KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello and welcome to the third quarter 2021 earnings results conference call. My name is Juan and I will be coordinating your call today. If you would like to ask a question, please press star one on your telephone keypad. I will now hand over to our CEO, Gary Chapman, to begin. Please, Gary, go ahead.

Thank you and welcome everybody to our third quarter earnings call for 2021. As usual, our earnings released in this presentation are also on our website at notoffshorepartners.com. As always, I need to point you towards the notice on slide two concerning the nature of this presentation and its contents, and in particular that the presentation includes forward-looking statements that we make in good faith today, but which contain risks and uncertainties, meaning that actual results may be materially different. We do ask that you take this on board as part of our presentation, noting that the partnership does not have or undertake a duty to update any forward-looking statements as referred on slide two. And our annual and quarterly SEC filings have further details if you wish to read. Our presentation also includes mention of certain non-US GAAP measures of distributable cash flow and adjusted EBITDA, although our earnings release does include the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. So to slide three. Total revenues in the third quarter were 66.6 million. Operating income was 21.1 million. Net income was 13.5 million and adjusted EBITDA was 47.2 million. Scheduled fleet utilization was 91.9% in the third quarter, driven by several vessels experiencing temporary technical issues or transitioning between charters. Distributable cash flow was 18.6 million and our coverage ratio was 1.03. At the end of the quarter, the partnership had $592 million of remaining firm-contracted forward revenue, excluding options held by our customers. Available liquidity on September 30 was $121.6 million, which included cash and cash equivalents of $66.6 million, and the average margin paid on our debt in the quarter was 2.06% over liable. And we announced and paid our 25th consecutive quarterly distribution of $0.52 per common unit. We closed the previously announced $345 million refinancing at the new senior secured credit facility for the Tordes, Figadis, Lena, Anna, and the Brazil Knudsen, and we now have no further refinance due until the third quarter of 2023. The partnership entered into a sales agreement with B Riley Securities for an ATM equity program, whereby the partnership may, but has no obligation, to offer and sell up to $100 million of common units from time to time. We put this programme in place to give the partnership more flexibility and to have another option under which it can raise growth capital, in particular for an accretive acquisition. From its commencement to the start of the trading blackout period, which was November 3rd, the partnership has sold 41,940 units under the programme, raising $0.8 million. We also entered into an exchange agreement on September 7th with our sponsor, Knutson NYK, and its general partner, whereby all of Knutson NYK's incentive distribution rights, or IDRs, were exchanged for the issuance by the partnership of 673,080 common units and 673,080 Class B units, and the IDRs were cancelled. This was effectively a cash flow neutral transaction and ensures an even clearer alignment of interest between the partnership and our sponsor. Slide 4. As announced previously, we had agreed commercial terms for a one-year fixed-time charter contract for the Windsor Knutson, and this was closed and the vessel started on the charter with PetroChina on September 15th. There are flexible options that allow us to substitute another vessel, and the charterer has options to extend the charter by one one-year period and then one six-month period. In November 2021, the Bodal Knudsen completed the installation of the majority of the Volatile Organic Compound Emissions, or VOC, recovery plant on board the vessel, and the vessel went back on hire on November 8th. Although there is further testing and setup work to do, this is expected to be completed by the end of December 2021. As we've stated previously, the plant 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. The partnership has agreed to initially fund the installation at an expected cost of up to $5 million. However, costs of installation plus loss of hire at a reduced rate during the installation and costs related to the ongoing operation of the system are then recoverable by the partnership up to an agreed budget with interest over a seven-year period. Any costs in excess of the agreed budget will be shared on a 50-50 basis. The boat of Knutson is currently operating under a rolling time charter contract with the sponsor Knutson NYK, or KNOT, which expires in December 2021, and the vessel is being used in Knutson NYK's North Sea business today. An extension to the charter has been agreed for a further three months on the same commercial terms, with three further one-month extensions at the charter's auction, potentially taking the vessel's fixed employment to June 2022. This support provided by the sponsor at this particular time is valuable for the partnership as we seek long-term employment for the vessel, and the time chart with Knudsen NYK can be terminated early should such a long-term employment opportunity arise. The Tordes Knudsen is due for her first planned five-year special survey dry docking and is expected to be off-hire from mid-December 2021 for the start of its trip to Europe, where the work will be carried out. The work is expected to take approximately 60 days to complete, including mobilisation time to and from Brazil. Slides five through eight are our usual financial results highlights. For the third quarter of 2021, revenues were slightly lower than the second quarter due to several vessels experiencing temporary technical issues or transitioning between charters. Vessel operating expenses for the third quarter were slightly higher than the second quarter as crew and crew-related costs remain challenging due to the ongoing impact of COVID issues around travel, quarantine and logistics costs in particular. We're mitigating high costs as far as possible through agile planning and various creative means, but a degree of cost increase at this time is unavoidable and we see that many companies are experiencing the same. Slide six shows adjusted EBITDA was 47.2 million, slightly lower than the second quarter for principally the same reasons outlined just now related to fleet operations in the quarter. Distributable cash flow on slide seven was 18.6 million with a coverage ratio of 1.03 times in the quarter. Although this ratio is lower than we have traditionally reported, it remains above one despite several vessels experiencing temporary technical issues and others transitioning between charters. On slide eight, you will see that now we have closed the new senior secured credit facility as reported earlier. Our current liabilities have settled back to a more comfortable figure, and we had 121.6 million of available liquidity at the end of the third quarter, which included cash and cash equivalents of 66.6 million, up from 52.6 million at the end of the second quarter. Slide 9 provides an update on our contracted revenue and charter portfolio. At the end of the third quarter, we had 592 million of contracted forward revenue remaining, excluding options held by our customers, an average remaining charter period of 2.1 years, and our customers have options to extend these charters by a further 2.7 years on average. As I've reported earlier, the Windsor Knutson and the Bodle Knutson are now respectively on charter to PetroChina and KNAT or Knutson NYK. This means that all of our vessels are secure for the fourth quarter, excepting the scheduled dry docking of the Tordes Knutson, which is expected to begin in mid-December 2021. In addition to the Tordes Knutson, whose dry dock work will commence in December 2021 and complete in early 2022, The partnership has five other vessels undertaking scheduled dry docks in 2022, being the Vigdisk Knutson, the Anna Knutson, the Windsor Knutson, the Lena Knutson and the Carmen Knutson. All are undertaking their five-year class surveys, except for Carmen, which is taking her 10-year survey, and the Windsor Knutson that is taking her 15-year survey. All of this work and related cost is planned and budgeted for in advance, and dry dock costs are capitalised on balance sheet and depreciated over the period to the next dry dock cost. We remain in discussions with all of our customers and potential customers to reach agreements to fill the gap periods between already committed charters. And although we cannot report anything firm at this time, those discussions are ongoing. Slide 10. Our sponsor, K&OT, continues to have six vessels that could be acquired by the partnership with an average fixed contract period of 5.3 years from charter commencement and with an average of a further 7.3 years extension options. While we were able to complete an accretive drop down at the end of 2020 without issuing equity, we've demonstrated over the course of 2021 that we are not compelled to accommodate drop downs from our sponsor if doing so would not be in the best interest of our unit holders, even when such drop down candidates are on contract and available for acquisition by the partnership, as is currently the case. At the present time, we do not anticipate acquiring a new vessel in 2021. However, we will keep this under review as we enter 2022. Slide 11. These next three slides, in fact, 11 through 13, are here to demonstrate why we consider that our business and market has a strong outlook using data from Restat Energy, who are an independent energy research firm. Slide 11 shows that our main two markets are expected to grow their production substantially as the publicly stated strategies of our customers come to life and further, where there is more competition in those markets, more vessels are needed. And this is the direction certainly the Brazilian market seems to be going in today. Slide 12 demonstrates the robustness of our two markets in terms of oil production costs, where almost all of the scheduled and expected oil production can be undertaken at oil prices above $40. and most of it can be produced with an oil price above just $35. This is in contrast to some other sources of oil around the world that have much higher break-even prices. For this reason alone, we believe that the demand for our vessels will stay robust and indeed grow for many years to come. On slide 13, we are showing where the greatest developments are expected to arise. And our two main markets of Brazil and Norway are top of this list, adding further to our confidence for the mid to longer term outlook for our business. Depending on how we are able to manage our charter portfolio going into 2022 to fill the gaps that exist right now, and the extent to which the COVID related market softness remains during the year, 2022 is likely to be a bumpy year for the partnership compared to prior years. But we have confidence that this is a temporary scenario and that our business will be rewarded over time. On to slide 14, where we can confirm that we published our second annual ESG report in the third quarter, and this is available on our website. We recognise that the industry in which we operate has challenges related to ESG, but we intend to be open and transparent about our operations and its impact, while at the same time working to reduce our emissions and help to drive improvements and standards in our industry and across shipping. We already have ballast water treatment systems to prevent transfer of microorganisms from one habitat to another around the world on almost all of our vessels. We've installed the VOC plant on the Bodal Knudsen, and our sponsor has two LNG fuel vessels on order. And we constantly strive to improve vessel design operations and health and safety across our fleet. Standards are increasing all the time, and we welcome that. And we're always assessing how our fleet of shuttle tankers can not only meet but exceed the regulations that are in place. It remains the case that throughout 2020 and to date in 2021, our fleet experienced no serious operational incidents, and we review all of our governance documents at least annually to ensure that it may fit the purpose and effective. As an MLP, we understand the importance of this. Slide 15 sets out our near-term priorities. After safety, our number one priority is the maintenance of our distribution. And to do this, we're targeting stable cash flows and looking to maximise fleet utilisation, as I've already explained. We will continue to apply the same principles that have served KNOP and our unit holders well for many years. As stated, we do not expect to acquire a new vessel in 2021, but as we move into 2022 and beyond, the key things we will be looking to do are to secure employment for our vessels that are currently open in 2022 and 2023, maintain high operational utilization, plan, prepare, and execute the dry docking of the Tordes Canucks and other vessels, assess attractive growth capital options for future accretive acquisitions, maybe in 2022, prepare for the expected growth in the shuttle tanker demand in Brazil and the North Sea, and continue ongoing close dialogue with our customers concerning operations and chartering and rechartering to ensure we can respond flexibly to demand opportunities as they arise. So in summary for this quarter on slide 16, we reported utilization of 91.9% for scheduled operations, distributable cash flow of 18.6 million with coverage of 1.03%. We paid a quarterly distribution of 52 cents for the 25th consecutive quarter and had 592 million of remaining contracted forward revenue, excluding options at the end of the quarter. We have no refinance due until the third quarter of 2023, and our operations are not exposed to short-term fluctuations in oil prices, volume of oil transported or global oil storage capacity. We recognise that shuttle tanker demand continues to be affected by a lag resulting from delays to offshore project development timelines, following capex reductions instituted by offshore oil producers during the early days of the COVID-19 pandemic, though capex spending is now beginning to recover. Other than the planned dry dock of the Tordes Canutsen due to commence in the fourth quarter of 2021, our fleet remains fully contracted for the remainder of 2021. In the mid to long term, Oil production in Brazil and the North Sea from shuttle tanker service fields is expected to grow significantly, and though we expect to continue to face demand softness in at least some part of 2022, the shuttle tanker market is fundamental, and our market position means we remain optimistic for the future. Thank you for listening, and that concludes the presentation, and I'll be happy to take any questions.

If you would like to ask a question, please press a star followed by one on your telephone keypad now. If you change your mind, please press a star followed by two. When preparing to ask a question, please ensure your phone is unmuted locally. And our first question comes from Liam Bourke from V-Reilly Securities. Please, Liam, your line is now open.