2023-08-16 04:46:27 ET
Summary
- KNOT Offshore Partners LP faces concerns over debt maturities and high debt levels, impacting its financial outlook.
- The Partnership has successfully secured credit facilities and new charter contracts, reducing the risk of losing assets.
- The market outlook for crude tankers is positive, with expected growth in supply and demand, and upward pressure on oil prices in the second half of 2023.
Introduction
KNOT Offshore Partners LP ( KNOP ) is operating and acquiring vessels to pursue its business in the shuttle tanker segment. In other words, a shuttle tanker is a floating pipeline that operates under a period charter and is based on non-volume contracts. the Partner's operation is mostly like pipelines on the ocean floor: Their tankers transport oil from offshore installations to onshore places. In this article, I have analyzed KNOP's market outlook as well as its financial outlook to conclude my rating for its units.
KNOP's financial and business outlooks
One of my main concerns about the Partnership was related to their upcoming debt maturities during 2023, which totaled around $372 million because this amount was much higher than their operating cash flow. Thankfully, during the recent quarter, the management announced that they fixed credit approval for the $320 million senior secured credit facility and the $55 million revolving credit facility. These debt facilities will mature in September 2023 and are related to six vessels. Moreover, the management mentioned:
It's worth noting that the $172.5 million senior secured loan facilities maturing in September 2023 and January 2024 secured by Dan Cisne and Dan Sabia, respectively, will be fully repaid on maturity. So, there is no need for a refinancing plan at this stage, and we have no immediate plans to incur additional borrowings secured by these two vessels until such time as the Partnership has better visibility on their future employment."
Going forward through 2023, KNOP's debt refinancing will remain on my watch list. For instance, they will announce the result of a discussion with their lenders regarding the two $25 million unsecured revolving credit facilities with maturity dates of August and November 2023. Moreover, their new contracts developments regarding new three-year time charter contracts for the Fortaleza Knutsen and the Recife Knutsen with Transpetro lower their risk of losing their total assets.
Notwithstanding the boom in oil prices during 2022, it seems that KNOP Partnership could not take appropriate advantage of high energy prices to improve its financial results. In other words, my main concern about the Partnership is associated with their debt levels, which is of great importance to be cared for. Albeit their net debt level declined slightly to circa $986 million by the end of 1Q 2023 versus $1.011 billion at the end of 2022, their net debt level is still higher than the equity amount. During the last year, the Partner's equity levels were almost constant, finally sitting at $648 million by the end of the first quarter of 2023. Additionally, KNOP could increase its cash generation slightly to $52 million in 1Q 2023 versus $47.6 million and $41 million at the end of 4Q 2022 and 1Q 2022, respectively (see Figure 1).
Figure 1 - KNOP's capital structure (in millions)
Analyzing their cash structure indicates that during the first quarter of 2023, the Partnership's cash from operations reached over $29 million versus $21 million and $18 million at the end of 4Q and 1Q 2022, respectively. Meanwhile, despite favorable energy prices during the last year, and the end of the downturn of 2020, the Partnership's charter contracts ended in tandem with several vessels dry docking. Being dry docked for vessels is the same as auto repairing for vehicles on the land. Thus, routinely maintaining and repairing their vessels increased their costs. As a result, the Partnership's capital expenditures surged to $1.4 million at the end of the recent quarter versus only $0.5 million at the end of 2022 and $0.2 million in the first quarter of 2022. When all was said and done, approximately $28 million is left as a free cash flow for the Partnership to finance its distributions. Moreover, KNOP Partnership declared a $0.026 dividend payment per share for the second quarter of 2023, which was paid a few days ago on August 10th, 2023, which was the same as the fourth quarter of 2022 after the management decided to cut their quarterly dividends by 95%. Consequently, their cash inflows should outpace their cash outflows because the number of their common number of outstanding shares was 34,900,000. Their dividend payment, thereby, was less than $1 million for the second quarter of 2023 (see Figure 2).
Figure 2 - KNOP's cash structure (in millions)
Investigating the Partnership's leverage condition across the board of net debt-to-EBITDA and net debt-to-CFO indicates the importance of declining debt levels. As it is indicated in Figure 3, Although KNOP's net debt-to-EBITDA ratio declined from over 26x at the end of 2022 to 22x in 1Q 2023, it is still very high. Moreover, their net debt-to-operating cash flow is even worse at 33x, while it was at 49x year over year compared with 1Q 2022. Their leverage condition is particularly concerning, and hopefully, the management reduce net debt levels, and thus, their leverage should be at a decent pace.
Figure 3 - KNOP's leverage condition
Besides leverage ratios, you can see that the Partnership's liquidity condition is at high risk. After analyzing the Partnership's cash and capital structures, it is not too surprising to receive warnings from their current and cash ratios of 0.22x and 0.13x, respectively, at the end of the first quarter of 2023. Notwithstanding not changing considerably from the fourth quarter of 2022, both liquidity ratios dropped considerably year over year as versus 1Q 2022. The partnership's current ratio was 0.56x, and its cash ratio was 0.38x in the first quarter of 2022 (see Figure 4).
Figure 4 - KNOP's liquidity condition
Market outlook
Looking ahead, as the supply constraints have mostly been solved, it is expected to see a strong period for crude tankers during the coming winter months, and it is expected to be continued over the next few years. In other words, the supply and demand balance outlook is positive, with oil consumption in 2023 expected to exceed its 2019 levels for the first time after the COVID-19 outbreak and even grow more during 2024. In minutiae, it is expected that the supply in the crude tanker segment to grow by 1.1% and 0.5% by the end of 2023 and 2024, respectively. Also, on the demand side, the demand for crude tanker volumes will improve by 1-2% in 2023 and 2024.
Additionally, based on the EIA report, global oil inventories will decline and thus put upward pressure on crude oil prices in the second half of 2023. This upward trend is mainly due to the extended voluntary cuts of Saudi Arabia's crude oil production and increasing global demand. Meanwhile, rising global crude oil production in 2024 will put moderate downward pressure on crude prices in the second quarter of 2024.
Conclusion
Analyzing KNOT Offshore Partners LP's financials and market outlook indicate that there is a particular concern associated with the Partnership's leverage and liquidity conditions. They cut their dividend payments by 95% in the first and second quarter of 2023, thus this distribution cut may provide an opportunity for their free cash inflow exceeds free cash outflow. However, it may take years for the Partnership to deleverage and thus be able to increase its dividend payments. Moreover, thankfully the management signed new three-year charter contracts and could successfully refinance some debt maturities. As a result, I prefer to keep an eye on the Partnership's leverage and liquidity conditions, and thus I believe that a hold rating is appropriate for KNOP units.
As always, thank you for your reading, and I welcome your comments.
For further details see:
KNOT Offshore Partners: Main Concerns Regarding Leverage And Liquidity