KNOT Offshore Partners: Navigating to Profitability in a Tightening Shuttle Tanker Market

The global shuttle tanker sector is undergoing a structural shift, driven by rising offshore oil production in key regions and a constrained vessel supply. Against this backdrop, KNOT Offshore Partners LP (KNOP) delivered a robust Q1 2025 performance, underscored by strategic fleet management and a prime positioning to capitalize on tightening market conditions. With a focus on long-term charters, dropdown opportunities, and operational excellence, KNOP is primed to deliver outsized returns for investors.

Q1 2025 Results: Resilience Amid Market Volatility

KNOP reported Q1 2025 adjusted EBITDA of $52.2 million, a non-GAAP measure highlighting strong cash flow generation. While net income dipped to $7.6 million due to derivative losses and higher EU Emissions Trading System (ETS) costs, the Partnership’s 96.9% fleet utilization—rising to 99.5% when accounting for scheduled maintenance—demonstrates operational efficiency. This outperformance is critical in an industry where downtime can severely impact profitability.

The Partnership’s financial stability is further bolstered by a $853.8 million contracted revenue backlog, excluding options. With 96% of 2025 charters secured and 75% of 2026 locked in, KNOP has insulated itself against near-term volatility. The average remaining fixed charter duration of 2.3 years—with extension options stretching to 4.7 years—ensures steady cash flows as the market tightens.

Strategic Fleet Management: A Blueprint for Growth

KNOP’s Q1 moves reflect a sharp focus on optimizing its fleet to meet evolving demand. Two key actions stand out:

1. The Vessel Swap with Knutsen NYK: In early March, KNOP acquired the Live Knutsen (a newer vessel with modern specifications) while disposing of the older Dan Sabia. This swap reduced the fleet’s average age to 9.8 years, enhancing fuel efficiency and compliance with stricter emissions standards.
2. Contract Extensions and New Charters:
3. The Brasil Knutsen secured a two-year charter with Equinor post-2025, with options for two additional years.
4. Shell converted the Vigdis Knutsen to a bareboat charter, extending its commitment through 2030.

These moves align with KNOP’s broader strategy: prioritizing long-term, high-quality contracts in regions like Brazil, where Petrobras’ deepwater projects are driving demand, and the North Sea, where delayed production is finally coming online.

Market Dynamics: A Tailwind for KNOP

The shuttle tanker sector is entering a golden period, driven by three key trends:

1. Brazil’s Offshore Boom: Petrobras’ FPSO projects and deepwater production require specialized shuttle tankers. KNOP’s fleet already serves 14 vessels in Brazil, giving it a first-mover advantage as demand soars.
2. North Sea Rebalancing: New fields like Johan Castberg and Penguins FPSO are set to boost North Sea activity, offsetting prior oversupply.
3. Limited Newbuild Supply: The global fleet is aging, with few new vessels entering the market. KNOP’s dropdown pipeline—six newbuilds from sponsor Knutsen NYK by 2028—positions it to dominate this constrained supply environment.

The Dropdown Opportunity: Fueling Long-Term Growth

KNOP’s partnership with Knutsen NYK is its secret weapon. Under their omnibus agreement, KNOP has first refusal on any Knutsen-owned vessel with a five-year+ charter. With six newbuilds under construction—all targeting Brazilian and North Sea markets—KNOP can acquire these assets at accretive valuations, further boosting its contracted revenue backlog.

The Hedda Knutsen, delivered in late 2024, already boasts a 15-year charter with Petrobras. By acquiring similar assets, KNOP can extend its average charter duration and reduce reliance on volatile spot markets.

Risks and Mitigations

• Debt Management: KNOP’s $949 million debt load requires refinancing in 2025–2026. However, its $100.8 million liquidity buffer and strong cash flow provide flexibility.
• EU ETS Costs: Compliance expenses rose in Q1, but KNOP’s modern fleet and dropdown newbuilds—designed for efficiency—will mitigate this over time.

Investment Thesis: Buy the Dip

KNOP’s Q1 results reveal a company executing flawlessly in a favorable market. With contracted revenue growing, fleet optimization underway, and dropdown opportunities on the horizon, this is a buy-and-hold name for energy infrastructure investors.

Call to Action: With the shuttle tanker market tightening and KNOP’s backlog expanding, now is the time to secure exposure to this underappreciated MLP.

As offshore oil production surges and competition for vessels intensifies, KNOP’s strategic moves position it to outperform—making it a standout investment in an era of energy transition and infrastructure demand.

Investors should conduct their own due diligence and consider their risk tolerance before making investment decisions.