KNOT Offshore Partners LP’s Dividend of 11.8% Is Dependable
March 9, 2021
KNOT Stock Should Be on Your Investing Radar
KNOT Offshore Partners LP (NYSE:KNOT) is not your typical oil and gas marine company. Instead of offering the same kind of shipping services as other marine companies, KNOT Offshore operates a sizeable fleet in a niche market.
Whereas most oil and gas marine companies transport refined oil to customers around the world, KNOT Offshore Partners uses its 16 specially designed ships equipped with sophisticated loading and positioning systems, called shuttle tankers, to transport oil from platforms out at sea to onshore terminals and refineries. (Source: “Our Fleet,” KNOT Offshore Partners LP, last accessed March 8, 2021.)
The shuttle tankers are essentially floating pipelines, sending oil from offshore installations to onshore facilities in much the same way a pipeline would along the ocean floor.
Why use ships instead of pipelines?
For starters, shuttle tankers require less upfront investment than pipelines. On top of that, pipelines have a fixed capacity, which doesn’t work very well for periods of declining production. Shuttle tanker capacity, on the other hand, can be adjusted to the needs of the offshore facilities.
Shuttle tankers are also called in when underwater pipelines are closed for maintenance.
Even when pipelines are working, they aren’t always efficient. Pipelines usually transport a blend of crude oil from several different oilfields connected to the same pipeline. The blended crude oil then has to be separated after it gets to its destination. With shuttle tankers, however, customers can purchase unblended crude oil. That’s because the oil from different oilfields is kept in separate onboard compartments.
So how does KNOT Offshore Partners LP make its money? The company charges its customers for the loading, transportation, and storage of crude oil under time charters and bareboat charters.
With time charters, KNOT Offshore Partners is responsible for providing the crew and other vessel operating services, while the customer is responsible for all the voyage expenses. With bareboat charters, KNOT Offshore Partners is not responsible for providing the crew or other operational services; the customer is responsible for all of the vessel operating and voyage expenses.
With KNOT Offshore Partners, each contract is for the use of a specific vessel for a fixed period, at a specific daily rate.
Because of the company’s fixed-term contracted assets and predictable cash flows, KNOT Offshore stock is able to provide a strong, stable yield to unitholders.
Being a leader in a niche market has its challenges, though, at least on the surface.
Because of KNOT Offshore Partners LP’s unique position in the marine shipping industry, it’s relatively easy for the company to secure significant levels of financing for its vessels, which it needs to maintain its high-yield distributions. This can mean the company’s debt levels are sometimes higher than those of other master limited partnerships. But in this case, the ends justify the means.
Operations Not Materially Affected by COVID-19
Whereas the coronavirus pandemic has crippled the global economy, it did not have a material impact on KNOT Offshore Partners LP’s operations in the third quarter. During the quarter, the company reported that its:
- Fleet operated with 100% utilization for scheduled operations
- Revenue was up 0.4%, at $71.3 million
- Net income was up 77.2%, at $25.1 million
- Diluted earnings per share were up 78.6%, at $0.75
- Net change in cash was up 266.3%, at $8.9 million
- Net profit margin was up 76.6%, at 35.2%
- Cash on hand was up 12.1%, at $50.3 million
(Source: “KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended September 30, 2020,” KNOT Offshore Partners LP, November 18, 2020.)
Furthermore, the company had $79.0 million in available liquidity, $585.0 million of remaining contracted forward revenue, and a distribution coverage ratio of 1.6 (60% more than needed to cover its dividend payouts).
In January, KNOT Offshore Partners announced a quarterly cash distribution of $0.52 per unit. This works out to an annual dividend yield of 11.8%.
Business Outlook
As of last November, KNOT Offshore Partners LP’s outlook for the fourth quarter and beyond was as follows:
- There were no dry-dockings scheduled for any of the company’s vessels during the fourth quarter (ended December 31, 2020)
- In the first quarter, earnings would be impacted by the planned 10-year special survey dry-docking of its ship Bodil Knutsen, which was to begin in mid-February and last 30 to 32 days
- No vessel in the company’s fleet accounted for more than 10% of total earnings before interest, taxes, depreciation, and amortization (EBITDA)
As of September 30, 2020:
- The company’s fleet of 16 vessels had charters with an average remaining fixed duration of 2.2 years
- The charterers of the company’s time charter vessels had options to extend their charters by an additional 3.9 years, on average
- The company had $585.0 million of remaining contracted forward revenue, excluding options
(Source: Ibid.)
The Lowdown on KNOT Offshore Partners LP
As mentioned earlier, KNOT Offshore Partners LP is a big player in a lucrative, niche market.
That position gives the company several competitive advantages, which allow it to provide KNOT stock investors with a stable, high-yield dividend.
