KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Good day and welcome to the Not Offshore Partners Second Quarter 2020 Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Gary Chapman, CEO. Please go ahead.

Thank you. Welcome, everybody. As always, the earnings release and slide presentation are both available through our website. Not Offshore Partners owns and operates Shuttle Tankers, where our ships transport oil from offshore production units to shoreside and are an essential part of the supply chain for our customers. all of whom are large names in the oil and energy markets. Our call today will include the non-US GAAP measures of distributable cash flow and adjusted earnings before interest tax depreciation and mortisation, EBITDA. The earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures, and please remember that any forward-looking statements made during today's call are subject to risks and uncertainties, and these are discussed in our annual and quarterly SEC findings. Actual events and results can differ materially from those forward-looking statements, and the partnership does not undertake a duty to update any forward-looking statements, and I refer you to slide 2 and our 2019-20F for further details. On to slide 3, Q1, Q2 2020, financial highlights and recent events. We continue to operate our fleet without any material disruption as a result of COVID-19, coronavirus, and you'll find more information in our earnings release related to this topic. I think it's worth saying that we're reporting this quarter one of the best sets of results of the partnership. We generated total revenue of £70.3 million, operating income of £33.4 million, and net income of £21.7 million, and more comparably quarter by quarter, adjusted EBITDA of £55.8 million. We ended with distributable cash flow generated of 30.7 million, giving a distribution coverage ratio at the end of the quarter of 1.70 times, and we again maintained our cash distribution of 52 cents per common unit, returning an annual yield of quite remarkably around 16% based on a $13 unit price. During the quarter, the fleet operated with 99.7% utilization for scheduled operations and there were no dry docks this quarter and there were none planned for the remainder of 2020. Shell in the end chose not to exercise their option on the Windsor Knutson and whilst the vessel is still with Shell today we expect that it will be re-delivered to the partnership sometime between mid-September and mid-December 2020 in accordance with the re-delivery provisions in the Charter. The partnership is currently looking at all options to re-charter the vessel and we're talking to a number of potential parties, including the sponsor. On slide four, the income statement. For this second quarter of 2020, we recorded total revenues of 70.3 million compared to 67.2 million for the first quarter of 2020. The increase was almost entirely related to the effect of Raquel Knutson's scheduled RIDOC in the first quarter. Lethal operating expenses for the second quarter of 2020 were 13.1 million a decrease of 2.5 million over the first quarter of 2020. This decrease was mainly the net result of lower operating expenses across the fleet in this second quarter and favourable movements in the Norwegian kroner US dollar exchange rate. Depreciation was essentially flat at 22.5 million for the second quarter compared to first quarter at 22.4 million. Similarly, Admin and general expenses were £1.3 million compared to £1.4 million in the first quarter. Overall, this caused operating income to rise to £33.4 million in the second quarter compared to £28.4 million in the first quarter of 2020. Interest expense for quarter two was £8.5 million, a decrease of £2 million from £10.5 million in quarter one. the decrease again being driven by lower LIBOR on average across all credit facilities that are not hedged. Realised and unrealised losses on derivative instruments were 3.1 million in the second quarter compared to a loss of 23.7 million in the first quarter. The unrealised non-cash element of the mark-to-market loss was 2.8 million for the second quarter of 2020 compared to a loss of 23.9 million for the first quarter of 2020. Of the unrealised loss for the second quarter of 2020, 3.5 million is related to a mark-to-market loss on interest rate swaps due to a decrease in US dollar rates, and a gain of 0.7 million is related to foreign exchange contracts. Slide 5, adjusted audit dark. You'll see an incredibly consistent adjusted EBITDA on this slide and again in the second quarter the partnership generated adjusted EBITDA of 55.8 million compared to 50.8 million in the first quarter. The difference again arising mainly as a result of Raquel Knutson's scheduled dry dock in the first quarter. Adjusted EBITDA is a proxy for cash flow referring to earnings before interest, tax depreciation, amortization and other financial items. And please do refer to the notes at the bottom of the slide. Slide six, distributable cash flow or DCF is another non-US GAAP financial measure and another very consistent measure for the partnership. DCF was 30.7 million in the second quarter in comparison to 24 million in the first quarter. And the distribution cover at the end of quarter two as stated was 1.70. The increase over the first quarter relates to Raquel Knutson's schedule dry dock in that first quarter but also to our careful management of the business, helped also by some favourable shifts in interest costs and exchange rates. In the quarter, we again maintained our distribution level at 52 cents per unit, equivalent to an annual distribution of $2.08. And again, please do refer to the notes at the bottom of the slide. Slide seven on the balance sheet. At the end of the second quarter, the partnership had 70.1 million in available liquidity, which consisted of cash and cash equivalents of 41.4 million, and we still retain 28.7 million of capacity under our revolving credit facilities. The revolving credit facilities mature in August 21 and September 2023, and otherwise, K&OP has no other refinancing falling due until the end of 2021. The partnership's total interest-bearing debt outstanding as of June 30, 2020, was £960 million down from £984 million at the end of the first quarter of 2020 and the average margin paid on the partnership's outstanding debt in this quarter again stayed the same as last quarter at approximately 2.1% over LIBOR. At the end of the second quarter the partnership had entered into various interest rate swap agreements for a total notional amount of £627 million down from £634 million at the end of last quarter. The hedge against the interest rate risks of its variable rate borrowings. Based on this in the quarter, we received interest based on three- or six-month libel and paid a weighted average interest rate of 1.74% under the interest rate swap agreements, which have an average maturity of approximately 3.6 years. We don't supply hedge accounting, so our financial results are impacted by changes in the market value of these financial instruments. However, cash flow is stabilised by them, mitigating interest rate risk on distributable cash flow. Slide 8, an update on our long-term contracts. For the Windsor Knutson, as stated at the outset, Shell in the end chose not to exercise their option of the Windsor Knutson and we expect that the vessel will be re-delivered sometime between mid-September and mid-December 2020 in accordance with the flexible re-delivery provisions in the Charter. These free delivery provisions are typical and just allow the charterer to complete a charter at an appropriate operational time rather than, say, mid-voyage. The partnership is currently looking at all options to recharter the vessel and we're talking to a number of potential parties, including the sponsor, not just for operations in Brazil, but also for potential deployment elsewhere. Bodil Knutson is our largest shuttle tanker operating in the North Sea and is still on charter to Equinor until May 2021. Equinor then have three further one year annual extension options. Toril Knutson and Hilda Knutson both operate on the Goliath Field in the Barents Sea. After initial five year terms on both vessels, the Hilda time charter extended for four more years to 2022 and then has further options to extend the charter by three more one year periods until 2025. The Charter of Toril has taken two of its one-year extension options to extend the time charter until November 2022 and then has further options to extend the Charter by two more one-year periods until 2024. Dansadia, Dansistna, Fortaleza and Recife Knutson remain on long-term bare-boat charters through to 2023 with Petrobras Transpetro. Salmon Knutson and Raquel Knutson are on charter to Repsol Sinopec until 2023 and 2025 respectively and with options to extend until 2026 and 2030 also respectively. The Ingrid Knudsen is on time charter until 2024 with VAR Energy, with charters options to extend by up to five more one-year periods. Tordis, Vigdis and Lena Knudsen are on five-year charters to Brazil Shipping, subsidiary of Shell. These will expire in 2022 and the charter has options to extend for up to a further 10 years on each vessel. The Brazil and Anaknutsen are on charter to gulp energy into 2022 with charter's options to extend up to 2028. At June 30, 2020, the Knopf fleet had an average remaining fixed contract duration of 2.4 years and an additional 3.9 years on average in charter's options. as you can see, all with strong credit counter policies. When the partnership listed in 2013, charter renewals were a distant issue, but whilst they are now starting to materialise, it's important to repeat that these renewal decision points are a natural part of our business, and it's natural that our average remaining fixed contract duration period will come down. This is unfortunately highlighted more right now by the fact that the equity markets are currently not economically available to us to drop down the growing list of new business that our sponsor has contracted, as we have done successfully in the past. What works in our favour, however, is our customers' essential need for these assets as part of their supply chain, our market-leading position, especially in Brazil, our sponsor's 30-plus year history in this industry, the age of our fleets, the technological stability that we see in the industry right now and into the foreseeable future, plus our willingness and ability to be flexible for our customers' needs. Contracts in the shuttle tanker market are also still typically measured in years rather than days, weeks or months, as compared to many other areas of shipping. We never give guarantees as to the future, and in particular the time charter rate for a charter as option or a new charter can be open for a level of negotiation, but we want to repeat our point that we believe the partnership's risk profile is not the same as a typical shipping company. All of these factors continue to make the partnership remain positive about the future of our business, and we've built up a strong distribution coverage ratio for these times of greater uncertainty. On slide 9, the sponsor, KNAT, now has seven vessels that could be dropped into the NLP beginning from around Q4 2020. These have an average fixed contract period of 5.6 years with an average of a further 8.1 years extension options. The acquisition by KNOP of any drop-down vessels in the future is subject to the approval of the board of directors of each of KNOP and the sponsor KNOT and there can be no assurance that any potential drop-downs will actually occur. In reality, it is not possible for the partnership to consider purchasing all of these vessels in today's market and indeed it is too early for some in any case. However, we are exploring options as to how we might be able to purchase one or even two vessels from the sponsor without issuing new common equity and without putting undue strain on the partnership's liquidity. More specifically, we're currently looking at how we can achieve one drop-down in the fourth quarter of 2020, perhaps December, but it remains uncertain at this time whether this will be possible. What is clear is that if the market does begin to change for the better, then the partnership is well positioned to grow. On slide 10, the next following slides are all taken from external sources which we feel give investors a slightly more independent view than simply presenting information solely prepared by management. This first slide provides some background information on the situation in Brazil and we think demonstrates the resilience of the Brazilian market in 2020 and whilst we've seen a dampening of output and growth, growth and economic development is still expected. All of this will have a knock-on effect for shuttle tankers in our commercial outlook. And whilst we're not contractually exposed to oil price volume or storage risks in our charters, these are some of the kinds of reasons as to why the partnership remains upbeat about the future. On slide 11, the purpose of this slide is to show the estimated oil production development in Brazil for shuttle tankers and how, despite some potential delays, the trajectory remains positive. Whilst we believe the number of barrels per day shown here for 2021 and beyond are quite conservative, we do agree that the gradient of the red line was quite representative before April 2020, whereas the blue line today is perhaps what we expect across the coming five years. What we also believe is that should the economic situation improve, then not only is Brazil well placed to capitalise, we do not think it would take much of an improvement for the shuttle tanker market to fully tighten again. Slide 12 shows similar data for the North Sea, and while the levels of growth are lower, we still expect this market to continue to grow over the next three to five years and the demand for shuttle tankers to remain robust. On slide 13, this slide is perhaps best at showing why we feel there are strong mid- to long-term prospects for shuttle tankers in the Brazilian market. Petrobras as still the dominant player in Brazil, have been selling a whole host of shallow and onshore assets in 2020, and reaffirming their commitment to the deep and ultra-deep wells, which have relatively low costs. We've seen increasing FPSO activity, and we're seeing more involvement of Chinese players in the Brazilian oil market, which opens up a new area of activity. And indeed, our sponsor now has its first shuttle tanker contract with PetroChina. We're not saying there aren't challenges in the short term with equity markets, with a softer economic climate and sentiment towards energy and shipping, but we see the mid to long-term growth and as a business and a leading and experienced business in this industry, we're doing all we can to ensure we navigate a stable path through the coming few quarters. Slide 14. So in summary, We've reported a very strong quarter with a continued stable operating performance at 99.7% utilization for scheduled operations. Distributable cash flow of 30.7 million with coverage of 1.7, giving the partnership a degree of flexibility to manage potential short and midterm headwinds. We maintained our quarterly distribution of 52 cents for the 20th consecutive quarter. Our operations have remained largely unaffected by coronavirus and we've been taking steps, like many companies, to keep our staff and crew safe whilst working. We're not exposed to short-term market turbulence, such as short-term fluctuations in oil prices, volume of oil transported or global oil storage capacity. We're seriously considering financing options to take one new vessel from the sponsor without issuing new equity to strengthen cash flows in our contracted revenue stream, if we can. And whilst we acknowledge the uncertainties seen in the wider energy market and the higher degree of difficulty in accessing new equity, both of which may continue for some time, we believe the shuttle tanker market is resilient and growth prospects remain strong over the mid to long term, particularly in Brazil. That concludes my short presentation for today and I'll open for any questions. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your hands up before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from . Please go ahead.