KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended June 30, 2020


For the three months ended June 30, 2020, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

• Generated total revenues of $70.3 million, operating income of $33.4 million and net income of $21.7 million.
• Generated Adjusted EBITDA of $55.8 million (1)
• Generated distributable cash flow of $30.7 million (1)
• Reported a distribution coverage ratio of 1.70 (2)
• Fleet operated with 99.7% utilization for scheduled operations.

Other events:
On April 20, 2020, Eni exercised two of its one-year options to extend the time charter of the Torill Knutsen until November 2022. In connection with the early exercise by Eni of its options, the Partnership granted Eni a further option to extend the time charter by one additional one-year period. Eni now has the option to extend the time charter by two one-year periods until November 2024.

• The charterer of the Windsor Knutsen, a subsidiary of Royal Dutch Shell (“Shell”), did not notify the Partnership by the due date of its intention to exercise its option to extend the time charter for the vessel. The charter will therefore expire in or around October 2020, the precise date to be fixed in accordance with the redelivery window as specified in the charter. As a result, the Partnership is currently exploring other options to recharter the vessel with a number of potential charterers, including a subsidiary of Knutsen NYK Offshore Tankers AS, the owner of the Partnership’s general partner (“Knutsen NYK”) for a potential charter term of six months, with an option for Knutsen NYK to extend for an additional six months.
• On August 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2020 to all common unitholders of record on July 30, 2020. On August 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended June 30, 2020 in an aggregate amount equal to $1.8 million.

Financial Results Overview

Total revenues were $70.3 million for the three months ended June 30, 2020 (the “second quarter”) compared to $67.8 million for the three months ended March 31, 2020 (the “first quarter”). The increase was mainly related to receipt of full earnings from the Raquel Knutsen in the second quarter compared to reduced earnings in the first quarter as a result of 64 offhire days for the vessel to finish its scheduled first special survey drydocking.

Vessel operating expenses for the second quarter of 2020 were $13.1 million, a decrease of $2.5 million from $15.6 million in the first quarter of 2020. The decrease was mainly due to lower operating cost on average for the fleet due to the strengthening of the U.S Dollar against the Norwegian Kroner (NOK) and decreased expenses for bunkers consumption, which were higher in the first quarter as a result of the drydocking of the Raquel Knutsen.

General and administrative expenses were $1.3 million for the second quarter compared to $1.4 million for the first quarter.

(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.

(2) Distribution coverage ratio is equal to distributable cash flow divided by distributions declared for the period presented.

Depreciation was $22.5 million for the second quarter, an increase of $0.1 from $22.4 million in the first quarter. The increase is mainly due to increased drydock depreciation for the Raquel Knutsen after the drydocking in the first quarter.

As a result, operating income for the second quarter was $33.4 million compared to $28.4 million in the first quarter.

Interest expense for the second quarter was $8.5 million, a decrease of $2.0 million from $10.5 million for the first quarter. The decrease was mainly due to lower LIBOR on average for all credit facilities.

Realized and unrealized loss on derivative instruments was $3.1 million in the second quarter, compared to $23.7 million in the first quarter. The unrealized non-cash element of the mark-to-market loss was $2.8 million for the second quarter of 2020 compared to $23.9 million for the first quarter of 2020. Of the unrealized loss for the second quarter of 2020, $3.5 million is related to a mark-to-market loss on interest rate swaps due to a decrease in the US swap rate and a gain of $0.7 million is related to foreign exchange contracts.

As a result, net income for the second quarter of 2020 was $21.7 million compared to a net loss of $6.1 million for the first quarter of 2020.

Net income for the second quarter of 2020 increased by $13.5 million to $21.7 million from net income of $8.2 million for the three months ended June 30, 2019. Operating income for the second quarter of 2020 increased by $1.4 million to $33.4 million compared to operating income of $31.9 million in the second quarter of 2019, mainly due to lower operating cost on average for the fleet. Total finance expense for the second quarter of 2020 decreased by $12.0 million to $11.7 million compared to finance expense of $23.7 million for the second quarter of 2019. The decrease was mainly due to lower unrealized losses on derivative instruments and lower average interest costs, mainly due to a decrease in the US LIBOR rate.

Distributable cash flow was $30.7 million for the second quarter of 2020 compared to $23.9 million for the first quarter of 2020. The increase in distributable cash flow is mainly due to full earnings from the Raquel Knutsen due to its scheduled drydocking which was finished in the first quarter and lower average operating cost for the fleet. The distribution declared for the second quarter of 2020 was $0.52 per common unit, equivalent to an annualized distribution of $2.08.

COVID-19

The outbreak of the coronavirus (“COVID-19”) has negatively affected global economic activity, including the demand for oil and oil shipping, which may materially impact the Partnership’s operations and the operations of its customers and suppliers.

Although the Partnership’s operations have not been materially affected by the COVID-19 outbreak to date, the ultimate length and severity of the COVID-19 outbreak and its potential impact on the Partnership’s business, financial condition and results of operations is uncertain at this time. The virus outbreak has increased uncertainty in a number of areas of the Partnership’s business, including operational, commercial and financial activities.

The Partnership’s focus continues to be on ensuring the health and safety of employees while providing safe and reliable operations for customers. All crew on board and staff onshore are taking precautions with respect to social distancing, personal hygiene and other measures and following all local guidelines and regulations to minimize the spread of the virus. To date, the Partnership has not had any material service interruptions on its vessels as a result of COVID-19 and none of its vessels are planned to drydock in 2020.

Due to international travel restrictions, there have been challenges in respect of crew changes and maintenance support; however the Partnership has been able to carry out crew changes in both Europe and Brazil, crew changes continue to occur with regularity and maintenance has continued to be performed, or in some cases postponed, where it is safe and possible to do so. The majority of such difficulties are a result of either local lockdowns or transportation or logistical restrictions. The Partnership expects that it will incur somewhat higher crewing expenses to ensure appropriate mitigation actions are in place to minimize risks of outbreaks. The closure of, or restricted access to, ports and terminals in regions affected by the virus may lead to further operational impacts that result in higher costs. It is possible that an outbreak onboard a vessel could prevent the Partnership from meeting its obligations under a charter, resulting in an off-hire claim and loss of revenue. Any outbreak of COVID-19 on board one of the Partnership’s vessels or that affects any of the Partnership’s main suppliers could cause an inability to replace critical supplies or parts, maintain adequate crewing or fulfill the Partnership’s obligations under its time charter contracts which in turn could result in off-hire or claims for the impacted period.

COVID-19 has placed downward pressure on economic activity and energy demand during the first and second quarters of 2020, and there remains significant uncertainty regarding near-term future oil demand and, therefore, shipping requirements. The fall in oil prices since the end of 2019 has caused many oil exploration and production companies, including certain of our customers, to cut their production forecasts for 2020 and beyond and / or reduce or delay planned future capital expenditures, particularly on new projects. This could have an impact on the demand for shuttle tankers in the short and medium term and, given the uncertainty around the continuation of the COVID-19 situation, this dampening of demand could persist in the long term. Such developments could affect the number of new offshore projects and the overall outlook for oil production, which could eventually and in turn impact the demand and pricing for shuttle tankers. Furthermore, the Partnership may be unable to re-charter its vessels at attractive rates in the future, particularly for vessels that are coming off charter in the next two years.

Although the Partnership is exposed to the uncertainty of cash flows from its time charter contracts arising from the credit risk associated with the individual charterers, the Partnership believes that its charter contracts, all with subsidiaries of national oil companies and oil majors, largely insulates the Partnership from this risk in most scenarios. Notwithstanding, any extended period of non-payment or idle time between charters could adversely affect the Partnership’s future liquidity, results of operations and cash flows. The Partnership has not so far experienced any reduced or non-payments for obligations under the Partnership’s time charter contracts and the Partnership has not provided concessions or made changes to the terms of payment for customers.

COVID-19 has had a sustained impact on global capital and bank credit markets, affecting access, timing and cost of capital. The responses of governments around the world to manage the impact of the virus have led to lower interest rates and volatility in the prices of equities, bonds, commodities and their respective derivatives. The Partnership’s common unit price has declined significantly this year, mainly due to the impact of COVID-19 on the wider economy and sentiment in the energy and shipping sectors. In these current market conditions with lower unit prices, issuing new common equity is a less viable and more expensive option for accessing liquidity. The Partnership does not have long term debt maturing before August 2021. Should the Partnership be unable to obtain refinancing for this debt or other debt in the future, it may not have sufficient funds or other assets to satisfy all of its obligations, which would have a material adverse effect on its business, results of operations and financial condition.

Operational Review

The Partnership’s vessels operated throughout the second quarter of 2020 with 99.7% utilization for scheduled operations.

On April 20, 2020, Eni exercised two of its one-year options to extend the time charter of the Torill Knutsen until November 2022. In connection with the early exercise by Eni of its options, the Partnership granted Eni a further option to extend the time charter by one additional one-year period. Eni now has the option to extend the time charter by two one-year periods until November 2024.

The charterer of the Windsor Knutsen, a subsidiary of Shell, did not notify the Partnership by the due date of its intention to exercise its option to extend the time charter for the vessel. The charter will therefore expire in or around October 2020, the precise date to be fixed in accordance with the redelivery window as specified in the charter. As a result, the Partnership is currently exploring other options to recharter the vessel with a number of potential charterers, including a subsidiary of Knutsen NYK for a potential charter term of six months, with an option for Knutsen NYK to extend for an additional six months.

Financing and Liquidity

As of June 30, 2020, the Partnership had $70.1 million in available liquidity, which consisted of cash and cash equivalents of $41.4 million and $28.7 million of capacity under its revolving credit facilities. The revolving credit facilities mature in August 2021 and September 2023. The Partnership’s total interest-bearing debt outstanding as of June 30, 2020 was $959.8 million ($953.7 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the second quarter of 2020 was approximately 2.1% over LIBOR.

As of June 30, 2020, the Partnership had entered into various interest rate swap agreements for a total notional amount of $627.1 million to hedge against the interest rate risks of its variable rate borrowings. As of June 30, 2020, the Partnership receives interest based on three or six-month LIBOR and pays a weighted average interest rate of 1.74% under its interest rate swap agreements, which have an average maturity of approximately 3.6 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, 2020, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $291.3 million based on total interest-bearing debt outstanding of $959.8 million, less interest rate swaps of $627.1 million and less cash and cash equivalents of $41.4 million. The Partnership’s outstanding interest-bearing debt of $959.8 million as of June 30, 2020 is repayable as follows:

Distributions

On August 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2020 to all common unitholders of record on July 30, 2020. On August 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended June 30, 2020 in an aggregate amount equal to $1.8 million.

Outlook

There are no dry dockings scheduled for any of the Partnership’s vessels during the remainder of 2020.

As of June 30, 2020, the Partnership’s fleet of sixteen vessels had charters with an average remaining fixed duration of 2.4 years. In addition, the charterers of the Partnership’s time charter vessels have options to extend their charters by an additional 3.9 years on average.

During the second quarter, Knutsen NYK entered into two new long-term time charters for newbuildings to be constructed by the Cosco (Zhoushan) Shipyard. The first is a 5-year fixed time charter with Galp Sinopec Brazil Services B.V., which may be extended by the charterer for up to two three-year periods. The vessel will operate in Brazil and delivery is scheduled for March 2021. The second is a 5-year fixed time charter with Petro China International (America) Inc., a subsidiary of PetroChina Company Limited, which may be extended by the charterer for up to five one-year periods. The vessel will operate in Brazil and delivery is scheduled for June 2022.

Knutsen NYK has five additional newbuilding shuttle tankers under construction, all of which are under contract for long-term charter. Two of these vessels will be chartered to Equinor, with deliveries scheduled from the shipyard in September 2020 and November 2020. The vessels are expected to operate in Brazil under time charters with a fixed term of 7 and 5 years with options to extend for up to 20 years.

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.

The Board believes that demand for existing and for newbuild shuttle tankers will continue to be driven over the long term based on the requirement to replace older tonnage in the North Sea and Brazil and by further expansion into deep water offshore oil production areas such as in Pre-salt Brazil and the Barents Sea.

Although the Partnership’s operations have not yet been materially impacted by the outbreak of COVID-19 or the recent decline in oil prices, the length and severity of the COVID-19 outbreak and the persistence of a low oil price environment still cannot be estimated at this time. Such developments could affect the number of new offshore projects and the overall outlook for the production of oil, which could eventually and in turn impact the demand and pricing for shuttle tankers.

The Partnership acknowledges the announcements made by its charterers and the oil industry with respect to near-term capital expenditure cuts that are expected to cause certain new developments in Brazil and the North Sea to be delayed. However the Partnership remains positive with respect to the mid to long term outlook for the growth in demand for shuttle tankers and this view is supported by the significant developments that continue to be announced in Brazil, in particular, and the foreseeable delivery pipeline of floating, production, storage and offloading (FPSO) units.
Source: KNOT Offshore Partners LP



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