KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello and welcome to today's KNOP fourth quarter 2022 earnings results conference call. My name is Bailey and I'll 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 Gary Chapman, CEO and CFO. Gary, please go ahead.

Thank you and welcome to our fourth quarter 2022 earnings call. The earnings released in this presentation are available on our website at notoffshorepartners.com if you want to view them. Slide 2 gives guidance on the inclusion of forward-looking statements in today's presentation 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 any such forward-looking 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 slides three and four are highlights from the fourth quarter of 2022 and subsequent. We announced a cash distribution of 2.6 cents for common units under a 1099 structure, which although reduced, was the 39th consecutive distribution overall since the partnership first listed in 2013. Our fleet in the fourth quarter operated with 96.1% utilization for scheduled operations and 94.9% utilization taking into account scheduled dry docking of the Karmann Knudsen. Since we last reported, we've been busy. On November 29, 2022, Repsol Sinopec, the charter of the Karmann Knudsen, confirmed its option to extend the existing time charter of the vessel by one further year. The vessel is now fixed until January 2024, with Repsol Sinopec holding options to extend the time charter by two further one-year periods. And since the end of the fourth quarter, we've signed six new contracts or extensions, including a new 10-month contract with Altera for the Ingrid Knudsen, contract extensions for the Tordes Knudsen and the Lena Knudsen, and new contracts with our sponsor Knudsen NYK for the Boodle Knudsen, the Hilda Knudsen and the Toril Knudsen. The three contracts with our sponsor were approved by the Partnership's Independent Conflicts Committee and provide a level of certainty to the Partnership. And in respect of the Boodle Knudsen and the Ingrid Knudsen, these vessels are now contracted to at least the fourth quarter of 2025 and 2026 respectively. During the fourth quarter or since, three of our vessels, the Windsor Knudsen, the Toril Knudsen, and the Ingrid Knudsen, have operated for at least some time in the spot market, either performing conventional tanker voyages or offshore loading voyages. And each has been able to generate a positive contribution from those activities. The Windsor Knudsen was also successfully delivered to Shell on January the 11th, 2023, commencing on a fixed one-year charter, with Shell also having an option to extend the charter by one further year. And then finally, We have agreed commercial terms for a new multi-year time charter contract for each of the Fortaleza Knutson and Recife Knutson with Transpetro to commence directly upon expiration of the existing bare boat charters, and we are now awaiting the charterer's management approval, which we anticipate will follow shortly. The increased market activity in our main market Brazil continued in the fourth quarter and to date, and we expect this will persist based on current market parameters and conditions. The North Sea time chart market, where currently four of our 18 vessels operate, remains subdued, taking longer to return to the predicted higher levels of oil production and shuttle tanker demand. However, we have secured a level of income for all of these four vessels in 2023, with the Boodle Knutson and the Ingrid Knutson secured until the fourth quarter 2025 and 2026, respectively, as I mentioned. At December 31, 2022, the partnership had 47.6 million in available liquidity, and the fleet had an average age of 8.7 years, with each vessel having an estimated useful life of 23 years. Slides five through seven are our summary of financial results, and as usual, I will just mention a few points. On slide five, our revenues were strong in the fourth quarter, and indeed, there may be over a million dollars more in loss of higher insurance to come, resulting from insurance claims for the Windsor-Connaughton and the Sonerva-Connaughton. But under US GAAP, we are not allowed to recognize in the accounts, as we are not yet sure of the final amount. Operating expenses were lower in the fourth quarter, largely reflecting higher bunker fuel costs in connection with multiple vessel dry docks in both the second and third quarters, recalling that when time-charted vessels are on hire, fuel is a cost for our customers, but these vessels are off hire during their dry dock. Crew-related costs and logistics remain somewhat elevated compared to historic averages ever since the COVID-19 pandemic. and which level we believe is probably now the new normal as we move forward. As we have mentioned before, with a wide and geographically spread crew and supply base to draw upon, we believe we have some protection against the inflationary pressures that are occurring in many countries just now. However, this is something that we, like all companies, are keeping under close review. Higher LIBOR, higher utilization of our evolving facilities, and having an 18th vessel from July 1st, 2022, have all increased interest expenses during 2022, and this trend continued in the fourth quarter. However, this has not had any impact on our continuing and scheduled debt repayments made during the year. At December 31, 2022, the partnership's net exposure to floating interest rate fluctuations was $372.5 million. or 35% of our total interest-bearing debt. In other words, 65% was fixed by interest rate swaps or effectively fixed by our two sailing lease-backed finances. On slide six, you can see our cash and cash equivalents balance at the end of the quarter of $47.6 million. And we are working on the upcoming debt refinancing, the first of which falls due in August 2023. And to date, we have no reason to believe that they will not be refinanced on acceptable and similar terms. and in good time prior to maturity. At present, we are not targeting to borrow more. That is, we do not currently plan to increase our leverage on any of the facilities. On slide seven, you can see the overall adjusted EBITDA results for the fourth quarter was very solid. And indeed, it was the highest achieved in 2022. Slide eight is an update on our contracted revenue and charter portfolio. As before, we've covered many of the contractual updates already, and they're also set out in the earnings release, so I won't repeat them here, other than to say that we are pleased with the progress we have been able to make in the fourth quarter of 2022 and subsequent. We're in a position where we have contract coverage for almost the whole of 2023, and several vessels are now under contract for much longer periods. It's still a work in progress, but we have certainly made progress. Including contracts and extensions signed since December 31, 2022, we have remaining forward contracted revenue of $715 million. This figure excludes options, but it does include contracts and extensions signed since December 31, 2022. And as we have agreed commercial terms, though we have not yet signed, we have included the anticipated charters on a bare-boat basis for the Fortaleza, Knudsen, and Recife Knudsen. Of our firm charters, these have 2.1 years remaining on average, and charters had options to extend these charters by a further 2.2 years on average. On slide 9, we are showing our contract coverage in a different way. This slide is not saying that utilization in the first quarter of 2023 will be 100%, but rather that for this quarter, there are not further outstanding days still to be covered by a charter contract. perhaps most clearly demonstrates where our work and focus is needed to restore forward visibility of earnings, to which we have very frequently referred to in the past. Then on slide 10, we have the potential drop-down vessels held by our sponsor, KNOP, that the partnership may choose to purchase in the future. 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 actually be possible. Slide 11, we have included a similar slide in previous presentations, but we believe this remains a very valuable source of independent information that speaks to the future of shuttle tanker demand in Brazil. Indeed, the number of new FPSOs to be deployed in Brazil through to 2027 equates to approximately 50% of the world's total FPSOs, and with a low carbon score and low marginal costs of oil production, we remain very positive with respect to the mid- to long-term outlook here. We have also included a further slide in the appendix to this presentation that gives some more detail. On slide 12, as we've highlighted previously, despite the forecast growth in demand for shuttle tankers in the mid and long term, only a very small number of new shuttle tanker orders have been placed for deliveries in 2023, 2024, and 2025, constituting approximately 8% of current shuttle tankers in service. Given this, and with the main shipyards having very limited or no capacity due to container ship and LNG carrier orders through 2025, the total order book for shuttle tankers is likely to remain very muted. Hence, we continue to expect that the market will meaningfully tighten, potentially to the point of shortage. There does remain some uncertainty around forecasting the specific timing of such market developments. New-build shuttle tanker prices, indeed the prices of any new ship today, remain elevated, up over 30% since the second half of 2021. as a 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 good utilization of 96.1% scheduled operations. We paid a quarterly distribution for the 39th consecutive quarter, albeit at a reduced level. And we have commenced discussions with lenders for our upcoming refinancing. And since December 31, 2022, We have signed six new charters and extensions and agreed commercial terms for multi-year charters for two further vessels. Overall, we've made good progress and important progress towards restoring visibility of earnings and a sustainable path forward, though of course there remains more to do. In the near term, as always, our focus is on safe operations, both on board and on shore, and to take care of our crew whilst maintaining our high standards and utilisation statistics. Our other main focus is on the refinancing due in 2023, and we are well underway with these processes and hope to be in a position to have each closed well in advance of each maturity date. After the Carmen Knutson dry dock, which is already completed, there remains four further scheduled dry docks in 2023 to take place in Europe, and which we are planning for. Three of these vessels are European-based, so mobilization costs will be lower than for the Brazilian-based vessels. And hopefully it goes without saying that we are talking to our customers and proactively monitoring the market to ensure we can respond flexibly as charter or even spot opportunities arise. And on slide 14, we have just put this in here to promote our newly refreshed website. We've tried to add a little more background content on shuttle tankers, and we will try to continue to do so over time. And hopefully people will find it useful and provide an improved experience. Thank you for listening and following this more formal part of the call. I'll be very 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 would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. 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 Liam Burke from B. Reilly. Please go ahead. Your line is now open.

Thank you. How are you today, Gary?

I'm very well, Liam. How are you?

Fine, thank you. Gary, a lot of your discussion on the market is Brazil. You have four vessels in the North Sea. If I look at the new building schedule, that's all slated for Brazil. Could you either give us color on the North Sea market, or does it make more sense to move capacity to Brazil?

Yeah, the North Sea market, as we've said, is a little bit soft, and it's still the overhang from the project delays that we've seen historically. In terms of moving vessels down to Brazil, we certainly haven't ruled that out. But timing is everything. And we would obviously also incur not insignificant costs in moving the vessels down to Brazil. So we would want to be really sure that if we did that, it would be a successful move. And so I come back to my first point that timing is everything there to do that. But it's certainly something we haven't ruled out. OK.

Obviously, your contracting outlook looks a lot better with what you've done in the fourth quarter. Does that help in your negotiations for your debt refinancings?

Yes, absolutely. Absolutely. We think we will be able to successfully close all of those anyway, regardless. But of course, all of our institutional lenders clearly are interested in us being a successful business. But yes, of course it helps. But nonetheless, we were confident that we would be able to get all of these refinancings done on a timely basis regardless. But yes, of course it helps.

And that also includes the two revolvers that are up for renewal later in the year?

That's correct. It includes those, yes.

Okay, great. Thank you.

Thank you.

Our next question today comes from the line of Richard Diamond from Castlewood. Please go ahead. Your line is now open.

Gary, good morning. I want to commend you on the progress you've made since the beginning of the year. And I have a quick market question. Are traders aware that today you have significant potential market? If, for example... Sorry, Richard.

I'm very quiet.

Okay. Can you hear me?

That's much better. Thank you. If you wouldn't mind starting again.

Okay. One, I want to commend you on making a lot of progress. It's not easy. Hats off. Secondly, are charters aware that you have or we have significant choices in the marketplace? If you were a conventional tanker company, you could charter out your vessels and your stock price would likely double. I understand our... you know, strategy, and I buy into it. I'm just wondering if the charters understand how vulnerable they are if shuttle tankers leave for conventional shipping.

Yes, Richard, it's a great point and a great question. And, you know, absolutely, we We're very much aware of that, and we make sure our customers are aware of that if they're not already aware of it by their own analysis. I mean, certainly, you know, our shuttle tankers are irreplaceable, and there are only so many of them, and with the yards full up, you know, supply isn't going to suddenly increase in the next few years. So I think it's something that we continually press with our customers that, you know, perhaps they do need to take a close look at what's going to be available when they need it. And I think we've seen a little bit of that with Equinor fixing some of the vessels, Windsor and Boodle, for example, in the North Sea for Boodle. So I think there is a little bit of movement there, and I think we're increasingly seeing that certainly in Brazil, for sure, for sure.

Thank you very much.

Thanks, Richard. Appreciate it. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from the line of Pofrad from Alliance Global Partners. Please go ahead. Your line is now open.

Good morning, Gary, or good afternoon to you. I had a couple of questions more in the micro level. Do you have the mix of operating days broken out by charter versus what days worked in the spot or the wage market and then how many days were idle including the lots of higher days?

Yes, of course we've got all of that data. I think we obviously try to strike a balance in what we publish in terms of giving people enough to understand the business and to make good decisions, but not opening ourselves up too much in terms of our competitors and our customers. But certainly we can take a look at that information if that going forward is something that is of interest to people as to whether or not we can publish some of that data in future quarters.

Yeah, I guess it's less interesting from the standpoint of you know, moving forward, you're going to have, you know, all the ones that worked in the Voyager spot market in the fourth and first quarter to date, you know, we'll be moving on to charters with, you know, Newts and NYK. So, you know, I was just trying to get a flavor for what happened in the fourth and the first. And to that end, what can you highlight the decision to move those back to, you know, um, time charters with NewtonNYK and why you didn't stick with the tanker market because of, as the previous questioner said, the tanker market looks pretty good. But nonetheless, you're moving that capacity back into the shuttle market.

Yeah, so I think there's a few little points in there. I think the conflicts committee had a look at it and what we've done is on an arm's length basis and I think the overall point is that it provides us with certainty, which I think is important for us at this point in time. Of course, we may look back with hindsight and realize that we could have perhaps got higher rates. We may look back and think we've done well, but I think what we're trying to do is understand is valuable to KNOP right now in terms of coverage and cash flow. And also, as we've suggested a little bit in the past as well, headline tanker rates don't necessarily easily translate into cash in the bank. And also our vessels are heavier and will require a discount on that rate when we do put them into the conventional market. So I think When you look at the objectives of what we're trying to do at this moment, I think the board and the conflicts committee felt that this was the right balance to strike, where these are relatively short-term arrangements. And in particular, the Hilde Knudsen is essentially on a rolling contract. So we have one vessel that we can take away or take back from KNOT. And if the market was to suddenly spike for a period of time we would have some exposure there if we wanted to take that so I think overall the board just felt that you know the balance between certainty and and what is achievable net at the end of the day that this was a the right balance for us to strike with the one vessel where we could move it around a little bit if if the market moved very very positively

Okay. And when you look at, you know, the three that are under, you know, the time charter with Newts and NYK, are all of those rates the same across the three shuttle tankers? And then was there any change from the month-to-month previous arrangement to the new arrangement where you're, you know, essentially creating some certainty into the end of the year?

Yeah, I think the process that we go through and the board goes through and the conflicts committee goes through looks at the rate and I think it's an appropriate rate once that analysis has been done. And I think the process involves looking at what the market's doing, what we think is achievable. to a degree, information from KNOT's side that we are able to access, which is not actually all of it, because clearly that's KNOT's business. But we're able to make an assessment on those charter rates such that the conflicts committee and the board get comfortable that they're fair arm's length rates under the circumstances. So I think clearly, whilst I'm not answering your question in numbers terms, the charter rates across the vessels are similar. They're not wildly different. One isn't double the other, for example. They are very, very similar.

Okay. And then I should mention, congratulations on closing some of the charter windows that you had. Can you just talk about the outlook for the other two bare boat charters in Brazil? One actually is, I think, the Dancis Cisne, is up in June. Can you just talk about, you know, on the Sabian, the Dan Sabian, the Dan Sissons, sort of your outlook there and your expectations? Will they also flip to time charters versus bareboats? And then if you could also just expand on the, you know, the difference, what we're going to see from the standpoint of, you know, your income statement impact on the change from bareboat to time charters.

Yes. Well, certainly the Fortaleza Recife and the Cis-Masabio, they're two sets of two sister vessels. So it makes sense that Transpetro and Petrobras are talking to us in these two pairs rather than all four vessels at once, for example. And the Fortaleza Recife have obviously come up first, and that's why we're talking to them about those. I think normally we would much prefer that we have these contracts signed earlier, and the same with the SysMasabia as well. But we obviously can only go at the speed of our customer, and they have a lot of internal arrangements and things to sort out themselves. I think at the moment on the SysMasabia, we will start those discussions with Petrobras, Transpetro, as soon as we've finished with the Fortilator and Recife. That's our current expectation. So I'm afraid I'm not giving you too much information there, but we're essentially having to follow our customer's lead.

Okay. And then when you look at sort of the time charters you have in place that start in January of 2024, can you just maybe give us a flavor for whether you know, on the Tortoise, the Lena, the Ingrid, you know, as you move on to time charters with either Shell or ENI, what's the change? Is it up, down, or neutral? Just directionally, if you give us an idea of sort of how those rates as they kick in in early 2024 look relative to what the current environment is.

Yeah, I mean, I think the rates on vessels are very much a factor of when those agreements were reached. And I think the net situation for 2024 for the vessels that you've mentioned there, I haven't done the math, so you're going to have to, I'm afraid, just bear with me. But my expectation would be that the rates on a net basis would probably be neutral across all of those vessels.

And again, Gary, that's relative to what they're currently working at?

I think that's a level of detail that I'm going to struggle to answer on the phone here. I think it's, you know, the rates as I say, are a function of when the charters were agreed and certainly some of those charters were agreed a while ago. So I think we've got some positive numbers in there and we've got some numbers that are today perhaps not so positive and therefore on a net basis you're perhaps looking at a neutral figure for 2024 for those vessels today. But obviously if we're fixing new charters for existing vessels right now, you know, those rates might be better.

And should I read anything into, you know, you're not talking about, you know, DCF or distributable cash flow. Do you have a figure for, you know, fourth quarter of 2022? And, you know, is Is that something you're going to be talking about going forward or, you know, I guess in the context of, you know, if you are going to be talking about distributable cash flow in 2023, sort of what you would be using for your maintenance capex?

Yeah, I think with the reduced distribution, we felt that it didn't make a lot of sense to continue with it. And so it's really not a metric we've focused on at Q4. Clearly it was helpful when people were monitoring the risk or the future outlook for the distribution, but I think we've reached the conclusion that perhaps it's not so helpful going forward, and that's really why we've not continued with it. We feel cash flow and liquidity is a clearer and more understandable position for our investors to look at.

okay so in the event of any possible change in the distribution you would be looking more to traditional you know payout ratios on earnings as opposed to distributable cash flow is that fair to say or can you just sort of expand on that um i i think you know unfortunately we cut the distribution but it was only in january so um that's not

At the moment, something that we've focused on looking at. I'm not saying that the DCR and DCF would never come back or what else we might do in its place. But yeah, I think right now, Poe, I don't really have an answer to that.

Okay. Just if I could squeeze one last one in. There's a lot of turmoil. There's obviously a lot of turmoil in the financial industry right now. Can you just talk about your interest rate hedges and when they roll? You have 65% of your debt currently hedged or fixed, and those don't last forever. Can you just give us sort of an aging on the interest rate swaps and when they roll?

Yeah, I don't have that information. We'll be putting out our... 20F very shortly, and I suspect all of that detail will be in there. Is that something that you can wait for, though?

Oh, absolutely. No, I was just wondering, I mean, as I recall, I think they're three-year tenors, or maybe they're remaining like two and a half, three years left on them. Yeah, there's a real mixture.

Yeah, there's a real mixture, and typically they follow the debt profiles, typically, but not always. But I think the best thing to do if you're not urgently waiting for that information is to get our 20F, and I suspect you'll find it in there.

Great.

Thanks for your help, Gary. No problem. Thank you very much.

As a reminder, if you would like to ask a question, please press star followed by one on today's call. The next question today comes from the line of Rohit Jindal from Quality Pint. Please go ahead. Your line is now open.

Hi. Good morning. Thank you. And Gary, my question was along the similar vein related to the interest expense, right? Do we find the hedging that we're doing by way of these derivatives, is that as effective as was anticipated? You know, clearly the interest expense right now is our biggest exposure. and kind of keeping on target with the profit. So I just wanted to understand if you had any other clarity beyond the additional detail you'd be providing later.

Yeah, I mean, we've always taken the view throughout the history of this business that it's prudent to hedge a good proportion of our floating debt. And by taking on two effectively fixed sale and leaseback transactions, that's also helped the percentage that is effectively fixed. I think we haven't entered into new swaps recently because of the rising interest rate environment. I think a lot of those forward pricing has already been factored in, and so the swaps were not so attractive. So I think we may see some of our coverage percentage-wise fall over time. But it's something we keep under constant review. If there's an opportunity and we feel it's the right thing to do, then there are opportunities for us to enter into new hedges. I think the board mandates and gives management some some leeway so that we can act quickly on this within certain parameters. Because obviously, if you wait too long, you kind of miss the boat. But yeah, it's something that we've constantly got under review. And like most other companies, interest rate increases are not particularly welcome after low interest rates for so long. But we've only got 35% open today. You know, we're not in a bad position. OK.

Thank you, Gary.

Thank you. As a final reminder, if you would like to ask a question on today's call, please press star followed by 1 on your telephone keypad. There are no additional questions waiting at this time. So I'd like to pass the call back to Gary Chapman for any closing remarks. Please go ahead.

Thank you, everybody, for listening. And we'll hopefully be back in touch for our first quarter in May. Have a good day.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.