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Alternative Investment

Knot Offshore Partners Is a Terrific Alternative Energy Trade

I wanna make bank, bro. Will Ferrell’s Brennan uttered those words in Step Brothers, as he is trying to curry favor with his step-brother-in-law (or something like that) Derek, played magnificently by Adam Scott.

As the market rallies today, I am advising my clients to sell into this strength and to harvest tax losses on their legacy positions this week. It’s the opposite of “making bank,” but it does help keep the taxman at bay, and that is a worthy pursuit.

Like Brennan Huff, I am on a different wavelength than the Dereks of this world, and their horrible market analysis. The most infamous call in 2022 was “Netflix! BUY! as (NFLX) skids to a 55% ytd decline. Another great idiotic utterance of 2022 was “Elon Musk is unassailable” as (TSLA) has sputtered to a 69% ytd decline.

That’s the problem with listening to the hucksters and the grifters of this market. They just have no clue what Professional Investors are doing, because, like the old commercial said, they only play them on TV

I, on the other hand, am an investor for my individual clients, and I take that responsibility incredibly seriously. I see zero attractive US-based common stocks outside the energy sector these days, and my HOAX portfolio is still holding a 50% ytd gain, while its benchmark, Cathie Wood’s (ARKK) , sputters to a 69% decline on the year.

But, as my clients and subscribers know, I never stop. It’s not in my DNA. Unlike the professional ganifs at certain investment banks, I want all my clients to “make bank.”

This week, I started yet another model portfolio, LOCO. These are proprietary to my firm, Excelsior Capital Partners, so I can’t divulge fully LOCO’s composition. As I have done in the past, though, I will give you one name.

Knot Offshore Partners (KNOP) is a Limited Partnership that is yielding a mere…22.5%. Not a typo. Wait, doesn’t that mean the market is telling you KNOP will cut its distribution? No, it means the market thinks KNOP will cut its distribution. That is an important difference.

Knot did not earn its LP distribution in 3Q22, and management’s earnings presentation was full of cautious tones given difficulties the company is having in finding employment for Knot Offshore’s four shuttle tankers that are based in the North Sea.

It absolutely would not surprise me if KNOP lowered its quarterly distribution of $0.56. That said, KNOP has paid at that level since 4Q15, and thus made no change to the payout during the Covid Crash

My clients are thinking that even if KNOP cuts its dividend in half, it would still be yielding 11%, and that is enough for us to find interest in the name. Neither BUY! Netflix nor Tesla, run by the unassailable Elon Musk, has ever paid a dividend.

That’s analysis, and that’s portfolio management. ExCap runs on a no-tears policy. I numerically assess risks and invest based on those calculations. If things don’t work as planned, I can and do change them.

But I understand the concept of deep value in the presence of megatrends. KNOP has an incredibly strong sponsor in shipping giant Knutsen NYK. NYK has a reason to keep KNOP viable, as it is a conduit for “drop down” of shuttle tankers onto KNOP’s balance sheet from the parent. That is a tax-efficient capital structure.

As the market freaks out about KNOP’s four ships in the North Sea, I am salivating over the cash flows that KNOP will generate from the balance of its fleet, the much larger cohort of 14 ships that are operating in waters offshore Brazil.

I have spent so much time in South America this year, I’m in Peru today, that I have gained an understanding of the bountiful supply of crude that lies in the deep waters off its shores. Deepwater means running pipelines to those rigs and FPSOs (floating production system) are inherently difficult. Using shuttle tankers, on the other hand, grants the oil majors optionality cargo destinations, while pipelines are by definition “point-to-point.”

Damn, that’s a good story! Now KNOP just needs to find the cash flows to back it up. No matter where KNOP’s Board sets its quarterly payout, the long-term supply and demand balance is still very much in favor of KNOP’s fleet of shuttle tankers.

That’s how we are rolling at EXCap into 2023. Almost zero exposure to the incredibly-stretched global consumer, and in constant search of new energy and energy-related ideas. It is just too damn expensive to keep buying Exxon (XOM) every day, although that trade has worked consistently this year.

So then, KNOP is a core member of my 10-name LOCO portfolio. I gave the portfolio that name because its blended average yield of 11.61% seems insane. It’s not. It is only the markets — and certain market commentators — that display insanity. The rest of us make bank by taking the other side of their trades.

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