KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Ladies and gentlemen, thank you for standing by for the Not Offshore Partners first quarter 2023 earnings results conference call. My name is Candice and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call for an opportunity for question and answer at the end. If you'd like to ask a question, please press start followed by one on your telephone keypad. I would now like to hand the conference call over to our host, Gary Chapman, CEO and CFO to begin.

Thank you and welcome to our first quarter 2023 earnings call. The earnings released in this presentation are available on our website at notoffshorepartners.com. Slide 2 gives guidance on the inclusion of forward-looking statements in today's presentation that are made in good faith and reflect management's current view, involve known and unknown risks, and are based upon assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied forward-looking statements, and the partnership does not have or undertake a duty to update any such forward-looking statements made as of the date of this presentation. 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 slides three, four, and five are highlights from the first quarter of 2023 and subsequent. We announced our 40th consecutive quarterly cash distribution since our IPO in respect to the first quarter of 2023 and which was paid in May 2023 under our 1099 structure. Our fleet in the first quarter operated with 100% utilization for scheduled operations and 96.6% utilization taking into account the scheduled dry docking of the Carmen commencement. We secured credit approval on similar terms for the 320 million senior secured credit facility and the £55 million revolving credit facility, which mature in September 2023, and which debt finances six of the partnership's vessels. We're anticipating to close this in June 2023, subject only to execution of documentation and other customary closing conditions. It's worth noting that the £172.5 million senior secured loan facilities maturing in September 2023 and January 2024, secured by the Dansista and Dansadia respectively, will be fully repaid on maturity, so there is no need for a refinance plan at this stage, and we have no immediate plans to incur additional borrowings secured by these two vessels until such time as the partnership has better visibility on their future employment. Finally, we're discussing with our lenders concerning the two $25 million unsecured revolving credit facilities that mature in August 2023 and November 2023. And based on conversations so far, we believe that both facilities will be refinanced on acceptable and similar terms prior to maturity. We would expect to provide further news on these in our second quarter 2023 earnings release. And in terms of charter and contract developments, we have now signed and closed new three-year time charter contracts for both the Fortaleza Knudsen and the Recife Knudsen with Transpetro, meaning these vessels are now contracted to March and August 2026 respectively. Then following, For the recent vessel developments listed on slide four, I don't plan to read through this. I'm sure you can all do that for yourself. But what I can say is that the combination of all of these charter developments has left us almost entirely covered in 2023. And for several vessels, we have now achieved charter coverage well beyond this year. And we'll see that when we look at the chart diagram shortly. And finally, on this slide, Carmen Knutson successfully completed her 10-year dry dock. taking a total of 74 days spread across the end of the fourth quarter of 2022 and into February 2023. On slide five, the partnership had £52.4 million in available liquidity at the end of the first quarter, £688 million of remaining contracted forward revenue, excluding charters options, but including the new charter for the Recife Knudsen, which was signed on April 11th, 2023. And our fleet had an average age of 8.9 years, with each vessel having an estimated useful life of 23 years. We saw great utilization for scheduled operations in the first quarter at 100%, and the trends and ShuttleTanker long-term fundamentals assisted us in securing the credit approvals we needed for the refinancing. And the encouraging trends that we have previously highlighted in Brazil, where 14 of our 18 vessels operate, are continuing to exert positive pressure on the ShuttleTanker charter market. We expect that the limited global fleet order book of only five vessels between now and 2026 combined with significant new offshore oil production volumes coming online, will drive charters and rates, both in Brazil and in the North Sea. But we do recognize that the North Sea market, where currently four of our 18 vessels operate, may still take longer to rebalance, meaning it may yet take several more quarters to filter into the partnership's results. Nonetheless, as stated, we continue to believe that the overall supportive fundamentals of vessel supply set against the faster pace of new offshore oil production implied by continuing FPSO ordering for shuttle tanker serviced fields will leave the partnership well placed over the coming years. Slide six, seven, and eight are our summary of financial results, and as usual, I will just mention a few points. Combined with voyage revenues, our total revenues were strong in the first quarter, and this was further boosted by over $900,000 in loss of higher insurance claims related to issues that occurred in prior quarters. Operating expenses were broadly in line with both our expectations and the fourth quarter of 2022, and voyage expenses, being the other side of voyage revenues, also remained consistent. As we had mentioned before, with a wide and geographically spread crew and supplier base to draw upon, we believe we have some protection against the inflationary pressures that are occurring in many places. However, this is something that we, like all companies, are keeping under close review. Higher LIBOR and higher utilization of our revolving credit facilities have all increased interest expenses in recent quarters, and this first quarter of 2023 is no different. However, this has not had any impact on our operations or on our continuing and scheduled debt repayments. On slide seven, you can see our cash and cash equivalents balance at the end of the quarter of $52.4 million, and the current portion of long-term debt is naturally elevated as this relates to the ongoing refinancing that we have already spoken about. On slide 8, you can see the overall adjusted EBITDA for the first quarter was again solid and consistent. Slide 9 shows how a significant portion of our total debt is hedged through to the end of 2024 and into 2025, meaning that the majority of our debt during that period is not affected by changes in interest rates as we have swapped a portion of our variable interest rate debt for fixed interest payments, therefore providing greater certainty of interest expense and cash flow. At March 31, 2023, the partnership's net exposure to floating interest rate debt was approximately £353 million, or around 34% of our total interest-bearing debt. In other words, 66% was fixed via interest rate swaps, or effectively fixed via our two sale and leaseback financings. You will see that we anticipate that more than 50% of our debt will remain fixed or effectively fixed for the next few years. and we're always monitoring the situation to look for new opportunities that could allow us to benefit. Then onto slide 10. As we have seen, many of the contractual updates already, and they're also set out in the earnings release. I won't repeat them here, but as of March 31, 2023, excluding charters options, but including the new charter for the Recife Knutson signed on April 11, 2023, we had £688 million of forward contracted revenue, And of our firm charters, these had 2.2 years remaining on average. And charters had options to extend these charters by a further 2.2 years on average. On slide 11, you will see that we have now contract coverage for almost the entirety of 2023. And several vessels are now under contract for much longer periods, as you could see on slide 10. As a result, most of our focus has moved on to the vessels that are yet to be fixed in 2024. And this is where our efforts are being directed. We believe it helps that only five new shuttle tankers are expected to come into the market between now and 2026. Therefore, the total supply of shuttle tankers is likely to become tight. And with new build shuttle tank prices remaining elevated, this all helps the competitiveness of our existing fleet. Just before we move on, please do be reminded that this slide does not talk to vessel utilization. It refers to future charter contract coverage. Then on slide 12, we list the potential drop-down vessels currently owned by our sponsor, KNOT. As stated, the acquisition by the partnership of any such vessel in the future would be subject to approval of the partnership's independent conflicts committee, as well as the board of directors of each of KNOP and KNOT, and there can be no assurance that any potential acquisitions will actually occur. As we have said, our top priorities are securing additional contract coverage, forward visibility of our existing fleet, and rebuilding our liquidity position. Slide 13, we have kept this slide in our presentation from previous quarters, given we have a lot of new investors. And as we continue to believe, this remains a very valuable source of independent information that speaks to the future growth of shuttle tanker demand in Brazil. 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 retained a further slide in the appendix to this presentation that gives some more detail. So in summary for this quarter on slide 14, we had excellent utilization of 100% for scheduled operations. We paid a quarterly distribution for the 40th consecutive quarter, albeit at a reduced level. We have secured credit approval for $375 million of refinancing due later this year. And we concluded two new three-year time charters for two of our vessels. In terms of going forward, we continue our absolute focus on safe operations, both onboard and onshore, and to taking care of our crew whilst maintaining our high standards and utilization statistics. We're working to close out the refinancings as set out, planning for the remaining dry docks this year, three of which are for vessels that are European-based, so mobilization costs will be lower than for the recent Brazil-based vessels. And of course, we're working towards securing charts coverage for all of our fleet in 2024 and beyond. Finally, and whilst it is not written on the slide, I do want to point out our press releases of April 5 and April 10, which give details of the changes and upcoming changes to our board of directors and also to my own position within the partnership. The same details are also contained within the earnings release issued after closing yesterday. Then finally, slide 15, we again want to promote our newly refreshed website where you can find more information on the shuttle tanker market, our fleet, and of course, investor-related information. including a frequently asked questions section. Hopefully people will find this a useful resource. Thank you very much for listening and following this, I'll be happy to answer any questions.

Thank you, Gary. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question at any time, it is star followed by two. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. So our first question comes from the line of Liam Burke of B Reilly. Your line is now open. Please go ahead.