KNOT Offshore Partners outlines $895M contract backlog and accelerates fleet expansion through vessel acquisitions and buybacks

KNOT Offshore Partners reported strong financial performance in Q2 2025, with revenue of $87.1 million, operating income of $22.2 million, and net income of $6.8 million, alongside robust vessel utilization of 96.8%.

The company is strategically enhancing its charter arrangements and has successfully acquired the Daqing Knutsen for $95 million, which is currently on a time charter with PetroChina until July 2027, indicating a focus on long-term revenue generation.

KNOT Offshore initiated a $10 million unit buyback program and highlighted an optimistic outlook for the charter market, particularly in Brazil and the North Sea, with a backlog of fixed contracts increasing to $895 million and an average duration of 2.6 years.

While management expressed confidence in financial and operational strategies, they acknowledged potential risks related to unexercised charter options and the importance of renewing contracts for vessels becoming available in 2026.

Earnings Call Analysis: KNOT Offshore Partners LP (KNOP) Q2 2025

Management Overview

Derek Lowe, CEO and CFO, initiated the earnings call with an overview of the financial performance and operational achievements for the second quarter. The company reported revenue of $87.1 million, operating income of $22.2 million, net income of $6.8 million, and adjusted EBITDA of $51.6 million. At the end of the quarter, available liquidity increased to $104 million, comprising $66.3 million in cash and $38.5 million in undrawn credit facilities. Vessel utilization stood at 96.8% even as two drydocking operations commenced. Lowe remarked, "Our full utilization stands robustly at 96.8%, despite the onset of drydockings."

He announced a quarterly cash distribution of $0.026 per common unit, scheduled for payment in August. Additionally, he noted achievements in extending charter coverage, affirming, "We've made substantial progress in enhancing our charter arrangements and optimizing the value of existing contracts." The company successfully refinanced the Tove Knutsen through a sale and leaseback deal, generating $32 million in cash. Furthermore, KNOT Offshore acquired the Daqing Knutsen from its sponsor for $95 million, utilizing a combination of cash and debt. This vessel is currently on a time charter with PetroChina in Brazil until July 2027, with options extending the charter to 2032. Lowe also disclosed the initiation of a $10 million unit buyback program, during which 226,000 common units were repurchased at an average price of $7.24 each. He stated, "We see it as wise to allocate discretionary capital for unit buybacks, especially considering the significant discount at which the units are trading relative to our valuation of the partnership's potential."

Market Outlook

Lowe indicated that the shuttle tanker market is tightening in both Brazil and the North Sea due to FPSO start-ups and ramp-ups. The backlog as of June 30, 2025, rose to $895 million in fixed contracts with an average duration of 2.6 years. He reported that 89% of vessel time in 2026 is secured by fixed contracts, stating, "Given the strength of the charter market, we anticipate that charter options will likely be exercised." The company aims to maintain a focus on safe operations, high scheduled utilization, and enhancing earnings transparency and liquidity through medium-term chartering and opportunistic capital investments.

Financial Performance

In summary, KNOT Offshore's quarterly results included revenues of $87.1 million, operating income of $22.2 million, net income of $6.8 million, and adjusted EBITDA of $51.6 million. Liquidity rose to $104.8 million, comprising $66.3 million in cash and $38.5 million in undrawn credit. The company continues to pay down debt at a rate exceeding $95 million annually, with Lowe elaborating, "This debt reduction also provides options to incur new leverage in other areas to ensure judicious capital allocation." The average interest margin on the company's debt is 2.23% above the SOFR benchmark.

Q&A Overview

During the question-and-answer session, Liam Burke from B. Riley Securities inquired about the Daqing Knutsen's delivery timeline. Lowe confirmed the company took delivery on July 2, the day of its announcement. Burke also praised the shareholder-friendly approach of the Daqing acquisition, to which Lowe replied that they aim to continue making accretive transactions, although timing depends on the company’s financial capacity.

Climent Molins from Value Investor's Edge asked about the older vessels, Windsor Knutsen, Fortaleza, and Recife, and their contracting discussions compared to more modern vessels. Lowe emphasized their business model centers on operating vessels rather than trading them but noted they were actively engaging with clients regarding these vessels.

Molins further queried about balancing fleet expansion with potential distribution increases. Lowe provided insight that fleet growth through acquisition is integral to revenue generation, stating, “It's through our charter schedules that we build income in the medium-to-long term. We believe both fleet rejuvenation and capital return to unitholders can occur simultaneously and effectively."

Market Sentiment

The analysts exhibited a neutral to positive sentiment, focusing on operational execution and strategic initiatives. Questions arose regarding the timing of vessel acquisitions and capital allocation strategies. Management displayed confidence, emphasizing prudent financial management, operational efficiency, and capital flexibility. Lowe conveyed optimism about market conditions, stating, "We're gaining positive momentum and taking comprehensive measures that benefit unitholders both now and in the future." Compared to the previous quarter, the perspectives of both analysts and management reflected a similar optimistic outlook with sustained focus on market dynamics.

Quarter-over-Quarter Analysis

A comparison with the previous quarter revealed revenue growth from $84 million in Q1 to $87.1 million in Q2. Net income decreased from $7.6 million to $6.8 million, while adjusted EBITDA saw a minimal drop from $52.2 million to $51.6 million. Liquidity rose from $101 million to $104 million, and the fixed contract backlog increased from $854 million to $895 million, with the average contract duration extending from 2.3 years to 2.6 years. The company’s more active capital deployment strategy in Q2 included the vessel acquisition of Daqing Knutsen and the launch of a unit buyback program. Management expressed a more favorable outlook on charter market conditions, particularly in Brazil and the North Sea.

Risks and Challenges

Lowe acknowledged the long timelines and contract durations that could impact the financial repercussions of market upswings. He highlighted risks associated with unexercised charter options and the importance of securing charter renewals for vessels approaching availability in 2026, especially Fortaleza and Recife. Management continues to monitor debt maturities and market conditions for refinancing opportunities, commenting, “Any actions will depend on the prevailing circumstances at that time."

Conclusion

KNOT Offshore Partners concluded Q2 2025 on a strong note with impressive operational metrics and financial agility. The company showcased an increased contract backlog, completed a vessel acquisition, and initiated a buyback program. Management's emphasis on the ongoing strength of the charter market in Brazil and the North Sea, as well as disciplined debt management and balanced attention to fleet growth and capital returns, serve as central strategies for the upcoming quarters.

For detailed earnings call transcripts, please refer to the company's official communications.