Hello and welcome to today’s KNOT Offshore Partners’ Second Quarter 2023 Earnings Results Conference Call. My name is Jordan and I’ll be coordinating your call today. [Operator Instructions] I am 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 knotoffshorepartners.com. Slide 2 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-U.S. GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures. On Slides 3, 4 and 5 are highlights from the second quarter of 2023 and some subsequent developments. Beginning on Slide 3, 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 Brasil Knutsen and the Hilda Knutsen. We successfully closed our new 5-year $240 million senior secured term loan facility in June, which was scheduled to mature in September 2023, secured by the 6 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 are discussing with the…

[Operator Instructions] We have a question from Liam Burke of B. Riley to begin. Liam, please go ahead.

Hi, Gary. How are you today?

Hello, Liam. I am very well. Thank you. How are you?

Good. Thank you. I guess the 4 vessels you talked about, the 2 Dans and then the Torill and the Hilda. But taking a step back, what needs to happen for the partnership? Is it just those 4 vessels when you can get back to what has created value traditionally, a higher payout or a resumption of taking drop-downs from your sponsor?

Yes. I think just let me address that last point first. Drop-downs right now, they’re not priority for us. Clearly, it’s something that’s still there. And our focus is on other things, as we’ve said. I think if you recall, when we reduced the distribution in January, we set back then that the priority is longer-term charter visibility and building liquidity. And I think those four vessels will go a long way to helping with that. We’ve sorted out the short-term refinancing or the vast majority of it. We’ve got a couple of dry docks still to go this year, so we need to be mindful of those. And I think that the Board’s discretion really then comes into play in terms of how they view the required level of visibility and liquidity. But certainly, those four vessels, and we’ve highlighted them for a reason because when you look at the charter diagram that is kind of where the obvious hole is at the moment and where we need to focus our efforts. And we think we’re moving in the right direction, but there’s clearly still some work to do.

Well, just looking at Brazil, you have – would the Torill and Hilda makes sense to take – I know it costs a lot of money, but does it make sense to move them to the Brazilian market and charter them there?

Yes. I mean I think we’ve said previously, we certainly haven’t ruled that out, but timing really is everything there. It would cost us a fair chunk to get them down there. And we it’s an option, absolutely. But it’s all about the timing and the choice there. So I think, yes, it’s on our list of options, if you like. But I think you can be assured that we are looking at it very carefully to make sure that if we ever went down that route, we do it at the right time and for the right reasons.

Great. Thank you, Gary.

Thanks, Liam.

Our next question comes from Poe Fratt of Alliance Global Partners. Poe, the line is yours.

First of all, Gary, I’d like to just congratulate you on your new position and navigator and just say that I’ve really enjoyed working with you as your – when we’ve covered KNOT Offshore. So I’ll miss you at least.

Thank you.

Yes, this is last drive. I did have a couple of questions, just a little more detail. Can you just remind me on where the Dan Cisne and the Dan Sabia have been written down to?

Yes. So the book values were in the region of 65 and we’ve taken 25 of each of them, broadly speaking.

Okay. And then how realistic is it to think that those two could be sold?

Yes. I mean, of course, it’s always an option. And I think the discussions that the Board has had, encompasses all sorts of things. So our first choice is always to utilize the vessels, utilize them for a good charter rate, run them very well. It’s only when that doesn’t become an option that we start to look at other things. But obviously, you have to factor in time, and we can’t leave those discussions until the very last moment. We need to start thinking about them now. So again, in the interest of transparency, we’ve mentioned that on this call and in this earnings release. But we’re far from having made any decisions about that. We don’t know that the vessels won’t be taken by either Transpetro, Petrobras or another charterer. The problem being is that today, we don’t know that they will either. The vessels have been on very long-term charters, bareboat charters. They’ve been very, very busy. The Brazilian market is tightening, as we’ve said. And although the environment in Brazil isn’t optimum for those smaller vessels today, with an absence of other vessels in Brazil, who used to say what might happen. So sale is possible. I think it’s arguably, perhaps the slightly harder option, particularly if we’re trying to sell it into a conventional market. But I think we’ve got other options before that. And certainly, our preference is to seek a new charter and run it to the shuttle tanker.

Great. And what is the more optimal market for those two? You said that Brazil are smaller, there’s – it’s suboptimal. Is there a more optimal market out there? In the shuttle tanker market. You just talked about the convention market in the shuttle tanker.

Yes. If you force me to answer that question, I would say they’re probably slightly more suited to the North Sea. They’re not North Sea compatible at the moment, but they could be made to be, so that is also an option. But clearly, right now, as we sit here today, perhaps the North Sea, transferring them immediately to the North Sea, it wouldn’t be a sensible idea. But nonetheless, both of them are contracted to the end of 2023 anyway. So we’ve still got several months before we even need to do anything with them. So that’s why at this stage, we just want people to be aware that we are looking at all options in case we aren’t able to secure a new charter at the end of these ones.

Great. And how much time and money would it take to make them North Sea compatible?

It’s not like – it’s not a huge conversion exercise like trying to convert a conventional vessel into a shuttle tanker. It’s equipment, and it’s substantial, but it’s not – I don’t think it’s something that our investors need to be concerned about from a material CapEx perspective. It’s something that we would bake into a transaction or a decision to bring them to the North Sea if that’s what we decide to do.

Okay, thanks. And then the loss of higher revenues that came in $1.3 or $1.4 million. What were they associated with?

Yes, they would all go back to slightly historic, and I would say slightly historic because it’s probably in the last one, two, three quarters of claims. So if you go back to some of our previous earnings releases, we have disclosed some of the more material off-hires that we suffered in terms of vessels suffering a few problems when we claimed on insurance. And that money coming through is a closure of those insurance claims from previous quarters. Under U.S. GAAP, you have to be really sure that you’re going to get the money before you can book it. So we always end up with a mismatch between when we put the insurance claim in and know about the problem on a ship, when we actually get the money in and we can recognize it in the accounts.

And I think I read that you don’t have any additional claims outstanding at this point in time?

Yes, yes, that’s right.

Okay. And then looking at the Hilda and Torill, they’re currently on short-term charter agreements that runs for the year-end with your subsidiary of one of your GPs. Is that something we should expect to continue to sort of filled the gap until the North Sea market rebalances, you’ve said it’s going to take a little longer than expected a couple more quarters. Is that something we should sort of expect as sort of a stop gap until you can get firm work?

Obviously, I can’t speak for the other side of that in terms of our sponsor and KNOT, but certainly, we worked with them and come to an agreement with them to date on those vessels. And if nothing further is forthcoming, as Liam talked about, there’s the Brazil option moving them to Brazil. But again, we’d have to assess the merits of that. But we would probably be turning to KNOT and seeking to negotiate with them a further extension if need to be. Obviously, I can’t talk to their reaction and to their response to that. But certainly, so far, they have proven and shown to be very supportive.

Okay. Great. And then just one last one, if you wouldn’t mind. When I look at the options in Brazil, that’s really where there might be a little bit uncertainty in looking into ‘24 with the Carmen and Windsor in the first quarter and then Anna in the third quarter. But you did say that your – given the tightening in the market, you are pretty confident that those will be exercised. When will we find out that those options have been exercised?

All the charters, unfortunately, for you and for us, all the charters have different terms and notice periods. So it’s not a simple thing to say or to answer that question. I think we’re increasingly confident given the market in Brazil that even if the options are not taken that there is alternative employment opportunities for each and all of those vessels in Brazil. So yes, we are confident that options will be taken, particularly if customers have got a good charter rate locked in. But notwithstanding that, I think the point is really that option or no option, we’re increasingly confident that we would find employment for any or all of those vessels in Brazil anyway.

Great. And just – I apologize, Gary. Just one more, if you wouldn’t mind. What it would be Hilda and Torill, and Ingrid as far as drydocks coming up in the fourth quarter, roughly 30 days? Or sort of what’s a ballpark number for those drydocks?

Yes. Torill and Ingrid, are obviously European-based vessels, and we perform all of our drydocks in Europe. So they’re much quicker. So similar to the Hilda that you’d probably expect in the region of 30 days.

Great. And Gary, good luck in your new endeavor. Thank you so much.

Thank you, Poe. It’s a pleasure working with you. Thank you.

Our next question comes from Robert Silvera of R.E. Silvera & Associates. Robert, the line is yours.

Thank you. Gary, I’m looking at the balance sheet and the current assets, current liabilities, we’re seeing that our cash since the end of ‘22 has climbed substantially, which is good, and the current portion of long-term debt has dropped very significantly, but then dropping down a little bit to the long-term assets, the net vessels and equipment has dropped about roughly $100 million, and the long-term debt has gone up to $820 million. And I’m having problem understanding this. I wonder if you could explain to me why this dynamic is happening where the long-term debt has gone up so substantially since the end of ‘22, while your cash and the rest of the things seem to improve and the current liabilities have dropped so much?

Yes. The cash position has risen through operations, but also we hold back money for drydocks. So as we come towards dry docks, the cash position, we will be slightly elevated in order that we’ve got excess cash to pay for those drydocks I think that’s one side of it. The other side in terms of the debt and the current versus the long-term or, let’s call it, non-current, it’s just reclassification between pre refinancing and post refinancing. So as we come up to a refinance, obviously, we’re within 1-year of that refinance maturity date and quite a lot of the debt moves into the current category. As we refinance, it shifts back into the long-term. So if you compare one quarter to the other quarter and there has been a refinance at some point, you will probably see movements such as that happening, and that’s exactly what’s happened on our balance sheet in Q2 compared to Q1 or even the end of Q4 last year.

So the long-term asset drop of about $100 million, most of it is that reassessment of the value of the two ships?

The reduction in the asset will be normal depreciation and the impairment taken together, yes.

Really, in 6 months, we’ve gone down $100 million almost – equipment net investment and equipment.

The impairment itself was $50 million of that.

Yes. And that’s what I’m saying as well. Okay. Well, our feelings are pleased do not take any more drop-downs until we show that the Brazilian market really has improved substantially and our charter rates are climbing before we will entertain the risk of taking some more drop-downs. That’s...

Yes, as I expect, I think one of the other question is drop downs at the moment, really not our priority. It’s still part of the strategy of the business to grow the fleet, but the focus at the moment is visibility of earnings and liquidity.

Right, reducing debt like that. Do you have any feeling at the rate you’re doing, what you’re doing and assuming that the Brazilian market continues to strengthen. How long might it take in your estimation? And you won’t be around to have to stand up to this estimation in the long run because you’re off to a new career. But – how long do you think it might take before you see the dividend begin to rise again charter of 6 months, 2 years, what do we do in?

Look, I think when we reduced the distribution only earlier this year, and I know it’s been a couple of quarters since then. And we said that we needed longer term charter visibility, and we needed to build liquidity. Clearly, we have sorted out the majority of our refinancing near-term. We have got some drydocks to take care of. And we are making moves in the right direction, I think we have still some work to do. But ultimately, the level at which we have got enough charter visibility and enough liquidity, that’s really up to the Board’s discretion. But I think we are moving in the right direction. I think there is still work to do. But ultimately, it’s the Board’s discretion. So, it’s difficult to answer that. I personally don’t – I don’t think we are there yet. We only got the distribution earlier this year.

I know. So, we are at six months in that, but I am trying to get a feeling is in another six months and not a whole year before we could entertain. We remember the sweet days of $0.52 a quarter and truly, you must have some feeling, I don’t hold you to an exact number, but you must have some feeling of your strategy, the changing market dynamic in Brazil, particularly the demand, etcetera, where the cash flows and the reduction of debt would play out to a timeframe of six months, a year, 2 years, and you have got to have some feeling for that.

Robert, even though I am leaving, I would be a full to answer that question in a way because we have stated what we are trying to do and where we need to get to. But first of all, I can’t predict the future actually. And secondly, ultimately, it’s the Board’s discretion. So, it’s when the Board feels that all of these things that you have mentioned there, the market, the liquidity, the feeling, the outlook is when the Board feels and the Board’s discretion to decide, yes, okay, now we feel we can do something. And I can’t possibly really second guess that. We have tried to put out information and explain where we are and what we think and where we see it. But ultimately, future quarters, like we have said right at the start with forward-looking statements, it’s very difficult to predict that.

Okay. Going down another line then, there has been some chatter in financial markets that what the parent might do is reach down and absorb the partnership at this lower level of pricing where we are now around $5. Do you see that as a possibility, or could you say pretty hard and fast that no, that’s not going to happen. The parent company is going to continue to honor the partnership and let it work its way back up into the higher price ranges of this – the share price?

Yes. Well, I can’t speak for the sponsor. And I am not involved or party to the sponsors discussions and thoughts. And all I can do is tell you that we have had a Board meeting yesterday, and our strategy as a company remains unchanged, and we are focusing on what we can do. And what we are looking at is the things within our control, and we are focused on getting more charters and we are building liquidity. And I think if we focus on that, it’s for everybody’s benefit, and we are trying to look after all the unit-holders here. The sponsor is a unit-holder, just like everybody else. So, it’s almost impossible for me to make any comment on that. And even if I did make a comment on it, the sponsor tomorrow could decide it has a different view. So, we are just trying to stick with what we can control and what we are focused on. And hopefully, that’s for everybody’s benefit.

Okay. Well, that’s somewhat encouraging. At least we know – we have stated our feelings with thousands of shares that we would not like to see that. So, thank you very much, and may your future career be blessed. Gary.

Thank you very much, Robert. I appreciate it.

Our next question comes from Honey Haffner [ph] of – a private investor. Honey, please go ahead.

Hi Gary, how are you doing?

Yes. Well, thank you.

Alright. Thank you so much and wonderful. Thank you so much for all the effort that you guys are doing and trying to stabilize the cash flow and increasing liquidity. My question comes in actually onto the potential future acquisitions. So, there are seven vessels out there that we can actually – I am not sure where we are in terms of discussions, have they been offered to us in order to acquire because they are still at the early stage. And they are fairly 5 years or more, or almost 7 years. So, are we entertaining any of those acquisitions at this time, or has it not been in our discussion at the time being?

At the moment, Honey, it’s the latter. I mean we – they are still there, and our sponsor has been flexible. And those acquisitions are still available to us. But first of all, it’s difficult to do them right now anyway. But secondly, as I have said, once or twice already on this call and previously, it’s not at the moment, our priority.

I understand. But it really – I understand that it will take more on the long-term debt and will increase the long-term debt. But it also will keep us on the positive cash flow side of things. That’s really where I am coming from.

Yes. I think – of course, first of all, we would never do an acquisition unless it was accretive, first of all. But I think – yes, but I think it’s where we are sitting here today, I think our liquidity position, the requirement to make sure we have cash for drydocks and to run the fleet and to get into a very comfortable position again, so that we have got options. I think that’s more important at the moment than acquisitions. And I believe that the Board shares that view. So, I don’t think we are concerned about necessarily adding debt to the balance sheet, provided that the transaction is accretive and the cash flow can handle that debt, etcetera. I don’t think that’s a concern particularly, certainly not the first concern, but the first concern today is getting stability of liquidity and getting to a comfortable position to have options again. And at that point, we could then start again to look at acquisitions.

Okay. I guess the way I look at it, we have about $63 million in cash and the drydock for the last two vessels were around $11 million. I guess we are anticipating another $11 million for the two other drydocks this year, correct, if we are like kind of an average ballpark?

You mean each or for both?

Both, for both?

Yes, probably less than that because they are both European-based vessels. So – but you are not…

So, we do have that – yes, I understand. So, even with the drydock, I mean we still have enough cash flow, and we can add up one or two vessels at least from the potential acquisition. And that’s really what I am trying to get to. Has that been discussed? Has it been not agree, or has it not really in our scope at this time?

I think the one extra thing that you have to take into consideration is that we have financial covenants as part of our debt structure and some of our loan agreements, and as a ballpark figure, and it’s more complex than this. But as a ballpark figure, we need to retain in the region of $40 million in available liquidity. So, that $63 million that we have isn’t fully available to spend, if you see what I mean. It’s obviously our cash, but it’s not something plus as well, notwithstanding that, we also, of course, have to maintain sufficient working capital, etcetera, to run 18 ships, and this is an expensive business. We are taking quite a lot of revenue, but we also have quite high costs.

No, I understand that. Well, thank you so much, Gary. Appreciate it. That kind of answers my questions.

Okay. Thanks very much, Honey. Appreciate it. Thank you.

Thank you. Yes, have a great one. And good luck in your future.

Thanks.

[Operator Instructions] Our next question comes from Jim Altschul of the Aviation Advisory Service. Jim, please go ahead.

Good afternoon. I guess first of all, I want to join the others Gary, I am thanking you for your really exceptional responsiveness in professionalism during the year, some of the years I have been an investor in participating in these calls. I got a couple of questions for it. First of all, looking at the news release, with regard to the extensions, the new charters, I mean for example, we signed a new charter or a new time charter for the Recife Knutsen. And what – I am sorry, I just looked scrolling down the Windsor Knutsen and the Brasil Knutsen without giving specific numbers, how do the charter rates on these newer extended charters compared to what you were receiving under the prior charters?

Yes. They reflect the tightening market, I think is the simple answer to that question. We have seen that gradually over the last few quarters in Brazil. We are not yet seeing that in the North Sea. But yes, they are, for sure, reflecting a tightening market with less available tonnage to customers.

It’s tightening in favor of KNOT Offshore Partners, is that what you mean?

Correct. Yes.

Okay. Next thing, over the next – in addition – after the – you completed these two drydockings, do you have any other drydockings anticipated schedule over the next 12 months?

The last drydock, the Ingrid might split into January of next year if it’s not depending on the exact timing of it. But leaving that aside, there are no drydock scheduled for 2024. And I think you should be able to see that on the Slide 9. We put the green boxes on each of the vessel charter timelines to show where the drydocks are. And if you look down the 2024 column, you will see that there are not in there. Like I said, the last couple of vessels may tumble a little bit for a few days into 2024, but really, we treat them as 2023 drydocks.

Okay. Excellent. Thank you very much.

No problem, Jim. Thanks for your kind words as well.

We have a follow-up question from Robert Silvera of R.E. Silvera and Associates. Robert, the line is yours.

Hi. Thank you for taking my follow-up, Gary. The previous call I have just talked to you about changing in the rates for new contracts now versus the old established contracts and you implied that things are getting better because of the tighter Brazilian marketplace at this point. Can you give us a feeling percentage-wise, are they 2%, 3% better, 10% better, 15%, what’s – how fast kind of thing do you see this going up and to what percentage extent in the near future, from what you see?

Robert on what you – it’s not quite as simple as to talk about percentage increases because obviously then you don’t have to sort of talk about from what date to what date and all charters are different or customers are different. And the discussions we have with each customer, every customer is in a different place in terms of their own operations and demands and volumes that they need to transport and numbers of cargoes and ton miles. So, there is a lot of variables that goes into it. And each discussion with each customer is pretty unique. So, yes, overall, for sure we have seen a robust strengthening of rates. It’s more than negligible, that’s for sure. But I think trying to give you percentages would be as misleading as us trying to give you precise numbers. So, I think it’s – the message we are trying to give is that the market is materially tightening, were the beneficiaries of that. It may take some time to come through. We have long-term charters. So, yes, we have signed a couple of new charters as we have disclosed. And we have got one or two more, hopefully, in the pipeline. But obviously, the majority of our vessels today are operating on charters that have been agreed sometime in the past. So, we have to wait for things to work through a little bit as well. So, there is an extra complexity there when you add in the timeline. So, the simple answer to your question is that it’s a robust tightening for sure. But trying to put percentages or numbers on to that, I am afraid, is I am going to mislead somebody, I almost guarantee.

Okay. Well, I like the word robust. It’s got a good connotation and putting percentages on sounds like the U.S. Government who is trying to tell us what inflation we really are living with. And it all depends on whether you are dealing with gasoline, eggs or something else. So, thank you very much for that extra color on that. It gives me a stronger feeling that the market really is moving in a robust manner. Thanks Gary.

Thank you.

We have no further questions on the line, so I will hand back for closing remarks.

Yes. Thank you very much everybody. I appreciate the time you have spent today, and the questions, and I wish you all the best for the future. Thank you.

Thank you for joining. This concludes today’s call. You may now disconnect your lines.