KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Hello, my name is Drew and I'll be your conference operator today. At this time, I would like to welcome everyone to the Not Offshore Partners fourth quarter 2023 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. Derek Lowe, you now may begin your conference.

Thank you and good morning ladies and gentlemen. My name is Derek Lowe and I'm the Chief Executive and Chief Financial Officer of Not Offshore Partners. Welcome to the partnerships earnings call for the fourth quarter of 2023. Our website is notoffshorepartners.com and you can find the earnings release there along with this presentation. On slide two you will find guidance on the inclusion of forward-looking statements in today's presentation. These 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 in 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. For further information, please consult our SEC filings, especially in relation to our annual and quarterly results. 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 slide three, we have the financial and operational headlines for Q4. Revenues were $73 million, operating income 18.1. There was a net loss of 5.3 million after accounting for an unrealized, in other words, non-cash loss of 8.9 million on derivatives, and adjusted EBITDA of 45.7 million. We closed Q4 with $63.9 million in available liquidity made up wholly of cash and cash equivalents. We operated with 99.6 utilization of the vessel time available for scheduled operations, which is equivalent to 96% of total fleet time after accounting for the planned dry dockings of Toriel Knutson and Ingrid Kutson. Following the end of Q4, we declared a cash distribution of 2.6 US cents per common unit, which was paid in early February. On slide four, we have the headlines of the contractual developments since our last results call, which was on December the 14th, 2023. In our major market, Brazil, Carmen Knutson saw exercise of a one-year extension option by Repsol, which commenced in January. Repsol holds a further one year's option, which, if exercised, would see Carmen Knutson employed through to January 2026. And Ansabio's charter to Transpetro has been extended to early June this year. In the North Sea, Hilda Knudsen, Toril Knudsen and Bodal Knudsen have continued to operate under time charters to our sponsor Knudsen NYK. For Bodal Knudsen, this charter will last until the end of March and delivery to Equinor to commence a charter of two years fixed plus two years options. For Hilda Knudsen and Toril Knudsen, the charter is for rolling one month terms up to January 2025. The continuing area of focus for our contracting team, especially for near-term deployment, is on Dan Cisner, Dan Sabia, Hilda Knutson and Toril Knutson. We received re-delivery of Dan Cisner in December 2023. Her size is more suited to the North Sea market, and we are assessing her technical compatibility for shuttle tanker work in the North Sea. In the meantime, we are deploying Dan Cisner on conventional tanker work. Dan Sabia is due for re-delivery to us in June, which is the extended expiry date of her charter to Transpetro. Marketing of all four vessels continues to potential charters, both existing clients and others, including the partnership sponsor. On slide five, our outlook remains positive on both industry dynamics and the partnerships positioning to participate fruitfully in our markets. Significant growth is anticipated in production in fields which rely on service by shuttle tankers. We see recently reported orders of around six vessels as an endorsement of confidence in the sector. Three of these vessels have been ordered by our sponsor for delivery over 2026 and 2027. Each of these is a 10-year fixed contract with Petrobras, along with a client option to extend by a further five years. We would expect to see further new build orders placed in order to service the large new production volumes coming online in the years ahead. A measured amount of new shuttle tanker ordering is imperative and should not be understood as some sort of negative development for the sector. We do also remain mindful of the near-term market conditions, where we are focused on the marketing of the four vessels, as I described earlier. In the meantime, the partnership remains financially resilient, with a strong contracted revenue position of $699 million at the end of Q4 on fixed contracts, which average two years in duration. Charter's options are additional to this, and average a further 2.1 years. Our pattern of cash generation and liquidity balance is sufficient for our operations and the significant pay down rate for our debt. And we have demonstrated the strength of our relationships with the lending banks by several refinancings completed over the last year. Finally, the average age of our vessels at 9.7 years places us well when compared to the useful life model at 23 years. On to slide six, you can see the consistency of revenues and operating income when comparing with those of previous quarters. including Q2 of 2023, when that is viewed without the impairment. Slide 7 similarly reflects the consistency of our adjusted EBITDA, and you can find the definition of this non-GAAP measure in the appendix. On slide 8, the most notable change in the balance sheet over 2023 has been the reduction in current liabilities, which has arisen from the refinancing secured during 2023. Long-term debt has increased as a reflection of these refinancings, However, the overall change in the partnership's liabilities has been a reduction by $92 million, which is reflective of the debt repayments we've made during the year. On slide 9, we've expanded on the terms of the partnership's debt facilities to provide added colour around the dynamics of debt repayment. The highlighted column shows how the outstanding balances of each facility have been reducing because of the repayments we've been making in line with scheduled repayment terms. The current instalments are the amounts of capital repayment due over the next year, which do not include interest. And the balloon payments are the final amounts of principal which will be due on the maturity dates. Of note, $153 million is due to be paid on these debt facilities over the 12 months following 31st December 23, of which $57 million is a balloon repayment due in May 24 on the loan which is secured by Hilde Knutson. Our practice with a significant repayment such as this is to seek a refinancing, and our track record demonstrates the viability of this approach. Negotiations are well advanced with potential lenders for a new facility to be secured also by the Hildekutzen, sufficient to finance the balloon repayment of the maturing facility. The partnership is not aware of any reasons why this refinancing would be unlikely to complete. However, there can be no guarantees of the success of any financing exercise. Aside from that refinancing, $87 million will be repayable over the course of this 12-month period, of which 10 million has already formed the repayment of the Dan Sabia facility in January. This leaves both Dan Cisner and Dan Sabia free of debt, and we don't have any plans to incur additional borrowing secured by these vessels until we have better visibility on their future employment. Slide 10 shows the contracted pipeline in chart format, reflecting the developments I set out earlier. Similarly, slide 11 highlights the focus of our commercial efforts on adding near-term contracts, primarily for the four vessels mentioned earlier. On slide 12, we see our sponsor's inventory of vessels which are eligible for purchase by the partnership. This applies to any vessel owned by or on order for our sponsor where the vessel has a firm contract period at least five years in length. At present, five existing vessels and five under construction fall into this category. There is no assurance that any further acquisitions will be made by the partnership and any transaction will be subject to the board approval of both parties, which includes the partnership's independent conflicts committee. As we have said, our top priorities remain securing additional contract coverage for our existing fleet and fostering our liquidity position. On slides 13 and 14, we have provided some useful illustrations of the strong demand dynamics in the Brazilian market as published by Petrobras. We encourage you to review Petrobras' materials directly at the web page as shown there. The primary takeaway from each of these slides is consistent. There is very significant committed demand growth coming in the Brazilian market in the form of new FPSOs that will require regular service from shuttle tankers. We believe that recent reports of up to six vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term and do not think this is an excessive amount of added supply in the context. As I mentioned earlier, three of these recent new-build contracts are for our sponsor, Knutson MYK, and are due for delivery over 2026 and 2027. On slide 15, we provide information relevant to our US unit holders, in particular those seeking a Form 1099. Those holding units via their custodians or brokers should approach those parties directly. Those with directly registered holdings should contact our transfer agent, American Stock Transfer, who come under the umbrella of Equinity Trust Company, whose details are shown there. On slide 16, we include some reminders of the strong fundamentals of our business in the market we serve, our assets, competitive landscape, robust contractual footprint and resilient finances. I'll finish with slide 17, recapping our financial and operational performance in Q4 2023 and the subsequent time and our outlook for 2024 We are glad to have delivered high and safe utilisation, which have generated consistent financial performance. We are pleased with the new contracts and extensions we've secured during the quarter and since, along with our ability to navigate our refinancing needs and capex relating to dry docks throughout last year. And our continued commercial focus remains on filling up utilisation for 2024, while looking further forward to longer term charter visibility and liquidity generation. Thank you for listening. And with that, I'll hand back the call to the operator for any questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press start followed by one on your telephone keypad. If you change your mind, please press start followed by two. Our first question today comes from Liam Burke from B Reilly. Your line is now open. Please go ahead.

Yes, thank you. Hi, Derek. How are you today?

Hi, Liam. Good. Thank you. And you?

I'm fine, thank you. On the Cisne and Sabia, asset values in the traditional tanker market are pretty healthy. And you've got one of those vessels currently working as a conventional tanker now anyway. Would a priority be to sell these two tankers for conventional use and redeploy that capital?

I wouldn't say it's a priority. We think any shuttle tanker is better equipped to earn higher rates in the shuttle tanker market rather than in the conventional market, and that goes for both us operating them or potential purchaser. So our interest is in actually operating vessels in the shuttle tanker market, and we're marketing them as such.

So, I mean, based on the supply-demand outlook, you see the earnings power of these two vessels outperforming a one-time sale and redeploying that capital?

For the time being, yes. Obviously, we've got a gap in utilization coming up, which we're seeking to fill. So it's a function of how well we secure or negotiate contracts for them.

Okay. And then just on your current debt, you laid it out. You've paid $10 million. You've got a $57 million balloon that's due in May that you've had a long history of successfully refinancing. So if I look at the balance and your current cash balance and your predictable cash flow, once you're past that refinancing, 2024 debt service should be pretty manageable.

It will be pretty consistent with previous years. So if you look at the reduction in debt over 2023, which was 92 million. The equivalent figure on slide nine is the 90 million, which, as I say, we've paid three from that column, an additional six and a half from the balloon payment list.

Great. Thank you, Derek.

Thank you.

Our next question today comes from Poe Fratt from Alliance Global Partners. Your line is now open. Please go ahead.

Good afternoon, Derek. Two questions on the quarter. If you could just highlight the increase in the sequential increase in OpEx, what caused that? And then also, it looks like the tax rate jumped a little bit or just there was a tax payment as opposed to, you know, what you would have expected with the loss. So can you just address those two things?

Sure. Hi, Poe. Thank you for the questions. Yeah. OPEX is typically impacted by unit costs in our major expenditure items. So things particularly like manning, if you extend that to, or crewing, if you extend that to costs like crew travel and so on, on and off shift. So that sort of unit pricing and other supplies like lube oil and so on, that's the major impact. when OPEX changes, and then tax rates. The tax item you can see at the bottom of page six, it's an adjustment to the value recognized in Q3, so there's a single item there, the net amount of which is something like $4.4 million.

Great. That's helpful. And then can you talk about OPEX going into this year as far as 2024? and then derek would you discuss the impact that the danfisnia is going to have on utilization and you know potentially revenues as it works as the conventional tanker versus the shuttle tanker um sure so um we are as i said we're marketing uh all four of those uh

vessels which are either on short term or limited contracts, of which Cissna is the most notable one because it's been re-delivered to us. Our preference is to secure medium and longer term shuttle tanker work. So the conventional work is pretty much spot market for the Cissna and we don't see it as a strategy in anything other than the near term to deploy into that market.

Great. Should we expect any downtime on it as it flips between charters? And then also, can you confirm that you don't expect any dry docking activity in 2024?

Correct about dry docking. We don't anticipate any dry docks in 2024. What you'll see on Dan Cisner is the utilization information will come through in the first course of results because we received re-delivery, I think it was around mid-December, so it had very little impact, if any, on the Q4 figures. And so her impact will come through in Q1 figures.

Okay. So expect a little bit of downtime. And can you – you know, the other – major option it seems like is the you know on the anna with total and is what's the notice period on that and have you heard or you know when do you expect to hear on on a potential you know option exercise there yeah i believe the um notice period is um between one and two months

And obviously we're coming up to the end of that notice period over the next month or so. I know we're always in active dialogue with all of our clients and potential clients. So while we don't have any news to announce there, it's not currently causing us any concern.

Okay, great. Thank you. Thank you, Derek.

Thanks, Bo.

Again, if you would like to ask a question, please press start, then one on your telephone keypad. Our next question comes from Jim Altshul from Aviation Advisory Service. Your line is now open. Please go ahead.

Good afternoon. Thanks for taking my question. A couple of related questions. The big thing is with the utilization, because in the fourth quarter of the whole year of 2023, we had something like 99% utilization. Now, I guess with the band Cisner will be off fire for part of this quarter. You indicated that you have, as of today, charter or coverage or something like 70%, a little more than 70% for the full year. what is utilization, what is the percentage figure going to look like for the first and second quarters based on the contracts you now have?

Well, Jim, thanks for your questions. So the range of utilization or contracting that we currently have in terms of full visibility for this year, 79% fixed and 91% if you include exercise of all client options. Those figures, I appreciate they're in chart format, but they're set out on slide 11. I don't have the individual numbers directly to hand, but the chart gives you a good indication of those levels.

Oh, I'm sorry. I didn't look at that. I just took it to news. Really sorry about that. But you're going to have one ship off higher for... uh this quarter um the dance system if i'm not if i remember correctly and also um maybe maybe i wasn't listening carefully enough but will there be much of an impact on the revenues and the fact some of the ships that were on charter are now on short-term conventional um tanker contractors that can make a meaningful good combination of all these things is that going to make a meaningful create a meaningful impact on first quarter revenues

Well, we're only talking about one vessel, so one out of 18. So the percentage there is order of magnitude 5%. And that's assuming no income. But actually, as we've described with the conventional work that she's been able to do, there has been some income and some utilization. So those overall figures should feed through to the figures in Q1. But it's not a question of entirely removing a vessel from the performance of the fleet over this quarter, and it is limited to one vessel in this quarter.

Okay. Is it reasonable to assume that the rates you're getting on short-term conventional tanker work are less than you would get on a medium or long-term charter for shuttle tanker work

Yes, that's correct, and obviously they're modeled on a slightly different basis because of the short-term nature of the conventional contracts we're looking at as well. Thank you very much. Okay, thanks, Jim.

Lastly, we have a follow-up from POFRAC from Alliance Global Partners. Your line is now open. Please go ahead.

Yeah, hi, Derek. Hi.

What...

Can you talk about the backlog? You know, there was a pretty healthy increase in the backlog of, you know, to 699 million from 645 million from the time of the third quarter call. Can you just talk about that incremental increase? Because it didn't seem like your contracted backlog in years went up that significantly, but you did add 50 million. Can you just talk about the mechanics of that, Derek?

Sure. I mean, obviously, we burn off backlog each quarter as well, and that would be factored into it. And I appreciate that serves to reduce the number before any additions. The main addition to the backlog was the Carmen Knutson with the exercise of one-year option by Repsol. We also had the extension of the... the Dan Sabia for an additional six months for the first half of this year as well. So those are the major changes.

Yeah, I sort of calculated that as adding about four and a half years of backlog and you burn off every quarter about four and a half years of backlog. And so, you know, you take the 645, you take out the 72 million that you recognized in the fourth quarter revenue and to get to the new number and That delta is about 126 million, and it just seemed a little bit higher than I would have anticipated, given that, you know, the Toro and the Hilda, which I assume are included in the backlog, are working at reduced rates, and the Carmen was really the only option that, you know, would have been expired or would have been exercised at, you know, a decent rate in my mind.

Yeah, I mean, the common was the main headline since we held our call in December. And these figures relate to quarter end. So you need to look at also at the additional contracts secured during Q4, but that were before December the 14th. Apologies for the complexity there. So on slide four, you've got just a reminder there and it will also be in our Q3 release as well. There was additional work secured for Windsor Knutson, which we announced in December, and Brazil Knutson as well, and then a one-year extension on each of the TARDIS and Lena Knutson. So those will also be part of the addition to backlog over that time.

Okay, great. That's helpful. Thank you so much.

Yeah. Thanks. So apologies, it's in two places, but we didn't want to re-announce the same thing twice.

There are no further questions. I will now hand back over to Derek Lowe for any closing remarks.

Thank you again for joining this earnings call for Knaus Offshore Partners fourth quarter in 2023, and I look forward to speaking with you again following the first quarter results for 2024.

That concludes today's call. You may now disconnect your line.