KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Welcome to the Notch Offshore Q4 Earnings Conference Call. All participants will be in a listen-only mode. Should we need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a 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. Please go ahead.

Thank you and welcome everybody to our fourth quarter earnings call. You can find our earnings release and this presentation on our website at notoffshorepartners.com. Our call today includes non-US GAAP measures of distributable cash flow and adjusted earnings before interest tax depreciation and amortization, EBITDA. Our earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, and please remember that any forward-looking statements made during today's call are subject to risks and uncertainties that are further discussed in our annual and quarterly SEC filings. 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. I refer you to slide two and our other SEC filings for further details. Onto slide three, the fourth quarter 2020 highlights. The partnership is yet again able to report a very good and very stable set of quarterly results. Total revenues in the fourth quarter were $69.9 million, operating income $30.4 million, and net income $24.6 million. Adjusted EBITDA was $52.9 million, distributable cash flow was $28.6 million, and our coverage ratio was 1.58%. This is all driven by scheduled fleet utilization of 98.6% in the quarter, allowing us to maintain and pay our 22nd consecutive quarterly distribution of 52 cents per common unit. Our crew and our operations have remained materially unaffected by the COVID-19 pandemic to date, and we've established many new procedures to do all we can to keep our colleagues safe, despite the many challenges that have arisen since this time last year. At the end of the quarter, the partnership had £738 million of remaining firm contracted forward revenue, excluding options, up from £585 million at the end of the prior quarter. We completed the drop-down of the Tover Knudsen in December without needing to issue new equity, and I'll give more information on that later in the presentation. Also in December 2020, we agreed terms for a sale and lease-back transaction for the And this completed in January 2021 with a net contribution of cash to the partnership of $38 million. In the quarter, we secured new firm charters for the Tordes, Figdis and Lena vessels. And again, I'll give more details shortly on that. The Windsor Knutson was eventually re-delivered to us from Shell on December 7th, 2020. And subsequently, we have agreed commercial terms with a major oil company for a one-year fixed-time charter contract for the vessel to commence in the third quarter of 2021, with further options to extend to a further 18 months. In December 2020, the Windsor Knudsen reported a crack in its main engine block and was placed off-hire. However, we expect that our insurances will cover both the repair cost and the vast majority of the loss of hire during the period of the repair. which may take as long as six months due to the manufacturing of parts, logistics and repair itself. A lot of higher insurance is expected to provide income at approximately the level earned during the vessel's prior long-term charter, excepting the 14-day deductible period under the policy, which fell entirely in December 2020. Equinor did not take its next option on the Dodal Knutson by the due date, and so we expect that the vessel will be re-delivered to us on or around April 9th, 2021. Whilst the vessel has worked well for Equinor, they're not in a position at the moment to commit to a new charter. In particular, the effects of the COVID-19 pandemic and lower oil prices haven't helped in this regard. However, we remain in close dialogue with them and other charters and we're optimistic of finding new employment for the vessel in the near future. To slide four, where we set out some of the unique aspects of our business that may not always be fully appreciated or which new investors may benefit from knowing. We're a market leader with more than 30 years of experience and investment in this business. We're classified as a corporation for U.S. federal income tax purposes. Therefore, we issue Form 1099 to report our distributions and not Form K1. Our vessels are specialized assets with limited replacement risk, and they represent critical infrastructure required by our customers to deliver oil production for projects that have significant upfront investments, long lifespans, and often low marginal production costs. Most of our vessels have operational flexibility and are capable of servicing many different fields. There are high barriers to entry due to the specific nature of our vessels, the additional capital cost required, technical specification, and crew training required over and above a conventional tanker. We have a diverse set of financially strong contractual counterparties. Our contracts are fixed rate and typically one to seven years, and once in operation, they do not depend on oil price fluctuations. and it's our customers that bear the risk of vessel utilization and operational fuel costs. Our management strategy remains to operate the business with a focus on long-term stability as far as possible and providing our unit holders with an attractive distribution. We have diversified revenue streams, meaning we are not disproportionately dependent on any single contract. Our debt repayment profile means we are paying down around $90 million each year, and we have access to attractive debt finance through a wide portfolio of lenders. On slide five, the income statement, where I will highlight just a few relevant points. For the fourth quarter of 2020, we recorded total revenues of 69.9 million, which is slightly lower than quarter three, mainly due to the off-hire of the Windsor Knudsen in December. Vessel operating expenses for the fourth quarter were slightly better than the third quarter, but much of that relates to timing across the fleet. and four-year costs were materially on budget despite higher crew costs as a result of the COVID-19 pandemic. Depreciation held steady and on track, and general and admin costs rose slightly due to transactional activity in the fourth quarter. Interest expense for quarter four was $6.1 million, a further decrease from the prior quarter, again driven by lower LIBOR on average across all our credit facilities that are not hedged. On slide six, adjusted EBITDA, Adjusting for some of the non-cash volatility that comes into the income statement, we were able to report another consistent adjusted EBITDA of $52.9 million, down only slightly from $53.3 million in the second quarter. Slide 7, distributable cash flow, or DCF, was $28.6 million in the fourth quarter, and the distribution cover at the end of the quarter showed a modest decrease to $1.58 from $1.60. And we again maintained our distribution level at $0.52 per unit, equivalent to an annual distribution of $2.08. Slide 8, balance sheet. At the end of the fourth quarter, the partnership had $73.3 million of available liquidity, which consisted of cash and cash equivalents of $52.6 million and $20.7 million of capacity under our revolving credit facilities. The revolving credit facilities mature in August 2021 and September 2023. The partnership's total interest-bearing debt outstanding at December 31, 2020, was $1.036 billion. And the average margin paid on the partnership's outstanding debt in the fourth quarter was approximately 2.04% over LIBOR. As of the end of the fourth quarter, the partnership had entered into various interest rate swap agreements for a total notional amount of $516 million to hedge against the interest rate risks of its variable rate borrowings. In the quarter, we received interest based on three or six-month LIBOR and paid an average interest rate of 1.88% under the interest rate swap agreements, which have an average maturity of approximately 4.3 years. On to slide nine. I'm pleased to give you a few more details related to the drop-down of the Tova Knudsen, a picture of the new vessel is on the left-hand side of this page. The vessel is a 153,000 deadweight ton DP-2 shuttle tanker, delivered from the shipyard on September 28, 2020, where it then sailed to Brazil and underwent a series of approval tests for Equinor and Petrobras, as are required for Brazilian operations. It then commenced on its seven-year fixed charter to Equinor on November 27th, 2020. There are further 13 years of charter as options attached. And KNOP closed the purchase from KNOT on December 31st to 2020. As stated, this was financed through a combination of internal cash and debt, thus being non-dilutive to our existing equity unit holders. The purchase price was $117.8 million, less $93.1 million of outstanding indebtedness, plus or minus other items typical at closing, such as working capital and fees. We also repaid $6.9 million of the indebtedness at closing, leaving an aggregate of $86.3 million outstanding of the secured credit facility related to the vessel. Given the non-dilutive nature of the financing, the cash contribution for the vessel will directly assist the partnership in maintaining our distribution. From an EBICDAO perspective, EBICDAO contribution is expected to be less than 10% of total partnership EBICDAO, keeping our vessel concentration risk down. And I can say that whilst we're satisfied with the projected from the vessel, its EBICDAO contribution will be slightly lower than some of our other vessels, as in return we received a seven-year commitment from the charterer. On to slide 10, an update on our contracted revenue and charter portfolio. In the quarter, we have $738 million of contracted forward revenue remaining to the partnership, an average remaining charter period of 2.9 years. Customers have options to extend these charters by a further 3.1 years on average. I've already talked about the Windsor Knutson, but here is the situation graphically. you'll see that we currently expect to have no material gaps in the vessel's income until May 2022 at the earliest, and possibly up to the end of 2023, as we expect today. Bodal, I have also covered already, but it is perhaps also worth mentioning that the vessel is currently undertaking its scheduled dry dock, which is going well. The work is due to complete around the end of March 2021. The Fortaleza, Recife, Carmen, Hilda, Toril, Dancisne, Dansavia, Ingrid, and Raquel are all unchanged on their fixed contracts. In December 2020, as I mentioned earlier, the partnership secured new three-year fixed contracts for the vessels Tordes, Vigdis, and Lena with a major oil company. The commencement of these new time charts was ranged between May and December 2023. What is hard to show on this diagram, however, is that it is the partnership's choice which of the three vessels will be put forward and used under each of the three charters. This gives us much more chartering flexibility when seeking opportunities in the intervening periods. So, for example, the charter that is currently showing this starting in Q2 2023 against the Tordish-Connaughton could instead be matched with the Lena-Connaughton. All free charters offer fixed periods of three years. However, the third charter grants cancellation options to the charterer at the end of the first and second years, with penalties payable to the partnership if exercised. We're now marketing the vessels for short- to mid-term charter business in the intervening period shown between the end of the vessel's current fixed charter periods in 2022 and the commencement of the above-mentioned new fixed charters in 2023. This period, on average, is currently estimated to be 15 months for each vessel. Finally, Brazil and ANA are unchanged, and we have covered the TOVA previously already. Slide 11, our sponsor, KNOT, now has six vessels that could be acquired by the NLP. These have an average fixed contract period of 5.3 years with an average of a further 7.3 years extension options. This high-value list of contracts continues to demonstrate the market's trust in our management team and sponsor and shows that the market is still active. Given where our unit price is still today, we have no firm plans for acquiring another vessel at this time. However, we are beginning to consider options for later in the year to assess whether a further internally financed vessel is possible, that is, without relying on raising new equity. Our sponsor, KNOP, has shown flexibility in this regard, and we will take a prudent approach to this issue, taking into consideration the long-term stability of the business. And as always, the acquisition by KNOP of any drop-down vessels in the future would be subject to the approval of our independent conflicts committee, as well as the board of directors of each of KNOP and the sponsor, KNOP. Slide 12. The next couple of slides are to give a little wider context to our business. Now, vessels are integral to the long-term offshore producing assets of our customers. These projects have significant upfront costs to construct and initiate. However, thereafter, marginal production costs tend to be low, and field life is typically measured in decades. Our shuttle tank is a critical infrastructure without which production cannot continue, and shuttle tanker charters are typically only a small component of customers' field operating costs. For new-build vessels, firm charge periods are typically five to seven years, and the fixed charter rate is not impacted by our customers' utilization of the vessel. Provided the vessel is fully functioning and made available, the fixed rate applies. Also, voyage expenses are a charterer's cost, and this includes all fuel while the vessel is on hire. We don't have any direct exposure to the price of oil, and you can see our list of customers are some of the biggest names. On slide 13, The total global fleet of shuttle tankers today is 75. If you consider that there are over 800 VLCCs, or Very Large Crew Carriers, in the world and some up to 90,000 commercial ships, this is in part why we say shuttle tankers are a niche business. There are two main geographies. Broadly, 29 vessels operate in the North Sea, Barents Sea, and 37 in offshore Brazil. A few operate in Canada and West Africa, but they're not significant in fleet terms. I also set out on this slide some of the characteristics of the two main markets, such as high operational standards and the types of contracts that are most prevalent. On to slide 14. This is designed to demonstrate why we are confident about demand and growth in the shuttle tanker market in the coming years and why we think our business has a strong long-term outlook. The main takeaway is that we expect startups to outpace declines. And with very competitive production and lifting costs, we see both Brazil and the North Sea as not only staying in the game, so to speak, for many years to come, but actually growing. The impact of the COVID-19 pandemic has slightly flattened the growth curve in 2021 and maybe into 2022 through project delays. But growth is still expected, and oil is perhaps rebounding faster today than was predicted even just a few months ago, meaning growth may yet come back sooner than we anticipate. This is also notwithstanding the energy transition and significant forecast growth in other forms of renewable energy. Whether we reach peak oil around 2030 or not, oil is not about to leave as quickly, even after this date. In acknowledgement of this, we are already taking many actions to reduce our own environmental impact, and we're working to be among the best in the global shipping industry in terms of minimizing our impact and operating with the highest standards and quality. You can read more on this in our latest ESG report covering 2019, which you can find on our website, and we hope to have our 2020 report completed soon. Slide 15. So to begin to wrap up, our near-term priorities for the next one or two quarters are as follows. To continue to operate our vessels safely and efficiently and to ensure the health and safety of our crew and employees goes without saying. Continue to progress discussions with our lenders for refinancing that are due in August and November 2021. Secure new charter contracts for the Bodal Knudsen where discussions are already ongoing and management are confident in the prospects for the vessel. Complete the Bodal's dry dock on time and on budget. Begin to consider options and possibilities for a further internally financed drop down later in 2021. and continue ongoing close dialogue with our customers concerning operations and chartering and rechartering options and opportunities. Slide 16, closing with a brief summary. Another strong and stable operational quarter with 98.6% utilization for scheduled operations. Distributable cash flow of 28.6 million with coverage of 1.58 and 73.3 million in available liquidity. which continues to give the partnership a degree of flexibility to manage any short to mid-term headwinds. We maintained our quarterly distribution of $0.52 for the 22nd consecutive quarter. We completed the drop-down of the Tover Knudsen in December without needing to issue new dilutive equity. We had $738 million of remaining contracted forward revenue, excluding options at the end of the quarter, up from $585 million. and the partnership's operations are not exposed to short-term fluctuations in oil prices, the volume of oil transported, or global oil storage capacity. Oil production in Brazil and the North Sea from shuttle tanker serviced fields is expected to grow significantly in the coming years, and we remain confident that the partnership is experienced enough to navigate through any short-term market uncertainty, and that the shuttle tanker market's fundamentals and growth prospects remain strong and very supportive over the mid- to long-term. Thank you very much for listening, and that concludes the formal presentation, and I'll be happy to take any questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Liam Burke with B. Riley. Please go ahead.