Knot Offshore Partners LP Earnings Release—interim Results for the Period Ended December 31, 2023

February 27, 2024

ABERDEEN, Scotland–(BUSINESS WIRE)–Financial Highlights

For the three months ended December 31, 2023 (“Q4 2023”), KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

Generated total revenues of $73.0 million, operating income of $18.1 million and net loss of $5.3 million.
Generated Adjusted EBITDA¹ of $45.7 million
Reported $63.9 million in available liquidity at December 31, 2023, which was comprised of cash and cash equivalents of $63.9 million.

Other Partnership Highlights and Events

Fleet operated with 99.6% utilization for scheduled operations in Q4 2023, and 96.0% utilization taking into account the scheduled drydockings of the Torill Knutsen and the Ingrid Knutsen, which were carried out during Q4 2023.
On January 16, 2024, the Partnership declared a quarterly cash distribution of $0.026 per common unit with respect to Q4 2023, which was paid on February 8, 2024, to all common unitholders of record on January 29, 2024. 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 Q4 2023 in an aggregate amount of $1.7 million.
On January 9, 2024, an extension to the existing bareboat charter party for the Dan Sabia was signed with Transpetro, extending the vessel’s fixed employment to early June 2024.
On December 15, 2023, Repsol Sinopec exercised its extension option to the existing time charter for the Carmen Knutsen extending the vessel’s fixed employment to mid-January 2025. A further 1 year’s option remains available to Repsol.
On December 15, 2023, the Partnership received the Dan Cisne back via redelivery, following expiry of its bareboat charter party to Transpetro. The Dan Cisne is being assessed for shuttle tanker operation in the North Sea and has also been deployed on short-term conventional tanker contracts in Europe.
The Hilda Knutsen, Torill Knutsen and Bodil Knutsen each continued to operate on separate time charter contracts with a subsidiary of the Partnership’s sponsor, Knutsen NYK Offshore Tankers AS (“Knutsen NYK”), at a reduced charter rate. On January 2, 2024, these rolling monthly contracts were extended to January 2025 (in the cases of the Hilda Knutsen and the Torill Knutsen) and March 2024 for the Bodil Knutsen, to terminate in time for delivery to Equinor.
The Partnership continues to market the Hilda Knutsen, Torill Knutsen, Dan Cisne and Dan Sabia for new, third-party employment and is in active discussions with both existing charterers and others, including Knutsen NYK.
On November 2, 2023, the Partnership entered into an at-the-market sales agreement with B. Riley Securities, Inc. (the “Agent”) pursuant to which the Partnership may offer and sell up to $100 million of common units (the “ATM program”), from time to time, through the Agent. This new sales agreement replaces and supersedes the prior sales agreement with the Agent entered into on August 26, 2021.

Derek Lowe, Chief Executive Officer and Chief Financial Officer of KNOT Offshore Partners LP, stated, “We are pleased to report another strong performance in Q4 2023, marked by safe operation at over 99% fleet utilization for scheduled operations, along with consistent revenue and operating income.

¹ EBITDA and Adjusted EBITDA 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 and Adjusted EBITDA and a reconciliation to net income, the most directly comparable GAAP financial measure.

Including those contracts signed since December 31, 2023, we now have 79% of charter coverage in 2024 from fixed contracts, which rises to 91% if charterers’ options are exercised. Having executed a number of new contracts, we remain focused on filling the remaining gaps in our charter portfolio.

In Brazil, the main offshore oil market where we operate, the outlook is continuing to improve, with robust demand and increasing charter rates. Driven by Petrobras’ continued high production levels and FPSO start-ups in the pre-salt fields that rely upon shuttle tankers, we believe the world’s biggest shuttle tanker market is tightening materially. Our secondary geography, in the North Sea, is taking longer to re-balance, where we anticipate progressive improvement during and beyond 2024.

We are aware that Knutsen NYK has recently ordered three new shuttle tankers with delivery over 2026-2027; and we note recent reports of another operator ordering three new shuttle tankers, with delivery by early 2027. We anticipate that all these new orders are backed by charters to clients in Brazil, and see this as a sign of confidence in the medium-long term demand for the global shuttle tanker fleet. These new orders bring anticipated deliveries to a total of eleven within the coming three years. While delivery of these orders will add to the supply of vessels into the global shuttle tanker fleet, we continue to believe that growth of offshore oil production in shuttle tanker-serviced fields across both Brazil and the North Sea is on track to outpace shuttle tanker supply growth in the coming years, particularly as increasing numbers of shuttle tankers reach or exceed typical retirement age.

As the largest owner and operator of shuttle tankers (together with our sponsor, Knutsen NYK), we believe we are well positioned to benefit from such an improving charter market. We remain focused on generating certainty and stability of cashflows from long-term employment with high quality counterparties, and are confident that continued operational performance and execution of our strategy can create unitholder value in the quarters and years ahead.”

Financial Results Overview

Results for Q4 2023 (compared to those for the three months ended September 30, 2023 (“Q3 2023”)) included:

Revenues of $73.0 million in Q4 2023 ($72.7 million in Q3 2023), with the increase due to loss of hire insurance recoveries in Q4 2023.
Vessel operating expenses of $25.5 million in Q4 2023 ($23.2 million in Q3 2023), with the increase due to higher costs for supplies, equipment and repairs.
Depreciation of $27.6 million in Q4 2023 ($27.5 million in Q3 2023).
General and administrative expenses of $1.6 million in Q4 2023 ($1.1 million in Q3 2023).
Operating income consequently of $18.1 million in Q4 2023 ($20.6 million in Q3 2023).
Interest expense of $18.1 million in Q4 2023 ($18.5 million in Q3 2023) with the decrease due to outstanding debt decreasing and lower fluctuations in interest rates.
Realized and unrealized loss on derivative instruments of $4.8 million in Q4 2023 (gain of $4.4 million in Q3 2023), including unrealized loss (i.e. non-cash) elements of $8.9 million in Q4 2023 (gain of $0.5 million in Q3 2023).
Net loss consequently of $5.3 million in Q4 2023 (net income of $12.6 million in Q3 2023).

By comparison with the three months ended December 31, 2022 (“Q4 2022”), results for Q4 2023 included:

a decrease of $1.5 million in operating income (to $18.1 million in Q4 2023 from $19.6 million in Q4 2022), driven primarily by higher vessel operating expenses;
an increase of $9.1 million in finance expense (to finance expense of $22.3 million in Q4 2023 from finance expense of $13.2 million in Q4 2022), due to fluctuations in interest rates; and
a decrease of $11.3 million in net income (to a net loss of $5.3 million in Q4 2023 from net income of $6.0 million in Q4 2022).

Fleet utilization

The Partnership’s vessels operated throughout Q4 2023 with 99.6% utilization for scheduled operations, and 96.0% utilization taking into account the scheduled drydockings of the Torill Knutsen and the Ingrid Knutsen, which were offhire for 23 days and 33 days respectively in Q4 2023.

Financing and Liquidity

As of December 31, 2023, the Partnership had $63.9 million in available liquidity, which was comprised of cash and cash equivalents of $63.9 million. The Partnership’s revolving credit facilities are fully drawn and mature between August 2025 and November 2025.

The Partnership’s total interest-bearing obligations outstanding as of December 31, 2023 were $963.0 million ($956.8 million net of debt issuance costs). The average margin paid on the Partnership’s outstanding debt during Q4 2023 was approximately 2.28% over SOFR. These obligations are repayable as follows:


(U.S. Dollars in thousands)	Sale & Leaseback		Period repayment		Balloon repayment		Total
2024	$	13,805	$	76,650	$	63,393	$	153,848
2025		14,399		68,581		181,583		269,563
2026		15,060		51,596		219,521		286,177
2027		15,751		26,481		—		42,232
2028 and thereafter		119,120		13,241		78,824		211,185
Total	$	178,135	$	236,549	$	548,321	$	963,005

As of December 31, 2023, the Partnership had entered into various interest rate swap agreements for a total notional amount outstanding of $426.5 million, to hedge against the interest rate risks of its variable rate borrowings. As of December 31, 2023, the Partnership receives interest based on SOFR and pays a weighted average interest rate of 1.9% under its interest rate swap agreements, which have an average maturity of approximately 1.8 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 December 31, 2023, the Partnership’s net exposure to floating interest rate fluctuations was approximately $294.5 million based on total interest-bearing contractual obligations of $963.0 million, less the Raquel Knutsen and Torill Knutsen sale and leaseback facilities of $178.1 million, less interest rate swaps of $426.5 million, and less cash and cash equivalents of $63.9 million.

On January 9, 2024, the loan facility secured by the Dan Sabia was repaid in full with a $10.4 million payment. The Dan Sabia and the Dan Cisne are now debt-free and there are no plans to incur additional borrowings secured by these vessels until such time as the Partnership has better visibility on the vessels’ future employment.

In May 2024, the loan facility secured by the Hilda Knutsen is due for repayment, for which the balloon repayment is $57 million. Negotiations are well-advanced with potential lenders for a new facility, to be secured also by the Hilda Knutsen, sufficient to finance the balloon repayment of the maturing facility. Management believe that such facility will be refinanced on acceptable and similar terms prior to maturity. However, there can be no guarantees of the success of any financing exercise.

On November 2, 2023, the Partnership entered into an at-the-market sales agreement with B. Riley Securities, Inc. for a new ATM program pursuant to which the Partnership may offer and sell up to $100 million of common units from time to time, through the Agent. This new sales agreement replaces and supersedes the prior sales agreement with the Agent entered into on August 26, 2021, which had provided for a $100 million at-the-market offering program for our common units. The Partnership intends to use the net proceeds of any sales of offered units for general partnership purposes, which may include, among other things, the repayment of indebtedness or the funding of acquisitions or other capital expenditures.

Assets Owned by Knutsen NYK

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. Given the relationship between the Partnership and Knutsen NYK, any such acquisition would be subject to the approval of the Conflicts Committee of the Partnership’s Board of Directors.

Knutsen NYK owns, or has ordered, the following vessels and has entered into the following charters:


1.		In February 2021, Tuva Knutsen was delivered to Knutsen NYK from the yard and 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 for up to a further ten years.
2.		In November 2021, Live Knutsen was delivered to Knutsen NYK from the yard in China and commenced on a five-year time charter contract with Galp Sinopec for operation in Brazil. Galp has options to extend the charter for up to a further six years.
3.		In June 2022, Daqing Knutsen was delivered to Knutsen NYK from the yard in China and 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 for up to a further five years.
4.		In July 2022, Frida Knutsen was delivered to Knutsen NYK from the yard in Korea and commenced in December 2022 on a seven-year time charter contact with Eni for operation in North Sea. The charterer has options to extend the charter for up to a further three years.
5.		In August 2022, Sindre Knutsen, was delivered to Knutsen NYK from the yard in Korea and commenced in September 2023 on a five-year time charter contract with Eni for operation in the North Sea. The charterer has options to extend the charter for up to a further five years.
6.		In May 2022, Knutsen NYK entered into a new ten-year time charter contract with Petrobras for a vessel to be constructed and 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.
7.		In November 2022, Knutsen NYK entered into a new fifteen-year time charter contract with Petrobras for a vessel to be constructed and which will operate in Brazil where the charterer has an 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 2025.
8.		In February 2024, Knutsen NYK entered into a new ten-year time charter contract with Petrobras for each of three vessels to be constructed and which will operate in Brazil, where the charterer has an option to extend each charter by up to five further years. The vessels will be built in China and are expected to be delivered over 2026 – 2027.

Outlook

At December 31, 2023, the Partnership’s fleet of eighteen vessels had an average age of 9.7 years, and the Partnership had charters with an average remaining fixed duration of 2.0 years, with the charterers of the Partnership’s vessels having options to extend their charters by an additional 2.1 years on average. The Partnership had $699 million of remaining contracted forward revenue at December 31, 2023, excluding charterers’ options and excluding contracts agreed or signed after that date.

The market for shuttle tankers in Brazil, where fourteen of our vessels have been operating, has continued to tighten in Q4 2023, driven by a significant pipeline of new production growth over the coming years, a limited newbuild order book, and typical long-term project viability requiring a Brent oil price of only $35 per barrel. While the Dan Cisne and Dan Sabia stand out among the Partnership’s fleet as being of a smaller size than is optimal in today’s Brazilian market, we remain in discussions with our customers and continue to evaluate all our options for the Dan Cisne and Dan Sabia vessels, including but not limited to redeployment in the tightening Brazilian market, deployment to the North Sea, charter to Knutsen NYK (subject to negotiation and approvals) and sale.

Shuttle tanker demand in the North Sea has remained subdued, driven by the impact of COVID-19-related project delays. We expect these conditions to persist for several more quarters until new oil production projects that are anticipated come on stream.

Looking ahead, based on supply and demand factors with significant forward visibility and committed capital from industry participants, we believe that the overall medium and long-term outlook for the shuttle tanker market remains favourable.

In the meantime, the Partnership intends to pursue long-term visibility from its charter contracts, build its liquidity, and position itself to benefit from its market-leading position in an improving shuttle tanker market.

The Partnership’s financial information for the year ended December 31, 2023 included in this press release is preliminary and unaudited and is subject to change in connection with the completion of the Partnership’s year end close procedure and further financial review, Actual results may differ as a result of the completion of the Partnership’s year end closing procedures, review adjustment and other developments that may arise between now and the time the audit for the year ended December 31, 2023 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 Brazil and the North Sea.

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 Tuesday, February 27, 2024 at 9:30 AM (Eastern Time) to discuss the results for the fourth quarter of 2023. All unitholders and interested parties are invited to listen to the live conference call by choosing from the following options:

By dialing 1-833-470-1428 from the US, dialing 1-833-950-0062 from Canada or 1-404-975-4839 if outside North America – please join the KNOT Offshore Partners LP call using access code 617850.
By accessing the webcast on the Partnership’s website: www.knotoffshorepartners.com.


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended									Year Ended December 31,
(U.S. Dollars in thousands)	December 31, 2023			September 30, 2023			December 31, 2022			2023			2022
Time charter and bareboat revenues	$	72,039		$	72,188		$	66,084		$	277,084		$	262,797
Voyage revenues (1)		—			10			4,689			8,849			4,689
Loss of hire insurance recoveries		505			—			758			2,840			758
Other income (2)		485			485			83			1,943			341
Total revenues		73,029			72,683			71,614			290,716			268,585
Vessel operating expenses		25,457			23,164			19,820			93,351			86,032
Voyage expenses and commission (3)		306			375			2,814			5,536			2,814
Depreciation		27,594			27,472			27,785			110,902			107,419
Impairment (4)		—			—			—			49,649			—
General and administrative expenses		1,571			1,083			1,606			6,142			6,098
Total operating expenses		54,928			52,094			52,025			265,580			202,363
Operating income (loss)		18,101			20,589			19,589			25,136			66,222
Finance income (expense):
Interest income		992			932			472			3,468			822
Interest expense		(18,101	)		(18,493	)		(15,358	)		(72,070	)		(42,604	)
Other finance expense		(176	)		(228	)		(103	)		(589	)		(628	)
Realized and unrealized gain (loss) on derivative instruments (5)		(4,806	)		4,361			1,663			5,369			35,510
Net gain (loss) on foreign currency transactions		(224	)		14			81			(237	)		220
Total finance income (expense)		(22,315	)		(13,414	)		(13,245	)		(64,059	)		(6,680	)
Income (loss) before income taxes		(4,214	)		7,175			6,344			(38,923	)		59,542
Income tax benefit (expense)		(1,068	)		5,466			(317	)		4 595			(875	)
Net income (loss)		(5,282	)		12,641			6,027			(34,328	)		58,667
Weighted average units outstanding (in thousands of units):
Common units		34,045			34,045			34,009			34,045			33,882
Class B units (6)		252			252			289			252			416
General Partner units		640			640			640			640			640

(1) Voyage revenues are revenues unique to spot voyages.
(2) The Bodil Knutsen has received $1.2 million as of December 31, 2023 related to the volatile organic compound emission (“VOC”) control equipment installation.
(3) Voyage expenses and commission are expenses unique to spot voyages, including bunker fuel expenses, port fees, cargo loading and unloading expenses, agency fees and commission.
(4) The carrying value of each of the Dan Cisne and the Dan Sabia was written down to its estimated fair value as of June 30, 2023.
(5) Realized gain (loss) on derivative instruments relates to amounts the Partnership actually received (paid) to settle derivative instruments, and the unrealized gain (loss) on derivative instruments relates to changes in the fair value of such derivative instruments, as detailed in the table below.


	Three Months Ended									Year Ended December 31,
(U.S. Dollars in thousands)	December 31, 2023			September 30, 2023			December 31, 2022			2023			2022
Realized gain (loss):
Interest rate swap contracts	$	4,141		$	3,963		$	1,229		$	14,648		$	(2,478	)
Foreign exchange forward contracts		—			(79	)		(502	)		(79	)		(502	)
Total realized gain (loss):		4,141			3,884			727			14,569			(2,980	)
Unrealized gain (loss):
Interest rate swap contracts		(8,947	)		352			(282	)		(9,200	)		38,490
Foreign exchange forward contracts		—			125			1,218			—			—
Total unrealized gain (loss):		(8,947	)		477			936			(9,200	)		38,490
Total realized and unrealized gain (loss) on derivative instruments:	$	(4,806	)	$	4,361		$	1,663		$	5,369		$	35,510

(6) On September 7, 2021, the Partnership entered into an exchange agreement with Knutsen NYK, and the Partnership’s general partner whereby Knutsen NYK contributed to the Partnership all of Knutsen NYK’s incentive distribution rights (“IDRs”), in exchange for the issuance by the Partnership to Knutsen NYK of 673,080 common units and 673,080 Class B Units, whereupon the IDRs were cancelled (the “IDR Exchange”). As of December 31, 2023, 420,675 of the Class B Units had been converted to common units.


UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(U.S. Dollars in thousands)	At December 31, 2023		At December 31, 2022
ASSETS
*Current assets:*
Cash and cash equivalents	$	63,921	$	47,579
Amounts due from related parties		348		1,998
Inventories		3,696		5,759
Derivative assets		13,019		15,070
Other current assets		8,795		15,528
*Total current assets*		*89,779*		*85,934*

*Long-term assets:*
Vessels, net of accumulated depreciation		1,492,998		1,631,380
Right-of-use assets		2,126		2,261
Deferred tax assets		4,358		—
Derivative assets		7,229		14,378
*Total Long-term assets*		*1,506,711*		*1,648,019*
*Total assets*	$	*1,596,490*	$	*1,733,953*

LIABILITIES AND EQUITY
*Current liabilities:*
Trade accounts payable	$	10,243	$	4,268
Accrued expenses		14,775		10,651
Current portion of long-term debt		151,796		369,787
Current lease liabilities		982		715
Income taxes payable		44		699
Current portion of contract liabilities		—		651
Prepaid charter		467		1,504
Amount due to related parties		2,106		1,717
*Total current liabilities*		*180,413*		*389,992*

*Long-term liabilities:*
Long-term debt		804,993		686,601
Lease liabilities		1,144		1,546
Deferred tax liabilities		127		424
Deferred revenues		2,336		3,178
*Total long-term liabilities*		*808,600*		*691,749*
*Total liabilities*		*989,013*		*1,081,741*
Commitments and contingencies
Series A Convertible Preferred Units		84,308		84,308
*Equity:*
Partners’ capital:
Common unitholders		510,013		553,922
Class B unitholders		3,871		3,871
General partner interest		9,285		10,111
*Total partners’ capital*		*523,169*		*567,904*
*Total liabilities and equity*	$	*1,596,490*	$	*1,733,953*