After a 60% Gain in Two Months, Can This Name Sail Higher?

What the heck is going on in the shipping industry? Earlier this month, I alerted readers about this red hot, often forgotten sector.

In the three weeks since then, my top holding in that sector, KNOT Offshore Partners KNOP, an Aberdeen, U.K. based limited partnership, has gained nearly 10%. Over the past two months, KNOT Offshore has climbed an astonishing 60%.

KNOT Offshore is rising on heavy volume (shaded yellow), despite a lack of any real news since the company reported earnings last month. On average, volume on bullish days (green) has been higher than on bearish days (red).

KNOT’s rising 50-day moving average (blue) recently crossed above its rising 200-day moving average (red), creating a bullish momentum indicator known as a golden cross (arrow). While the effectiveness of this particular formation is debatable, there’s no question that the stock’s moving averages are sorting themselves into the proper order for a bullish move. 

In late May, KNOT reported earnings of 21 cents per share, well ahead of the estimated loss of 6 cents. Revenues climbed by nearly 10%.

Those are solid numbers, but they hardly explain why shares of this tiny shipping company, with a market capitalization of just $271 million, are soaring. I find the lack of news on KNOT intriguing, because companies that roar higher for no apparent reason often follow with a positive announcement.

In the case of KNOT Offshore, there are several possible reasons:

Potential Distribution Increase

Due to tax laws, publicly traded master limited partnerships like KNOT Offshore generally offer high yields. Because of their high volatility, MLPs shouldn’t be considered substitutes for bonds.

From October of 2015 through October of 2022, KNOT Offshore offered a quarterly distribution of 52 cents per share. In early 2023, that payout was slashed to just 2.6 cents per share, a reduction of 95%.

Now that the company’s earnings and revenues have improved, perhaps an increased payout is on the horizon.

Business Conditions

At the time of the distribution cut in 2023, KNOT Offshore CEO Gary Chapman blamed poor market conditions in the North Sea and Brazil. Those two deep-sea oil production regions are crucial to KNOT’s business. Chapman referenced multiple drydocks and a “temporary but material reduction in vessel utilization rates and income”.

Now, the Brazilian market is showing strength, and new fields are coming online in the North Sea. Shipping rates are higher in general, in part due to continued disruptions in the Red Sea. In short, business conditions have improved. 

Potential M&A Activity

Within the past year, there have been numerous mergers and acquisitions in shipping and in related sectors. Many companies have taken themselves private.

It’s no myth that Atlas Corp. was acquired by Poseidon Acquisition Corp. last year. Eagle Bulk Shipping and Star Bulk Shipping also announced a merger last year. Navios Maritime Holdings also was acquired. This is just a partial list.

Is a buyout in the cards for KNOT Offshore? While we have no information to that effect, the company’s tiny market capitalization makes it an intriguing target. 

At the time of publication, Ponsi was long KNOP.