KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello and welcome to today's KNOP first quarter 2022 earnings results conference call. My name is Jordan and I'll be coordinating your call today. If you'd like to register a question, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Gary Chapman, CEO to begin. Gary, please go ahead.

Thank you and welcome everybody to our 2022 first quarter earnings call. The earnings release and this presentation are already available on our website at notoffshorepartners.com. Slide 2, as always, provides an important notice about the nature of our presentation today, and in particular that we include forward-looking statements made in good faith, but which contain risks and uncertainties, such that actual results may be materially different. The partnership does not have or undertake a duty to update any such forward-looking statements, and for further information, you may wish to read our annual and quarterly SEC filings. Please also be aware that our presentation includes certain non-US GAAP measures of distributable cash flow and adjusted EBITDA, and our earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. On to slide three, highlights of the first quarter and subsequent. We announced a further cash distribution of $0.52 for the 27th consecutive time at this level under our 1099 structure. which was the 36th consecutive distribution made since the partnership first listed in 2013. And indeed, this should be received by our unit holders today, in fact. We maintain very high scheduled fleet utilization during the first quarter of 99.7% and 92.8%, taking into account the scheduled dry dockings of the Tordisk Knudsen, Anna Knudsen, and Vigdisk Knudsen. We continue to make good progress in agreeing both interim and longer-term employment contracts for a number of our vessels coming into the charter market The Tortoise Knutson commenced on her time charter to Petrobras in February 2022 after successfully completing her dry dock. We have a new two-year time charter for the Anna Knutson with Total Energies, which commenced immediately after the vessel returned to Brazil following successful completion of her dry dock. Total Energies had an option to take only a one-year fixed charter on the Anna Knutson, but instead chose to take two years fixed. Knutson NYK, our sponsor, has agreed to extend the time charter of the Boodle Knutson for three further months, plus nine additional one-month extension options, which in total could take the vessel's employment to June 2023. The current time charter for the Brazil Knutson is now expected to end in or around September 2022. However, we are currently negotiating with an oil major for a proposed one-year time charter contract to commence in or around September 2022, and with options for the charter to extend further. And from the time that the Windsor Knutson is expected to commence her mobilization trip to her dry dock in June, the partnership currently expects the Vigdis Knutson to step in and fulfill most or all of the remaining existing PetroChina time charter contract, such that PetroChina would retain the use of the vessel throughout, and we would suffer a little less off-hire. And in such case, after her dry dock, the Windsor Knutson would be available for other employment. We're also in discussions as to several further charter opportunities, and we believe we've seen a noticeable upturn in market activity in Brazil in this first quarter of 2022. And with continuing high oil prices, combined with low break-even prices and low lifting costs for offshore deepwater Brazilian oil, certainly working to incentivize our customers to invest and produce, this all helps to lift demand for shuttle tankers. Then to round off this slide with some important metrics at March 31st, 2022, We had 594 million of remaining contracted forward revenue, excluding options, and 96.3 million in available liquidity, which included cash and cash equivalents of 41.3 million. And we've got no debt maturities until the third quarter of 2023. Slides four through to seven summarize our financial results, and as usual, I will allow you to read these for yourselves, but I will mention just a few points. On slide four in the first quarter of 2022, Whilst we generated good numbers across scheduled operations, our revenue, operating income, and adjusted EBITDA were all predictably affected by the off-hire incurred due to the vessel dry docks that were taking place. Whilst these dry docks affect our results, they do so in a controlled and scheduled manner for which we have budgeted. Up to six vessel dry docks will occur in 2022, and due to the timing of the works, we expect the main impacts will be seen in the first and the second quarter of the year. Vessel operating expenses for the first quarter of 2022 were slightly higher than the fourth quarter of 2021, mainly as a result of bunker fuel costs for the Tordeskenutzen, Anaknutzen and Vigdeskenutzen in connection with their voyages to the dry dock. We only incur fuel costs when a vessel is off hire, such as during a dry dock, as otherwise fuel for our vessels is a cost for our customer. Crew and crew-related costs remain challenging due to the continuing impact of COVID issues around travel, quarantine and logistics costs, but we have seen some pressures continue to ease, so hopefully such cost increases have peaked. Though as everyone right now, we are closely monitoring our cost and supply bases to guard against the inflationary pressures that seem to be building in certain parts of the world. Though I would say that we do have a wide and geographically spread supply base to draw upon, and so at this time we have no immediate or specific inflationary concerns. Finally, as over half of our net debt is effectively fixed rate, principles through the use of interest rate swaps. The mark-to-market, non-cash valuation of those swaps, that is a major part of our realized and unrealized gain loss on derivative instruments in our income statement, has shown a significant gain in the first quarter of 2022, reflecting upward market sentiment for U.S. dollar interest rates going forward. Adjusted EBITDA on slide five for the first quarter was strong at 43.4 million, but down compared to previous quarters for the reasons related to our vessel dry docks, as explained previously. On slide six, you can see our significant cash balance at the end of the first quarter of 41.3 million, which again is naturally and predictably lower than the end of 2021 as a result of the planned vessel dry docks. The distribution coverage ratio on slide seven was 0.80 for the first quarter of 2022, And although perhaps some investors and analysts will want to focus heavily on this figure for each quarter to inform about current and maybe even future distributions, the partnership in the board instead takes a longer, wider, and more rounded view. When deciding on the payment of a distribution, we don't make simple reference to or have a mechanical link to the distribution coverage ratio for that quarter. Rather, we take into account many factors, including our liquidity position, the outlook for the business and our market, our strategic interests, and anything else that we consider to be relevant. We feel this allows us to operate in the best interests of our unit holders and serve the long term, and we always try to encourage our investors and analysts to think in the same way. Slide eight provides an update on our contracted revenue and charter portfolio. As many of the changes here were explained previously on slide three, I won't say too much more other than at the end of the first quarter, we had remaining forward contracted revenue of 594 million, excluding options, average remaining firm charters remaining of 1.8 years, and charters had options to extend these charters by a further 2.4 years on average. Then on slide 9, we have the potential drop-down vessels held by our sponsor that the partnership may choose to purchase in the future. There are no changes on this slide this quarter compared to the previous quarter. Slide 10. As regular listeners to this earnings call will know, in the limited time we have each quarter, we try to provide some extra market information or background that we hope people may find useful. We have some further information in the appendices to this presentation today, but I wanted to look further at the offshore expansion in Brazil that has already started. Although oil and gas sanctioning momentum in Brazil stalled in 2020 due to the COVID-19 pandemic, we've seen it pick up again in 2021. Several projects were approved, including pre-salt projects operated by Petrobras at Miro 4 and two more FPSOs in the Búzios field, Búzios 6 and 7. And we expect activity to continue at pace over the next three years with several more projects in line for sanctioning, including FPSOs for Búzios 8 and 9. Restart Energy projects that Brazil from 2021 to 2025 will receive a total of over £36 billion in investments across its oil and gas industry from Petrobras and a variety of other international oil majors, representing 9% of worldwide estimated capex for new sanctioning across that period. Things are happening in the near term also with Brazil's Minister of Mines and Energy recently announcing the aim to increase crude output by around 10% this year to help stabilize international oil markets. What is also good for us is that companies such as Shell, Equinor, and Total Energies are growing their influence in the Brazilian offshore oil market and reaffirming their strategic commitment to deep water oil production in Brazil, which brings more diversification and business to the shuttle tanker market. With very limited new net tonnage coming into the market before the end of 2025 and break even for those Brazilian oil offshore deep water projects as low as $20 per barrel, there are some key reasons why we are confident about the shuttle tanker market as we move forward. Then our near-term priorities on slide 11. Again, for those that follow KNOP closely, there will be no surprises here. We remain committed to safety in all that we do, first and foremost, and to target the maintenance of our distribution through high scheduled utilization, high operational standards, and stable cash flows. We will continue our dialogue with all of our customers and work to secure employment for those vessels that remain open or partially open in 2022 and beyond. And we have already made further progress on this front so far in 2022 with the Tordes Knutson, the Ana Knutson and the Boodle Knutson and we hope the Brazil Knutson on the back of what we believe has been a noticeable upturn in market inquiries and activity, particularly in our main market of Brazil. And although the North Sea market is more mature and hence we would not expect to see the same rapid growth as in Brazil, we have continued and KNOT has continued with its charter of the Boodle Knutson We remain optimistic about the mid to longer term prospects there also. We need to take care of the several dry docks that are still to be performed, mainly in and around the first half of 2022, and be aware of the temporary but scheduled and budgeted impact that that concentration of work will have on our results. We're continuing to weigh up options for the acquisition of a new vessel, most likely using debts and available liquidity rather than new equity. Such a transaction should be expected to further strengthen the partnership's stability, contribute to net cash flow, and in the opinion of the board and the partnership's independent conflicts committee, be in the interest of the partnership as a whole. As I stated previously, whilst we have a supportive sponsor and have no obligation to grow, we will still take an opportunity if we believe the conditions and timing are right. So in summary for this quarter on slide 12, Utilisation was 99.7% for scheduled operations, distributable cash flow was 14.5 million and coverage was 0.8, principally due to the scheduled dry docks that are taking place. The partnership continues to believe that its longer term cash flow prospects and near term liquidity offer good support for its quarterly distribution and as such we maintained our distribution of 52 cents for the 27th consecutive time. Again, we had $594 million of remaining contracted forward revenue excluding options at the end of the first quarter, and we have no refinancing due until the third quarter of 2023. Please continue to bear in mind that the partnership's operations are not exposed to short-term fluctuations in oil commodity prices, volumes of oil transported on our vessels, or global oil storage capacity. And we can report that multiple opportunities are being discussed with customers, and the partnership is optimistic that we can secure further profitable charters for its vessels for any open and intervening periods. And this follows given the signs of increasing activity we are seeing in the market, particularly in Brazil. Though we do continue to expect the path this year to be bumpy, some market softness may continue, and our second quarter will be impacted by the dry dockings in the manner we have described. Thereafter, we continue to expect mid- to long-term expansion in the offshore oil production in pre-sold Brazil and 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. And therefore, we remain very positive with respect to the mid- to long-term outlook. Then following this formal part of today's earnings call, I'll be happy to answer any questions. But just to say, that the partnership now has a LinkedIn page under Not Offshore Partners LP. For those that use LinkedIn, please feel free to go there and follow our posts. And also, we plan to release an updated website very shortly at the same address as now, which will include more information than is on our current website, and we hope people will find it to be a useful reference. Thank you very much for listening.

As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. And please ensure you're unmuted when speaking. Our first question comes from Robert Silvera of RA Silvera and Associates. Robert, the line is yours.