Operator
Hello and welcome everyone to the NOP First Quarter 2025 Earnings Call. My name is Maxine and I'll be coordinating the call today. If you would like to ask a question, you may do so by pressing staff low by one on your telephone keypad. I will now hand you over to Derek Lowe, Chief Executive Officer. Please go ahead.
Thank you, Maxine, and good morning, ladies and gentlemen. My name is Derek Lowe and I'm the Chief Executive and Chief Financial Officer of Connaughts Offshore Partners. welcome to the partnership's earnings call for the first quarter of 2025. Our website is cannotoffshorepartners.com and you can find the earnings release there along with this presentation. On slide two you will find guidance on the inclusion of forward-looking statements in today's presentation. These are made in good faith and reflect the management's current views, known and unknown risks, and are based on assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied in forward-looking statements, and the partnership does not have or undertake a duty to update any such forward-looking statements made as of the date of this presentation. For further information, please consult our SEC filings, especially in relation to our annual and quarterly results. Today's presentation also includes certain non-US gap measures, and our earnings release includes a reconciliation of these to the most directly comparable gap measures. On slide three, we have the financial and operational headlines for Q1. Revenues were $84 million, operating income $23.4 million, and net income $7.6 million. Adjusted EBITDA was $52.2 million. We closed Q1 with $101 million in available liquidity, made up of $67 million in cash and cash equivalents, plus $34 million in undrawn capacity on our credit facilities. We operated with 99.5% utilisation, taking into account the start of two dry dockings, which amounts to 96.9 utilisation overall. Following the end of Q1, we declared a cash distribution of 2.6 US cents per common unit, which was paid in early May. Onto slide four, our outlook remains positive on both industry dynamics and the partnerships positioning to participate fruitfully in our markets. significant growth is anticipated in production in fields which rely on service by shuttle tankers in particular we've seen brazilian fpsos delivering and starting up ahead of schedule with quite a few still to come in the north sea the long awaited johan casberg fpso started production following shortly after the penguins fpso back in february on the vessel supply front we are seeing continued new build orders placed in order to service the large new production volumes coming online in the years ahead this includes for our sponsor knutson myk whose most recent order was placed in march the most amount of new shuttle tank ordering is unavoidable and in fact necessary as a shortage of shuttle tank capacity remains projected in the coming years as usual for the shuttle market we believe that all known new build orders are backed by firm client charters which minimizes or even eliminates a dynamic of speculation around anticipated supply into global fleet in two to three years time. The partnership remains financially resilient with a strong contracted revenue position of $854 million at the end of Q1 on fixed contracts, which averaged 2.3 years in duration. Transfers options are additional to this and average a further 4.7 years. With the market having strengthened and given expectations for tightness in the years ahead, the economic rationale for exercising these options has been strengthening and we increasingly expect these options to be taken up and our pattern of cash generation and liquidity balance is sufficient for our operations and the significant pay down rate for our debt which is in the region of 90 million dollars per year for installment payments the debt from the lever acquisition fits in with this repayment profile also on slide five a number of developments in q1 were announced already on the previous earnings call most notably our near-term chartering exposure was addressed by a swap of the Dan Sabia for the Leverknudsen. Slide 6 contains additional details on that vessel swap, which is explained further in our Form 20F filing as a subsequent event in our 2024 annual report. On slide 7, our most recent developments include the Hildeknudsen going on hire with Shell in late March on the one-year fixed charter, the addition of one vessel to our potential drop-down inventory, which is the new build order I mentioned earlier, and the current charter for Brazilknudsen has also been extended to September when she'll be re-delivered from Petro Rio and then delivered out to Equinox. On to slide eight you can see consistent and growing revenues over the quarters and years along with improving profitability. Slide nine similarly reflects consistent and growing adjusted EBITDA and you can find the definition of this non-GAAP measure in the appendix. On slide 10 we showed the change in our balance sheet from the end of 2024 to the 31st of March 2025. The main point to note there is that even after the assumption of $73 million of debt from the lever acquisition, our long-term debt balance rose by the much lower figure of $47 million in that period, which reflects the contractual debt repayments we make in the area of $90 million per year. The debt facilities can be seen on side 11, which sets out the maturity profile. On line one, the first of our revolving credit facilities is due to mature in August 2025, and on line two, the loan secured by Tova Knudsen and Sinova Knudsen matures over September and October 2025. The second revolver matures in November 2025. We typically seek to refinance such facilities on very comparable terms and may have a good track record of refinancing success, even in less favourable market environments. The highlighted column shows how the outstanding balances of each facility have been reducing because of the repayments we've been making in line with scheduled repayment terms. The current instalments are the amounts of capital repayment due over the next year, which do not include interest or the final balloon payments due on maturity dates. Of note, $96 million in current instalments is due to be paid over the 12 months following 31st of March 2025. Our typical pattern is for our vessels to provide security for our debt facilities, and that now applies to the whole fleet of 18 vessels. In addition to the $932 million of secured debt, the two revolving credit facilities totaling $50 million of capacity are unsecured. The maturity profile of these debts is set out graphically on slide 12. As you can see, repayments are spread out over the coming years, but include material balloons in each of 2025 and 2026. Slide 13 shows the contracted pipeline in chart format, reflecting the developments I set out earlier, as well as the fact that Raquel Knudsen's option period is the only material outstanding period until Q2 of 2026. While nothing is certain until it's formally in place, we are cautiously optimistic about securing that additional coverage in the current time market, either as an extension or under a new charter. Similarly, slide 14 highlights an encouraging 96% of fixed charter coverage for the last three quarters of 2025. We currently have 75% of 2026 fixed as well, although the open percentage does rise materially over the course of the year, which demonstrates the need for our continuing commercial efforts. On slide 15, we see our sponsor's inventory of vessels which are eligible for purchase by the partnership. This applies to any vessel owned by or on order for our sponsor where the vessel has secured a firm contract period at least five years in length. At present, four existing vessels and six under construction fall into this category. There is no insurance that any further acquisitions will be made by the partnership, and any transaction will be subject to the board approval of both parties, which includes the partnership's independent conflicts committee. We continue to believe that key components of KNOP's strategy and value proposition are accretive investment in the fleet and a long-term sustainable distribution. At present, we see a compelling opportunity to increase our revenue backlog and long-term cash flow while lowering our average fleet age by drop downs from KNOT. As such we intend to pursue long-term charter visibility and accretive drop downs supportive of long-term cash flow generation. On slides 16 to 18 we've provided some useful illustrations of the strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras's materials directly at the web pages shown there. The primary takeaway from each of these slides is consistent. There is very significant committed demand growth coming in the Brazilian market in the form of new FPSOs that will require regular service from shuttle tankers. We believe that recent reports of additional vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term. Six outstanding new build contracts are for our sponsor, Kuditson-MIK, and are due for delivery over late 2025 to early 2028. We would not be surprised to see further new build orders placed in order to service the large new production volumes coming online in the years ahead. In a trend that also applies to oil production globally, you'll see that even in the years ahead when aggregate production growth slows down, deep offshore production, in this case in the Brazilian pre-sorts, continues to outpace the overall market and take market share. On slide 19, we provide information relevant to our US unit holders, in particular those seeking a form 1099 those holding units by their custodians or brokers should approach those parties directly those with directly registered holdings should contact our transfer agent equinity trust company whose details are shown there on slide 20 we include some reminders of the strong fund fundamentals of our business in the market we serve our assets competitive landscape robust contractual footprint, and resilient finances. I'll finish with slide 21, recapping our financial and operational performance in Q1 2025 in the subsequent time and our current outlook. We're glad to have delivered high and safe utilisation, which have generated consistent financial performance. We're particularly pleased to have filled the contracting schedule and taken a further growth step by swapping Dan Sabia for Leverknutzen. Our continued commercial focus remains on adding to our longer term chance visibility and the cash flows that provide us with the capacity for both accretive investment in the fleet and a long-term sustainable distribution and in the coming months we will also be addressing the four refinancings which are coming coming due this year in total though we're making good progress i'm pleased to have established positive momentum against an improving market backdrop thank you for listening and with that i'll hand the call back to maxine for any questions thank you if you would like to ask a question you may do so by pressing star followed by one on your telephone keypad.
Operator
If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure that your line is unmuted locally. Our first question today comes from Liam Burke from B-Riley Securities. Please go ahead, Liam. Your line is now open.
Thank you. How are you today?
Derek, the drop-downs, there are 11 potential drop-downs from the sponsor. Any sense of timing? You have growing liquidity and financial flexibility now.
Each of those potential transactions is reviewed one by one on its own merits, although there's no guarantee that any of them will come through. Clearly, it's something that we would seek to invest in on the right terms. It's a function of when those vessels are offered to us and the board's decision at at the time around the terms on which the vessels are offered. So we don't have any clear timing for you. And obviously a number of the vessels are on the water and some are still new builds. And so that would guide the timing on those as well.
Okay. And then you've had a pretty strong history of successful refinancings of your balloon payments. Do you anticipate being able to refinance at similar or better terms?
That's what we're working towards. We've got the same pattern of refinancing as we've had in the past in that we tend to start those conversations with our lenders quite early and so the negotiations go on a fairly slow pace because there's so much time in which to do that and there's no real urgency as we go through from either side. Those conversations are underway. we don't have any negative indications so far, but until they're signed, of course, then they're not set.
Operator
Thank you. As a reminder, to ask a question, please press star flow by one on the telephone keypad. Our next question comes from Jim Autschel from Aviation Advisors. Please go ahead, Jim. Your line is now open.
Good afternoon. Thanks for taking my call. My question rather. The question I have is this looking at the news release, it appears that the interest, various interest rate hedges you currently have in place will all run off by sometime next year. What will be the impact on the bottom line of the end of these interest rate hedges?
Thanks, Jim, for your question. The average maturity is one and a half years, and so some of them will come off earlier than that, and some will roll out later. But you're right to highlight that they do all expire. We put in new interest rate hedges on a rolling basis when we see terms that we think are suitable or attractive. So it's not as if the portfolio of interest rate swaps is static and will just expire. I don't have a direct comment on bottom line impact. Obviously, you can see with each quarter's results, disclosures around what we receive as realized income from those derivatives and also mark-to-market on the unrealized portions.
Well, but if you're putting new ones in place, it's certainly not going to be at two and a half or 2.8% the way you have now.
That's right. If you reference the swap rate versus SOFA over anywhere between two and five years, that will give you an indication of the type of fixings that are currently available in the market.
Obviously that's a market level that that moves around uh fairly quickly and um but we're in a position to put new swaps in place when we see a rate that we like good but um um related question though of the i i don't i don't have a balance sheet and things in front of me but um i believe we have 600 odd or 900 600 odd million in long-term debt or is it 900 million but um what whatever how much of the long-term debt is covered by some of these different interest rate swaps.
Sure. That's described in, I think it's about page four of the release, directly under the debt maturity profile. So you asked how much long-term debt, I mean, the total debt burden we've got is $948 million as of the end of March. 932 of that is in the secure debt facilities, and then the remainder is what we've drawn down on our RCS. And then in the paragraph below, I won't read through that but you can see how or two paragraphs below you can see how our interest rate swap portfolio covers that in various portions. I would also say that the sale and leaseback facilities we've got are on fixed rates so we treat those as being part of our effectively fixed cost portfolio.
Okay well thank you very much.
Operator
Thank you. Our next question comes from Paddle. Oliver from Rockhill Global. Please go ahead. Your line is now open.
Hi. Good morning. Thank you very much for another great quarter. And it sounds like that you guys are doing sort of 40 million pre-debt repayment in free cash flow and sort of mid to high 20s in free cash flow afterwards. But my question is on the refinancing that you're doing this summer. You have several packages that are potentially to be refinanced. I think it's the $345 million facility for Ana, Tordes, Vigdes, Brazil, and Lena Knutson. Is that correct? Is that the one that's getting care refinanced?
No, that's September next year, 2026. So, on slide 11, that's…
So, it's the Windsor, Bodle, Carmen, Fortaleza, Recife, and Ingrid, right?
No, that's 2028. So, if you look at slide 11 in the presentation, you've got them in time order. So, we've got two revolving credit facilities unsecured that are due over the course of uh august to um november and that's 50 million of capacity in total and then the secured loans uh are for toba and sonova and that's over september and october and they total at that point um 139 million i see i see okay um and those um how old are those ships i'm trying to figure out.
Those are one of the new ones, right?
Yeah, I'm just thinking off the top of my head. They were delivered around 20 and 22. Now, you need to refer to our findings just to get that exactly right uh 21 and um so yeah beginning of 21 middle of 22. and so um can i ask you in terms of what kind of loan to value are these at this point because you have been making uh re you know pretty aggressive repayment yeah i don't i don't have that figure off the top of my head i'm not sure if we disclose the vessel valuation, vessel by vessel, which would help get through that calculation. But yes, you're right that we've been paying down pretty heavily over that time.
Can I ask you, you know, when you're doing loan to values and, you know, trying to determine how much you can borrow against the different assets. Do you do mark-to-market or is it the accounting value or the bank?
Sorry. I'm not sure I followed the exact line of the question.
Well, if I am the bank and I'm trying to determine the loan-to-value, Do I use the mark-to-market, what I think the market value of the ship is, or do I use the accounting value of the ship?
I generally use the mark-to-market value, so it's a broker valuation. And, in fact, the company's in the loans.
Is it fair to say that, given the tight market in Brazil, the value of the ships has gone up?
They've held pretty level over the last time we did it. I wouldn't say it's necessarily gone up, but obviously we've got a range of special ages and specifications and so on, but they held pretty well over the last time we did that, which was for the year-end 24, and you'll see that in the disclosure in .
So where I'm getting at is I'm trying to understand, you know, You may be able to negotiate with the banks as you talk to them over the next few months. And my guess is you're already talking to them, obviously. If you can get further advance on these ships and basically get some cash through refinancing to speed up the drop downs.
Yeah, if that's enough of your curiosity on that topic, then yes, we think there is potential to, or there can be potential to increase proceeds with refinancing. And that would obviously generate liquidity, but additional debt on the balance sheet and additional amortization rates if we do that.
Right, right. And then my other question was about the two ships that will come up to for renewal early next year. They are operating in Brazil, right? And they're probably at fairly low rates. So is it fair to assume that that rate that you would recharter it on would be a lot higher than where it is now?
I think I need to leave you to make your own assumptions about that. I mean, because you don't comment on individual contract rates. And the key when you're looking at that is um contracts are the levels are set at the time they're signed and of course that can be sometime in the past uh or in the case of extensions uh the time those extensions are signed and we make disclosures each quarter on um when uh when new contracts have come through so i have to leave you to make your own assumptions about um the rates that those vessels may be on at the moment and what current or future markets might be.
So, if I make an assumption that the rates in the past are a lot lower than they are right now, that's probably a fair assumption, would you say?
Well, as I say, I think I need to leave you to make your own assumptions on that. But if you look at the timing at which any gift contract was signed and within the next within the subsequent quarter announced, that should give you a guide as to where you want to set those levels.
And one question, you mentioned that the valuations of the ships per broker quotes have been relatively stable. Does that mean as in terms of valuations year on year, given the age of the fleet, or even with the increase in age of the ship, the value of the ship stayed about the same?
It's the latter. It's just the absolute numbers that came through.
Okay. So, basically, an older ship hasn't really depreciated in value. It has remained about the same. One year older ship has changed.
Yeah, it was a comment on the fleet overall for the vessels, obviously, that were in the fleet throughout the period.
And if the rates, especially in Brazil, have increased, which it seems when we talk to your customers, that's the case, theoretically that should also be reflected in the value of the ships, correct?
That will certainly be in the minds of the brokers as they're looking at them, along with any other circumstances they think are relevant.
And like the other circumstance would be that the new ships are, you know, 120 or 140 million, depending Brazil or North Sea, right? That seems sort of the new quotes. So also given that the new ships are more expensive, that would also increase the value of the used ships, correct?
It should do, and that's for the brokers themselves to comment on. But those are some of the considerations they would have as they come up with each valuation.
Understood. Okay. Okay, and how long does it take in general to drop down the ship?
What, from start to finish of the transaction process, do you mean? and I would say that's two to four months.
And can you comment if you have started or have done any of those right now? Because you have $67 million on your balance sheet, right? And it sounds like you will be refinancing and potentially taking some cash out of these borrowings that you're doing And hopefully, you know, even the revolving credit facility may be extended, et cetera. You know, this may not be a bad time to drop down some of those ships, right?
Well, you may see that we announce drop-down transactions at the time that they're agreed on. And usually that's around the closing time. and that's the pattern of our announcements and that's the point at which those transactions become material and obviously we need to announce them then and prior to that we don't make any other comments.
Last one or two drop downs. How much cash or value, you know, you did the swaps with then Sabia and then Cisna, but even the one before, How much cash or value did you have to provide in order to swap, in order to drop down those ships, if you can remind us?
Sure. You've got, I think it's page six in this presentation and a similar page in the, I think it's going to be the Q2 or Q3 presentation from last year. and also in the 20th but i just i think it's certainly in the filings but if you want the headlines um so those those two uh obviously as you've alluded to they were vessel swaps rather than uh funded um purchases of the uh the new larger drop down vessels um and the The valuation of the two Dans, Sabia and Cisner, was order of magnitude 30 million. Clearly you need to look at the filings for the exact numbers and even the deal summaries have got the figure set out further. But that's the approximate valuation where the cash element of the consideration was very low by comparison. So sort of 1 million in either direction. I think it was in one way for one of the transactions and the other way for the other. So the cash element of those was negligible compared with the value of the value of the value of the value.
But the value was about 30 million.
Plus or minus, I think. You can see on page six that the Sabia sale price was 25 and three quarters.
And for the Cisner, it was, I think, above that memory. but the ships going forward would be probably slightly higher right so you for the three or four ships that are ready to be dropped down at the moment you probably need 30 or 35 million per ship correct yeah we don't have a particular comment on the exact terms of those but being that bit newer and contracted that bit more recently it wouldn't be a surprise to see a slightly high number there for the equity component.
And, you know, the latest dropdown came in March. So the full impact of that we're going to see only in the second quarter, right? And again, that was an accretive transaction. So on the margin, the cash flow, free cash flow run rate should be slightly higher in the second quarter than in the first quarter. Would that be a fair statement?
Yes, as it relates to that 118th of the fleet. Yeah.
Well, thank you very much. Great quarter. Really appreciate it.
Operator
Thank you. Our next question comes from Robert Silvera. Please go ahead. Your line is now open.
Good morning, and thank you for taking my call. I was a little late to the call, And I'm trying to understand the long-term debt increased significantly, about $50 million, and the lease liabilities increased by about roughly $3 million. Could you give me a wraparound as to why that took place during this last quarter?
Sure. And if you listen to the replay in due course, you'll get a couple of comments on that. as well, but I'm happy to repeat them here. So, the Bessel swap that we did in March involved us assuming $73 million of debt as part of the transaction terms. But our long-term debt balance over the quarter increased by much less than that, so increased by only $47 million. So, yes, the long-term debt has gone up. It's primarily transaction-related, And the fact that there is that difference of, is that $26 million, I think, demonstrates the debt pay down rate that we have in all of our facilities where we make amortization payments. Back on slide 11, I just refer you to the, I think it's the third column of figures that add up to $96 million. That's our current outlook for debt amortization in cash over the next year. And we pull out that figure deliberately to show that that's our debt service capacity as far as amortization is concerned and our ability to pay it back.
Thank you. That involves what, one ship drop-down?
The March transaction, yes. That's right.
That was one ship, a drop-down, one, a single ship.
It was a single ship drop-down, but it was a vessel swap, actually. So we sold our Dan Sabia, and we bought Lieberknutzen.
Good. Okay, well, thank you very much for taking my call, and it looks good. And hopefully in the future, the dividend can go back toward the old days when it was 51 cents a share. We'll talk to you later. Thank you.
Great. Thanks, Robert. Thanks for your question.
Operator
Thank you. Our next question comes from Mario Applebaum from First New York. Please go ahead, Mario. Your line is now open.
Hi. I was on mute. Sorry. Can you hear me now?
Okay. Thank you for the space to ask questions. I had a question about the Raquel with Repsol. When is that charter actually supposed to finish or the option to remove? What you could give me? I can't see the date.
The final end of the option is in 2030. Do you mean the current?
Well, the current fixed period finishes around the end of June and then the option runs through to the same time in 2030.
Okay, so you're one and a half months. And how is, if that gets renewed by, with Repsol, is there a little bit of an increase in the, could we expect an increase in the charter rate or usually at the signing, they have the option of the same? Charter rate or you can't talk specifically about this one, but in general, what should happen at renewals?
Yeah, I mean, you're right that we can't comment on individual charter rates, but it is generally the case that we have a small amount of escalation in option terms.
And in general, when you remove, does the charter tell you one month in advance, or is this unusually late that you have not been known to remove?
Yeah, it's not unusually late, which you can imagine is a little bit of a frustration, I think, for any vessel owner, any operator in the space. they'd prefer to have more notice but that is common practice that the deadline is relatively close and that a lot of clients leave it quite late on to choose whether to exercise or not. I would say that simply on the basis of current market rates and the need for shuttle service we are I would say we're not particularly nervous about exercise of that but the sooner that happens clearly the happier we'll be okay and and then thank you for that then the second question i had is with regard to things that you can easily see when you compare the first quarter in the second quarter when you look at the drop down i mean at the sorry the again the dry dockings how would you compare first quarter dry dockings to second quarters Well, there are two that are relatively current, and the vast majority of their work was after the start of the second quarter, but clearly six weeks or so or seven weeks into the second quarter now, and much of that work fell in April rather than in March. I realised on page 13 that the the current time red line, it's hard to see exactly when that falls. That's designed to be now rather than the end of the quarter.
Okay, so when you compare the second quarter to first quarter, we have an additional shift, but we have some additional dry dockings. So those are the two puts and takes when you compare the cash flow.
Yeah, that's fair enough. Would that be fair?
Yeah. Okay. And then with the Fortaleza and Recife, these shifts that you have that are coming up in 2026, are you engaged already with other parties in discussions of potential Yeah, I mean, it may be a generic comment, but we're marketing our open contract positions all the time.
And I'm glad that the next material open positions are as far out in the future as they are now. That clearly wasn't the position that we had a year ago or even six months ago. But yes, we are marketing that all the time.
And so given your description of the market being tight, I imagine that you are enjoying these negotiations of the open marketing positions in Brazil. Would that be fair? In the sense that you're in a stronger position than you've been in quite a while. I think it's fair to say we are in a stronger position now than we have been previously um but nonetheless until they're until they're signed they're not signed and then in terms of the the uh the north sea it's my understanding that the customer is going to ramp up quite quickly that they have these wells that they have drilled in advance and that it should go up to its max capacity, like 200,000 barrels a day, one time in the mid-year to third quarter. Would that be your sense?
Yeah, we do expect it to be fairly quick, and that's the public domain information or news discussion information as well.
And that should be increasing significantly, the number of ships in the North Sea that are needed. between those two what would be what would be you think the increased demand for sure for short tankers in general in that market yeah i formed the numbers but but if you help us i mean you know a lot better than i do yeah i mean i i i'm reluctant to get i'm reluctant to guess but what um what i would say is as you're aware we've got four vessels in the north sea they're all contracted, which means that they're not available for contracting in the immediate
term to soak up that extra demand. I'd say the next vessel that is due for, that will be open is the Hilda, and she gets open again late March next year. But what you described means that we are um reasonably confident with that open position and looking to uh looking to contract this in due course but we we run a uh a time charter model as you're aware um so it's it's the operators in the uh spas or or koa um markets that will experience that uh that change yeah no but i i i the reason i think you just chartered the you chartered your most recent time charter was for one year on in the in the north sea so do you expect the conditions when you recharter that to be significantly better than what they were when you chartered that before uh there is a good
chance of that i mean i think the north sea is ramping up um more slowly than um the conditions we got in brazil um but uh yes those conditions ought to be ought to be better when we recontract oh okay so i'm just getting at the fact that there's whatever is open in the next two years you're a lot more confident about the the likelihood of chartering it and the price that you've been in let's say the last 12 to 24 months yeah that's fair comment yeah so we And today, if you annualize the first quarter, you're cash flowing somewhere between around $1.50 to $2 a share of free cash flow after debt repayment. and that'll soon go out is these things between the drop downs and those additional increased charter rates that will go up maybe to two dollars two dollars twenty two dollars fifty and i understand that getting drop downs is interesting but how does that compare to the return on investment of spending some of the additional cash and buying back shares I mean, it seems to me that it's impossible for those drop-down economics to match the purchase of shares at this price, at the current market price.
Yeah, I mean, I would say that at the moment, the board's focus is on growth in the fleet, improving the capital value position of the partnership overall, rather than…
So the board believes that it should deploy capital at a WAC of seven to eight instead of buying shares at an IRR of 25, 30 percent, 100 percent of the capital used by the firm. That's what he says the board's appropriate decision to allocate 120 percent of the capital because they're going to maybe borrow more to do the drop downs at seven to eight percent work, which is, I believe, what you must be buying the ships versus a 25% to 30% IRR on the shares? Do you think that's what the board thinks? Is that what you're saying?
Well, the board is interested in the longer-term interest.
This maintains a longer term. If your shares appreciate, you could use the shares to do more drop downs as far as cash, they're valid correctly. This is definitely in the long-term interest of the shares. What is the fiduciary duty of the board? Is it maximizing the shareholder value over the long term?
It's the valuation of the partnership overall, and that's, if anything, is going to be reduced if some of the units are bought in rather than spent on uh expanding the fleet on uh appropriate terms is it is it overall or is it percent why would they care about the whole the size of the pie rather than the type for shareholders for the shareholders well they consider both in the decisions that they make and um well they uh they're aware of the uh I feel the ability to buy back units as well. That's one of the options that's available to them, and they judge between those.
Well, I appreciate that I'm putting you here on the spot, but the message is really to the board that they do have a fiduciary duty to everyone, and the return on investment on doing the drop downs with that money is dramatically different to buying the units. and is in my opinion not in the best interest of all shareholders at least some money allocated to buybacks and i really appreciate you taking my questions seriously thank you and i i take the point you raised at the end uh and we'll uh raise it with with the board i would uh point also to the uh rather low absolute amount of trading volume in the units so uh any exercise in uh repurchasing is likely to um uh suffer in its effectiveness from low trading volume well it might raise the value of the shares and then one can use the shares for part of the drop-downs and increase the number of shares at a better price. So that is, if there's a buyback, sometimes it increases the liquidity of the shares, actually, because people know that if they need to sell for some other reason, there's a buyer out there.
Sure. No, I understand those issues as well. Yeah.
Thank you. No, I appreciate it.
Cheers. thank you our next question comes from clement mullins from value investors edge please go ahead your line is now open hi and good afternoon thank you for taking my questions most has already been covered but i wanted to ask a question on the modeling side will tops trade hawking take place in q3 or q4 oh hi comment thanks for your question um tuva is um the moment i'm seeing that in actually in jimmy oh you mean tova sorry we've got two vessels with similar names over it's uh uh i think straddling um the end of um q3 and the start of q4 perfect thank you that's helpful and over the last couple of years we've seen a number of new built orders including sacos recent transactions and i was wondering could you talk a bit about the cost advantage of a shuttle tanker new build or modern asset relative to say a 15 year old vessel i think that's quite hard to
comment on specifically we've obviously got a fleet with a range of ages um that cover the almost new through to um a good 15 plus years uh old and you can see our operating expenditure rates as well i think too you probably can't stress anything more refined than that as to the around the differences between different vessels.
Right, but like, is the eco-component something meaningful in the shuttle tanker market, or given the shortage distances, is it like a smaller factor?
I believe it's less of a factor, but we, as I say, we prefer for commercial reasons not to comment on differences between individual vessel cost or revenue. understand make sense all right that's everything from me thank you for taking my questions okay thank you thank you our next question comes from honey has the name please go ahead your line is now open hello derek how are you doing all right good thank you uh wonderful thank you uh
congratulations for an awesome uh quarter i'm looking at it right now with the increase in revenues to around like 84 annualized to 335 million which is about like 50 to 60 million in revenue above the previous years if we annualize it further so this is great but looking at the operating expenses i'm curious i have two questions first one on the depreciation uh currently it's at the rate of around 28 and three quarters uh when will that depreciation drop i mean like if we look at a depreciation table that we have we have older vessels and newer vessels, when will we see that depreciation drop to, let's say, 20 million a quarter?
I don't have a direct answer on when it would drop as quickly down to 20. The depreciation is generally on a straight line basis, not down to zero, but down to a disposal value. So it's only when we start having vessels leave the fleet that you would start to see any impact on that. And in fact, you're more likely to have the introduction of new vessels. So the lever only has one month of depreciation in there, for example, but we'll have the full quarters worth for the second quarter. It's the introduction of new vessels if we do further drop downs that's likely to have a greater influence on that figure. So with a higher fleet value, which would come from acquisitions, you would actually expect to see that depreciation figure to go up, not down.
Okay, I understand. So this depreciation, like say, for example, for the vessel that we just acquired, are we putting the depreciation over a period of like 10 years, 15 years, or do we put it to end of life, like 25 years? What numbers, what number of years do we use in our own calculations at this stage? we've got a we've got a useful life policy of 23 years and so we run it to that okay all right so that answers my question here um all right so with regards to uh the loans that we have especially the balloon payments uh i can see that we have 150 plus this year and 280 plus next year and i'm sure that you're working on refinancing those uh are we going to try to refinance them with a balloon payment at the end as well? Like a three-year finance with a balloon payment or a five-year finance with a balloon payment? I'm sure you're in the middle of negotiation. I'm not sure if you can divulge that or not, but what are you targeting at this stage?
Well, it's typical to replace like for like. So if we keep with the same structure of debt, then it would be typical to replace a three-year with another three-year. But there's no So there's no particular magic to that or no particular formula or rule about it, but we'd still expect to have a medium to long-term debt facility with desamortizations, which you can see some of on page 11, and then a lower balloon at the end of the next period. And that's been the pattern for these facilities since the vessels were purchased.
Okay. Wonderful. I think it's just a quick typo on item number three on the long-term borrowing. It says that we have an outstanding of $15 million, but there's a balloon payment of $25 million. So I think there's just a typo here.
For the revolvers, the outstanding amount is what's currently drawn, and you're right, it's $15 in that last column. my last question is actually about uh dividends uh currently we're at 2.6 cents per share um and i can see that we have a little bit of net profits there is there any uh discussion the board with regards to incremental increase in the dividends i mean like raising it up to like 15 cents or uh 20 cents uh or are we waiting until we can go back to the 52 cents that we used to get before.
Well, they're not waiting for a particular level target, if you like, as you described at the end there. What I would refer you to is the board's thinking in the outlook section of the earnings release. So the last couple of paragraphs of that cover the board's considerations around how they want to deploy capital.
I understand that's how they want to deploy capital, but also as shareholders, I think we're looking at a little bit better payout. maybe not back to the full but I mean like if we even got like a 20% and like in the capital expenditure I guess there's something for the board to discuss if the capital expenditure just use 80% to what you think we need which I agree with I don't have a problem with and 20% gets distributed versus what we're getting at this stage that's my point of view to be discussed I guess with the board at a later stage yeah well those are my questions appreciate very much Derek Great.
Thank you so much. You have a great day.
Operator
Thank you. That does conclude our Q&A session for today, so I'll hand back over to Derek for closing remarks.
Thanks, Maxine, and thank you all again for joining this earnings call for Knott Offshore Partners first quarter in 2025, and I look forward to speaking with you again following the second quarter results, and also at the Marine Money Conference in New York over the 16th to 18th of June.
Operator
Thank you. This does conclude today's call. Thank you for joining. You may now disconnect your alarm.
