KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello and welcome to today's Not Offshore Partners second quarter 2023 earnings results conference call. My name is Jordan and I'll be coordinating your call today. If you'd like to register an audio question, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Gary Chapman, CEO and CFO to begin. Gary, please go ahead.

thank you and welcome everybody to our second quarter 2023 earnings call the earnings release and this presentation are available on our website at not offshorepartners.com slide two of the presentation gives guidance on the inclusion of forward-looking statements in today's presentation that are made in good faith and reflect management's current views known and unknown risks and are based on 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 second quarter of 2023 and some subsequent developments. Beginning on slide three, we announced our 41st consecutive quarterly cash distribution since our IPO in respect to the second quarter and which was paid in August 2023 under our 1099 structure. We had a strong operational quarter as our fleet operated with 99.3% utilization for scheduled operations. and 95.5% utilization, taking into account the scheduled dry dockings of the Brazil Knutson and the Hilda Knutson. We successfully closed our new five-year, $240 million senior secured term loan facility in June, which was scheduled to mature in September 2023, secured by the six vessels listed on the slide. And in August, we also successfully closed the refinancing of our first $25 million revolving credit facility, with the facility being rolled until August 2025 on similar terms. We're discussing with the lender under our second $25 million revolving credit facility, which will mature in November 2023. We also expect this will be successfully refinanced on acceptable and similar terms prior to its maturity. Then coming to some recent contract developments. In August, we agreed a 100-day extension to the existing bare-boat charter party for the Dan Cisner with Transpetro. which will extend the vessel's employment to around the end of December 2023. This is not yet signed, but it is only subject to agreement of customary documentation and we expect that it will be signed in the coming days. On August 8, 2023, we entered into a new time charter contract for the Brazil Knutson with a major independent operator in Brazil to commence in January 2024 for a fixed period of one year. We agreed with Equinor to substitute the Brazil Knutson for the Windsor Knutson in the time charter contract we have with Equinor that is due to commence in the fourth quarter of 2024 or the first quarter of 2025 with the time charter otherwise remaining unchanged. This allowed us to move forward and agree commercial terms in July 2023 for a new time charter contract for the Windsor Knudsen with an oil major to commence within the window from February 1st to May 1st 2025 for a fixed period at the charter as option of either one year with an option for the charterer to extend the charter by a further year or a single firm period of two years. Signing of this new contract does remain subject to the charterer's management approval, agreement of certain operational details and customary documentation, but we are confident at this moment that this will be successfully concluded within September 2023. On slide four, the Hilda Knutson and the Torrell Knutson each continued to operate on separate time charter contracts with a subsidiary of the partnership's sponsor, Knutson NYK, at a reduced charter rate. and we are continuing to market both vessels for new third-party charter employment, and we are in active discussions with potential charters, including Knutson NYK, and we hope to be able to give more details in a future release. As we have disclosed previously, in April 2023, a new time charter contract for the Recife Knutson was signed with Transpetro for a firm period of three years, and the vessel began operating under this new time charter contract on August 3rd, 2023. directly after the expiration of the then-existing bareboat charter, also with Transpetro, and the vessel is now fixed until around August 2026. The Tordes Knudsen operated under a time charter contract with a subsidiary of Total Energies, which expired on July 1st, 2023, and on the same day the vessel was delivered to Shell to commence on its new three-year time charter. On August 1st, PetroChina took its final option on Victis Knudsen, such that the time charter contract was extended by six more months to March 2024, after which the vessel is due to be delivered to Shell to commence on a new three-year time charter. The Lena Knutson operated under a time charter contract with a subsidiary of Total Energies, which is in fact anticipated to end today, August 31st, following which the vessel will start on its new three-year time charter contract with Shell, which we expect will start in early September 2023. Following discussions with Ernst & Young, or EY, our auditors, in this second quarter we recognized non-cash impairments in respect of the Dan Cisner and Dan Sarbia, in accordance with US GAAP, in a total amount of $49.6 million. This was due to the vessels' current charter contracts moving closer to their expiry, their high carrying value, and their smaller size not being optimal for the Brazilian market. These vessels are the partnership's only two smaller Panamax-sized vessels, and we do not currently expect there to be any wider implications on the rest of the fleet from this same issue. In terms of employment for the Dansisme and Dansabia, we are actively assessing options should Transpetro or Petrobras not wish to enter into a new charter for one or both of the vessels. And these options include a potential sale, though at this stage no decisions have been made and discussions remain ongoing as both vessels are under contract until at least the end of 2023. We expect to be able to give more details in a future release. The scheduled 10-year special survey dry dockings of the Brazil Knutson and the Hilde Knutson commenced in the second quarter of 2023, with both dry dockings being successfully completed in Europe in July 2023. We were able to secure a cargo voyage from Brazil to Europe for the Brazil Knutson, and it allowed us to avoid incurring the majority of bunker fuel costs in transit from Brazil to the European yard, and as well reduce the number of days off hire. Following the work this quarter and beforehand, we have now essentially secured employment across the fleet for the vast majority of 2023, allowing us to focus on the gaps remaining in 2024 and beyond. On slide five, the partnership had 68.1 million in available liquidity at the end of the second quarter. We had around 67% of our debt hedged or effectively operating on a fixed interest rate basis, and we had 620 million of remaining contracted forward revenue excluding charter options and excluding contracts agreed or signed after June 30, 2023. The fleet was on average 9.2 years old over a useful life of 23 years, and we continue to see very encouraging tightening in the Brazilian market, a very limited new build order book, and although the North Sea market is still expected to take several more quarters before it begins to rise again, the supportive fundamentals of vessel supply set against the faster pace of new offshore oil production that will drive demand we believe leaves the partnership well placed over the coming years to benefit from our market-leading position. Slide six, seven, and eight are our summary of financial results for the quarter. On slide six, our revenues were strong in the second quarter. Operating expenses were broadly in line with our expectations, excluding the non-cash impairment charge. And although interest expenses increased over the first quarter, we're hopeful that interest rate increases may now have peaked. On slide seven, You can see our cash and cash equivalents balance at the end of the quarter of 63.1 million, and the current portion of long-term debt has reduced as the refinancings have closed. On slide 8, which eliminates the non-cash impairment, you can see that adjusted EBITDA for the second quarter was again solid. Slide 9 shows our contractual position, and the updates are also set out in the earnings release, so I won't repeat them here. As at June 30, 2023, excluding charterers' options and contracts agreed after this date, We had $620 million of forward contracted revenue. And of our firm charters, these have two years remaining on average. And charters had options to extend these charters by a further 2.2 years on average. On slide 10, you will see that we now have contract coverage for practically the entire of 2023. And several vessels are now under contract for much longer periods, as you could see on slide 9. As a result, most of our focus has moved on to the vessels that are yet to be fixed in 2024, principally the Hilde Knutson, Toril Knutson, Dan Cisner and Dan Sabia, and these vessels are where our main efforts are being directed. With only five new shuttle tankers to come into the market between now and 2026, the total supply of shuttle tankers is likely to become tight in view of oil production increases, and with new-build shuttle tank prices remaining very elevated, this helps the competitiveness of our fleet. Whereas in recent years we have been cautious about vessels nearing the end of their firm periods, the balance in Brazil in particular is shifting. That is, while we can't say that a given vessel option will or will not be taken up by a charterer at the end of a firm period, we're increasingly confident that either options will be exercised or we would at that time be in a good negotiating position to secure new employment. As noted, the size of the DAN vessels makes them something of an outlier for Brazil, but the majority of the fleet would be well positioned. Finally, do please bear in mind that this slide does not talk to vessel utilization. It refers to future charter contract coverage. Then on slide 11, we list the potential drop-down vessels currently owned by our sponsor, K&OT. 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 K&OP and K&OT. 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 for our existing fleet, and rebuilding our liquidity position, and that remains unchanged. Slide 12. We've shown this slide before, and I will just dwell on it for a moment to emphasize that we are in fact seeing these new FPSOs making their way to the Brazilian offshore region, as anticipated, with Petrobras alone starting up two of them during the second quarter, indicating that another will start during the third quarter, and Equinor announcing that another is currently on its way. As a practical matter, FPSOs do not simply arrive on the scene and immediately produce at maximum capacity, but these processes are underway and building significant momentum in the manner that we had anticipated. Just as further context and as one example, Tetrabras' Miro 2 with the Sepitiba FPSO will be the largest project anticipated to start up during the second half of 2023. Once sailed from China and installed in the pre-salt field, it is expected to produce around 164,000 barrels per day at its peak. With a low carbon score and low marginal costs of oil production, combined with a general need to utilize shuttle tankers for much of this growth, this hopefully helps to explain why we feel very positive with respect to the mid- to long-term outlook for our business, particularly in Brazil. And we have also retained a further slide in the appendix to this presentation that gives some more detail. On top of this, slide 13 sets out our investment case in summary form, listing the various key attributes of our business, and which helps us to explain even further why we are so positive about the partnership's mid- and long-term outlook. I won't read these out, but hopefully you will agree that we are able to present a very strong case. So in summary for this quarter on slide 14, Our fleet operated with 99.3% utilization for scheduled operations and 95.5% utilization taking into account the scheduled dry dockings of the Brazil Knutson and the Hilda Knutson. And we paid our 41st consecutive distribution since the partnership listed in 2013 under our 1099 structure. We've now largely addressed our near term refinancing needs, having successfully closed the new five year 240 million senior secured term loan facility, which was scheduled to mature in September 2023. and the first $25 million revolving credit facility, with the facility being rolled until August 2025 on similar terms. And we expect that the second $25 million revolving credit facility, which will mature in November 2023, will also be successfully refinanced on acceptable and similar terms prior to its maturity. We concluded a new contract for the Brazil Knutson, agreed terms for a new contract for the Windsor Knutson. PetroChina took up their option to extend their existing charter for the Victis Knutson, and we agreed a short charter extension for the Down Cisner. Then in the near term, we'll continue to focus on safety as our number one priority and plan for the remaining two 2023 scheduled dry dogs. Look to maintain high scheduled operational utilization in line with our historically strong track record and continue to rebuild liquidity and earnings visibility by working to secure additional charter coverage, in particular across 2024, with our focus on the Hilda Knutson, Toril Knutson, Dan Cisner and Dan Sabia. So overall, I believe we have had a strong and successful quarter, notwithstanding the non-cash impairments on our two smallest vessels. We've been successful in getting new charters, though we acknowledge there's more to do, and we've now largely addressed our near-term refinancing needs, all moving us in the right direction. We remain committed to being open and transparent in what we are doing and delivering what we say we will. As you've hopefully heard me say many times, we believe that there are clear signs of a positive mid to long-term future. And as the partnership moves forward in the very capable hands of Mr. Derek Lowe as the new incoming CEO CFO, I believe our and our sponsors' decades-long experience and market-leading position in the shuttle tanker sector will serve the partnership very well. Thank you very much for your time today, and I'll now take any questions.

As a reminder, if you'd like to register an audio question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. And please ensure you're unmuted when speaking. We have a question from Liam Burke of B Reilly to begin. Liam, please go ahead.