Executive Summary / Key Takeaways

• KNOT Offshore Partners LP (KNOP) operates a specialized fleet of shuttle tankers, essential for deep-water oil production in the North Sea and Brazil, benefiting from a tightening market and anticipated growth in offshore fields.
• The company has strategically transformed its fleet through accretive vessel swaps, enhancing long-term contract visibility, reducing average fleet age, and focusing on high-demand vessel classes without requiring new funding.
• KNOP demonstrates robust financial performance, with consistent Adjusted EBITDA and strong liquidity, supported by a significant contracted revenue backlog of $854 million as of Q1 2025 and a disciplined debt repayment schedule.
• A positive outlook is driven by accelerating FPSO deployments in Brazil and new production in the North Sea, alongside a projected shortage of shuttle tanker capacity, strengthening the economic rationale for charter extensions.
• Key considerations for investors include the successful refinancing of upcoming debt maturities, the strategic deployment of the remaining Panamax vessel (Dan Sabia), and the Board's capital allocation strategy balancing fleet growth with unitholder distributions.

The Specialized World of Offshore Oil Transportation

KNOT Offshore Partners LP (KNOP), founded in 2013 and headquartered in Aberdeen, United Kingdom, plays a critical role in the global energy supply chain. The company owns and operates a specialized fleet of shuttle tankers, providing essential services for the loading, transportation, and discharge of crude oil and condensates from offshore oil field installations to onshore terminals. This niche market primarily serves deep-water production regions, notably the North Sea and Brazil, where conventional tankers are unsuitable due to the unique operational demands.

KNOP's core technology lies in its highly specialized shuttle tankers, equipped with advanced dynamic positioning (DP) systems and sophisticated loading capabilities. These technological differentiators enable safe and efficient cargo transfer in challenging offshore environments, including adverse weather conditions. The DP systems allow vessels to maintain precise positions relative to floating production storage and offloading (FPSO) units without anchoring, a critical feature for deep-water operations. The specialized loading systems facilitate direct transfer from FPSOs, enhancing operational flexibility and reducing downtime. These capabilities provide KNOP with a significant competitive moat, ensuring operational reliability and the ability to secure long-term contracts with major oil companies. While specific quantitative metrics on the performance advantages of this technology are not publicly detailed, the strategic intent is clear: to offer superior operational safety and efficiency that is indispensable for its clients, thereby contributing to robust revenue stability and capital efficiency.

The broader industry landscape for shuttle tankers is characterized by significant demand growth, particularly in deep offshore production. Even as aggregate global oil production growth may slow, deep offshore production, especially in Brazil's pre-salt region, continues to outpace the overall market and gain market share. This trend is a key driver for KNOP, as these fields inherently rely on shuttle tanker services. A material shortage of shuttle tanker capacity is projected in the coming years, making newbuild orders necessary. Notably, all known newbuild orders in the shuttle market are typically backed by firm client charters, which minimizes speculative supply and supports a stable market environment.

Competitive Arena: KNOP's Niche Dominance

KNOP operates within a competitive yet specialized segment of the tanker industry. While companies like DHT Holdings (DHT), Frontline Ltd. (FRO), Scorpio Tankers (STNG), and Teekay Tankers (TNK) operate in the broader crude and product tanker markets, KNOP's direct competition is primarily with other specialized shuttle tanker operators. KNOP's strategic emphasis on long-term charters provides a more stable and predictable revenue stream compared to competitors with a higher exposure to volatile spot markets.

KNOP's specialized shuttle tanker fleet and long-term contract strategy give it a distinct advantage. Its offerings are tailored for the complex demands of offshore loading, which often requires enhanced safety and efficiency in dynamic conditions. This specialization allows KNOP to build strong, enduring relationships with high-quality counterparties in its core regions. In contrast, competitors like Frontline, with their larger, more generalized fleets, may achieve economies of scale and broader global reach, but lack KNOP's deep niche expertise.

Financially, KNOP's focus on stability from long-term agreements is reflected in its profitability metrics. While direct comparative TTM margins for competitors are not available, KNOP's TTM Gross Profit Margin of 38.64%, Operating Profit Margin of 23.51%, and EBITDA Margin of 57.58% underscore its operational efficiency within its specialized segment. When comparing valuation multiples, KNOP's TTM P/E ratio of 22.30 is higher than DHT (10.96), Frontline (10.37), Scorpio Tankers (4.14), and Teekay Tankers (4.44). This higher multiple could reflect investor confidence in KNOP's stable, contracted cash flows and specialized market position, despite its significant Debt/Equity ratio of 1.54.

Indirect competition arises from alternative oil transportation methods, such as pipelines, which could offer cheaper options for certain routes. However, for deep offshore fields, shuttle tankers remain indispensable. The long-term shift towards renewable energy also poses a potential threat by reducing overall oil demand, which could impact KNOP's revenue opportunities. Nevertheless, high capital requirements for fleet acquisition and stringent regulatory approvals act as significant barriers to entry, protecting KNOP's market position by limiting new entrants.

Strategic Fleet Transformation and Financial Resilience

KNOP's history is marked by consistent fleet expansion, growing from four vessels at its inception to 18 by Q1 2025. This growth has been underpinned by a strategy of accretive investments and a commitment to a long-term sustainable distribution. A pivotal aspect of this strategy has been the execution of strategic vessel swaps, which have allowed KNOP to modernize its fleet and enhance its contract pipeline without the need for new funding.

In September 2024, KNOP acquired the Tuva Knutsen while simultaneously selling the Dan Cisne to its sponsor, Knutsen NYK. This transaction was valued at a net price of $28.9 million for the Tuva Knutsen, with the Dan Cisne sold for $30 million, resulting in a cash payment of $1.1 million to KNOP. The Tuva Knutsen brought a fixed contract with TotalEnergies (TTE) until February 2026, with options for an additional 10 years, backed by a seven-year rate guarantee from Knutsen NYK. Building on this, in March 2025, KNOP completed another strategic swap, exchanging the Dan Sabia for the Live Knutsen. This move secured nearly five years of fixed or guaranteed future charter revenue and further concentrated KNOP's fleet in the most in-demand shuttle tanker classes. The Live acquisition involved assuming $73 million of debt, but the partnership's long-term debt balance increased by a lower figure of $47 million due to ongoing contractual repayments. These swaps have been instrumental in reducing the average fleet age and focusing KNOP's assets on the most lucrative segments of the shuttle tanker market, thereby enhancing the certainty and stability of cash flows.

The partnership maintains a robust contracted revenue position, totaling $854 million at the end of Q1 2025. These fixed contracts average 2.3 years in duration, with charterers' options extending this visibility by an additional 4.7 years on average. This substantial backlog provides a strong foundation for future earnings.

Robust Financial Performance and Liquidity Management

For the first quarter of 2025 (Q1 2025), the company reported revenues of $84 million, operating income of $23.4 million, and net income of $7.6 million. Adjusted EBITDA, a key measure of operational cash flow, stood at $52.2 million. This performance follows a strong Q4 2024, which saw revenues of $91.3 million and Adjusted EBITDA of $63.1 million, driven by new operations for the Ingrid and Torill vessels. While Q2 2024 revenues were $74.4 million, operating income and net income were significantly impacted by non-cash vessel impairments on its Panamax vessels; excluding these, operating income would have been $17.7 million and net income $3.5 million.

Liquidity remains a key strength, with $101 million available at the end of Q1 2025, comprising $67 million in cash and cash equivalents, plus $34 million in undrawn credit facilities. This liquidity supports the partnership's operations and its significant debt repayment schedule, which averages approximately $90 million per year for installment payments. Over the 12 months following March 31, 2025, $96 million in current installments is due.

KNOP actively manages its debt maturity profile. The total debt burden as of March 31, 2025, was $948 million, with the majority ($932 million) in secured debt facilities. Several refinancings are due in 2025, including two revolving credit facilities (August and November) and a secured loan for Tove Knutsen and Synnove Knutsen (September/October). Management has a strong track record of refinancing these facilities on comparable terms, leveraging its relationships with lending banks. While the current market environment is acknowledged as potentially more volatile, the company is engaging in early negotiations and expects to continue its success in this area.

Outlook and Growth Trajectory

KNOP's outlook remains positive, driven by favorable industry dynamics and strategic positioning. Significant growth is anticipated in production from fields reliant on shuttle tankers. Brazilian FPSOs are delivering and starting up ahead of schedule, with many more expected. In the North Sea, the long-awaited Johan Castberg FPSO commenced production, following the Penguins FPSO, and is expected to ramp up quickly to 200,000 barrels a day by mid-year to Q3. This increased activity in both key markets is expected to drive demand for shuttle tanker services.

The strengthening market conditions and projected tightness in shuttle tanker capacity are enhancing the economic rationale for charterers to exercise their extension options, which could further extend KNOP's contracted revenue visibility. The partnership boasts encouraging fixed charter coverage: 96% for the last three quarters of 2025 and 75% for 2026. However, the open percentage for 2026 rises materially over the year, underscoring the need for continuous commercial efforts to secure new contracts.

A key component of KNOP's growth strategy is the acquisition of additional vessels from its sponsor, Knutsen NYK, through accretive drop-downs. The sponsor currently has an inventory of 10 eligible vessels (four existing and six under construction), each with a firm contract period of at least five years. These drop-downs are intended to increase KNOP's revenue backlog, generate long-term cash flow, and lower the average age of its fleet. While the timing of these transactions is subject to individual review and Board approval, they represent a significant avenue for future growth.

Key Risks and Shareholder Value

Despite the positive outlook, KNOP faces several pertinent risks. Market volatility, particularly in oil prices and global economic conditions, could impact charter rates and demand for shuttle tanker services. While the company has a strong track record, the successful refinancing of upcoming debt maturities in 2025 remains a priority. The deployment of the Dan Sabia, a smaller Panamax vessel, continues to be a commercial focus, as its size makes securing long-term shuttle tanker employment challenging in the current market, despite high day rates.

The Board's capital allocation strategy also presents a point of discussion for investors. While management emphasizes accretive fleet investment and a long-term sustainable distribution as serving the unitholders' best interests, some investors advocate for increased distributions or share buybacks, particularly given the perceived disconnect between the company's intrinsic value and its unit price. Management acknowledges these discussions but prioritizes fleet growth and overall partnership value, also noting the potential ineffectiveness of buybacks due to low trading volume.

Conclusion

KNOT Offshore Partners LP is strategically positioned within a specialized and tightening shuttle tanker market, driven by robust demand from deep offshore oil production in Brazil and the North Sea. The company's core technological advantage in specialized loading and dynamic positioning systems provides a strong competitive moat, enabling operational excellence and securing long-term contracts. Through a history of accretive fleet expansion and recent strategic vessel swaps, KNOP has successfully enhanced its contracted revenue backlog and modernized its fleet, demonstrating strong financial resilience with consistent cash flow generation and disciplined debt management.

The outlook remains favorable, with accelerating FPSO deployments and a projected shortage of shuttle tanker capacity expected to bolster charter rates and extension options. While the company must diligently manage upcoming debt refinancings and the deployment of the Dan Sabia, its established track record and strategic initiatives, including potential drop-downs from its sponsor, underscore a clear path for continued growth. For discerning investors, KNOP represents an opportunity to invest in a specialized energy infrastructure provider with a stable, contracted revenue base and a clear strategy for long-term value creation, even as it balances growth ambitions with unitholder returns.