KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello and welcome to today's Not Offshore Partners second quarter 2022 Earning Results conference call. My name is Bailey and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Gary Chapman, Chief Executive Officer with Not Offshore Partners. Gary, please go ahead.

Thank you, Bailey, and welcome, everybody, to our second quarter 2022 earnings call. The earnings released in this presentation are also available on our website at notoffshorepartners.com if you want to view them. Slide two reminds about the nature of today's presentation, in particular as regards the inclusion of forward-looking statements which are made in good faith but which contain risks and uncertainties, meaning that actual results may be materially different. The partnership does not have or undertake a duty to update such forward-looking statements, and for further information, please consult our annual and quarterly SEC filings. Today's presentation also includes certain non-US GAAP measures, and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures. On to slide three of the presentation, highlights of the second quarter and subsequent. We announced a cash distribution of $0.52 for the quarter for the 28th consecutive time at this level under our 1099 structure. which was the 37th consecutive distribution made since the partnership first listed in 2013. We maintained 100% scheduled fleet utilisation during the second quarter, 90.5% taking into account the scheduled dry dockings of the Lena, Anna, Victis and Windsor Knudsen vessels. We were able to conclude a further sale and lease back agreement with respect to the Toril Knudsen, generating net proceeds of approximately $39 million after fees and expenses, And we used the majority of these funds to purchase the Sunerva Knutson from our sponsor, Knutson NYK, or as we refer, KNOT. The total purchase price of the Sunerva Knutson was $119 million, including taking on the debt associated with the vessel. We've been able to conclude, or nearly conclude, a number of charters this quarter, including that in return for accepting an early re-delivery of the vessel under the existing contract, we closed a new three-year deal with ENI for the Ingrid Knutson It commenced in January 2024 for a period of three years and with three further years of charter's options. The Vigdisk Knutson took over the time charter contract for PetroChina, and PetroChina also exercised their first option for an additional period of 12 months, taking the vessel's employment to at least September 2023. Tordisk Knutson is expected to go on charter to Total Energies in September 2022 for a fixed period of three months, with charter's options to extend by up to nine further months, subject to agreement of customary operational terms. Lena Knutson has also secured a charter with Total Energies, and this commenced on August 21st, 2022, for a period of six months, with charterers' options to extend by up to six further months. Windsor Knutson is expected to be chartered to a major oil company from around January 2023 for a fixed period of one year, with a charterer's option to extend the charter by one further year. Again, this remains subject to agreement of customary operational terms. Finally, we remain in discussions with an oil major for the Brazil Knutson for a one-year time charter contract with options to extend to commence in or around September 2022, and we're hopeful that this can be concluded soon. Slide four. In April 2022, Anna Knutson commenced on a charter with Total Energies for two years with options for the charterer to extend the time charter by up to three further one-year periods. The Bodle Knutson is continuing to operate on a time charter with Knutson NYK at a somewhat favourable rate to Knutson NYK that with options could last until June 2023. And this is all pending finding other new employment for the vessel. We received news that E&I would re-deliver the Hilda Knutson to us around September 2022. And following her dry dock, the Windsor Knutson will, absent other employment, be available until the end of this year. They were working hard to secure further charters for these vessels. We, of course, continue to discuss with our customers other opportunities, and we've seen the upturn in market activity in Brazil continuing into the second quarter. The North Sea market, where four of our vessels operate, is taking longer to return to the higher levels of production we're predicting, mainly following the delays caused by the initial onset of COVID. And we think this could take several more quarters to resolve itself. In particular, we await the large Johan Castberg field in the Barents Sea coming on stream. The FPSO for which has suffered delays during COVID and also with some construction issues. We've continued to take precautions against COVID in our business, and we have been able to avoid any serious or sustained operational impacts from the pandemic. And there have been no effects on the partnership's contractual position. At June 30th, 2022, we had 487 million of remaining contracted forward revenue excluding options and 123.5 million in available liquidity. which included cash and cash equivalents of 88.5 million, of which we utilized around 32 million on July 1st, 2022, in connection with the acquisition of the Sunerva Knudsen. Slides five through eight are a summary of our financial results, and I will allow you to read these for yourself, but mentioning just a few points. On slide five, whilst we generated good numbers across scheduled operations, our revenue, operating income, and adjusted EBITDA were all predictably affected by the off-firing curve due to the vessel dry docks that were taking place. Five of the six vessels due for dry dock in 2022 have now completed or nearly completed them, with the sixth vessel due late in the fourth quarter of 2022 into the first quarter of 2023. Our operating expenses were also higher this quarter, partly as a result of increased bunker costs related to our time-charted vessels that needed to transit to and from their dry docks. When time-charted vessels are on hire, fuel is a cost for our customers, but these vessels are off hire during their dry dock, and with fuel costs increasing, this has impacted here. 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 further easing in some parts of the world, so hopefully such cost increases have peaked. With a wide and geographically spread supply base to draw upon, we believe we have some protection against certain elements of inflation that is occurring in many countries just now. However, this is something that we, like all companies, are keeping under close review. Our interest expenses are up this quarter, mainly due to increased LIBOR related to the proportion of our debt that is floating rate. On slide seven, you can see our cash and cash equivalents balance at the end of the quarter of 88.5 million, which, when you deduct the approximate 32 million we utilized on July 1st for the acquisition of the Sunerva Knudsen, is a little down on the first quarter balance. Again, this is predictable, given the planned dry docks that have occurred. The distribution coverage ratio was 0.51, for the second quarter of 2022. And as we have disclosed previously, although there is a tendency to focus heavily on this figure each quarter, the partnership in the board instead takes a longer, wider, and more rounded view. When deciding on the payment of a distribution, we do not mechanically link to the distribution coverage ratio for that quarter. Rather, we consider 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 continue to try to encourage all of our stakeholders to think in the same way. Slide nine provides an update on our contracted revenue and chart portfolio. I don't intend to read through this slide as we've covered many of the contractual updates already, other than to say that although it's not a smooth chart picture right now, We have had success in filling some of the gaps we had in 2022, and we are, of course, working hard and continuing our efforts. We had remaining forward contracted revenue of 487 million, excluding options, average remaining firm charters of 1.7 years, and charterers had options to extend these charters by a further 2.4 years on average. I've included the Sunerva Knudsen on here, even though we did not purchase the vessel until July 1st, as I think this is more useful for readers of the presentation. Then on slide 10, we have the potential drop-down vessels held by our sponsor, K&OT, that the partnership may choose to purchase in the future. There are no material changes to this slide, this quarter, compared to the previous quarter, other than the removal of the Sunerva connection given the partnership's purchase on July 1st. Slide 11, the delivery schedules for FPSOs, many of which were delayed due to early pandemic capex reductions, have seen overall timelines normalize, particularly in Brazil. I can also refer you to Appendix C of this presentation, a slide we have used previously and which shows the many FPSOs Petrobras have ordered for operation in Brazil. Current high oil prices against project level break-evens at or below $35 per barrel and producer optimism about continued high prices are further encouraging investment in additional production capacity and in the shorter term providing trading opportunities. Importantly, New FPSO ordering activity for the Brazilian pre-salt reflects funded commitments to increase production in shuttle tanker-serviced deep offshore fields. And the more mature North Sea market saw the milestone arrival into Norway during the second quarter this year of the delayed Johan Castberg FPSO, intended for the shuttle tanker-serviced Barents Sea. With scheduled start-up in late 2024, early 2025, proven volumes today are estimated between 400 and 650 million barrels, and production is expected to run for 30 years. Once on stream, this field would be the source of much activity. On slide 12, following earlier CAPEX program delays across the energy industry and increasing new build prices, we understand that only one new shuttle tanker order has been placed in 2022, thus constituting just over 1% of the current 79 shuttle tankers in service today. This limited ordering activity, with the main shipyards being effectively full with container ship and LNG carrier orders through 2025, means that the total order book for shuttle tankers is quickly dwindling, with only four likely to deliver before 2025, all of which we understand are already assigned to long-term charters. As a result, oil production growth in the midterm may suffer from a lack of available tonnage. And with new-build shuttle tank prices up around 30% since the second half of 2021, the competitiveness of the existing fleet and vessels should be highlighted. So slide 13, our near-term priorities, which are quite simple and consistent, continue to focus on safety, maintain high scheduled operational utilization in line with our historic track record, ensure the remaining dry docks in 2022 are successfully closed out, Keep close dialogue with our customers to ensure we can respond as opportunities arise. Work hard to secure employment for our vessels that remain open in 2022 and 2023, with particular emphasis on the North Sea. And we think by targeting these things, we will be keeping the best long-term interests of the partnership unit holders to the fore. So in summary for this quarter on slide 12, We had strong utilization of 100% for scheduled operations. We generated distributable cash flow of 9.4 million following the several dry docks in the quarter. We paid a quarterly distribution of 52 cents for the 28th consecutive quarter. We had 487 million of remaining contracted forward revenue, excluding options at the end of the quarter, and no refinance due until the third quarter of 2023. As a reminder, the partnership's operations are not exposed to short-term fluctuations in oil prices, volume of oil transported or global oil storage capacity, and our charter rates are not as volatile as you find in other segments of shipping, either upwards or downwards. Opportunities continue to be discussed with our customers and we remain optimistic that we can secure further profitable charters for our vessels in the intervening periods. The activity we are seeing in our main market, Brazil, is very encouraging, though the speed of recovery in oil production in the North Sea is a cause for concern at this moment. The significant mid- to long-term expansion of offshore oil production in pre-salt Brazil, with some growth in the North Sea Barents Sea, continues to be supported by the large number of committed FPSO orders, and with low marginal costs of oil production, we continue to remain positive with respect to the mid- to long-term outlook for the shuttle tanker markets. Thank you very much for listening to this short presentation. That concludes the formal part of today's presentation, and I'll be happy to answer any questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you should like to remove that question, please press star followed by two. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question today comes from the line of Richard Diamond from Castlewood Capital. Please go ahead. Your line is now open.