KNOT Offshore Partners LP Common Units representing Limited Partner Interests

Good morning, everyone. Welcome to KNOB second quarter 2024 earnings call. My name is Kiki, and I will be your conference operator today. During the presentation, you will have the opportunity to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to your host, Derek Lowe, Chief Executive Officer and Chief Financial Officer. Derek, please go ahead.

Thank you, Kiki, and good morning, ladies and gentlemen. My name is Derek Lowe, and I'm the Chief Executive and Chief Financial Officer of Knot Offshore Partners. Welcome to the Partnerships Earnings Call for the second quarter of 2024. Our website is knotoffshorepartners.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, the most directly comparable gap measures. On slide three, we have the financial and operational headlines for Q2. Revenues were $74.4 million, operating income $1.3 million, and there's a net loss of $12.9 million. However, these figures notably include the effects of vessel impairments on our two Panamax vessels, the Dans, and if those are excluded, then operating income would be $17.7 million, and net income 3.5 million. Adjusted EBITDA was 45.5 million. We closed Q2 with $66 million in available liquidity, made up of 56 million in cash and cash equivalents, plus 10 million in under capacity on our credit facilities. We operated with 98.8% utilization, and the best of all time available for schedules operations was not impacted by any planned dry docking. Following the end of Q2, we declared a cash distribution of 2.6 US cents per common unit, which was paid in early August. On slide four, we have headlines of the contractual and operational developments in our major market of Brazil, which cover both Q2 and the subsequent time. Carmen Knutson saw signature of time charter with an oil major commencing Q1 2026 for four years fixed plus one year's option. Dan Sabia was re-delivered to us in July after a further extension to her bare boat charter with Transpetro and is now being marketed for work both in and outside of Brazil. Tordes and Lena Knutson both saw agreement with Shell to extend their fixed periods by a year, and that's to Q3 of 2028. Shell also holds three further one-year options on each of the Tordes and Lena Knutson. I'm excited to welcome the Tuva Knutson into our fleet. I'm going to expand later on the terms of that acquisition, which completed yesterday. She comes with an existing contract with Total Energies, which has a fixed period lasting until February 2026. Total Energies holds options for a further 10 years after that as well. This purchase is from our sponsor, Connects and MYK, who have provided a guarantee of the high rate for the next seven years. So that's until Q3 2031. On slide five, we have headlines of the contractual operational developments in the North Sea, which cover both Q2 and the subsequent time. Ingrid Knutson went on to time-charge with Knutson MYK in April pending delivery to ENI in October on a time-charter lasting two years fixed with two further one-year options. Toril Knutson saw signature in July of the time-charge with ENI which we announced previously. This charter commences in Q4 this year and is for three years fixed plus three options each of one year. Repairs have now been completed on Toril's broken generator rotor. We anticipate insurance cover subject to the usual deductibles and other terms and conditions for limits to the hire we were able to achieve and for the cost of the repair itself. Finally, Dan Sissner was sold to Knutson NYK in conjunction with our purchase of the Tuva Knutson, effectively making for a swap of those vessels. On slide six, we have the headline terms of this swap between Dan Sissner and Tuva Knutson, which completed yesterday and is described more fully in the press release for that transaction as well as in our earnings release. The Tuva Knutson was bought for $97.5 million, less 68.6 million of net outstanding debt, which is made up of 69 million of gross debt, less 0.4 million of capitalised financing fees. The net price was therefore $28.9 million. The Dan Cisner was sold for $30 million with no accompanying debt. The difference between these figures is $1.1 million, and that was paid in cash by Knutson MRK to the partnership. There will also be customary post-deal adjustments relating to working capital. The transaction was negotiated on the partnership's behalf by our board's conflicts committee, which is made up of directors who are independent of Knutson MYK. We are delighted to complete this vessel swap as it provides fleet growth without the need for any new funding. It increases the pipeline of long-term contracts, especially when the seven-year guarantee is taken into account. It reduces the average fleet age, and it helps to focus our fleet into the most in-demand segment of the shuttle tanker market. It is therefore an important step towards growing certainty and stability of cash flows from long-term employment with high-quality counterparties. On to slide 7, 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 reported new build orders from earlier this year as an endorsement of confidence in the sector and are aware of a total of 11 new builds on order. Three of the vessels ordered earlier this year are for our sponsor Knutson MYK for delivery over 2026 and 2027. Each of these sponsor vessels has a 10 year 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 Shuttletank ordering is imperative and should not be understood as some sort of negative development for the sector. The material shortage of shuttle tanker capacity remains projected in the coming years. We do also remain mindful of the near-term market conditions, where we're particularly focused on marketing the Danstabia and Hilda Knutson. In the meantime, the partnership remains financially resilient, with a strong contracted revenue position of $773 million at the end of Q2 on fixed contracts, which average 2.3 years in duration. Transfer options are additional to this, and average a further 2.3 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've demonstrated the strength of our relationships with lending banks by several refinancing completed over the last year. Finally, the average age of our vessels at 10.2 years places us well when compared with a useful life model at 23 years. On to slide eight. You can see the consistency of our revenues over the quarters and years. This consistently applies also to our operating income when the effects of vessel impairments is removed. Slide 9 similarly reflects the consistency of our adjusted EBITDA, and you can find the definition of this non-GAAP measure in the appendix. On slide 10, the most noticeable change in the balance sheet over the first half of 2024 has been a $68 million reduction in our liabilities. of which 52 million is in long-term debt of over one year, and a further 10 million in long-term debt due for repayment within the coming year. This comes from our contractual debt repayment schedule, which in turn reflects our strong debt service capacity. Slide 11 sets out these long-term debts, where we 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 that we've been making in line with scheduled repayment terms. The current installments 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, $91 million is due to be paid on these debt facilities over the 12 months following 30th of June. At present, the next balloon repayments are due over August to November 2025. Our typical pattern is for our vessels to provide security for our debt facilities, and that applies to 16 out of 18 vessels in the fleet as of the 30th of June. We did completed repayments of the most recent loans secured by Dan Cisner and Dan Sarbia and of course now Dan Cisner has left the fleet. New arrival Tuva Knutson has brought 69 million of debt with a maturity in January, 2027. At present Dan Sarbia is the only vessel free of debt and we do not have any plans to incur additional borrowing secured by Dan Sarbia until we have better visibility on her future employment. 861 million. out of 901 million in-depth facilities are secured by vessels, while the two revolving credit facilities, saving $50 million of capacity, are unsecured. Slide 12 shows the contracted pipeline in chart format, reflecting the developments I set out earlier, including from the Tuva Knutson acquisition. Similarly, slide 13 highlights the focus of our commercial efforts on adding near-term contracts for Dansabia and Hilda Knutson. We've made good progress in increasing our fixed charter coverage, and we intend to remain active in that regard. On slide 14, 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, four 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 Partnerships 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 15 to 17, we have provided some useful illustrations of the strong demand dynamics in the Brazilian market, as published by Petrobras. We encourage you to view Petrobras' materials directly at the web pages shown there. 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 FBSOs that will require regular service from shuttle tankers. Two particular items that I would flag as indicative of the progress here. In recent days, Equinor announced that the long-awaited Johan Casberg FBSO had set sail for the Barents Sea, but it's scheduled to begin operations later this year. And in Brazil, the FBSO Maria Criteria scheduled a spellographic here to begin in 2025, That's in fact already arrived in Brazil and is now guided to start up during 2024. There's a great deal of production growth under development, and it's certainly encouraging to see these projects moving decisively forward. We believe that reports earlier this year of additional vessel construction contracts are an endorsement of the strong anticipated market conditions in the medium and longer term. As I mentioned earlier, three of those recent new builds, new build contracts are for our sponsor, Knutson MYK, and are due for delivery over 2026 and 2027. 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, and a material shortage of shuttle tanker capacity remains projected in the coming years. On slide 18, 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, Equinity Trusts Company, whose details are shown there. On slide 19, 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 20, recapping our financial and operational performance in Q2 2024 and the subsequent time, and our outlook for the remainder of 2024. We're glad to have delivered high and safe utilization, which have generated consistent financial performance. We are pleased with the new contracts and extensions being secured during the quarter and since, along with our ability to navigate our refinancing needs and periodic capital expenditure. We're particularly delighted to have taken the growth step of swapping the Dan Cisner for Tuva Knutson, and our continued commercial focus remains on filling up third-party utilisation for the next 12 months, while looking further forward to longer-term charter visibility and liquidity generation. In total, though, we are making good progress and pleased to have established positive momentum against an improving market backdrop. Thank you for listening, and with that, I'll hand the call back to the operator for any questions.

Thank you, Tarek. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. The first question we receive is from Lion Bark from B Riley. The line is now open. Please go ahead.