The Maritime MLP That's Too Expensive For This Analyst

In a report issued Tuesday, analyst Matthew Phillips explained that the main reasons behind the demotion of KNOT Offshore Partners from Buy to Neutral are “significantly slower growth profile and continued headwinds in the offshore space.”

In addition, the firm cut its price target on the belief that the stock will be range-bound at the current growth expectations.

The Downgrade

The analyst recognized KNOT’s solid coverage (~1.30x run-rate) and sees a few drop-down opportunities. However, the firm also believes the company’s growth is slowing, “as the two main shuttle tanker basins (North Sea & Brazil) have seen major capex cuts and diminished production expectations” – which could lead to a reversion in the recent outperformance seen versus AMZ.

Related Link: KNOT Offshore Partners LP Announces Entry Into An Agreement To Acquire The Dan Sabia

The company has five more vessels in their drop-down fleet (versus a current fleet of 10). However, the note expounded, if the drop-downs are executed at 10x (like the Dan Sabia and Ingrid Knutsen transactions were), and taking into account that the next drop-down will probably need equity funding, “they won't be able to grow the distribution at an attractive rate given the current share valuation.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.