KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Today and welcome to the KNOP second quarter 2021 earnings results conference call. All participants will be in a 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 a touchtone song. 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 and welcome everybody to our second quarter earnings call for 2021. As always, our earnings released in this presentation are also available on our website at notoffshorepartners.com. I have to remind you that our call includes mention of certain non-US GAAP measures of distributable cash flow and adjusted EBITDA, although our earnings release does include a reconciliation of those non-GAAP measures to the most directly comparable GAAP measures. This presentation and other publicly available information contain forward-looking statements, and as such, statements made during today's call are subject to risks and uncertainties. Actual events and results can materially differ from those statements, and the partnership does not have or undertake a duty to update any forward-looking statements. Please refer to slide two and our annual and quarterly SEC filings for further details. Straight on to slide three, we're reporting another strong set of quarterly results. Total revenues in the second quarter were $70.9 million, an operating loss of $1.2 million, and a net loss of $10.9 million. The losses arise as a result of recording a non-cash write-down in the carrying value of the Windsor Knudsen. Adjusted EBITDA was $52.1 million, Distributable cash flow was 24.0 million, and our coverage ratio was 1.32. We announced our 24th consecutive quarterly distribution of 52 cents per common unit. Available liquidity, 30 June, was $101.6 million, which included cash and cash equivalents of 51.6 million, and the average margin paid on our debt in the quarter was 2.04%. Scheduled fleet utilization was 96.9% in the second quarter, including the winds of commencing for the time the vessel received insurance proceeds equivalent to higher during the quarter. And at the end of the quarter, the partnership had 642 million of remaining firm contracted forward revenue, excluding options held by our customers. We're very pleased to be able to announce that we have entered into a new senior secured credit facility to refinance the existing term loans related to the Tordes, Figvis, Lena, Anna and the Brazil Knutson vessels. The term loans for these vessels otherwise expired between November 21 and July 22. The new facility has a balloon payment of 219 million at maturity in September 2026 and bears interest at LIBOR plus a margin of 2.05%. and we expect to close the new credit facility in September 2021, next month. In the quarter, we also extended our $25 million unsecured revolving credit facility with NTT Finance Corporation out to August 2023 on the same terms, and as a result of these refinancings, we now have no further significant refinance due until the third quarter of 2023. The partnership has also entered into a sales agreement with B Reilly Securities for an ATM program whereby the partnership may offer and sell up to $100 million of common units from time to time. Such a program is a common tool that many companies have in place and which for KNOP gives extra flexibility and another option under which we may raise growth capital for an accretive acquisition in the future. For more details, I'd refer you to the relevant documents that were filed today. Slide four. In respect to the Windsor Knutson, you may recall we explained previously that the vessel was found to have a crack in her main engine block back in December 2020. The vessel was repaired and returned to service on 10th of June, and we can confirm that the partnership's insurance is covering the cost of repairs and provided loss of higher income at approximately the level earned during the vessel's prior long-term charter, except in the deductibles under the policy shown on the slide here. As we announced last quarter, we have agreed on the commercial terms for a one-year fixed-time charter contract for the Windsor-Connaughton, with owner's option to substitute and with the charter's options to extend the charter by one one-year period and then one six-month period, with a major oil company, and we expect this will commence in September 2021. As mentioned earlier, we recorded a non-cash write-down in respect to the Windsor-Connaughton of £29.4 million 30 June. to bring the carrying value of the vessel down to its fair value in our accounts. This principally arose as a result of the vessel's unusually high carrying value, which in turn is a result of it being the sum of both the purchase cost and the cost of conversion of the vessel to a shuttle tanker from a conventional tanker. There are no other similar converted vessels in the partnerships fleet, and therefore we don't anticipate this particular issue recurring. In May 2021, the partnership agreed a new time charter contract for the vessel with a major oil company to commence in the fourth quarter of 2023 or the first quarter of 2024 for a fixed period of either one year or two years. And in either case with options to extend the charter by two further one year periods. Also in May 2021, as we reported last quarter, the partnership reached an agreement with the VOC Industry Cooperation Norwegian sector or LOCIC Norway, whereby VOCIC Norway agreed to fund loss of fire at a reduced rate during and cost related to the installation of a VAC or volatile organic compound recovery plant on Bodal Knutson. The work is expected to be carried out in the third or fourth quarter of 2021 and take around one month. This will be the second material improvement made to the vessel in 2021 after the addition of the ballast water treatment system. The VOC system will significantly improve the operational attractiveness of the vessel in the North Sea and Norwegian sectors going forward, as well as virtually eliminate the non-methane VOC released into the atmosphere arising from the vessel's cargo. We're continuing to market the vessel for new time charter employment, but in the meantime, to provide support to the partnership, our sponsor, KNAC, has agreed to time charter the Bodal Knutson initially on a three-month basis, and then on a rolling one-month basis, possibly for the remainder of 2021. Slide 5. During July 2021, the Vigdisk went off higher for 17 days due to an outbreak of COVID-19 on board. Thankfully, this was quickly contained and with no serious ill health caused to any of our crew and persons affected. The Tordisk Knutson is due to undergo her first planned five-year special survey dry docking in the fourth quarter of 2021, and this is expected to be carried out in Europe. The vessel may be off higher for approximately 50 to 55 days, including mobilisation to and from Europe, and this is expected to have a scheduled impact on our fourth quarter earnings. Then finally, whilst not impacting on the cash flow of the partnership, to reflect on prevailing longer-term market trends, we changed the accounting useful life estimate of our fleet from 25 years to 23 years, with effect from 1 July this year. The non-cash accounting depreciation charge in all future quarters, beginning in the third quarter of 2021, will therefore increase. But as this change does not prevent our vessels from being utilised beyond 23 years, we do not anticipate that this change will have a material impact on our future revenue or cash flow from operations. Slides six through nine are our main financial results and I'll just highlight a few relevant points. For the first quarter of 2021, we were able to maintain revenues broadly in line with previous quarters at 70.9 million. Vessel operating expenses for the quarter were improved compared to the first quarter in which the Bodal Knudsen had its dry dock. Our crew and associated costs such as travel and logistics remained slightly elevated overall due to COVID related issues. though we continue to expect some of this will fall back over the course of the full year. Adjusted EBITDA on slide 7 was 52.1 million, another very consistent quarter. In fact, we have reported adjusted EBITDA in the range 50 million to 56 million in every quarter since the beginning of 2018. Prior to that, it is arguable that it was only lower as our fleet was smaller. Distributable cash flow on slide 8 was a solid 1.32 times in the quarter, and we continue to target stability in our results and in our distribution, and our coverage gives us room to manoeuvre. On slide 9, I would just note here that now we have entered into our new secured credit facility. Once this closes, which we anticipate will be in September, then our current liabilities should settle back to a more comfortable figure. Otherwise, we're comfortable with our balance sheet position overall. Slide 10 gives an update on our contracted revenue and charter portfolio. At the end of the second quarter, we had 642 million of contracted forward revenue remaining, excluding options held by our customers, an average remaining charter period of 2.3 years, and our customers have options to extend these charters by a further 2.8 years on average. For the Windsor Knutson, we have seen some unemployment of the vessel in the second quarter, but we are expecting a new charter to commence in September 2021 as outlined above. For Bodle Knutson, we are showing the time chart to KNOT, which is on a rolling basis to allow flexibility for when a third party charter is found. And we have introduced here the new charter that is to commence in either fourth quarter of 2023 or the first quarter of 2024. Thereafter, you will see that our remaining fleet is contracted for the remainder of the year, though as mentioned, the Tordisk Knutson is scheduled for its first planned five-year special survey dry docking in the fourth quarter. We are, of course, already discussing with our customers to fill the other gap periods between charters, beginning with the Tordisk Knutson. However, we wouldn't necessarily expect to have firm contracts in place at this time. Slide 11, our sponsor, KNIT, continues to have six vessels that could be acquired by the partnership with an average fixed contract period of 5.3 years and with an average of a further 7.3 years extension options. We have continued to see some robustness in our unit price in recent months, though still today we have no firm plans for acquiring another vessel at this time. However, we are continuing to actively consider our options for later in the year, And our new ATM facility gives us further flexibility for considering accreted acquisitions. 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 our sponsor, KNOT. Slide 12. We've included this graphic previously, but we think it remains informative towards the outlook for our shuttle tanker business in Brazil. And in addition, we have added just a few points that help to demonstrate why we think this growth will arrive. Strong contracted FPSO activity, low break-even prices, low lifting costs, a strategic focus by our customers on deep water pre-salt areas that require shuttle tanker operations, and importantly, but slightly differently, due to the increase in vessel ordering across all elements of shipping recently, this has increased the price of all new build ships which is favorable for us when offering our existing ships to our customers for rechartering. Slide 13. This presentation is not really the place for a long educational piece on shuttle tankers, but I always like to put something in here to increase knowledge around what K&OP does and its wider market. This slide is very simple, but I think powerful. You can read for yourself the words issued by Petrobras in May this year, but the opportunities that we expect will come from Brazilian production are many. The Bousios field is one of several developments that are either already in production and or are scheduled to materially grow their production in the coming years. Slide 14, ESG. Just to note that in the coming days we will publish our second annual ESG report where much more information will be available. The installation of ballast water treatment systems on board our vessels, the VOC plant to be installed on Burdell, Connaughton, or the LNG-fueled shuttle tankers ordered by our sponsor are just a few significant examples of the work we pursue. But we always consider ways in which we can improve our contribution to all ESG matters, whether it's in operations, in vessel design, in the office, or in ports, large or small, and we take our responsibilities to ESG seriously. We recognize our impact and work hard with and across a number of networks, organizations, and other entities to not only comply with rules but steer and lead in areas where we can and target to be best in class, importantly not just on paper but in real-life operational environments. It remains the case that throughout 2020 and to date in 2021, our fleet experienced no serious incidents or casualties, and we review all of our government's documents at least annually to ensure they remain fit for purpose and effective. As an MLP, we understand the importance of this, Slide 15. Our near-term priorities for this quarter are to continue to operate our vessels safely and efficiently and look after our offshore and onshore staff, of course, with particular regard as to how the COVID pandemic and vaccination programs develop. We continue to target stability in our results and in our distribution and focus our efforts on securing new near-term charter contracts for the Bodal-Connaughton. We're continuing to study the options and possibilities for a further internally financed drop-down later in 2021. As mentioned, we expect to publish our 2020 ESG report shortly. We're preparing for the dry docking of the Tordisk Knutson. And of course, we continue our close dialogue with customers concerning operations and chartering and rechartering to ensure we can respond flexibly to demand opportunities as they arise. Slide 16, so in summary, We've reported another strong and stable quarter with utilization of 96.9% for scheduled operations if Windsor Knutson is included. Distributable cash flow of 24 million and a coverage ratio of 1.32. We paid a quarterly distribution of 52 cents for the 24th consecutive quarter. We had $642 million of remaining contracted forward revenue excluding options at the end of June. And with strong support from our lenders, we now have no significant refinance due until the third quarter of 2023. We're not exposed to short-term fluctuations in oil price, volume of oil transported or global oil storage capacity. And whilst the recent effects of COVID and our customers' CAPEX schedules have created headwinds for shuttle tanker demand, other than Windsor Knudsen, Bodle Knudsen and Tordes Knudsen, our fleet remains fully contracted for the remainder of 2021. We continue to firmly believe that in the mid to long term, oil production in Brazil and the North Sea from shuttle tanker service fields will grow significantly. And though we expect to continue to face softness in 2022, the shuttle tanker market's fundamentals and growth prospects, our liquidity and our market leading position allow us to remain optimistic for the future. Thank you for listening. That concludes the formal presentation and I'll be very happy to take any questions.

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