KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended March 31, 2024

ABERDEEN, Scotland–(BUSINESS WIRE)–Financial Highlights

For the three months ended March 31, 2024 (“Q1 2024”), KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

• Generated total revenues of $76.6 million, operating income of $19.7 million and net income of $7.4 million.
• Generated Adjusted EBITDA¹ of $47.5 million
• Reported $55.2 million in available liquidity at March 31, 2024, which was comprised of cash and cash equivalents of $50.2 million and undrawn revolving credit facility capacity of $5.0 million.

Other Partnership Highlights and Events

• Fleet operated with 97.6% utilization for scheduled operations in Q1 2024.
• On April 16, 2024, the Partnership declared a quarterly cash distribution of $0.026 per common unit with respect to Q1 2024, which was paid on May 9, 2024, to all common unitholders of record on April 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 Q1 2024 in an aggregate amount of $1.7 million.
• 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 is, in the interim, being deployed on short-term conventional tanker contracts.
• On January 2, 2024, the rolling monthly time charter contracts at a reduced rate with Knutsen NYK Offshore Tankers AS (“Knutsen NYK”) were extended to January 2025 for the Hilda Knutsen and the Torill Knutsen. The time charter contract with Knutsen NYK for Bodil Knutsen was extended through to March 2024, at which point it was terminated as anticipated to facilitate delivery to Equinor on March 27, 2024.
• 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 January 28, 2024, the Torill Knutsen experienced a broken generator rotor, which limits the range of client facilities this vessel is able to serve. Under its loss of hire insurance policies, the Partnership will be compensated by insurance for the extent to which, as a consequence of this breakage, the Torill Knutsen’s earnings fall short of a contractual hire rate, commencing 14 days after the date of the breakage. The Partnership expects the supply of necessary components, and thereafter completion of the repair, to occur late in the second quarter or early in the third quarter of 2024. The Partnership also expects that the repair cost will be covered by insurance, in excess of a deductible of $150,000.
• On March 16, 2024 the Vigdis Knutsen was delivered to Shell to commence on a three-year time charter.
• On March 22, 2024, TotalEnergies exercised its option to extend its charter for the Anna Knutsen to April 2026.
• On March 28, 2024 the Ingrid Knutsen was redelivered from Altera, following which she worked temporarily in the conventional tanker market. On April 22, 2024, the Ingrid Knutsen began operating under a rolling monthly time charter with Knutsen NYK at a reduced charter rate, to expire upon her delivery to Eni in October 2024.
• On April 17, 2024 a time charter for the Carmen Knutsen was executed with an oil major, to commence Q1 2026 for a fixed period of four years plus a charterer’s option for one additional year.
• On April 12, 2024, an agreement was reached with Eni, on terms no less favourable to the Partnership than applied previously, to delay delivery of Ingrid Knutsen until October 2024 for a time charter for a fixed period of two years plus two charterer’s options each of one year. On the same date, a time charter commencing Q4 2024 was agreed with Eni in respect of the Torill Knutsen for a fixed period of three years plus three charterer’s options each of one year.
• On April 5, 2024, Knutsen Shuttle Tankers 14 AS, the Partnership’s wholly-owned subsidiary which owns the vessel Hilda Knutsen, entered into a new $60 million senior secured term loan facility with DNB. The new facility will replace the facility with Mitsubishi UFJ Lease & Finance (Hong Kong) Limited, which is secured by the Hilda Knutsen and due to be repaid in May 2024 with a balloon payment of $58.5 million. This refinancing is anticipated to close shortly, following completion of customary closing conditions.

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.

Derek Lowe, Chief Executive Officer and Chief Financial Officer of KNOT Offshore Partners LP, stated, “We are pleased to report another strong performance in Q1 2024, marked by safe operation at over 97% fleet utilization, along with consistent revenue and operating income.

Including those contracts signed since March 31, 2024, we now have 88% of charter coverage for 2024 from fixed contracts, which rises to 93% 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 look forward to the long-anticipated start-up of the Johan Castberg FPSO scheduled for the latter part of this year.

We are aware that Knutsen NYK has ordered three new shuttle tankers to be chartered to Petrobras with delivery over 2026-2027; and we note 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 Q1 2024 (compared to those for the three months ended December 31, 2023 (“Q4 2023”)) included:
• Revenues of $76.6 million in Q1 2024 ($73.0 million in Q4 2023), with the increase due to revenues related to spot voyages performed in Q1.
• Vessel operating expenses of $25.9 million in Q1 2024 ($25.5 million in Q4 2023), with the increase due to higher port expenses and IT related costs.
• Depreciation of $27.7 million in Q1 2024 ($27.6 million in Q4 2023).
• General and administrative expenses of $1.6 million in Q1 2024 ($1.6 million in Q4 2023).
• Operating income consequently of $19.7 million in Q1 2024 ($18.1 million in Q4 2023).
• Interest expense of $17.5 million in Q1 2024 ($18.1 million in Q4 2023) with the decrease due to outstanding debt decreasing and lower interest rates.
• Realized and unrealized gain on derivative instruments of $5.0 million in Q1 2024 (loss of $4.8 million in Q4 2023), including unrealized gain (i.e. non-cash) elements of $0.9 million in Q1 2024 (loss of $8.9 million in Q4 2023).
• Net income consequently of $7.4 million in Q1 2024 (net loss of $5.3 million in Q4 2023).

By comparison with the three months ended March 31, 2023 (“Q1 2023”), results for Q1 2024 included:

• an increase of $2.0 million in operating income (to $19.7 million in Q1 2024 from $17.7 million in Q1 2023), driven primarily by higher time charter and bareboat revenues partly offset by higher vessel operating expenses;
• a decrease of $7.1 million in finance expense (to finance expense of $12.1 million in Q1 2024 from finance expense of $19.2 million in Q1 2023), due to lower interest rates; and
• an increase of $8.7 million in net income (to a net income of $7.4 million in Q1 2024 from a net loss of $1.3 million in Q1 2023).

Financing and Liquidity

As of March 31, 2024, the Partnership had $55.2 million in available liquidity, which was comprised of cash and cash equivalents of $50.2 million and $5.0 million of capacity under one of the revolving credit facilities. The Partnership’s revolving credit facilities mature between August 2025 and November 2025.

The Partnership’s total interest-bearing obligations outstanding as of March 31, 2024 were $925.3 million ($919.6 million net of debt issuance costs). The average margin paid on the Partnership’s outstanding debt during Q1 2024 was approximately 2.28% over SOFR. These obligations are repayable as follows:

(U.S. Dollars in thousands)		Sale & Leaseback			Period repayment			Balloon repayment			Total
Remainder of 2024		$	10,430		$	57,880		$	—		$	68,310
2025			14,399			76,081			181,583			272,063
2026			15,060			59,096			219,521			293,677
2027			15,751			26,818			37,500			80,069
2028			16,520			13,241			78,824			108,585
2029 and thereafter			102,601			—			—			102,601
Total		$	174,761		$	233,116		$	517,428		$	925,305

As of March 31, 2024, the Partnership had entered into various interest rate swap agreements for a total notional amount outstanding of $442.6 million, to hedge against the interest rate risks of its variable rate borrowings. As of March 31, 2024, the Partnership receives interest based on SOFR and pays a weighted average interest rate of 2.0% under its interest rate swap agreements, which have an average maturity of approximately 1.7 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 March 31, 2024, the Partnership’s net exposure to floating interest rate fluctuations was approximately $257.7 million based on total interest-bearing contractual obligations of $925.3 million, less the Raquel Knutsen and Torill Knutsen sale and leaseback facilities of $174.8 million, less interest rate swaps of $442.6 million, and less cash and cash equivalents of $50.2 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.

On April 5, 2024, Knutsen Shuttle Tankers 14 AS, the Partnership’s wholly-owned subsidiary which owns the vessel Hilda Knutsen, entered into a new $60 million senior secured term loan facility which is due to replace the existing loan facility secured by the Hilda Knutsen. That existing facility is due to mature with a balloon payment of $58.5 million in May 2024. This refinancing is anticipated to close shortly, following completion of customary closing conditions.

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 March 31, 2024, the Partnership’s fleet of eighteen vessels had an average age of 9.9 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 2.0 years on average. The Partnership had $683 million of remaining contracted forward revenue at March 31, 2024, excluding charterers’ options and excluding contracts agreed or signed after that date.

The market for shuttle tankers in Brazil, where thirteen of our vessels have been operating, has continued to tighten in Q1 2024, 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, most notably the long-anticipated Johan Castberg field in the Barents Sea, which is scheduled to come online during the latter portion of this year.

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.

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 Thursday May 23, 2024 at 9:30 AM (Eastern Time) to discuss the results for Q1 2024. 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 871209.
• By accessing the webcast on the Partnership’s website: www.knotoffshorepartners.com.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		Three Months Ended
(U.S. Dollars in thousands)		March 31, 2024				December 31, 2023				March 31, 2023
Time charter and bareboat revenues		$	73,362			$	72,039			$	62,933
Voyage revenues (1)			2,715				—				7,254
Loss of hire insurance recoveries			—				505				911
Other income			555				485				82
Total revenues			76,632				73,029				71,180
Vessel operating expenses			25,909				25,457				19,443
Voyage expenses and commission (2)			1,635				306				4,696
Depreciation			27,742				27,594				27,729
General and administrative expenses			1,637				1,571				1,650
Total operating expenses			56,923				54,928				53,518
Operating income (loss)			19,709				18,101				17,662
Finance income (expense):
Interest income			828				992				683
Interest expense			(17,465	)			(18,101	)			(17,369	)
Other finance expense			(269	)			(176	)			(72	)
Realized and unrealized gain (loss) on derivative instruments (3)			5,002				(4,806	)			(2,310	)
Net gain (loss) on foreign currency transactions			(226	)			(224	)			(136	)
Total finance income (expense)			(12,130	)			(22,315	)			(19,204	)
Income (loss) before income taxes			7,579				(4,214	)			(1,542	)
Income tax benefit (expense)			(141	)			(1,068	)			245
Net income (loss)		$	7,438			$	(5,282	)		$	(1,297	)
Weighted average units outstanding (in thousands of units):
Common units			34,045				34,045				34,045
Class B units (4)			252				252				252
General Partner units			640				640				640
(1) Voyage revenues are revenues unique to spot voyages.
(2) 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.
(3) 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
(U.S. Dollars in thousands)		March 31, 2024				December 31, 2023				March 31, 2023
Realized gain (loss):
Interest rate swap contracts		$	4,063			$	4,141			$	3,006
Total realized gain (loss):			4,063				4,141				3,006
Unrealized gain (loss):
Interest rate swap contracts			939				(8,947	)			(5,272	)
Foreign exchange forward contracts			—				—				(44	)
Total unrealized gain (loss):			939				(8,947	)			(5,316	)
Total realized and unrealized gain (loss) on derivative instruments:		$	5,002			$	(4,806	)		$	(2,310	)
(4) 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 March 31, 2024, 420,675 of the Class B Units had been converted to common units.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(U.S. Dollars in thousands)		At March 31, 2024				At December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents		$	50,243			$	63,921
Amounts due from related parties			1,198				348
Inventories			4,286				3,696
Derivative assets			13,528				13,019
Other current assets			11,565				8,795
Total current assets			80,820				89,779
Long-term assets:
Vessels, net of accumulated depreciation			1,465,229				1,492,998
Right-of-use assets			1,993				2,126
Deferred tax assets			3,990				4,358
Derivative assets			7,660				7,229
Total Long-term assets			1,478,872				1,506,711
Total assets		$	1,559,692			$	1,596,490
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable		$	6,687			$	10,243
Accrued expenses			14,342				14,775
Current portion of long-term debt			89,126				98,960
Current lease liabilities			1,077				982
Income taxes payable			22				44
Prepaid charter			467				467
Amount due to related parties			1,896				2,106
Total current liabilities			113,617				127,577
Long-term liabilities:
Long-term debt			830,508				857,829
Lease liabilities			915				1,144
Deferred tax liabilities			120				127
Deferred revenues			2,219				2,336
Total long-term liabilities			833,762				861,436
Total liabilities			947,379				989,013
Commitments and contingencies
Series A Convertible Preferred Units			84,308				84,308
Equity:
Partners’ capital:
Common unitholders			514,760				510,013
Class B unitholders			3,871				3,871
General partner interest			9,374				9,285
Total partners’ capital			528,005				523,169
Total liabilities and equity		$	1,559,692			$	1,596,490

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
		Partners’ Capital													Accumulated									Series A
(U.S. Dollars in thousands) Three Months Ended March 31, 2023 and 2024		Common Units				Class B Units				General Partner Units					Other Comprehensive Income (Loss)				Total Partners’ Capital					Convertible Preferred Units
Consolidated balance at December 31, 2022		$	553,922			$	3,871			$	10,111				$	—			$	567,904				$	84,308
Net income (loss)			(2,942	)			—				(55	)				—				(2,997	)				1,700
Other comprehensive income			—				—				—					—				—					—
Cash distributions			(885	)			—				(17	)				—				(902	)				(1,700	)
Consolidated balance at March 31, 2023		$	550,095			$	3,871			$	10,039				$	—			$	564,005				$	84,308
Consolidated balance at December 31, 2023		$	510,013			$	3,871			$	9,285				$	—			$	523,169				$	84,308
Net income			5,632				—				106					—				5,738					1,700
Other comprehensive income			—				—				—					—				—					—
Cash distributions			(885	)			—				(17	)				—				(902	)				(1,700	)
Consolidated balance at March 31, 2024		$	514,760			$	3,871			$	9,374				$	—			$	528,005				$	84,308

Contacts

KNOT Offshore Partners LP

Derek Lowe

[email protected]

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