax purposes, and thus issues a Form 1099 to its unitholders, rather than a Form K-1. KNOT Offshore Partners LP’s common units trade on the New York Stock Exchange under the symbol “KNOP”.

The Partnership plans to host a conference call on Thurs

Gary Chapman
+44 1224 618 420
This email address is being protected from spambots. You need JavaScript enabled to view it.