KNOT Offshore sinks as North Sea oversupply expected to pressure DCF (NYSE:KNOP)

KNOT Offshore Partners (NYSE:KNOP) -19.1% in Wednesday’s trading to its lowest in more than two-and-a-half years after reporting an increase in Q3 distributable cash flow to $10.9M but warning of a potentially significant drop in DCF.

KNOT Offshore (KNOP) said while its operational performance and utilization for scheduled operations remained at a high level, its financial results, liquidity and DCF reflect its “heavy” drydocking program and delays in resuming offshore oil production in the North Sea and near Norway for creating an oversupply of shuttle tanker capacity and weighing on charter rates.

The North Sea situation could continue in 2023, which is leading the company to consider other opportunities for its North Sea-based vessels in the conventional tanker market as a potential alternate source of income, but CEO Gary Chapman warned the all-in returns might not be enough to boost its cash flow.

“If we are unable to employ our North Sea vessels in the near term at acceptable rates, either on third party charters or in the conventional tanker market, we are likely to experience a material adverse effect on our distributable cash flow,” Chapman warned.

With limited shuttle tanker supply growth expected in the coming years, KNOT Offshore (KNOP) believes the market environment will improve beyond 2023.

KNOT Offshore Partners’ (KNOP) unit price return shows a 23% YTD loss and a 33% decline during the past year.