Knott Offshore Partners (KNOP) Q3 2025: Charter Backlog Climbs to $963M as Market Tightens
KNOP’s Q3 was defined by a surge in fixed contract backlog to $963 million, reflecting tightening shuttle tanker markets and robust charter demand in both Brazil and the North Sea. The partnership’s refinancing momentum and disciplined capital management further insulated cash flows, even as the pending $10 per unit buyout proposal from sponsor K&OT reshapes the risk-reward calculus for public unitholders. Investors now face a landscape where operational stability and fleet coverage are high, but strategic uncertainty looms around the potential take-private transaction and medium-term fleet renewal.
Summary
- Charter Backlog Expansion: Fixed contract coverage reached $963 million, reinforcing multi-year cash flow visibility.
- Capital Structure Moves: Four refinancings and a concluded buyback program signal proactive balance sheet management.
- Strategic Uncertainty: Pending $10 per unit buyout offer introduces a new decision point for public holders.
Performance Analysis
KNOP delivered another quarter of high operational reliability, achieving 99.9 percent vessel utilization (excluding scheduled dry docking) and maintaining strong liquidity at $125.2 million, a $20.4 million increase from the prior quarter. Segment results were underpinned by the addition of the DAC in Knutson vessel, which came with a seven-year charter, and the extension of several key contracts, notably with Equinor and Shell, further lengthening the average charter duration and supporting forward revenue.
Capital allocation was a clear focus, with management completing two refinancing deals during the quarter and two more post-quarter, extending debt maturities and reducing refinancing risk. The unit buyback program was concluded after repurchasing roughly 385,000 units at an average price of $7.87, well below the sponsor’s current $10 per unit offer, highlighting management’s opportunistic approach to capital deployment. General and administrative expenses remained flat despite the fleet’s expansion to 19 vessels, reflecting operational leverage and tight cost controls.
- Backlog Momentum: Contracted backlog now covers 93 percent of 2026 and 69 percent of 2027 vessel time, with upside if options are exercised.
- Refinancing Execution: Four successful debt deals in H2 2025 bolster liquidity and reduce near-term risk.
- Cost Discipline: G&A held steady at $1.6 million per quarter despite fleet growth, supporting margin preservation.
Operationally, the business remains resilient, but the looming buyout process and a heavy 2026 dry docking schedule add complexity to the forward risk profile.
Executive Commentary
"We operated with 99.9 percent utilization, taking into account the scheduled dry docking of Tover Knutson, which amounts to 96.5 percent utilization overall. And following the end of Q3, we declared a cash distribution of 2.6 US cents per common unit, which was paid in November."
Derek Lowe, Chief Executive Officer & Chief Financial Officer
"We've extended our backlog as of September 30th, 2025 to $963 million of fixed contracts, averaging 2.6 years, and rather more if all options are exercised. At September 30th our fleet of 19 vessels had an average age of 10 years."
Derek Lowe, Chief Executive Officer & Chief Financial Officer
Strategic Positioning
1. Charter Market Tightening
Shuttle tanker demand is strengthening, driven by FPSO (Floating Production Storage and Offloading) startups in both Brazil and the North Sea. Management noted that several long-awaited projects are now operational, directly increasing demand for KNOP’s vessels. The company’s ability to secure contract extensions with major oil companies such as Equinor and Shell, and to lock in new charters like Fortaleza Knutson, underscores the positive supply-demand dynamics and enhances medium-term revenue visibility.
2. Capital Structure and Liquidity Management
Refinancing activity accelerated in the second half, with four separate transactions completed, including sale-leaseback and new revolving credit facilities. These moves increased available liquidity, reduced near-term refinancing risk, and demonstrated continued lender appetite for the shuttle tanker asset class. The average margin on floating rate debt was 2.2 percent over SOFA, and the company continues to prioritize debt repayment at a rate of $95 million or more per year, aligning with asset depreciation and maintaining financial flexibility.
3. Fleet Renewal and Drop-down Pipeline
Fleet renewal is a recurring theme, with the sponsor’s drop-down inventory remaining a potential lever for future growth. The acquisition of the DAC in Knutson with a seven-year guaranteed charter illustrates this model, but with the average fleet age at 10 years and a heavy dry docking schedule ahead, ongoing investment will be needed to sustain competitiveness and earnings power. Management continues to highlight the sponsor’s drop-down inventory as a mechanism to rejuvenate the fleet, though future drop-downs may depend on the outcome of the current buyout proposal.
4. Buyback and Buyout Dynamics
The unit buyback program was opportunistically executed, with repurchases well below the sponsor’s subsequent $10 per unit offer. The conclusion of the buyback and the initiation of the sponsor’s take-private proposal have shifted the capital allocation narrative and introduced a new path for public unitholders. The independent conflicts committee is now evaluating the offer, with no further details available until that process concludes.
Key Considerations
Q3’s results and developments position KNOP at the intersection of operational stability and strategic transition, with both the business model and capital structure showing resilience, even as the sponsor’s buyout offer introduces a new set of variables for investors.
Key Considerations:
- Contract Coverage Strength: 93 percent of 2026 and 69 percent of 2027 vessel days are already contracted, with further upside if options are exercised.
- Refinancing Track Record: Multiple successful debt deals in 2025 reinforce lender confidence and set a precedent for future balance sheet flexibility.
- Dry Docking Headwinds: A heavy schedule of four to five dry dockings in 2026 will temporarily reduce utilization and increase capex, impacting short-term cash flows.
- Buyout Process Uncertainty: The pending $10 per unit offer from K&OT will dominate near-term investor focus, potentially capping upside and shifting risk dynamics.
Risks
The largest near-term risk is the outcome of the sponsor’s buyout proposal, which could alter the partnership’s public status and capital access. Operationally, a cluster of scheduled dry dockings in 2026 will pressure utilization and cash generation, while the aging fleet underscores the need for ongoing investment. Sector-specific risks include potential volatility in offshore oil project timelines and counterparty risk with key charterers.
Forward Outlook
For Q4 2025 and beyond, KNOP management signaled:
- Continued high vessel utilization, with strong contract coverage through 2026 and 2027.
- Completion of all major 2025 refinancing activities, reducing near-term debt maturities.
For full-year 2025, management did not provide explicit financial guidance but emphasized:
- Ongoing debt repayment at $95 million or more per year.
- Expectation that market conditions will support further charter option exercises.
Management highlighted that the shuttle tanker market remains tight and that Petrobras’s five-year plan supports sustained demand growth in Brazil, providing a constructive backdrop for future charter renewals and fleet deployment.
- Watch for updates on the conflicts committee’s evaluation of the buyout offer.
- Monitor the impact of scheduled dry dockings on 2026 cash flows and earnings.
Takeaways
KNOP’s Q3 results showcase a business model anchored by stable cash flows, robust contract coverage, and proactive capital management, but the pending sponsor buyout and upcoming fleet maintenance cycle create a mixed risk-reward profile for public investors.
- Operational Reliability: High utilization and contract extensions with blue-chip charterers underpin forward earnings visibility.
- Strategic Crossroads: The $10 per unit buyout offer from K&OT introduces uncertainty and may cap further upside for public holders.
- Fleet Renewal Imperative: Sustained investment in fleet and drop-downs will be necessary to maintain long-term competitiveness, regardless of ownership structure.
Conclusion
KNOP’s Q3 demonstrated the durability of its contracted business model and capital discipline, even as the sponsor’s buyout proposal shifts the narrative from operational execution to strategic resolution. Investors must now weigh the merits of near-term liquidity against the long-term value of remaining public, with market fundamentals providing a supportive but evolving backdrop.
Industry Read-Through
KNOP’s experience this quarter highlights a tightening shuttle tanker market, with increased FPSO activity in Brazil and the North Sea driving demand for specialized tonnage. The ability to secure multi-year charters and refinance on favorable terms signals continued lender and customer confidence in the sector. For peers, the cluster of dry dockings and the importance of maintaining a young, efficient fleet are key competitive differentiators. The sponsor-driven buyout trend also underscores the value of contracted cash flows in a consolidating market environment, suggesting further MLP privatizations or restructurings could emerge as the cycle progresses.