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Motley Fool Issues Rare “All In” Buy Alert
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Units of Knot Offshore Partners (KNOP -18.32%) had sunk by more than 18% by 10:30 a.m. ET on Wednesday. Weighing on the master limited partnership (MLP) was an oversupply of shuttle tankers in the North Sea.
Knot Offshore Partners issued its third-quarter report, and CEO Gary Chapman said in the accompanying release that its financial results, liquidity, and distributable cash flow “reflect our heavy scheduled drydocking program.”
Chapman also said, “We remain focused on securing additional employment for our fleet for the next and coming quarters.” But the pandemic caused a delay in starting new offshore oil production in the North Sea, creating an oversupply of shuttle tanker capacity. This issue has affected rates and charter opportunities.
Chapman said that the North Sea situation could continue in 2023, which is leading the company to consider other opportunities for its North Sea vessels in the conventional tanker market. But he warned that the returns might not be enough to boost its cash flow. Because of that, if the company can’t find work for its vessels at an acceptable rate, it will likely see a significant drop in its distributable cash flow. That could affect its ability to make distribution payments.
But the company does expect this situation to improve after next year. Oil companies are committing to spend more money offshore in the North Sea and Brazil. Meanwhile, it expects limited growth in shuttle tanker supply in its two operating regions in the coming years.
Knot Offshore Partners expects 2023 to be a challenge. If it can’t find work for its tankers, its cash flow could plunge. That might force it to reduce or suspend its distribution to shore up its liquidity. That could put additional downward pressure on the unit price. Because of that, income-focused investors should avoid the allure of this MLP’s double-digit yield, which it might not be able to sustain next year.
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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