KNOT Offshore Partners LP: Can Investors Count on This 12.3% Yield?
A High-Yield Stock Most People Have Never Heard Of
In today’s low-yield economic environment, a stock that pays 12.3% in distribution yield may seem too good to be true. But it is happening: just take a look at KNOT Offshore Partners LP (NYSE:KNOP).
Structured as a master limited partnership (MLP), KNOT Offshore Partners is in the shuttle tanker business. Right now, it has a fleet of 16 vessels designed to transport crude oil and condensates from offshore oil field installations to onshore terminals and refineries. (Source: “Our Fleet,” KNOT Offshore Partners LP, last accessed February 16, 2021.)
The shuttle tanker business is a bit of a niche in the vast energy world, but the business can provide a solid income opportunity for investors. In particular, the business has high barriers to entry due to the specialist nature of the asset, the capital costs, and the need for an operating track record. Moreover, KNOT Offshore Partners operates through fixed-rate contracts that do not depend on short-term oil prices—and the customer bears vessel utilization risk and all operational fuel costs.
If you’ve been following the energy sector, you’d know that the ups and downs in oil prices over the past several years have led to plenty of energy companies cutting their dividends. However, KNOT Offshore Partners was not one of them. In fact, the partnership has paid either steady or increasing distributions ever since it went public in 2013. (Source: “Distribution Policy & History,” KNOT Offshore Partners LP, last accessed February 16, 2021.)
That’s right, even the economic impact from the COVID-19 pandemic—and the resulting oil price downturn—did not make this little-known energy stock reduce its payout.
Today, KNOP stock has a quarterly distribution rate of $0.52 per unit, which translates to an annual yield of 12.3%.
Of course, as I mentioned earlier, a double-digit yield in the current market environment can look too good to be true. The main reason is dividend safety, or rather the lack of it, among ultra-high yielders.
So let’s check if KNOT Offshore Partners can actually afford its oversized cash payout.
According to its latest earnings report, the company generated $28.9 million in distributable cash flow in the third quarter of 2020. The actual declared distributions, on the other hand, totaled $18.0 million for the quarter. That resulted in a distribution coverage ratio of 1.6 times. (Source: “KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended September 30, 2020,” KNOT Offshore Partners LP, November 18, 2020.)
In other words, the partnership earned 60% more cash than needed to meet its distribution obligations. Among the high-yield stocks in the energy world, that was a fairly wide margin of safety.
In the company’s earnings conference call, KNOT Offshore Partners’ chief executive officer, Gary Chapman, said, “We maintained our quarterly distribution of $0.52 for the 25th consecutive quarter. We have $595 million remaining contracted forward revenue excluding options at the end of the quarter. The [partnership’s] operations are not exposed to short term fluctuations in oil prices, the volume of oil transported or global storage capacity.” (Source: “KNOT Offshore Partners LP (KNOP) CEO Gary Chapman on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, November 19, 2020.)
Bottom Line on KNOT Offshore Partners LP
Ultimately, remember that past performance is no guarantee of future results, and that the energy sector still faces uncertainty. So investors should take this risk into account when considering energy stocks.
That said, KNOT Offshore Partners LP has demonstrated its resilience through reliable distributions since its inception. If the partnership can continue that track record, it would make KNOP stock one of the few double-digit yielders worth considering in today’s market.