KNOP: Takeover Proposal And Improved Margins Will Shape Future Prospects

Key Takeaways

• Robust demand for offshore oil transport and limited alternative infrastructure ensure stable revenue and high vessel utilization for KNOT's modern shuttle tanker fleet.
  
• Long-term, fixed-rate contracts and a tightening shuttle tanker market support strong earnings visibility, margin improvement, and sustained distribution potential.
  
• Rising refinancing costs, leverage, and customer concentration heighten earnings volatility and limit flexibility, while industry decarbonization trends threaten long-term demand and cash flow growth.

Catalysts

Acquires, owns, and operates shuttle tankers under long-term charters in the North Sea and Brazil.

• Anticipated growth in deepwater offshore oil production, particularly in Brazil (with numerous new FPSOs coming online), is expected to drive sustained demand for shuttle tanker services, supporting higher vessel utilization rates and increasing future contracted revenues for KNOT.
  
• Persistent infrastructure constraints and lack of scalable alternatives to marine transportation for moving offshore oil, especially in production-heavy regions, suggest long-term, reliable demand for KNOT's specialized shuttle tanker fleet, which underpins revenue stability and supports contract renewals at potentially higher day-rates.
  
• KNOT's strong pipeline of long-term, fixed-rate charter contracts-with $854 million in backlog and growing charter coverage-provides earnings visibility, reduces revenue volatility, and enhances the capacity to sustain and potentially increase distributions over time.
  
• Ongoing fleet modernization via drop-downs and accretive asset acquisitions from Knutsen NYK (the sponsor) allows KNOT to maintain a younger, more efficient fleet, potentially leading to higher net margins and improved operational efficiency as older vessels are swapped for newer ones on favorable terms.
  
• The slow pace of new shuttle tanker deliveries, combined with rising regulatory standards on emissions, points to a tightening market supply, which is likely to support elevated charter rates and fleet values-positively impacting KNOT's topline growth and net profitability over the long term.

KNOT Offshore Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KNOT Offshore Partners's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $45.6 million (and earnings per share of $0.84) by about September 2028, up from $7.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 38.5x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.15%, as per the Simply Wall St company report.

KNOT Offshore Partners Future Earnings Per Share Growth

Risks

• The company's significant upcoming debt maturities and balloon payments in 2025 and 2026 pose refinancing risk, particularly as existing low-rate interest rate hedges are rolling off and new swaps will likely be at higher market rates, potentially raising interest expense and eroding net margins and earnings.
  
• Persistent focus on fleet expansion via drop-downs rather than share buybacks may result in lower return on invested capital, especially if new vessel acquisitions generate a lower internal rate of return than the company's current equity valuation would justify, which could dilute earnings per share and limit capital returns to shareholders.
  
• Customer concentration risk remains elevated, as several vessels have long-term charters with a small pool of oil majors; if contracts are not renewed or options are not exercised, revenue backlog and fixed charter coverage would decrease, increasing earnings volatility and revenue risk.
  
• The current strategy increases leverage and future amortization commitments, which, alongside subdued distribution payouts, limits financial flexibility for reinvestment or weathering industry downturns, raising the risk of dividend cuts or missed growth opportunities if market conditions weaken.
  
• Long-term industry and secular shifts toward decarbonization, stricter emissions regulations, and global energy transition could gradually reduce demand for offshore oil transport and shuttle tankers, threatening vessel utilization, reducing day rates, and pressuring long-term revenue and cash flow growth.

Valuation

• The analysts have a consensus price target of $11.967 for KNOT Offshore Partners based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $8.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $330.7 million, earnings will come to $45.6 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 13.2%.
• Given the current share price of $8.17, the analyst price target of $11.97 is 31.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.