Earnings Call Transcript
KNOT Offshore Partners LP (KNOP)
Earnings Call Transcript - KNOP Q1 2025
Operator, Operator
Hello, and welcome, everyone, to the KNOT First Quarter 2025 Earnings Call. My name is Maxine, and I'll be coordinating the call today. I will now hand you over to Derek Lowe, Chief Executive Officer. Please go ahead.
Derek Lowe, CEO
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 KNOT Offshore Partners. Welcome to the Partnership's earnings call for the first quarter of 2025. Our website is knotoffshorepartners.com, and you can find the earnings release there along with this presentation. On Slide 2, you will find guidance on the inclusion of forward-looking statements in today's presentation. These are made in good faith and reflect 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 GAAP measures, and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures. On Slide 3, 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% utilization, taking into account the start of two dry dockings, which amounts to 96.9% utilization overall. Following the end of Q1, we declared a cash distribution of $0.026 per common unit, which was paid in early May. On to Slide 4. Our outlook remains positive on both industry dynamics and the partnership's 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 Castberg FPSO started production following shortly after the Penguins FPSO back in February. On the vessel supply front, we are seeing continued newbuild orders placed to service the large new production volumes coming online in the years ahead. This includes for our sponsor, Knutsen NYK, whose most recent order was placed in March. A measured amount of new shuttle tanker ordering is unavoidable and in fact, necessary as a shortage of shuttle tanker capacity remains projected in the coming years. As usual, for the shuttle market, we believe that all known newbuild orders are backed by firm client charters, which minimizes or even eliminates a dynamic of speculation around anticipated supply into the 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. Transfer 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 cash generation and liquidity balance is sufficient for our operations and the significant paydown rate for our debt, which is in the region of $90 million per year for installment payments. The debt from the Live acquisition fits in with this repayment profile also. On Slide 5, 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 Live Knutsen. Slide 6 contains additional details on that vessel swap, which is explained further in our Form 20-F filing as a subsequent event in our 2024 annual report. On Slide 7, our most recent developments include the Hilda Knutsen going on hire with Shell in late March on a 1-year fixed charter, the addition of one vessel to our potential drop-down inventory, which is the newbuild order I mentioned earlier. And the current charter for Brazil Knutsen has also been extended to September when she will be redelivered from PetroRio and then delivered out to Equinor. On to Slide 8, you can see consistent and growing revenues over the quarters and years, along with improving profitability. Slide 9 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 show the change in our balance sheet from the end of 2024 to the 31 of March 2025. The main point to note there is that even after the assumption of $73 million of debt from the Live 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 Slide 11, which sets out the maturity profile. On Line 1, the first of our revolving credit facilities is due to mature in August 2025. And on Line 2, the loan secured by Tove Knutsen and Synnove Knutsen 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 we have a good track record of refinancing success even in less favorable 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 installments 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 installments 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 this debt 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 Knutsen'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 tight 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 sponsors' inventory of vessels which are eligible for purchase by the partnership. This applies to any vessel owned by or an 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 assurance 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-down supportive of long-term cash flow generation. On Slides 16 to 18, we have provided some useful illustrations of the strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras' 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 newbuild contracts are for our sponsor, Knutsen NYK, that are due for delivery over late 2025 to early 2028. We would not be surprised to see further newbuild 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-salt continues to outpace the overall market and take market share. On Slide 19, we provide information relevant to our US unitholders, in particular, those seeking a Form 1099. Those holding units via their custodians or brokers should approach those parties directly. Those with directly registered holdings should contact our transfer agent, Equiniti Trust Company, whose details are shown there. On Slide 20, we include some reminders of the strong 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 and the subsequent time and our current outlook. We're glad to have delivered high and safe utilization, 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 Live Knutsen. Our continued commercial focus remains on adding to our longer-term charter visibility and the cash flows that provide us with the capacity for both accretive investment in the fleet and a long-term sustainable distribution. In the coming months, we will also be addressing the four refinancings which are coming due this year. In total, though, we are making good progress and 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.
Operator, Operator
Our first question today comes from Liam Burke from B. Riley Securities. Please go ahead, Liam. Your line is now open.
Liam Burke, Analyst
Thank you. Hi, Derek. How are you today?
Derek Lowe, CEO
Okay. Good, thank you.
Liam Burke, Analyst
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.
Derek Lowe, CEO
Sure. Well, 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 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.
Liam Burke, Analyst
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?
Derek Lowe, CEO
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 at 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.
Liam Burke, Analyst
Sure. Thank you, Derek.
Derek Lowe, CEO
Thanks, Liam.
Operator, Operator
Our next question comes from Jim Altschul from Aviation Advisors. Please go ahead, Jim. Your line is now open.
Jim Altschul, Analyst
Good afternoon. Thank you for taking my question. Based on the news release, it looks like the various interest rate hedges you currently have will all expire by sometime next year. What will be the impact on the bottom line once these interest rate hedges end?
Derek Lowe, CEO
Thanks, Jim, for your question. The average maturity is 1.5 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.
Jim Altschul, Analyst
Well, but if you're putting new ones in place, you're certainly not going to be at 2.5% or 2.8%, the way you have now.
Derek Lowe, CEO
That's correct. If you look at the swap rate compared to SOFR over a period of two to five years, it provides insight into the current market fixings. This market level fluctuates rapidly, but we are ready to establish new swaps when we identify a favorable rate.
Jim Altschul, Analyst
Good. I have a related question. I don't have the balance sheet in front of me, but I believe you have around $600 million or maybe $900 million in long-term debt. Regardless, how much of that long-term debt is covered by the different interest rate swaps?
Derek Lowe, CEO
That's described in the release directly under the debt maturity profile. You asked about our long-term debt. The total debt burden we have is $948 million as of the end of March. Of that, $932 million is in secured debt facilities, and the remainder is the amount drawn down on our RCF. In the paragraphs below, you can see how our interest rate swap portfolio covers that in various portions. I would also mention that the sale and leaseback facilities we have are at fixed rates, so we consider those part of our effectively fixed cost portfolio.
Jim Altschul, Analyst
Okay. Well, thank you very much.
Derek Lowe, CEO
Great. Thank you, Jim.
Operator, Operator
Our next question comes from Pavel Oliva from Rockhill Global. Please go ahead. Your line is now open.
Pavel Oliva, Analyst
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 afterward. 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 Anna, Tordis, Vigdis, Brasil, and Lena Knutsen. Is that correct? Is that the one that's getting refinanced?
Derek Lowe, CEO
No, that's September next year, 2026. So on Slide 11, that's...
Pavel Oliva, Analyst
So it's the Windsor, Bodil, Carmen, Fortaleza, Recife, and Ingrid, right?
Derek Lowe, CEO
No, that's 2028. If you look at Slide 11 in the presentation, you'll see them in time order. We have two unsecured revolving credit facilities due between August and November, with a total capacity of $50 million. Additionally, the secured loans for Tova and Synnove are due in September and October, totaling $139 million at that point.
Pavel Oliva, Analyst
I see. Okay. And how old are those ships? I'm trying to figure that out. Those are some of the new ones, right?
Derek Lowe, CEO
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 filings just to get that timeframe.
Pavel Oliva, Analyst
And so can I ask you in terms of what kind of loan-to-value are these at this point? Because you have been making pretty aggressive repayments.
Derek Lowe, CEO
Yeah. 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.
Pavel Oliva, Analyst
Can I ask you, when you're doing loan-to-values and 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 banks?
Derek Lowe, CEO
Sorry, I'm not sure I follow the question.
Pavel Oliva, Analyst
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?
Derek Lowe, CEO
I generally use the mark-to-market value. So it's a broker valuation. And about the covenants in the loans...
Pavel Oliva, Analyst
Is it fair to say that given the tight market in Brazil, the value of the ships has gone up?
Derek Lowe, CEO
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 vessel 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 20-F.
Pavel Oliva, Analyst
So where I'm getting at is I'm trying to understand, 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, if you can get further advance on these ships and basically get some cash through refinancing to speed up the dropdowns.
Derek Lowe, CEO
Yes, if that’s your main interest in the topic, then we believe there is potential to increase proceeds through refinancing, which would generate liquidity. However, that would also mean taking on more debt on the balance sheet and facing increased amortization rates.
Pavel Oliva, Analyst
Right. And then my other question was about the two ships that will come up 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?
Derek Lowe, CEO
I think it's best for you to form your own conclusions about that. We do not provide comments on individual contract rates. It's important to note that contract levels are established at the time they are signed, which may have been in the past, or in the case of extensions, when those extensions are signed. We also provide quarterly disclosures regarding new contracts. Therefore, I would have to leave it to you to deduce the current rates for those vessels and what the present or future markets might look like.
Pavel Oliva, Analyst
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?
Derek Lowe, CEO
I think it's best for you to form your own conclusions on that. However, if you examine when any specific contract was signed and the announcement made in the following quarter, that should help you determine how to assess those rates.
Pavel Oliva, Analyst
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?
Derek Lowe, CEO
It's the latter. It's just the absolute numbers that came through.
Pavel Oliva, Analyst
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?
Derek Lowe, CEO
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.
Pavel Oliva, Analyst
And like the other circumstance would be that the new ships are $120 million or $140 million depending on Brazil or the 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?
Derek Lowe, CEO
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.
Pavel Oliva, Analyst
Understood. Okay. And how long does it take in general to drop down a ship?
Derek Lowe, CEO
And what? From start to finish of the transaction process, do you mean?
Pavel Oliva, Analyst
Yeah.
Derek Lowe, CEO
And I would say that's two to four months.
Pavel Oliva, Analyst
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, even the revolving credit facility may be extended, et cetera. This may not be a bad time to drop down some of those ships, right?
Derek Lowe, CEO
We typically announce drop-down transactions at the time they are finalized, which usually coincides with the closing time. This is our standard practice, as that is when the transactions become significant, and therefore, we need to make an announcement. Before that point, we refrain from making any further comments.
Pavel Oliva, Analyst
Last one or two drop-downs. How much cash or value, you did the swaps with Dan Sabia and then Cisne. 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?
Derek Lowe, CEO
Sure. I believe it’s on Page 6 of this presentation and a similar page in the Q2 or Q3 presentation from last year. It is definitely in the filings, but to summarize, those two were vessel swaps instead of purchases of the new, larger drop-down vessels. The valuation of the two vessels, Sabia and Cisne, was approximately $30 million. You will need to check the filings for the exact numbers, and the deal summaries also outline these figures further. However, that gives you an approximate valuation where the cash portion of the consideration was very low in comparison, around $1 million in either direction. One transaction had that amount going one way and the other transaction had it going the other way. Thus, the cash element in these cases was minimal compared to the overall value.
Pavel Oliva, Analyst
Negligible. But the value was about $30 million.
Derek Lowe, CEO
You can see on Page 6 that the Sabia sale price was $25.75, and for the Cisne, it was above that.
Pavel Oliva, Analyst
The ships going forward will likely be slightly higher in cost. For the three or four ships that are ready to be deployed, you probably need around $30 million or $35 million per ship.
Derek Lowe, CEO
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 higher number there for the equity component.
Pavel Oliva, Analyst
Understood. The latest drop-down occurred in March, so we will only see the full impact of that in the second quarter. That transaction was accretive, which suggests that the free cash flow run rate should be slightly higher in the second quarter compared to the first. Would that be a fair statement?
Derek Lowe, CEO
Yes, as it relates to that aspect of the fleet. Yeah.
Pavel Oliva, Analyst
Okay. Understood. Okay, well, thank you very much. Great quarter. Really appreciate it.
Derek Lowe, CEO
Thank you, Pavel. Cheers.
Operator, Operator
Our next question comes from Robert Silvera. Please go ahead. Your line is now open.
Unidentified Analyst, Analyst
Hi, 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 roughly $3 million. Could you give me a wrap-around as to why that took place during this last quarter?
Derek Lowe, CEO
Sure. If you listen to the replay later, you'll find some additional comments on that topic, but I can go over them now. The vessel swap we executed in March included taking on $73 million in debt as part of the deal. However, our long-term debt balance for the quarter increased by much less, only $47 million. So, while the long-term debt has indeed risen, it's mainly due to the transaction. The difference of $26 million illustrates our ability to pay down debt across all our facilities where we make amortization payments. On Slide 11, you can see the third column of figures totaling $96 million, which represents our current forecast for cash debt amortization over the next year. We provided that figure intentionally to highlight our capacity for debt service in terms of amortization and our ability to repay it.
Unidentified Analyst, Analyst
Thank you. That involves what, one ship dropdown?
Derek Lowe, CEO
The March transaction, yes. That's right.
Unidentified Analyst, Analyst
That was one ship dropdown, one, a single ship.
Derek Lowe, CEO
It was a single ship drop-down, but it was a vessel swap actually. So we sold our Dan Sabia and we bought Live Knutsen.
Unidentified Analyst, Analyst
Good. Okay, well thank you very much for taking my call. And looks good and hopefully, in the future, the dividend can go back toward the old days when it was $0.51 a share. We'll talk to you later. Thank you.
Derek Lowe, CEO
Great. Thanks for your question.
Operator, Operator
Our next question comes from Mario Epelbaum from First New York. Please go ahead, Mario. Your line is now open.
Mario Epelbaum, Analyst
Hi, I was on mute, sorry. Can you hear me now?
Derek Lowe, CEO
Yes, I can. Thanks.
Mario Epelbaum, Analyst
Thank you for the opportunity to ask questions. I would like to inquire about the Raquel with Repsol. When is the charter expected to end, or when is the option to renew? I am unable to see the date.
Derek Lowe, CEO
The final end of the option is in 2030. But do you mean the current option?
Mario Epelbaum, Analyst
Yeah.
Derek Lowe, CEO
The current fixed period finishes around the end of June and then the option runs until the same time in 2030.
Mario Epelbaum, Analyst
Okay. So you're 1.5 months in, and how is the renewal with Repsol looking? Is there an expectation for an increase in the charter rate, or do they typically have the option to maintain the same rate upon signing? Can you provide any insights on what generally occurs during renewals?
Derek Lowe, CEO
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.
Mario Epelbaum, Analyst
And in general, when you remove the charter value one month in advance? Or is this unusually late that you have not been known to?
Derek Lowe, CEO
It's not unusually late, which can be a bit frustrating. Any vessel owner or operator in this space would prefer more notice. However, it's common practice for the deadline to be relatively close, and many clients tend to make their decision late on whether to exercise or not. Based on current market rates and the need for shuttle service, I'm not particularly concerned about the exercise. But the sooner it happens, the happier we will be.
Mario Epelbaum, Analyst
Thank you for that. My second question is about comparing the first and second quarters, specifically regarding the dry dockings. How do the first quarter dry dockings compare to those in the second quarter?
Derek Lowe, CEO
Well, the two that are relatively current. And the vast majority of their work was after the start of the second quarter. We're clearly six weeks or so or seven weeks into the second quarter now, and that much of that work fell in April rather than in March. I realize on Page 13 that 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.
Mario Epelbaum, Analyst
When comparing the second quarter to the first quarter, we anticipate having an additional ship, but we also have some extra dry dockings. These factors are significant when assessing the cash flow comparison.
Derek Lowe, CEO
Yeah, that's fair enough.
Mario Epelbaum, Analyst
Would that be fair?
Derek Lowe, CEO
Yeah.
Mario Epelbaum, Analyst
Okay. And then with Fortaleza and Recife, these ships that you have that are coming up in 2026, are you engaged already with other parties in discussions of potential...
Derek Lowe, CEO
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.
Mario Epelbaum, Analyst
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?
Derek Lowe, CEO
I think it's fair to say we are in a strong position now than we have been previously. But nonetheless, until they're signed, they're not signed.
Mario Epelbaum, Analyst
Great. And then in terms of the North Sea, it's my understanding that the production is ramping 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 sometime in the midyear to third quarter. Would that be your sense?
Derek Lowe, CEO
Yeah, we do expect it to be fairly quick, and that's public domain information or new discussion information.
Mario Epelbaum, Analyst
That should significantly increase the number of ships needed in the North Sea. Considering those factors, what do you think about the overall increased demand for shuttle tankers in that market from the North Sea? You have a better understanding of this than I do.
Derek Lowe, CEO
I'm hesitant to make a prediction. However, I can say that we currently have four vessels in the North Sea, all of which are contracted and therefore not available for immediate contracting to meet the extra demand. The next vessel set to become available is the Hilda, which will be free again in late March next year. Given the situation you mentioned, we feel reasonably confident about that upcoming availability and plan to contract it at the appropriate time. As you know, we operate under a time charter model, so the operators in the North Sea market will be the ones to feel that demand change.
Mario Epelbaum, Analyst
Yeah, the reason you recently chartered for one year in the North Sea is understood. Do you expect the conditions when you recharter that to be significantly better than they were when you first chartered it?
Derek Lowe, CEO
There is a good chance of that. I mean I think the North Sea is ramping up more slowly than the conditions we got in Brazil. But yes, those conditions ought to be better when we recontract the Hilda.
Mario Epelbaum, Analyst
So I'm pointing out that whatever opportunities arise in the next two years, you feel much more assured about securing contracts and the pricing compared to what you've experienced in the last 12 to 24 months?
Derek Lowe, CEO
Yeah, that's fair.
Mario Epelbaum, Analyst
So today, if you annualize the first half and the first quarter, you're cash flowing somewhere between $1.50 to $2 a share of free cash flow after debt repayment. That amount could increase to $2, $2.20, or $2.50 with the drop-downs and higher charter rates. I recognize that drop-downs can be appealing, but how do they compare to the return on investment of using some of the extra cash for share buybacks? It seems to me that it's unlikely those drop-down economics could match the value of purchasing shares at the current market price.
Derek Lowe, CEO
Yeah. I mean, I would say at the moment, the Board's focus is on growth in the fleet, improving the capital value position of the partnership overall rather than on share buybacks.
Mario Epelbaum, Analyst
The Board believes it should invest capital at a WACC of 7% to 8% rather than repurchasing shares at an IRR of 25%, 30%, or even 100% of the firm's capital. Is that the Board's decision to allocate 120% of the capital because they might need to borrow more for the drop-downs at the 7% to 8% WACC? I believe this implies they are prioritizing purchasing ships over achieving a 25% to 30% IRR on shares. Is that the Board's view? Is that your perspective?
Derek Lowe, CEO
The Board is interested in the longer-term interest exposure.
Mario Epelbaum, Analyst
Well, this is a longer-term as well. This maintains the longer term. If your shares appreciate, you could use the shares to do more dropdowns if they valued 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?
Derek Lowe, CEO
It's the valuation of the partnership overall. And that, if anything, is going to be reduced if some of the units are bought in rather than spent on expanding the fleet on appropriate terms.
Mario Epelbaum, Analyst
Is it overall or is it per share? Why would they be concerned about the overall size instead of what it means for the shareholders?
Derek Lowe, CEO
Well, they consider both in the decisions that they make. And they are aware of the ability to buy back units as well. That's one of the options that's available to them, and they judge between those.
Mario Epelbaum, Analyst
Well, I appreciate that putting this 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 than buy 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 here.
Derek Lowe, CEO
And I take the point you raised at the end, and we'll raise it with the Board. I would point also to the rather low absolute amount of trading volume in the units. So any exercise in repurchasing is likely to suffer in its effectiveness from low trading volume.
Mario Epelbaum, Analyst
Well, it might raise the value of the shares and then one can use your shares for part of your dropdowns 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.
Derek Lowe, CEO
Sure. No, I understand those issues as well.
Operator, Operator
Thank you. That does conclude our Q&A session for today. So I'll hand back over to Derek for closing remarks.
Derek Lowe, CEO
Thanks, Maxine, and thank you all again for joining this earnings call for KNOT 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 16 to 18 of June.
Operator, Operator
Thank you. This does conclude today's call. Thank you for joining. You may now disconnect your lines.