KNOT Offshore Partners' Q2 2025: Contradictions Emerge on Drop-Down Transaction Process, Fleet Growth Strategy, and Refinancing Approach

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 26, 2025

Financials Results

• Revenue: $87.1M

Guidance:

• Brasil Knutsen to start charter with Equinor next month with minimized downtime.
• Raquel Knutsen extended by Repsol Sinopec through June 2028; Windsor Knutsen back in service post-drydock (June 4).
• Acquired Daqing Knutsen; on time charter with PetroChina to July 2027; day rate effectively guaranteed by KNOP to 2032.
• 89% of 2026 vessel time covered by fixed contracts; backlog at $895M, averaging 2.6 years (more with options).
• Shuttle tanker market tightening in Brazil and the North Sea as FPSOs ramp, expected to absorb orderbook; potential medium-term vessel shortage.
• Continue ~$95M+ annual debt repayment; may raise liquidity via sale-leasebacks/releveraging; pursue opportunistic growth and buybacks.

Business Commentary:

* Financial Performance and Liquidity: - In Q2 2025, KNOT Offshore Partners reported revenues of $87.1 million, operating income of $22.2 million, net income of $6.8 million, and an adjusted EBITDA of $51.6 million. - The company had $104 million in available liquidity as of June 30, 2025, which was $4 million higher than at the end of Q1. - The strong financial performance was driven by full utilization, new chartering activities, and strategic acquisitions.

• Fleet Growth and Charter Coverage:
• KNOT Offshore Partners added a new vessel, the Daqing Knutsen, through a dropdown transaction, increasing its fleet to 19 vessels.
• The company extended its backlog to $895 million in fixed contracts, averaging 2.6 years.

• The growth in fleet size and charter coverage was supported by strong market conditions, particularly in Brazil and the North Sea, driven by FPSO start-ups and ramp-ups.

• Shareholder-Friendly Initiatives:

• KNOT Offshore Partners initiated a $10 million unit buyback program, repurchasing 226,000 common units at an average price of $7.24 per unit.
• The buyback program was implemented due to the units trading at a significant discount, reflecting the company's positive outlook and confidence in its prospects.

Sentiment Analysis:

• Management cited "strong utilization and financial results," a tightening shuttle tanker market, and a backlog of $895M. They completed a sale-leaseback that "netted $32 million in cash," acquired Daqing Knutsen on long-term charter, and initiated a $10M buyback. They "feel quite confident about these maturities in the years ahead."

Q&A:

• Question from Liam Burke (B. Riley Securities): When do you expect to take delivery of the Daqing Knutsen given customary closing events?
  Response: Delivery occurred on July 2, the day of the announcement.

• Question from Liam Burke (B. Riley Securities): Can you continue executing shareholder-friendly drop-downs, and what is the timing given financing flexibility?
  Response: No set timing; acquisitions depend on offered terms and available funding, with tools like sale-leasebacks to release liquidity.

• Question from Climent Molins (Value Investor's Edge): How do contracting discussions for older vessels (Windsor, Fortaleza, Recife) compare to newer tonnage, and is asset disposal on the table?
  Response: The model is to operate—not trade—vessels; active client discussions continue, but no specifics or disposal plans were disclosed.

• Question from Climent Molins (Value Investor's Edge): How will you balance fleet expansion with potential distribution increases in the medium term?
  Response: Growth via drop-downs and returns (e.g., buybacks/distributions) are complementary; fleet rejuvenation requires ongoing acquisitions, while buybacks are modest in scale.