KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello everyone and welcome to the Notts Third Quarter 2022 Earnings Results Conference call. My name is Charlie and I'll be coordinating the call today. You'll have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypads. I'll now hand over to your host, Gary Chapman, CEO and CFO to begin. Gary, please go ahead.

Thank you, Charlie. Thank you and welcome everybody to our Third Quarter 2022 Earnings call. The earnings release and this presentation are also available on our website at notoffshorepartners.com if you want to view them. Straight on to slide two, which concerns the nature of today's presentation, in particular 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, highlights of the third quarter and subsequent. We announced a cash distribution of $0.52 for the quarter for the 29th consecutive time at this level under our 1099 structure, and which was the 38th consecutive distribution made since the partnership first listed. We ran at 99.7% utilization for scheduled operations during the third quarter and 92.8% taking into account the scheduled dry dockings of the Lena and Windsor Knudsen vessels. We completed the acquisition of the Sunerva Knudsen on July 1st, 2022 to bring our fleet up to 18 vessels and at the same time, adding a block of forward revenue and charter coverage as a result. And all five of our vessel dry docking scheduled in 2022 have been completed. In terms of charter developments, Knutson NYK have taken each of their one month options on the Boodle Knutson to date and have options to keep the vessel until June 2023. We signed the time charter for the Windsor Knutson with Shell to commence in or around January 2023 for a one year fixed period plus a one year option. The Lane of Knutson commenced on its charter with Total Energies for six months plus a further six month option. And although in the second quarter we announced the re-delivery of the Hilda Knutson, we can confirm that the partnership's sponsor, Knudsen NYK, in similar fashion to the Boodle Knudsen arrangement, have agreed to time charter the vessel for a 90-day period plus three further 30-day option periods, albeit at a reduced charter rate, but to help support the partnership's cash flow in the short term. This arrangement commenced on September 3rd, 2022, and if all options are taken by Knudsen NYK, would currently expire on or around the beginning of March 2023. The time charter for the Tordes Knutson with Total Energies commenced on September 10th, 2022, for a fixed period of three months, with charters options to extend the charter by up to two further three-month periods. And Total Energies has already exercised the first of its two three-month option periods. On slide four, the current time charter for the Brazil Knutson with Galp Sinopec expired in November 2022. However, the partnership has entered into a new time charter contract, also with GALP, in direct continuation for a period of one year, extending the vessel's firm employment to November 2023. Regarding the partnership's time charter contract with Equinor for the Boodle Knudsen that is to commence around the end of 2023, this charter was either one year firm plus two one year options, or two years firm with two one year options In November 2022, Equinor confirmed their intention to fix the initial charge period at two years, meaning that if all options are taken by Equinor, the charter will be for four years and will expire around the end of 2027. We received news that ENI would re-deliver the Toril Knudsen to us, and we expect this to occur on or around December 17th, 2022. We're now marketing the vessel for new employment. In accordance with the previously announced time charter agreement with ENI for the Ingrid Knudsen, the partnership is expecting re-delivery of the vessel on or around December 7th, 2022. The partnership is continuing to market the vessel for new employment during 2023 in anticipation of the commencement of the new three-year ENI time charter contract commencing in January 2024. In terms of the wider market, we have continued to see good levels of activity in Brazil, but the North Sea remains a significant concern as we consider that this could take several further quarters to rebalance. As we've said before, we're also in this time looking at the conventional tanker market where headline spot rates have risen substantially in recent weeks. And although this is a positive development, the reality is that it is not that easy to secure those high rates. And as part of this type of employment, it is necessary to consider utilisation where the vessel may not earn revenue every day when it's between cargoes, as it does under a time charter, and also fuel costs, which would normally be a cost for our customers under a time charter contract. Although we are also actively looking at the conventional market, it may be that this does not provide a sufficient level of income. Notwithstanding, given the charter developments we have seen, we now have 644 million of contracted forward revenue excluding options up from 594 million at the end of June 2022, plus 74.6 million in available liquidity. Slides five through eight are our usual summary of our financial results, and as usual, I will just mention a few points. On slide five, our revenues held up well this quarter given the dry dockings ongoing, and depreciation was higher as a result of there now being 18 vessels in the fleet from July 1st. Operating expenses are above their historic average, mainly as a result of increased bunker fuel costs related to our time charter vessels that needed to transit to and from their dry docks. When time chartered vessels are on hire fuel is a cost for our customers but these vessels are off hire during their dry docks and with fuel costs increasing this has impacted our results. The other factor affecting operating expenses are crew and crew related costs which remain elevated since the onset of Covid and which level may become the new normal as we move forward. With a wide and geographically spread supply base to draw upon, we do believe we have some protection against certain elements of inflation that are occurring in many countries just now. However, this is something that we, like all companies, are keeping under close review. The upturn in interest expenses and realized and unrealized gains and losses on derivative instruments are driven in part by the recent increases in US dollar interest rates and forward curve, and again, partly driven by having an extra vessel in the fleet. September 30th, 2022, around 61% of our debt was actually or effectively fixed rate through either interest rate swaps or our two sale and lease back financings. On slide seven, you can see our cash and cash equivalents balance at the end of the quarter of 49.6 million and the debt refinancing due in the third quarter of 2023 has moved to the current portion of our long-term debt balance. This is something we have already started talking to our lenders about And early indications are that we will be able to successfully refinance the six underlying vessels in good time by mid 2023 and on acceptable terms. The distribution coverage ratio on slide eight was slightly up at 0.6 for the third quarter of 2022. And as we have disclosed previously, although there is a tendency to focus heavily on this figure each quarter, the partnership and the board instead takes a longer and more rounded view. But of course, that's not to say that a DCR of less than one is something that is sustainable. In the context of the distribution, although we do not mechanically link that to the distribution coverage ratio in a given quarter, our board does take into account our liquidity position, the outlook for the business in our market, our strategic interests, and anything else we consider to be relevant. We feel this allows us to bring a holistic view in ensuring that we operate in the best interests of our unit holders, without jeopardizing their ability to participate in the longer term shuttle tanker opportunities that are the core of our business. Slide nine is an update on our contracted revenue and charter portfolio. We've covered many of the contractual updates already, so I won't repeat them here, other than to say that while we have had success in filling some of the gaps we had in 2022 and in the longer term, there remains important work to be done in the near term for 2023, particularly in the North Sea. and that is what we're expending a great deal of energy on at the moment. As noted before, at September 30th, 2022, we had remaining forward contracted revenue of $644 million, excluding options, with average remaining firm charters of 1.9 years, and charters had options to extend these charters by a further three years on average. Then on slide 10, we have the potential drop-down vessels held by our sponsor, KNOT, that the partnership may choose to purchase in the future. We've now added the two recently contracted vessels that are due for delivery in late 2024 and late 2025. It remains the partnership's target to acquire these vessels from the sponsor when suitable opportunities arise. However, there is, of course, no guarantee that this will be possible. Slide 11. We have seen pandemic-related impacts start to recede, and FPSO deployment and oil production schedules have accelerated, especially in the Brazilian offshore shuttle tanker service to pre-salt areas. Partly, this is from a belief that higher or higher oil prices will persist compared to project break-evens at or below $35 per barrel, driving investment and additional production capacity in the deepwater offshore fields. Although the more mature North Sea market has continued to encounter delays, resulting in the current oversupply of shuttle tankers in the region, we saw the arrival into Norway during the second quarter of the delayed Johan Kastberg FPSO that is to be operated by Equinor. This is a great example of a large field that will need shuttle tankers for its proven volumes that are today estimated at between 400 and 650 million barrels of oil equivalent and for throughout its production life, which is expected to be 30 years. On slide 12, we've highlighted previously only a very small number of new shuttle tanker orders that have been placed in 2022 for deliveries in 2024 and 2025. constituting only approximately 5% of current shuttle tankers in service. Given this, and the main shipyard still being effectively full with container ships and LNG carrier orders through 2025, the total order book for shuttle tankers is very muted, with only six likely to deliver before the end of 2025, all of which are understood to be assigned to long-term charters. Set against anticipated production startups from ordered or delivered FPSOs, we expect this will meaningfully tighten the mid-term charter market, potentially to the point of shortage. New-built shuttle tank prices also remain elevated up around 30% since the second half of 2021 as the result of tight shipyard capacity and higher input prices for steel and labor, all of which continues to help the competitiveness of our existing fleet. So in summary for this quarter on slide 13, we had strong utilization of 99.7% for scheduled operations, we generated distributable cash flow of 10.9 million, and we paid a quarterly distribution of 52 cents for the 29th consecutive quarter. We had 644 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 offshore loading charter rates are not as volatile as you find in other segments of shipping, either upwards or downwards. In the near term, we focus very much on safe operations, both onboard and onshore, and we aim to maintain our high utilization statistics for scheduled operations. We're talking with our customers, as we always do, and are proactively monitoring the wider market, including the conventional tanker market, to ensure we can respond flexibly as opportunities arise. We're planning for the scheduled dry docks that are to occur in 2023. And it may be worth saying here that all five of the dry docks in 2022 were for vessels based in Brazil. And with the dry docks taking place in Europe, these were our most expensive works due to longer mobilization time and fuel costs. In 2023, we have five further dry docks, however three of these vessels are already based in Europe, resulting in significantly lower budgeted time and costs. Finally, as mentioned, the speed of recovery in oil production and hence shuttle tanker demand in the North Sea is our biggest cause for concern at this moment. We're working every angle to support our short-term cash flows across our North Sea vessels to find opportunities to reinforce our balance sheet, But if we're not able to do that and soon, then the board will need to consider how this impacts on our distributable cash flow. At the same time, we continue to believe that the significant mid to long-term expansion of offshore oil production, particularly in pre-salt Brazil, supported by the large number of committed FPSO orders and with low marginal costs of oil production, together with the barriers to entry in our track record, mean we can continue to remain positive with respect to the mid to long-term outlook. Thank you very much for listening. And following this part of today's call, I'll be happy to answer questions.

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