KNOT Offshore Partners (KNOP) Q2 2026 earnings call transcript

Thank you. Good morning, ladies and gentlemen. My name is Derek Lowe and I'm the Chief Executive and Chief Financial Officer of Cloth Offshore Partners. Welcome to the partnership earnings call for the 2nd quarter of 2026. Our website is cannotoffshorepartness. com, and you can find the earnings release there along with this presentation.

On slide 2, you'll find guidance on the inclusion of forward-looking statements in today's presentation. These are made in good faith and reflect management's current views, known and unknown risks, and are based on assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied in forward-looking statements. And the partnership does not have or undertake a duty to update any such statements made as the for date of this presentation.

For further information, please consult our SEC findings, especially in relation to our annual and quarterly results. Today's presentation also includes certain non-U. S. gap measures, and our earnings release includes a reconciliation of these to the most directly comparable gap measures. We begin on slide 3 with the Q2 financial and operational headlines. We have revenues from 96.8 million, operating income 15.6, net income 3.4 million, adjusted at $57.6 million, and as of June 30, 2026, we had $143.3 million in available liquidity, made up of $95.3 million in cash and cash equivalents, plus 48 million in under on capacity.

This available liquidity was $2.6 million higher than at March 31, and that rises largely in line with a reducing trend in recent quarters.

We operated with 96.8% utilization, taking into account schedule dry docking, which amounts to 92.4% utilization overall, following the dry docking of Fort Laser Council.

Following the end of the quarter, we declared a cash distribution of 7.5 cents per common unit, which was paid in August under the 1099 structure. And which represented an increase from the previous level. We're pleased to have continued the process of multiple gradual increases to our distribution, anchored in our reliable and diversified long-term cash flow and improved balance sheet.

On slide 4, we have the most significant developments is the start of the second quarter. On September 1, 2026, we purchased the head of Knudsen from Knodt for a purchase price of $113 million, less than $89.4 million debt facility, plus an $8 million of capitalized financing fees. Resulting in a net cash cost of $24.4 million. The transaction is negotiated by our board's independent conflicts committee.

The vessel was delivered new to KNO-T in October 2024, and is on time chart at a pectra-brass in Brazil through to November 2034, with an additional five years of charge res options.

The acquisition provides fleet growth, diversifies and extends our pipeline of long-term contracts, reduces our average fleet age, and develops the fleet in the most in-demand shuttle-time grad-set class.

On slide 5, we have commercial and financing developments. We list you a number of positive contractual developments since the beginning of the second quarter. In addition to the various chart res options exercised, as expected, I would highlight the time chart of the Hilda Knudsen was executed with ENI, to commence in June 2027, for a fixed period of three years plus three chart res options each for one additional year.

The time chart for a receive recognition was executed by Transpetro to commence in Q3-2026 for a fixed period of two years.

The agreement was reached with ENI for a time chart on Ingrid Knudsen, financing October 2026, for three years fixed plus three years options, three options each for one year. This is in direct continuation of the existing time charted to ENI and replaces their existing options. And we refinance the loan secured by Tordis, Figdis, Layner, Anna, and Brazil, Clenson, by a new $225 million five-year senior secure term loan facility arranged by DMV, with the interest rate reduced meaningfully to sofa plus 165 basis points.

Turning to slide 6 for a high-level summary of our operating momentum. In both Brazil and the North Sea, we continue to see tightening markets driven by robust multi-year FPSO pipeline, production growth, and continuing investment in exploration and existing project expansion.

The increase in shuttle tanker service volumes across both markets has been sustained and sufficient to tighten the supply demand balance, even as new vessels have been delivered. We have expanded our strong backlog with $81.2 million of fixed contracts at quarter end, which averaged 2.5 years in duration and charted as options averaging further four years.

At quarter end, our fleet of 19 vessels had an average age of 10.7 years. Acquisition of the header reduces the average age by nearly half a year.

We are continuing to repay to exit around $95 million per year, which we consider prudent with a depreciating asset base. And we are well-advanced in the refinancing of the $65 million facility secured by Leverkenson, which is due later in October.

Over slides eight to 11, we provide the financials for Q2, the highlights of which we've covered already. On slide 12 is our debt maturity profile. While our guarantees can be made, we have historically benefited from access to a white pool of lenders and attractive bank finance. And we've been encouraged by our refinancing experience in recent years, including during significant week shuttle tanker markets than the current one.

Notably, the average margin on our floating rate debt during the second quarter was 2.21% over sofa. Moving on to slide 14 and our charter portfolio, I believe this remains a very useful resource for investors looking to track the primary moments where change can occur in a highly stable portfolio of cash flows. Based on current charter rates, we believe charter options are likely to be exercised given the strength of the charter market.

On slide 15, you can see our strong forward coverage, where we're fully chartered for the remainder of 2026. And in 2027, we have 92% firm coverage, or 96%, including charter options.

Likewise, for 2028, we have 65% firm coverage, or 93%, including charter options. If we assume the charter options are picked up, which is our current expectation, then you can see the slowly widening light gray section at the top of the bars, as those offering upside potential for the K&A P fleet, if market momentum is sustained.

On slide 16, you can see the dropdown inventory held at the sponsor. Dropdowns have been the route to growth in the fleet throughout life of the partnership, and remain the means of replenishing and rejuvenating fleet. In June 2026, the partnership decided not to pursue free-dickness and syndricness, and they've been removed from our dropdown inventory.

At the same time, we believe that the combination of accretive dropdowns and an improving charter market should support multiple gradual distribution increases over the coming quarters and years. In addition to material extending our long-term cash generation runway, a certain of our vessels begin to age out in the years ahead.

On slide 17 to 19, we include market commentary, particularly from Petrobras, which continues to highlight record production, a strong and expanding offshore production outlook, and continued FPSO deployment. We encourage you to review this, as well as the copious materials that Petrobras publishes as the largest player in the Brazilian market to where we primarily operate.

To summarise on slide 20, during the second quarter, we had strong utilisation and solid financial results. We secured additional charter coverage across key vessels. We maintained a constructive backlog and market outlook. We paid a quarterly distribution of 7.5 cents per unit, which is an increase from 5 cents in the pry quarter and 2.6 cents per quarter for several years before that.

Following the end of the quarter, we purchased head reconnaissance, secured additional charter coverage, and refinance the $225 million loan facility.

On slide 21, we include with the key themes for KNOP and the shuttle tanker market. The market remains niche and highly concentrated. Offshore extraction continues to take market share from traditional onshore production, and FPSOs service by shuttle tankers remain dominant compared with the construction of new pipelines.

Presented North Sea offshore build-outs have had a stronger wind to find a quieter stretch, while the shuttle tanker order remains non-speculative and insufficient to meet anticipated demand levels.

Looking ahead to come in quarters and years, we believe that KNOP is well-positioned to pursue attractive long-term growth opportunities alongside multiple gradual increases to our sustainable distribution.

With that, I'll hand the call back to Leah for any questions. Thank you.

Yes, I have.

We respond to the offers that are made to us, and obviously, a limited number of the fleet have been delivered, the dropdown list have been delivered at this stage, and so they can only be offered once they've been delivered.

Yeah, I mean, the standard model for all of them is that they have a secure debt facility in place already as they are offered. So the financing itself does not need to be arranged at the time that the dropdowns offered, and it's the standard term of all's facilities that the ownership and the guarantor arrangements can be transferred over to KNOP from KNOT, so that that is straightforward. I would say the loan on the header is very standard from the point of view of the dropdowns we've had in the past, so that those terms did not come as a great surprise.

Nor did the approximate cash cost of the transaction, so that 24 million is fairly consistent with the cost that you'll see, the net of debt, the cost that you'll see in the previous transactions we've done.

Well, thank you again, ladies and gentlemen, for joining us, Ernie's Court, for coming off your part in the second quarter of 2026, and I look forward to speaking with you again following the third call to results.