KNOT Offshore Partners: Strategic Fleet Moves and Buybacks Signal Value Creation

KNOT Offshore Partners LP (NYSE: KNOP) has positioned itself as a value-creation engine in the shuttle tanker sector through a series of strategic fleet transactions and capital management moves. The recent $24.8 million acquisition of the Daqing Knutsen, the $32 million net proceeds from the Tove Knutsen sale-leaseback, and a $10 million buyback program at a discount to net asset value (NAV) collectively underscore management's focus on optimizing liquidity, enhancing fleet quality, and returning capital to unitholders. For income investors, KNOP's stable distributions, long-term charter stability, and undervalued units present a compelling opportunity in an improving market.

The Daqing Knutsen: A Strategic, Accretive Acquisition

The acquisition of the 2022-built Daqing Knutsen—a modern DP2 Suezmax shuttle tanker—represents a textbook example of value creation. The vessel's net cost of $24.8 million after debt adjustments and fees is modest compared to its long-term earnings potential. The charter with PetroChina in Brazil runs until July 2027, with options to extend to 2032. Critically, KNOT has guaranteed the hire rate until July 2032, effectively locking in 7+ years of fixed income.

This deal enhances KNOP's fleet in two key ways:
1. Modernization: The Daqing Knutsen's 2022 build date lowers the Partnership's average fleet age, reducing maintenance costs and extending vessel lifecycles.
2. Cashflow Stability: The guaranteed hire rate shields KNOP from near-term market volatility while providing a predictable revenue stream.

The acquisition is also accretive, meaning it should boost distributable cash flow per unit (DCFPU) immediately. With the vessel already on charter, the Partnership avoids the risk of idle time, a common pitfall in shipping.

The Tove Knutsen Sale-Leaseback: Liquidity Boost with Operational Control

The sale-leaseback of the Tove Knutsen for $32 million net proceeds addresses two priorities:
- Debt Reduction: The transaction refinances the vessel's $70.5 million debt, improving KNOP's balance sheet flexibility.
- Liquidity: The $32 million adds to KNOP's $104 million in available cash and credit facilities as of June 2025, reinforcing its ability to fund future acquisitions or buybacks.

The 10-year lease with a fixed-price purchase obligation at maturity ensures KNOP retains operational control of the vessel. This structure avoids the need to draw on its revolving credit facility, preserving borrowing capacity for higher-value opportunities.

The $10M Buyback: Discount to NAV Signals Confidence

KNOP's decision to repurchase up to $10 million of its common units highlights management's belief that the units are undervalued relative to NAV. The buyback program:
- Addresses the Discount: If KNOP's NAV exceeds its market cap, repurchases narrow the gap, returning capital to unitholders at a discount.
- Flexibility: Purchases can occur over 12 months via open-market transactions, allowing KNOP to capitalize on dips in unit price.

While the $10 million size is modest relative to KNOP's $1.2 billion NAV (as of Q2 2025), the move signals confidence in future cash flows. CEO Derek Lowe emphasized that the program aligns with KNOP's focus on “maximizing unitholder value in a disciplined manner.”

Why Income Investors Should Take Notice

KNOP's 13-year dividend track record and stable distributions—maintained at $0.026 per unit since Q1 2024—position it as a reliable income play. With the fleet operating at 98.8% utilization (Q2 2024 data), and charters extending to 2032+, cash flows remain resilient.

Key Catalysts for Upside:
1. Improving Shuttle Tanker Market: Strong demand in Brazil's offshore oil sector, where KNOP has multiple vessels operating, supports higher charter rates.
2. NAV Appreciation: As the fleet's average age drops and long-term charters expand, NAV per unit could rise, closing the gap to market value.
3. Buyback Impact: If KNOP's NAV is indeed higher than its market cap, repurchases could amplify returns as the discount narrows.

Risks to Consider

• Charterer Defaults: PetroChina or other counterparties could terminate charters early, disrupting cash flows.
• Market Volatility: Oil price declines or reduced offshore drilling could lower demand for shuttle tankers.
• Execution Risks: Delays in closing the Tove Knutsen sale-leaseback or securing new charters could strain liquidity.

Investment Thesis

KNOP's combination of accretive acquisitions, liquidity-boosting sales, and undervalued buybacks creates a compelling case for long-term income investors. With a disciplined capital strategy, a fortress balance sheet ($104M liquidity as of June 2025), and exposure to a growing shuttle tanker market, KNOP offers both dividend stability and NAV-driven upside.

Recommendation:
- Hold for Income: The $0.026 quarterly distribution (8.4% annualized yield at current prices) provides steady returns.
- Buy for NAV Appreciation: If the Partnership's buybacks close the NAV discount, units could rise sharply.

The would further illustrate this potential.

In a sector where few companies boast KNOP's charter stability and modern fleet, this is a rare play for income with asymmetric upside.

Final Note: As of June 2025, KNOP's units trade at a material discount to NAV. Investors should monitor the execution of its buyback program and charter renewal progress closely.