20-F: KNOT Offshore Partners LP Reports Financial Results for Fiscal Year Ended December 31, 2023

KNOT Offshore Partners LP files its annual report on Form 20-F, detailing its financial performance for the year ended December 31, 2023, and outlining key business strategies and risk factors.

Summary

• KNOT Offshore Partners LP has filed its annual report on Form 20-F for the fiscal year ended December 31, 2023.
• The report includes forward-looking statements regarding market trends, growth strategies, and financial forecasts.
• The Partnership's primary business objective is to generate stable cash flows and provide a sustainable quarterly distribution per unit to its unitholders.
• As of April 11, 2024, the Partnership had a fleet of eighteen shuttle tankers.
• The report details various risk factors that could materially and adversely affect the Partnership's business, financial condition, and operating results.
• The Partnership is subject to taxes in various jurisdictions, which reduces cash available for distribution to unitholders.
• The report also discusses compliance with environmental regulations and the potential impact of climate change concerns.
• The Partnership is exposed to currency exchange rate fluctuations, which can impact cash flows and operating results.
• The report includes a discussion of related party transactions with KNOT and its affiliates.
• The Partnership is subject to complex and evolving laws, directives and regulations regarding privacy and data protection.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there are positives such as new charter contracts and refinancing activities, the net loss, impairment charges, and various risk factors contribute to a neutral sentiment.

Positives

• The Partnership has secured new time charter contracts for the Windsor Knutsen and the Brasil Knutsen.
• The Partnership has extended the time charter for the Anna Knutsen with TotalEnergies to April 2026.
• The Partnership has extended the time charter for the Tordis Knutsen with Shell to July 2027.
• The Partnership has extended the time charter for the Lena Knutsen with Shell to September 2027.
• The Partnership has refinanced its revolving credit facilities with NTT Finance Corporation and SBI Shinsei Bank, Limited.
• The Partnership has repaid the loan facility secured by the Dan Sabia in full.

Negatives

• The Partnership reduced its quarterly common unit distribution to $0.026 per unit.
• The Partnership recognized impairment charges of $24.5 million and $25.2 million in respect of the Dan Cisne and Dan Sabia, respectively.
• The Partnership experienced approximately 192 offhire days due to scheduled drydocking of five vessels.
• The Partnership's net current liabilities were $37.8 million as of December 31, 2023.
• The Partnership's ability to make cash distributions to unitholders is dependent on future performance and may be affected by events beyond its control.

Risks

• The Partnership may not have sufficient cash from operations to continue to pay distributions on its common units.
• The Partnership's cash distribution policy may adversely affect its ability to grow and to meet its financial needs.
• The Partnership must make substantial capital expenditures to maintain the operating capacity of its fleet.
• The required drydocking of the Partnership's vessels could be more expensive and time consuming than anticipated.
• The Partnership may be unable to re-charter its vessels upon termination or expiration of their existing charters.
• The Partnership's debt levels may limit its flexibility in obtaining additional financing, refinancing credit facilities upon maturity, pursuing other business opportunities or paying distributions.
• The Partnership's financing agreements contain operating and financial restrictions.
• The Partnership may fail to consummate or integrate acquisitions in a timely and cost-effective manner.
• The Partnership's charters are subject to early termination under certain circumstances.
• The Partnership may experience operational problems with vessels that reduce revenue and increase costs.
• The Partnership currently derives all of its time charter and bareboat revenues from eleven customers.
• The Partnership depends on subsidiaries of KNOT to assist it in operating its businesses and chartering certain of its vessels.
• The Partnership's growth depends on continued growth in demand for shuttle tanker transportation services.
• Persistent low oil prices may adversely affect the Partnership's growth prospects and results of operations.
• The Partnership's business is affected by macroeconomic conditions, including rising inflation, interest rates, market volatility, economic uncertainty and supply chain constraints.
• Adverse conditions in the global economy or financial markets may impair the Partnership's customers and suppliers ability to pay for its services.
• The Partnership's growth depends on its ability to expand relationships with existing customers and obtain new customers, for which it faces substantial competition.
• An increase in the global supply of shuttle tanker capacity without a commensurate increase in demand may have an adverse effect on hire rates and the values of the Partnership's vessels.
• Compliance with safety and other vessel requirements imposed by classification societies may be very costly and may adversely affect the Partnership's business.
• The value of the Partnership's vessels may decline, which could adversely affect its operating results.
• Climate change concerns and greenhouse gas restrictions may adversely impact the Partnership's operations and markets.
• Increased scrutiny from stakeholders and others regarding climate change, as well as the Partnership's ESG practices and reporting responsibilities, could result in additional costs or risks and adversely impact its business and reputation.
• The Partnership's international operations expose it to political, governmental and economic instability.
• Marine transportation is inherently risky, particularly in the extreme conditions in which the Partnership's vessels operate.
• The Partnership's insurance may not be sufficient to cover losses.
• Acts of piracy on ocean-going vessels may affect the Partnership.
• Vessels transporting oil are subject to substantial environmental and other regulations.
• The Partnership is exposed to currency exchange rate fluctuations.
• Many seafaring employees are covered by collective bargaining agreements.
• KNOT may on the Partnership's behalf be unable to attract and retain qualified, skilled employees or crew necessary to operate its business or may have to pay substantially increased costs for its employees and crew.
• Outbreaks of epidemics and pandemics may adversely affect the Partnership's business.
• Maritime claimants could arrest the Partnership's vessels, which could interrupt its cash flow.
• Lack of diversification and adverse developments in the shuttle tanker market or the conventional oil tanker market would negatively impact the Partnership's results.
• If in the future the Partnership's business activities involve countries, entities and individuals that are subject to restrictions imposed by the U.S. or other governments, it could be subject to enforcement action.
• The Partnership could fail to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, the anti-corruption provisions in the Norwegian Criminal Code and other anti-bribery legislation.
• A cyber-attack could materially disrupt the Partnership's business.
• The Partnership's business is subject to complex and evolving laws, directives and regulations regarding privacy and data protection.
• KNOT and its affiliates may compete with the Partnership.
• Unitholders have limited voting rights, and the Partnership's partnership agreement restricts the voting rights of Norwegian Resident Holders and unitholders owning more than 4.9% of its common units or Class B Units.
• KNOT and its affiliates own a substantial interest in the Partnership and have conflicts of interest and limited fiduciary and contractual duties to the Partnership and its common unitholders, which may permit them to favor their own interests to the detriment of the Partnership's unitholders.
• The Partnership's partnership agreement limits its general partners and its directors fiduciary duties to its unitholders and restricts the remedies available to unitholders for actions taken by its general partner or its directors.
• Fees and cost reimbursements, which affiliates of KNOT determine for services provided to the Partnership and its subsidiaries, are substantial and payable regardless of the Partnership's profitability.
• The Partnership's partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove its management or its general partner without KNOT's consent.
• The control of the Partnership's general partner may be transferred to a third party without unitholder consent.
• Substantial future sales of the Partnership's common units or the issuance of additional preferred units could cause the price of its common units to fall.
• The Partnership's common units are subordinated to its existing and future indebtedness and Series A Preferred Units.
• The Partnership may issue additional equity securities without the approval of its unitholders, which would dilute their ownership interests.
• A substantial number of the Partnership's common units may be issued upon conversion of its Series A Preferred Units or Class B Units or as redemption payments in respect of its Series A Preferred Units, which issuances could reduce the value of its common units.
• The Partnership's Series A Preferred Units have rights, preferences and privileges that are not held by, and are preferential to the rights of, holders of its common units.
• The Partnership's general partners limited call right may require its unitholders to sell their common units at an undesirable time or price.
• The Partnership's unitholders may not have limited liability if a court finds that unitholder action constitutes control of its business.
• The Partnership can borrow money to pay distributions, which would reduce the amount of credit available to operate its business.
• Increases in interest rates may cause the market price of the Partnership's common units to decline.
• The Partnership relies on the master limited partnership (MLP) structure and its appeal to investors for accessing debt and equity markets to finance its growth and repay or refinance its debt.
• Unitholders may have liability to repay distributions.
• The Marshall Islands does not have a well-developed body of partnership law.
• The Partnership's operations are subject to economic substance requirements.
• It may be difficult to serve the Partnership with legal process or enforce judgments against it, its directors or its management.
• The Partnership's partnership agreement designates the Court of Chancery of the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by its unitholders unless otherwise provided for under the laws of the Marshall Islands.
• The Partnership is subject to taxes, which reduces its cash available for distribution to its unitholders.
• A change in tax laws in any country in which the Partnership operates could adversely affect it.
• U.S. tax authorities could treat the Partnership as a passive foreign investment company.
• The Partnership may have to pay tax on U.S. source income, which would reduce its cash flow.
• The Partnership's unitholders may be subject to income tax in one or more non-U.S. jurisdictions if, under the laws of any such jurisdiction, it is considered to be carrying on business there.

Future Outlook

The Partnership expects to continue to use its internally generated cash flow to provide for working capital, reduce its debt levels and strengthen its balance sheet. The Partnership remains positive with respect to the mid-to-long-term outlook for the growth in demand for shuttle tankers and the opportunities that this will present.

Industry Context

The report provides insights into the shuttle tanker market, including factors affecting supply and demand, competition, and regulatory requirements. It also discusses the impact of macroeconomic conditions and climate change concerns on the industry.

Comparison to Industry Standards

• The report mentions key players in the shuttle tanker market, including KNOT, Altera Shuttle Tankers L.L.C., and American Eagle Tankers (AET).
• It notes that KNOT and KNOP together are the largest owners of shuttle tankers with 27 shuttle tankers plus 2 newbuilds on order.
• The report references Fearnresearch data on the global shuttle tanker fleet size and newbuild orders.
• The report discusses compliance with IMO regulations, including MARPOL Annex VI and the BWM Convention, which are industry standards for environmental protection.
• The report mentions the use of DNV GL and ABS classification societies, which are standard in the maritime industry for ensuring vessel safety and seaworthiness.

Management Changes

Related Party Transactions

• The Partnership has entered into various services agreements with certain subsidiaries and affiliates of KNOT, including KNOT Management, KNOT Management Denmark, KOAS and KOAS UK.
• Subsidiaries of KNOT currently charter two of the Partnership's vessels.
• The Partnership has entered into an administrative services agreement with KNOT UK.
• The Partnership has entered into technical management agreements with KNOT Management and KNOT Management Denmark.
• The Partnership has entered into management and administration agreements with KNOT Management and KNOT Management Denmark.
• The Partnership has purchased courses for seafarers from Simsea Real Operations AS, a company jointly owned by Trygve Seglem.
• Knutsen OAS Crewing AS, a subsidiary of TSSI, provides administrative services related to East European crew on the Partnership's vessels.
• The Partnership has purchased parts for ballast water treatment systems from Knutsen Ballast Water AS, a subsidiary of TSSI.

Stakeholder Impact

• The reduction in the quarterly common unit distribution may negatively impact the unit price and affect the ability to raise capital.
• The Partnership's ability to make cash distributions to unitholders depends on its financial performance and compliance with debt covenants.
• The Partnership's operations are subject to environmental regulations, which may impact the resale value or useful lives of its vessels.
• The Partnership's international operations expose it to political, governmental and economic instability, which could harm its operations.
• The Partnership's reliance on KNOT and its affiliates for various services creates potential conflicts of interest.
• The Partnership's unitholders have limited voting rights and are subject to certain restrictions in the partnership agreement.

Next Steps

• The Partnership will continue to market the Hilda Knutsen and the Torill Knutsen for new, third-party charter employment.
• The Partnership expects to refinance its debt as it matures.
• The Partnership will continue to undertake actions and implement plans to strengthen its supply chain to address pressures and protect the requisite access to commodities and services.
• The Partnership will continue to monitor the market value of its vessels and assess for potential asset impairment.

Key Dates

Keywords

KNOT Offshore Partners, financial results, annual report, shuttle tankers, Form 20-F, distributions, risk factors, charters, debt, vessels, oil transportation, KNOT, preferred units, maritime, shipping