KNOP - Knot Offshore Partners

[Libs]

One of our esteemed contributors mentioned this idea the other day. I know nothing about this industry but it seems like a compelling opportunity. The main idea is that it trades with oil, but really shouldn't.

 

At $10 it yields 20%+. Priced ~ .6 BV.

 

Shuttle tanker operator. Moves oil from offshore platforms to market.

Operates in a duopoly ( with Teekay, which i think has its own thread). The market is tight. No supply overhang.

This is a specialized area- the tankers must meet specs of their clients ( imagine what it's like doing this job in the North Sea). Not like VLCC.

Fixed price, multi-year contracts with majors.

Sunk costs are huge for the majors; lifting the oil is a relatively small issue. Presumably they will carry on even at $10 oil.

KNOP's fortunes are not tied to oil price - check their results when oil crashed a few years ago.

Went public '13. Distribution has gone from .375 / Q to .52 currently. Never missed a beat.

Operates primarily in North Sea and off Brazil.

Paid primarily in US dollars.

Distribution coverage 1.5X.

Young fleet.

 

 

CEO in the CC ~3/12 said so far no change in operations from the virus. "It's easier to take the oil out and store it than shut down operations."

 

So the crux of the issue is-

 

1) Will any customers go broke / shut down offshore. Largest are Royal Dutch Shell (23%) Petrobas (16%).

2) Their contracts average 2.8 years. Will they be extended / renewed? CEO says he expects so - and in fact Shell just did extend one.

3) Will renewals be at lower rates? Doesn't look like it. That market is tight, and specialized. It doesn't look to me like they've had the swings in pricing you see in other shipping markets.

 

This is all from a layman's perspective. I'm hoping some of the smart energy people on this board weigh in. These inflated yields usually court disaster- wondering what I'm missing?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[BG2008]

One of our esteemed contributors mentioned this idea the other day. I know nothing about this industry but it seems like a compelling opportunity. The main idea is that it trades with oil, but really shouldn't.

 

At $10 it yields 20%+. Priced ~ .6 BV.

 

Shuttle tanker operator. Moves oil from offshore platforms to market.

Operates in a duopoly ( with Teekay, which i think has its own thread). The market is tight. No supply overhang.

This is a specialized area- the tankers must meet specs of their clients ( imagine what it's like doing this job in the North Sea). Not like VLCC.

Fixed price, multi-year contracts with majors.

Sunk costs are huge for the majors; lifting the oil is a relatively small issue. Presumably they will carry on even at $10 oil.

KNOP's fortunes are not tied to oil price - check their results when oil crashed a few years ago.

Went public '13. Distribution has gone from .375 / Q to .52 currently. Never missed a beat.

Operates primarily in North Sea and off Brazil.

Paid primarily in US dollars.

Distribution coverage 1.5X.

Young fleet.

 

 

CEO in the CC ~3/12 said so far no change in operations from the virus. "It's easier to take the oil out and store it than shut down operations."

 

So the crux of the issue is-

 

1) Will any customers go broke / shut down offshore. Largest are Royal Dutch Shell (23%) Petrobas (16%).

2) Their contracts average 2.8 years. Will they be extended / renewed? CEO says he expects so - and in fact Shell just did extend one.

3) Will renewals be at lower rates? Doesn't look like it. That market is tight, and specialized. It doesn't look to me like they've had the swings in pricing you see in other shipping markets.

 

This is all from a layman's perspective. I'm hoping some of the smart energy people on this board weigh in. These inflated yields usually court disaster- wondering what I'm missing?

 

Why bother with this when you have EPD and some of the other best in breed pipelines trading at the same yield? 

[wabuffo]

Yep - KNOP is really a dedicated floating pipeline between a deep sea oil platform and oil terminals on-shore. 

 

You have to think of it as an income stock (which at current prices offers capital appreciation potential, too) whose price trades up and down with oil market sentiment when really its fundamentals have little to do with oil. 

 

Its a big position for me and I've been adding in this swoon.

 

wabuffo

[wabuffo]

Why bother with this when you have EPD and some of the other best in breed pipelines trading at the same yield?

 

Which pipelines are currently yielding a safe 22% and are structured as C-Corps and not LPs (no messy K-1s)?

 

wabuffo

 

[gfp]

Is KNOP a C-Corp?

[wabuffo]

Is KNOP a C-Corp?

 

yes.

 

wabuffo

[gfp]

Thanks wabuffo - I had missed that they have elected to be taxed as a corporation despite their MLP structure.  So they issue a 1099 instead of a K-1. 

[wabuffo]

So they issue a 1099 instead of a K-1.

 

Yep -- here is their IR US taxpayer page. 

 

http://www.knotoffshorepartners.com/investor-relations/unitholder-information/us-tax-information/default.aspx

 

Of note, approx. 80-cents of their $2.08 annual distribution is typically classified as return-of-capital for US tax purposes.  So the 80-cents goes to a reduction of your cost basis.  Its a gift that keeps giving.  You get a 20%+ cash yield (at current prices) but only pay annual tax on $1.28 of it and only pay capital gains taxes (if you hold) when your cost basis goes below zero.

 

wabuffo

[wabuffo]

KNOP - steady as she goes at a 20%+ yield.

https://www.sec.gov/Archives/edgar/data/1564180/000110465920044217/a20-15125_1ex99d1.htm

The Partnership announced today that its Board of Directors has declared a quarterly cash distribution with respect to the quarter ended March 31, 2020 of $0.52 per common unit.    This corresponds to $2.08 per outstanding common unit on an annualized basis.  This cash distribution will be paid on May 14, 2020 to all unitholders of record as of the close of business on May 1, 2020.

they also go out of their way to try to ring a bell to get Mr. Market's attention.

Due to the nature of its charters, the Partnership’s operations are not exposed to short-term fluctuations in oil prices, volume of oil transported or global oil storage capacity.  Furthermore, its vessels operate in areas where the oil being produced typically has a lower marginal cost than that produced in other parts of the world.

 

wabuffo

[keerthiprasad]

Excellent business with great upside.

[Libs]

Wabuffo thanks again for the idea.

 

If you look at the '14-16 oil crash as a lab experiment, they came through with flying colors. They added ships, and revenue went up every year. No clients dropped a contract; in fact  since they went public ('13) every extension has been taken up. It's just not that easy to replace a ship designed for a specific offshore rig.

 

Also, maybe i don't understand this market, but lifting costs are $8-15. They're selling it for a fair amount than that. Why would they stop taking it out?

 

One question. Storage is running out. Could they run out of VLCC's?

 

 

 

 

 

[writser]

Bill (or others), a couple of questions / points:

 

1. How comfortable are you with the GP / LP structure? There are 5 ships under construction at the GP level, two of them are expected to be finished in two months. How do you assess the risk of these being stuffed into the LP? How would they be financed at this point? More debt? Equity offering? How do you judge the risk of an ill-timed (for KNOP holders) IDR buyout potentially followed by a slash in distributions? The structure seems ripe for abuse (and this happened a lot in similar names)

 

2. Any thoughts on pricing power? Some very superficial research shows that options have been renegotiated in the past (with oil prices being higher).

 

    In April 2014, the Partnership was notified that Shell would not exercise its option to extend the Windsor Knutsen time charter after the expiration of its initial term. The vessel was re-delivered on July 28, 2014. In order to comply with its obligations under the Omnibus Agreement, on July 29, 2014, KNOT and the Partnership entered into a time charter for the vessel at a rate of hire that would have been in effect during the option period under the previous Shell time charter. This charter was effective until the new Shell time charter commenced in October 2015. The new Shell charter has a hire rate that is lower than the hire rate in the initial charter. The difference between the new hire rate and the initial rate was paid by KNOT until April 15, 2018.

 

The next time the GP will not reimburse the difference. I guess the bull case is that rates are only a small cost compared to the value of the oil being shipped? Was this an exceptional event?

 

3. It seems there are quite a few new shuttle tankers coming on the market (most notably 13 in 2020 according to the March presentation). AET seems like a new player aggressively entering the market. That seems like quite a big inflow? Though granted, a few of those are quite old already. From the AR:

 

According to Fearnresearch, as of March 1, 2020, there were approximately 94 vessels in the world shuttle tanker fleet (including 23 newbuilds on order). KNOT is the largest owner of shuttle tankers with 34 shuttle tankers (including our vessels and 6 newbuilds on order). Teekay Offshore Partners L.P. is the second largest owner in the shuttle tanker market with 29 shuttle tankers (including 5 newbuilds on order). American Eagle Tankers (AET) is the third largest owner of shuttle tankers with 17 vessels (including 12 newbuilds on order). Petrobras, which owns two vessels, employs a total of 27 shuttle tankers (including 7 newbuilds on order) through long-term bareboat and time charters. There are other shuttle tanker owners in the industry, but most of such owners have a limited fleet size and have chartered vessels out for the long term.

 

Again, how would this influence rates and/or options? Would the market still be tight at that point (and with low oil prices?)

 

4. Is there a dry-docking schedule somewhere? It seems to me that especially the Brazilian ships will lose out on quite a bit of revenue if they are off-hire for a few months. Would the distributions be sustainable at that time?

 

Just trying to get a feel for this thing. Mostly I'm trying to get comfortable with the debt. On an EV basis the whole complex isn't down that much this year.

[wabuffo]

Hey writser - great questions!  I'll take them in order.

 

1. How comfortable are you with the GP / LP structure? There are 5 ships under construction at the GP level, two of them are expected to be finished in two months. How do you assess the risk of these being stuffed into the LP? How would they be financed at this point? More debt? Equity offering? How do you judge the risk of an ill-timed (for KNOP holders) IDR buyout potentially followed by a slash in distributions? The structure seems ripe for abuse (and this happened a lot in similar names)

 

IMO - the GP/LP structure is the BIGGEST risk here (even more than the external macro/oil environment). The only thing you can do is look at the past behavior.  Both KNOT and KNOP have been pretty responsible to the KNOP unitholders.  I think KNOP mgmt views the distribution as a cost of capital and is loath to issue shares at greater than a 9% yield in the past.  If the price stays lower, they will delay the dropdowns.  KNOT also runs charters - so they'll operate the new ships for awhile.  Or they may adjust the cost of capital to 10-11% (implying units issued at $19-$20) plus a slightly heavier debt/equity mix (especially if debt is cheaper next year).  More likely - if KNOP's share price stays low - they'll become a buyer rather than seller and perhaps buy back shares.  They did so in 2015-16 - though back then, the share price rebounded very quickly so they stopped and didn't buy many units.

 

You have to place a bit of trust in mgmt and give them a bit of rope - they've earned it.

 

2. Any thoughts on pricing power? Some very superficial research shows that options have been renegotiated in the past (with oil prices being higher).

 

The Windsor Knutsen is KNOP's oldest tanker (2007).  The contracts (plus renewals) have a 15 year term and the oil majors will not use a tanker older than 20 years.  This could be normal give-and-take between Shell and KNOP as they get to renewals on older ships. 

 

The funny thing is it looks the Windsor Knutsen is heading back to Brazil (from the offshore oilfields in Western Africa) to go back on hire with Shell (though there's been no announcement).  This removes the only uncertainty that was left for 2020 in KNOP"s tanker fleet.

https://www.marinetraffic.com/en/ais/details/ships/shipid:313028/mmsi:258931000/imo:9316115/vessel:WINDSOR_KNUTSEN

 

If you recall from the latest conference call for Q4, 2019, this is what KNOP mgmt said:

"For the Windsor Knutsen, the partnership agreed with Shell, as the charter, to suspend the vessel's time charter contract.  The suspension period commenced March 4, 2019 and is expected to end April 3, 2020.

During the suspension period, the Windsor Knutsen has been operating under a time charter contract with Knutsen shuttle tankers pool AS on the same terms as the existing time charter contract with Shell, meaning no financial loss has arisen to KNOP as a result of this arrangement."

Worst case scenario I guess is that KNOP can console itself leasing out the Windsor Knutsen as floating storage at $70K/day vs shuttling at $40K/day.  Boo hoo.

 

3. It seems there are quite a few new shuttle tankers coming on the market (most notably 13 in 2020 according to the March presentation). AET seems like a new player aggressively entering the market. That seems like quite a big inflow? Though granted, a few of those are quite old already.

 

The practice in this industry is that every ship is built as part of an oil major's capex project for a new deep-sea platform.  You can view KNOP as an extension of that capex budget - except its off the books for the oil major.  No ship is built without a contract to service an oil platform years before the platform comes on-line.  These are specially engineered tankers (often designed with the input of the oil majors' engineering departments).  There is no excess capacity looking for a contract.

 

4. Is there a dry-docking schedule somewhere? It seems to me that especially the Brazilian ships will lose out on quite a bit of revenue if they are off-hire for a few months. Would the distributions be sustainable at that time?

There's none scheduled for this year - there's a couple for next year, IIRC.  KNOP manages this to a pre-determined schedule.  It has never interfered with earnings and/or distributions.

 

--------------------------------------------------------------------------------------------------------------------------------------------------------------

Final point - KNOP's price swoon was driven by your classic indiscriminate seller.  Let's meet them, shall we?

https://www.sec.gov/Archives/edgar/data/949615/000114036120008343/formsc13ga.htm

 

Kayne Andersen runs two MLP funds (both leveraged) - KMF and KYN.  Together, per their annual reports (as at 11/30/19) they held 2.449m KNOP shares (almost 8% of the units o/s).  In the March collapse of energy names, they had to delever and sold their position down to 1.356m KNOP shares.  They probably weren't alone - there are smaller MLP ETFs and funds that were also likely forced sellers.  I was happy to be a tiny liquidity provider to Kayne Andersen, et al.

 

That gives a bit of comfort that the drop in KNOP price was largely for technical rather than fundamental reasons.  Its hard to internalize but KNOP's results have almost nothing to do with oil prices or oil industry supply issues.  The oil majors can't stop operating their deepsea platforms and KNOP is the only way to get their oil to market.

 

wabuffo

[KJP]

Hey writser - great questions!  I'll take them in order.

 

1. How comfortable are you with the GP / LP structure? There are 5 ships under construction at the GP level, two of them are expected to be finished in two months. How do you assess the risk of these being stuffed into the LP? How would they be financed at this point? More debt? Equity offering? How do you judge the risk of an ill-timed (for KNOP holders) IDR buyout potentially followed by a slash in distributions? The structure seems ripe for abuse (and this happened a lot in similar names)

 

IMO - the GP/LP structure is the BIGGEST risk here (even more than the external macro/oil environment). The only thing you can do is look at the past behavior.  Both KNOT and KNOP have been pretty responsible to the KNOP unitholders.  I think KNOP mgmt views the distribution as a cost of capital and is loath to issue shares at greater than a 9% yield in the past.  If the price stays lower, they will delay the dropdowns.  KNOT also runs charters - so they'll operate the new ships for awhile.  Or they may adjust the cost of capital to 10-11% (implying units issued at $19-$20) plus a slightly heavier debt/equity mix (especially if debt is cheaper next year).  More likely - if KNOP's share price stays low - they'll become a buyer rather than seller and perhaps buy back shares.  They did so in 2015-16 - though back then, the share price rebounded very quickly so they stopped and didn't buy many units.

 

You have to place a bit of trust in mgmt and give them a bit of rope - they've earned it.

 

2. Any thoughts on pricing power? Some very superficial research shows that options have been renegotiated in the past (with oil prices being higher).

 

The Windsor Knutsen is KNOP's oldest tanker (2007).  The contracts (plus renewals) have a 15 year term and the oil majors will not use a tanker older than 20 years.  This could be normal give-and-take between Shell and KNOP as they get to renewals on older ships. 

 

The funny thing is it looks the Windsor Knutsen is heading back to Brazil (from the offshore oilfields in Western Africa) to go back on hire with Shell (though there's been no announcement).  This removes the only uncertainty that was left for 2020 in KNOP"s tanker fleet.

https://www.marinetraffic.com/en/ais/details/ships/shipid:313028/mmsi:258931000/imo:9316115/vessel:WINDSOR_KNUTSEN

 

If you recall from the latest conference call for Q4, 2019, this is what KNOP mgmt said:

"For the Windsor Knutsen, the partnership agreed with Shell, as the charter, to suspend the vessel's time charter contract.  The suspension period commenced March 4, 2019 and is expected to end April 3, 2020.

During the suspension period, the Windsor Knutsen has been operating under a time charter contract with Knutsen shuttle tankers pool AS on the same terms as the existing time charter contract with Shell, meaning no financial loss has arisen to KNOP as a result of this arrangement."

Worst case scenario I guess is that KNOP can console itself leasing out the Windsor Knutsen as floating storage at $70K/day vs shuttling at $40K/day.  Boo hoo.

 

3. It seems there are quite a few new shuttle tankers coming on the market (most notably 13 in 2020 according to the March presentation). AET seems like a new player aggressively entering the market. That seems like quite a big inflow? Though granted, a few of those are quite old already.

 

The practice in this industry is that every ship is built as part of an oil major's capex project for a new deep-sea platform.  You can view KNOP as an extension of that capex budget - except its off the books for the oil major.  No ship is built without a contract to service an oil platform years before the platform comes on-line.  These are specially engineered tankers (often designed with the input of the oil majors' engineering departments).  There is no excess capacity looking for a contract.

 

4. Is there a dry-docking schedule somewhere? It seems to me that especially the Brazilian ships will lose out on quite a bit of revenue if they are off-hire for a few months. Would the distributions be sustainable at that time?

There's none scheduled for this year - there's a couple for next year, IIRC.  KNOP manages this to a pre-determined schedule.  It has never interfered with earnings and/or distributions.

 

--------------------------------------------------------------------------------------------------------------------------------------------------------------

Final point - KNOP's price swoon was driven by your classic indiscriminate seller.  Let's meet them, shall we?

https://www.sec.gov/Archives/edgar/data/949615/000114036120008343/formsc13ga.htm

 

Kayne Andersen runs two MLP funds (both leveraged) - KMF and KYN.  Together, per their annual reports (as at 11/30/19) they held 2.449m KNOP shares (almost 8% of the units o/s).  In the March collapse of energy names, they had to delever and sold their position down to 1.356m KNOP shares.  They probably weren't alone - there are smaller MLP ETFs and funds that were also likely forced sellers.  I was happy to be a tiny liquidity provider to Kayne Andersen, et al.

 

That gives a bit of comfort that the drop in KNOP price was largely for technical rather than fundamental reasons.  Its hard to internalize but KNOP's results have almost nothing to do with oil prices or oil industry supply issues.  The oil majors can't stop operating their deepsea platforms and KNOP is the only way to get their oil to market.

 

wabuffo

 

Very helpful post.  Thanks.

 

Why does this business exist independently, rather than as part of an integrated oil company?  Put another way, the boats clearly do something essential for the business of offshore oil, but why is that function outsourced to third parties rather than done internally, particularly if it has good economics?  Pipelines typically aggregate production from many producers, so that's a clear underlying economic reason why they would be independent of the producers.  But here a boat serves one producer, so same underlying economic reason for non-integration is not present.

 

Is the reason that to generate a good ROE you need to really lever the assets, and the oil majors don't want that debt/asset profile on their balance sheets?

 

ps...Our friends and Kayne Anderson and their brethren have also created opportunities elsewhere.  See, e.g., here:  https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/energy-sector/msg401990/#msg401990 and the follow up posts.

[wabuffo]

Is the reason that to generate a good ROE you need to really lever the assets, and the oil majors don't want that debt/asset profile on their balance sheets?

 

I think this is the reason.  A new deepsea shuttle tanker probably costs $150m-$200m (especially with DP2 technology, LNG fueling).  I've seen a few knowledgeable KNOP investor say that the oil majors don't want this capex on their books in order to make the IRRs of deepsea oil exploration better.  I think this is also why there are 15-year contracts with multiple renewals.  It gets around the capital lease accounting.

 

wabuffo

[tytthus]

Same reason integrated oil leases drill rigs.  Capital intensive, like boats.

[Foreign Tuffett]

Is KNOP a C-Corp?

 

yes.

 

wabuffo

 

No. The name of the company is "KNOT Offshore Partners LP." Regardless of how the company has elected to be taxed, it is definitely not a C-corp. It doesn't appear to be structured any differently than other energy MLPs (has a GP, has IDRs, etc). Page 62 of the most recent 10-K has the org chart

[NoCalledStrikes]

KNOP is most definitely a partnership, but "We have elected to be treated as a corporation for U.S. federal income tax purposes. As a result, we are subject to U.S. federal income tax to the extent we earn income from U.S. sources or income that is treated as effectively connected with the conduct of a trade or business in the United States unless such income is exempt from tax under an applicable treaty or Section 883 of the Code. Because our fleet is owned by subsidiaries resident in Norway, we expect that we qualify for an exemption from U.S. federal income tax on any U.S. source gross transportation income we earn by virtue of the application of the U.S.-Norway Tax Treaty, and we intend to take this position for U.S. federal income tax purposes."

 

 

[Foreign Tuffett]

Overwhelming majority of fleet (13 of 16 ships) operates off the coast of Brazil. Are offshore pipelines illegal in Brazil, or are there just a f*** ton of FPSO vessels down there?

 

Annual report: "Our charters have an average remaining term of 2.6 years as of March 19, 2020." So the average fleet age is 6.5 years, the average remaining charter is 2.6 years, but the typical charter contract is 15 years? The last annual report doesn't list a single charter that extends past 2025, so consider me skeptical about these 15 year charters.

 

 

 

 

[wabuffo]

Are offshore pipelines illegal in Brazil, or are there just a f*** ton of FPSO vessels down there?

 

Pipelines are not practical for deep-sea and ultra-deep sea platforms.  You need to be on a continental shelf, be fairly close to shore and in warm waters (oil gets viscous and can't flow in cold environments such as exist in the ocean floor bottoms).  The depths and sea floor terrain also make it very hard to lay a gathering pipeline all the way to shore. 

 

There are some pipelines in the Gulf of Mexico - but in deep water and ultra-deep water they just don't work/aren't cost-effective.  The fields that are serviced by shuttles are the major ones in deep water.

 

The tankers are also specialized for the task of loading safely even if the seas are rough. You can't use a conventional crude tanker for the job.  Thus, there are only 69 of these shuttle tankers in the world (in an effective duopoly between KNOP/KNOT and Alterra/Teekay - though there is a new entrant have mixed success trying to bid for new projects).  There is not a single shuttle tanker in the world that doesn't have fixed employment (unless it is in drydock or is an older shuttle nearing its end of useful life).  The term is typically 15 years but there are renewals every five years - which in theory can be refused by the oil major but in practice are almost always renewed.  You can go back in KNOPs history and check this out for yourself.

 

Hope this helps.

 

wabuffo

 

[Foreign Tuffett]

Are offshore pipelines illegal in Brazil, or are there just a f*** ton of FPSO vessels down there?

 

Pipelines are not practical for deep-sea and ultra-deep sea platforms.  You need to be on a continental shelf, be fairly close to shore and in warm waters (oil gets viscous and can't flow in cold environments such as exist in the ocean floor bottoms).  The depths and sea floor terrain also make it very hard to lay a gathering pipeline all the way to shore. 

 

There are some pipelines in the Gulf of Mexico - but in deep water and ultra-deep water they just don't work/aren't cost-effective.  The fields that are serviced by shuttles are the major ones in deep water.

 

The tankers are also specialized for the task of loading safely even if the seas are rough. You can't use a conventional crude tanker for the job.  Thus, there are only 69 of these shuttle tankers in the world (in an effective duopoly between KNOP/KNOT and Alterra/Teekay - though there is a new entrant have mixed success trying to bid for new projects).  There is not a single shuttle tanker in the world that doesn't have fixed employment (unless it is in drydock or is an older shuttle nearing its end of useful life).  The term is typically 15 years but there are renewals every five years - which in theory can be refused by the oil major but in practice are almost always renewed.  You can go back in KNOPs history and check this out for yourself.

 

Hope this helps.

 

wabuffo

 

OK, so the real charter contract term is more like 5 years. That was my point. Customer options to extend really shouldn't be included.

 

Page 44 of the last annual report for anyone else doing work on this.

[gfp]

There really has been a lot of discipline in not building these on spec in the past.  Not sure how the newer entrant AET has changed this dynamic but I would think they are more of a risk to putting pressure on the duopoly pricing power (it is now an oligopoly) than in overbuilding new ships without a specific project they are being built for.

 

The main point for me to understand was that they really do go to the scrap yard after 20-25 years.  Especially nowadays with newer ships being powered by LNG and allowing the oil majors to say they are lowering their carbon footprint.  So depreciation is absolutely real and a portion of the distribution is a return of capital.  But I am Ok with this at these prices.  It would bother me a lot more at a 10% yield than it does at half the price.  Management has been rational and fair.  It's a very simple business.  I was surprised it popped on the distribution news because anyone following this business had no doubt the economics would be unaffected in the short-medium term.

 

 

[wabuffo]

So depreciation is absolutely real and a portion of the distribution is a return of capital.

 

Absolutely!

 

When KNOP is selling at $19-$20, part of your distribution is a return of YOUR capital. 

 

But at recent sub-$10 prices, part of your distribution is a return of SOMEONE ELSE's capital....and then some.

 

wabuffo

[lnofeisone]

The tankers are also specialized for the task of loading safely even if the seas are rough.

 

Just wanted to highlight wabuffo's point that has always been one of the corner stones of my thesis. These are built to major's spec and safety is beyond paramount to a point where switching needs to really be cost effective to outweigh the risks of new ship and new operator.

[kab60]

Just wanted to say thanks to Wabuffo. Your analysis is really impressive. Having studied Teekay Offshore (without pulling the trigger), I'm glad to have come across this opportunity now. I don't think I'd ever pay BV for this business, but at a fat discount I like it - more so in a volatile environment where the risk of KNOP has little to so with Covid19.