KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello everyone and thanks for joining the KNOP fourth quarter 2021 earnings results conference call. My name is Darren and I will be moderating the call today. Before handing you over to your host Gary Chapman, I would like to remind you that if you would like to ask a question during a Q&A session and the end of the call, please press star followed by one on your telephone keypad. I now have the pleasure of handing you over to Gary Chapman. Please go ahead Gary.

Thank you and welcome everybody to our fourth quarter 2021 earnings call. As usual, our earnings released in this presentation are available on our website at notoffshorepartners.com. Moving straight in, slide two provides important information concerning the nature of our presentation today, and in particular, that our presentation includes forward-looking statements that we make in good faith, but which contain risks and uncertainties, meaning that actual results may be materially different. Please do take this on board, noting that the partnership does not have or undertake a duty to update any forward-looking statements, and you may also wish to consider our annual and quarterly SEC filings for further details and information. Please also be aware that our presentation includes mention of certain non-US GAAP measures of distributable cash flow and adjusted EBITDA, although our earnings release does include a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. On to slide three. The partnership maintained very high fleet utilisation during the fourth quarter of 2021, in fact 100% for scheduled operations, and we generated strong cash flow, all resulting in solid coverage for our distribution. Good progress has also been made in terms of employment contracts for a number of our vessels coming into the market, and of course we remain highly focused on securing further coverage for the quarters ahead. Although we are not directly affected by short or mid-term oil prices, The current high levels certainly further incentivize oil production, and we may also see general tanker charter rates improving, both of which we see as positive for our shuttle tankers in our markets. In the fourth quarter of 2021, we generated total revenues of 72.1 million, operating income of 26 million, net income of 23.1 million, and adjusted EBITDA of 52 million. The partnership had 560 million of remaining contracted forward revenue, excluding options, at December 31, 2021, and $117.3 million in available liquidity, including cash and cash equivalents of $62.3 million. In the quarter, we were able to announce our 26th consecutive quarterly cash distribution of $0.52 per common unit, and this was our 35th consecutive distribution under our 1099 tax structure since the partnership first listed in 2013. There was no refinancing activity in the quarter as our next tranche is not due until the third quarter of 2023. And in the medium term and beyond, with Brazil and Petrobras in particular committing extensive capex to the FPSOs that will serve as the basis for their deep water expansion, we believe that KNOP remains very well positioned to service the significant growth that we expect in the shuttle tanker serviced offshore oil fields where we operate. Slide four. shows that in the fourth quarter of 2021, and to date, we've made progress on a number of vessel employment contracts. Although GALP Sinopec did not take up their option on the Annika Knudsen, we subsequently agreed commercial terms for a new time charge contract for the vessel with a major oil company to commence in the second quarter of 2022. This new charter is for a fixed period at the Charter's option of either A, one year with options for the Charter to extend the time charter by up to four further one year periods, or B, two years with options for the Charter to extend the time charter by up to three further one year periods. The partnership also entered into a new time charter contract for the Tordes Knudsen with Petrobras, and this commenced on February 23rd, 2022 for a fixed period of five months. with an option for the charterer to extend the charter by one month. This is an example of the type of shorter term contract that we hope to replicate for the gap periods between our longer term charters. We also secured two future dated charters for the Windsor Knutson and Bodle Knutson with Equinor. The Windsor Knutson charter commences in the fourth quarter of 24 or the first quarter of 25 and is for a fixed period at the charterer's option of either one year or two years with options for the Charter to extend the Charter in either case by two further one-year periods. The Boodle Knutson Charter commences in the fourth quarter of 2023 or the first quarter of 2024 and is for a fixed period at the Charter's option of either one year or two years with options for the Charter to extend the Charter gain in either case by two further one-year periods. It's worth mentioning here that through the Charter rates we offer for the various options, we do often try to incentivize the charterer to take the longer fixed charter periods, but ultimately it's the charterer's choice. And finally, the boat of Knutson continues to operate under a rolling charter contract with the sponsor Knutson NYK, which currently expires in April 2022, but with two further one month extensions at the charterer's option, which would take the vessel's fixed employment to June 2022. We continue to seek long-term employment for the vessel and the time charter with Knudsen NYK can be terminated early should an opportunity arise. Slides five through eight summarize our financial results. For the fourth quarter of 2021, revenues were robust, affected only by the scheduled dry docking of the Tordes Knudsen and the installation of the VOC plant on the Boodle Knudsen. Vessel operating expenses for the fourth quarter were again slightly higher than previous quarters as crew and crew-related costs remained challenging due to the continuing impact of COVID issues around travel quarantine and logistics costs in particular. Coming into 2022, we have seen that some of those COVID pressures may be starting to reduce slightly, whereby crew changes are occurring with a little more ease, travel restrictions are being wound back, and more flights are available. However, with other global challenges, such as inflationary pressures, we do remain cautious about the coming year. And as you might expect, we will be closely monitoring our cost base, As stated, adjusted EBITDA showing on slide six for the fourth quarter was a strong 52 million. On slide seven, you can see our healthy cash balance at the end of 2021 of 62 million, which balance is actually higher than at the end of 2020, partly in anticipation of the dry docks that are upcoming in early 2022. Our debt continues to be repaid each quarter on schedule, and in 2021, we repaid almost 96 million in scheduled repayments. Distributable cash flow on slide eight was 23.2 million, with a solid coverage ratio of 1.28 times for the quarter. Slide nine provides an update on our contracted revenue and charter portfolio. At the end of the fourth quarter, we had 560 million of contracted forward revenue, excluding charter options held by our customers. An average remaining charter period of two years, and our customers have options to extend these charters by a further 2.7 years on average. The Winsor Knutson and the Boodle Knutson are now respectively on charter to PetroChina and KNOT or Knutson NYK, as we refer to KNOT in the earnings release. In respect to the new charters announced today for the Winsor Knutson, the Boodle Knutson and the Anna Knutson, the chart here shows initial one-year fixed charter periods, whereas actually these charters may become two-year fixed contracts in due course once the charters declare their preference. We've been able to take a first step with the Tordes Knutson in closing some of the gaps related to the Tordes Knutson, Figdis Knutson and Lena Knutson before they commence their next long-term charters in 2023. And we are seeing a modest upturn in market activity, which provides us with some optimism that whilst bumpy, new opportunities will present themselves during this year, in addition to those longer-term opportunities that we continue to anticipate. What is also foreseeable is that our first quarter 2022 revenue will be impacted by the scheduled dry dock works related to three vessels, the Tordis Knudsen, Vigdis Knudsen and Anna Knudsen. This concentration of dry dock work impacting one quarter, whilst unusual, is anticipated by the partnership and an impact on revenue and coverage for our first quarter 2022 should be expected. However, aside from these planned dry docks works, It is important to note that all of the partnership's vessels are otherwise employed on contracts during the first quarter of 2022, and the partnership does not mechanically link our quarterly distribution to any single quarter's results or coverage ratio. Slide 10 shows our sponsor, KNAT, 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. Growth through the acquisition of new vessels remains a source of strength and diversification for the partnership, and we continue to assess our options despite our cost of common equity today. We're constantly looking to further strengthen the partnership's contracted revenue stream through a further acquisition of one of the available vessels from K&OT. Any such acquisition would need to be in the interest of the partnership overall, avoid any undue financial risk to the wider business, and should be expected to strengthen our coverage. Absent that, We're not compelled to grow for growth's sake, and we'll provide further information on due course as our ideas and plans develop. On slide 11, we wanted to provide some supply data on the current global shuttle tanker fleet in response to questions we often receive. You can see it is very concentrated among the three largest market participants, with KNOP and KNOT as the largest of those. Beyond that, I would just make a few points. As you can see in the upper rows of the grid at the bottom, There are a total of 12 vessels currently on order, though clearly the absolute number here is not the kind of figure that you would see in the far larger conventional tanker sector. These 12 ships are scheduled to come into the market, primarily into Brazil in 2022, and all of those are going on to charter contracts that are already in place. This is not speculative tonnage. Additionally, following a high level of scrapping in the shuttle tanker market in 2021, and the fact that shipyard order books are typically full of LNG and container vessel orders, such that we think no new shuttle tankers can now be delivered before 2025, except for the ones on the chart here. Taking all of that against a backdrop of significant demand growth in the medium term, which I'll come to in a moment, we believe the marginal oversupply we see today is still a situation that is transitory in nature. Then on slide 12, as I've mentioned before, Brazil is where we expect to see the majority of shuttle tanker demand growth moving forward. And we're showing here the extent of anticipated expansion over the next decade or so in the largest Brazilian basins, which is significant growth. We've also added some commentary from Petrobras here on the right side of the slide that should provide helpful color. First of all, in the pre-salt fields, which are serviced by shuttle tankers, Petrobras expects its average marginal lifting cost to be $3.50 per barrel. pre-tax and leasing between 2022 and 2026, which very strongly supports continued production from existing platforms in almost any market environment. And as a matter of interest, the equivalent average figure across the period 2016 to 2020 was still only $3.70. From 2022 to 2026, Petrobras are planning to significantly increase their total production of oil and the proportion of that oil that is sourced from the shuttle tanker serviced pre-salt fields. And moving forward, Petrobras expect to be able to establish break-evens for oil production at $20 per barrel, putting them in a position to confidently pursue expansion projects that can compete with almost any other international project, whether onshore or offshore. Finally, I'll point out that Petrobras in 2021 made their largest ever reserve additions at nearly 2 billion barrel equivalents, or 219% of what they produced during the year. even after their asset sales. There are also a couple of further extracts in the appendices to this presentation that you may wish to take a look at, giving a little more on Petrobras' FPSO order book and some further details on what is widely anticipated to be the largest producing field in Brazil, the Buzios field, for which 10 FPSOs are currently expected to be in operation by 2026. Of course, we're not in the business of FPSOs, and Petrobras is not our only customer. But we do think of these metrics and this activity as close proxies for future shuttle tanker demand offshore Brazil. Then coming back to our near-term priorities on slide 13, for those that follow KNOP more closely, there will be no surprises on this slide. We remain absolutely committed to safety in all that we do. And then beyond that is the maintenance of our distribution through high utilization and our high operational standards. We need to take care of the several dry docks that are coming in and around the first quarter of 2022 in particular, and be aware of the temporary impact that that concentration of work will have. And of course, our immediate focus also remains on securing further charters for our vessels as they ford due in the coming near-term quarters in anticipation of the growth that we see coming as previously outlined. We still expect that 2022 will be bumpy for our business compared to previous years, but we remain confident that this is a temporary situation and that the business will be rewarded over time. As I stated previously, as an MLP, we're always looking at potential growth and the acquisition of another vessel. And whilst we have a supportive sponsor and no obligation to grow, we will still take an opportunity if the conditions and timing are right for the partnership as a whole. So in summary for this quarter on slide 14, we reported utilization of 100% for scheduled operations, Distributable cash flow of 23.3 million with solid coverage of 1.28. We paid a quarterly distribution of 52 cents for the 26th consecutive quarter and had 560 million of remaining contracted forward revenue, excluding options at the end of the year. 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. Nine shuttle tankers were removed from the market in 2021, and there are no new shuttle tankers entering the market on a speculative basis. And although softness in short-term demand for shuttle tankers seems likely to persist through at least the majority of 2022, we're discussing several opportunities with our customers and remain optimistic that we can secure further profitable charters for our vessels in the immediate and intervening periods. Then finally, As outlined above, we continue to expect mid- to long-term expansion of offshore oil production in pre-salt Brazil, and less but still some growth in the North Sea Barents Sea, supported most notably by the large number of FPSO orders and low marginal costs of oil production. We therefore remain very positive with respect to the mid- to long-term outlook. And on that, that concludes today's formal presentation, and I'll be happy to take any questions.

Thank you, Gary. So if you would like to ask a question, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure your phone is unmuted locally. So our first question comes from Liam Burke from B. Reilly. Please go ahead, Liam.