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.