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KNOP - Undervalued Dividend Monster

Jan. 09, 2019 3:50 PM ETKNOT Offshore Partners LP (KNOP)103 Comments
Guy Ausmus profile picture
Guy Ausmus


  • Knight Offshore Partners (KNOP) is a limited partnership managed and operated by Knutsen NYK (KNOT).
  • KNOP competes in a niche industry (shuttle tanker transport) with very favorable competitive characteristics.
  • These characteristics, plus the firm’s strong balance sheet and counterparty credit ratings augur for a low risk dividend producer.
  • Valuation using an perpetuity pricing model indicates that KNOP is undervalued by the market.
  • KNOP must be viewed as a Return of Capital, and a Return of Capital (depreciation) when valuing the units and the dividend.

Shuttle Tanker Industry:

Recent articles on Seeking Alpha have described this company in detail:

10% Yield, 1.46X Coverage, No K-1, Robust Earnings, Selling At Book Value: KNOT Offshore Partners LP

KNOT Offshore Partners: A Conservative Fixed-Income Dream Stock

3 Stable High-Yield Plays: Beating The Market YTD

For those unfamiliar with KNOP, the following is a brief discussion of the Shuttle tanker industry.

Shuttle tankers transport crude oil/condensate from remote offshore oil fields to a marine terminal or refinery.

The shuttle tanker industry is a very small niche, notably distinct from the Crude Oil and Product Tanker industry. In 2017[1], the entire shuttle tanker industry was comprised of 74 vessels. In contrast, the Crude oil tanker (VLCC) industry at the time was +/- 5,600 vessels. The shuttle tanker industry has nine identified competitors. KNOT/KNOP and TEEKAY comprise a duopoly, owning market shares of 38% and 36% respectively. All other competitors have 7% share or less.

Entrance to the industry is difficult.

  • Shuttle tankers have specialized mooring and directional control systems allowing them to remain “On Station” in rough seas.
  • Existing ships from the world’s crude transportation fleet cannot be refitted to shuttle service economically.
  • Shuttle tankers are subject to a rigorous inspection/maintenance schedule[2].
  • Shuttle tanker crews have specialized training and certification.

As a result, shuttle tankers are built to contract, operated to contract. Typical contract terms, or charters, are 5-15 years in length, with renewal periods after the primary term. In contrast, VLCC’s are usually built to spec, operated to spec, based upon the market view of the shipping company owning the vessel. The skill level of crews and captain are usually less than shuttle tankers. Charter contract structure is important, as full life cycle economics form the pricing structure of the shuttle tanker charter contracts. VLCC’s operate in a dog eat dog competitive spot market. KNOP has an average vessel charter term of 3.9

This article was written by

Guy Ausmus profile picture
I'm a retired energy wonk, having spent 34 years in the energy business, working at every link of the energy supply chain: Producer, buyer, seller, and transporter. You can learn more about me at my Linked In profile if you care to.

Analyst’s Disclosure: I am/we are long KNOP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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