KNOT Offshore Partners LP Q2 FY2026 earnings call

• Financial Results & Liquidity: Reported strong Q2 results with $96.8 million in revenue and $57.6 million in Adjusted EBITDA. Available liquidity stood at $143.3 million as of June 30, 2026, comprising $95.3 million in cash and $48 million in undrawn credit capacity.
• Distribution Increase: Declared a quarterly cash distribution of 7.5 cents per common unit (paid in August), marking a significant increase from the previous 5 cents and reflecting confidence in reliable, diversified long-term cash flows.
• Strategic Acquisition: Purchased the vessel 'Head of Knutson' on September 1, 2026, for a net cash cost of $24.4 million. The vessel is under a time charter with Petrobras through November 2034, with options for five additional years, thereby diversifying the contract pipeline and reducing average fleet age.
• Chartering Momentum: Secured multiple new fixed-term charters, including agreements with ENI for Hilde Knudsen (commencing June 2027), Transpetro for Recife Knudsen (Q3 2026), and E&I for Ingrid Knudsen (October 2026). Total fixed contracts in the backlog reached $881.2 million with an average duration of 2.5 years.
• Refinancing Success: Refinanced loans secured by five vessels into a new $225 million five-year senior secured term loan facility with DNB, achieving a meaningful reduction in interest rates to SOFAR plus 165 basis points.
• Market Outlook: Highlighted tightening supply-demand balances in Brazil and the North Sea driven by robust FPSO pipelines and production growth. Noted that the shuttle tanker order book is non-speculative and insufficient to meet anticipated demand.
• Drop-down Strategy: Removed Frieda Knudsen and Sindra Knudsen from the drop-down inventory after deciding not to pursue them. Maintained that accretive drop-downs remain a key route for fleet rejuvenation and growth.

The transcript does not provide a breakdown of financial performance by specific product segment or division. It reports consolidated figures for the second quarter of 2026: Revenues were $96.8 million, Operating Income was $15.6 million, Net Income was $3.4 million, and Adjusted EBITDA was $57.6 million.

• Distribution Policy: Management anticipates continuing multiple gradual increases to distributions, anchored by improved balance sheets and sustainable cash flows.
• Charter Option Exercise: Expects charterer options to be exercised given the strength of the current charter market, which would further extend high-revenue coverage beyond firm contracts.
• Debt Repayment: Plans to continue repaying debt at approximately $95 million per year, described as prudent given the depreciating nature of the asset base.
• Forward Coverage: Fully chartered for the remainder of 2026; 92% firm coverage (96% with options) expected for 2027, and 65% firm coverage (93% with options) for 2028.

• Asset Depreciation: Acknowledges the depreciating nature of the fleet assets, necessitating prudent debt repayment strategies to maintain financial health.
• Market Volatility: While current markets are tight, the shuttle tanker industry remains niche and concentrated, subject to changes in offshore extraction trends and FPSO deployment cycles.
• Financing Dependence: Relies on access to a wide pool of lenders and attractive bank finance for refinancing maturing facilities, such as the $65 million facility due in October.

Q: Liam Burke asked about the future cadence of fleet growth via drop-downs and whether financing structures would mirror the recent Head of Knutson acquisition, specifically regarding debt assumption and cash addition.

A: Derek Lowe explained that the partnership responds to offers as they arise, noting that only a limited number of drop-down vessels have been delivered so far, restricting when they can be offered. He confirmed that ownership and guarantor arrangements can be transferred from the sponsor to the partnership straightforwardly, but emphasized that the timing depends on delivery schedules and the Board's Independent Conflicts Committee decisions.

Q: Analysts sought clarity on how the management views the sustainability of current charter rates and the likelihood of exercising charterer options given the strong market conditions.

A: Management stated that based on current charter rates, they believe charterer options are likely to be exercised due to the strength of the market. They highlighted that assuming these options are picked up creates upside potential for the KNOP fleet if market momentum is sustained, contributing to the widening coverage seen in their forward charts.

Q: Questions were raised regarding the impact of the new acquisitions and refinancing on the company’s overall leverage and ability to fund future growth without compromising liquidity.

A: Derek Lowe noted that the Head of Knutson acquisition reduced the average fleet age by nearly half a year and extended the long-term contract pipeline. The refinancing of the $225 million facility significantly lowered interest margins. Combined with steady debt repayment of ~$95 million annually, management believes the balance sheet is strengthened to support continued growth and distribution increases.