Arild Vik - Chief Executive Officer and CFO Bjorn Bakkevig - Chairman, KNOT Offshore Partners GP LLC

Spiro Dounis - UBS Theresa Chen - Barclays Capital

Good morning. And welcome to the KNOT Offshore Partners’ Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Arild Vik, CEO and CFO. Please go ahead, sir.

Thank you very much. Good morning. And welcome to KNOT Offshore Partners’ fourth quarter results presentation and I would like to go through the presentation that we -- that’s online. And I think, let’s just go straight into, well, page two is the Notice to Recipients in relation to forward-looking statements. And I will go straight into page three which is the highlights and recent events for the fourth quarter. The fourth quarter has been strong quarter for the Partnership. We generated net income of $5.9 million. That is affected by $4.2 million of unrealized derivative losses. So you will see in our numbers that all the topline results are well in line with and actually above expectations. So we generated operating income than $15.9 million, which is strong result. We generated adjusted EBITDA of $26.5 million and we generated distributable cash flow of $15.1 million. During this quarter we have completed refinancing of Fortaleza Knutsen and Recife Knutsen reducing low margins. And we have acquired Dan Cisne vessel both by KNOT our sponsor from Lauritzen in Denmark. This vessel is operating under a 12-year bareboat contract with Transpetro and this acquisition has taken place without taking up any new equity, was fully debt financed, although there is a $12 million seller credit from KNOT. In terms of market activity, shuttle tanker market continues to be active, you must remember that it’s a small market, so its not that many contracts is done every month, but our sponsor has been made one long-term contract with an international oil company to be disclosed and the build -- the vessel will be build at Cosco Zhousan in China. So we will after this have six defined vessels eligible for acquisition. We further informed the market that myself the CEO will step down to pursue other interest and however, I shall be available to work for the Partnership throughout July ‘15 and the Board is working to find replacement for my position. And finally, we have then paid as previous advisement a cash distribution of $0.49 for each unit corresponding than to an annual distribution of $1.96. And turning to page four, as you can see from the three months ended December this quarter. Toplines are well in line with expectations. This is pretty much the same as the third quarter and the Dan Cisne, which acquired did not really have any material effect on PL for this period as it was acquired pretty close to year end. We had uptime 99.6% and also just to mention that revenues, as it has done previously, does include some non-cash items that amounts to $0.9 million for the fourth quarter related to contractual income which has been -- where the cash has been received previously. And of course, the item which then is important to you is the derivatives where we have interest swaps and also a ForEx hedging which has led to unrealized loss of $4.2 million. So in total, including realized losses, this brings our realized losses in with $5.2 million and this brings our result down to $5.9 million of this period. On page five, we continue to maintain strong balance sheet. We hold cash of $30.7 million. We now hold interest bearing debt of $613 million, including then the seller’s credit of $12 million and after having refinanced the Fortaleza and Recife Knutsen with a 9-year remaining profile, you will see that we do not have any major refinancing activity until 2018. And we have secured part of our interest obviously flowing from the fact that we have losses on interest swaps. So that we have now an average duration of about 4.5 years or an amount of $382 million. And our equity position has been about 40% as you can see. And we have on page six, we are showing the calculation of distributable cash flow as you can see that amounts to $15.1 million. And if that gives us courage ratio 1.32, that’s a high number, part of the reason that it’s -- that high is that we have the effect of the interest of the loan amounts which has short-term interest obviously and we calculate what we think we should retain. We normally use higher number but this is how it comes out in -- looking strictly at the accounting numbers. And on page seven, we showed you adjusted EBITDA, which then comes out $26.5 million after adding back the non-cash items, including then the realized losses on -- sorry unrealized losses on currency and derivatives. Turning them to our -- business as it now appears on page eight. We have continued to build a strong contract based by acquiring vessels as previously advised to the market. And you will see that we have a fixed contract duration of 5.3 years remaining. And obviously, adding the Dan Cisne increases the contract durations, so that we are already comfortable now having a long-term visibility on our earnings. And as mentioned, referring to page nine, KNOT has ordered one new shuttle tanker in January for an international oil company. That is a contract that could be between 5 to 20 years depending on options and it will be built in China and the rest will operate in Brazil. And we believe this is showing the visibility of new business within this market. And following this on page 10, we are showing our dropdown inventory and you will see that fleet. Those six vessels have an average of seven-years in fixed contracts, 14 years if we include the options and as you will see, it is a strong group of charters, which then is basically using this as part of their logistics in order to lift off the oil from their offshore production units. So basically, we continue to stay in the mainstream of what we call floating pipeline business. On page 11, I’m going to come a little bit into the markets situation and risks, which is there and which is not there in the sense. Obviously, Brazil is the main area of activity. There has been a lot of unrest and speculation on the Brazilian situation. Now, we have now seen that there is a new management in Petrobras, obviously being the main company there. And we see that in their updated information, which is still new. It appears us to very clear that all existing projects that is under construction and order will continue in order for them to prioritize, securing cash flow, which takes us up to 2017 and actually also into ’18 with new projects, which will in our opinion leads to further demand. Then of course, oil price over time will be important but as we will come to the oil price breakeven for these projects are generally below shales. So, we are in spite of the uncertainty that has been shown, we are optimistic and comfortable that existing business and business, which is already well under way will continue to be developed and there will be a consequence of that business opportunities for us. So this is what you will see on page 11. On page 12, we see also the Petrobras old management view on their cash flow situation basically with their new plan, where they will reduce CapEx on exploration and development of new projects. But they will maintain development of the existing projects already underway. We see that they see, as we are informed, no need for additional funding of Petrobras and there are many people analyzing this. We are not better than anyone else. But we do, based on this, continue to believe that they will give priority to keeping ongoing business active and by that really securing their long-term cash flow. On page 13, as you know, we some time ago secured contracts with BG or KNOT did, which is now in our portfolio of dropdown candidates and this shows the uptick of production where they have already reached 103,000 barrels per day and they have some units on plateau and they have new startups. And my understanding is that they continue to see progress as set out here and they continue to see flow rates exceeding expectations indicating that the BG development in Brazil is on track. On page 11, we really continued that the same line of thinking where we have indicated from their own presentation what is their activity, how they are going about this. And in summary, we see from this that they are continuing high activity and they are confident that this will be successful. And really the same impression is what you get when you look through further the page 12 or page 15 in our presentation where we see that they are continuing with the work on the units in Asia and we know that they are also considering further options for vessels that they have under the contract with KNOT, which hopefully could be concluded within this year. So on page 16, in summary what are the effects of lower oil prices for Knutsen Offshore Partners. Existing projects are continuing. There are very low lifting costs on the existing fields as the former or initial investment is sunk cost. So it is profitable and shuttle tanker service will be required as planned. And in terms of deliveries in '17 onwards, which is now what is available on the shipyards, we do see in our discussions with several of the majors, mainly in Brazil, but also in the North Sea that there is activity and that both due to new fields and due to facing other existing vessels we expect to see activity on new contracting during this year. We are in the process of revising our growth scenario. We do not think it is materially changed from what we had initially, except that we see that’s northern part of Norway, Arctic business seems to be a bit delayed and obviously waiting for oil prices that are maybe higher than today. But in Brazil, I think we have previously advised that the breakeven level is around 40, which is basically the low lot of the shale business. So we continue to see that as a viable, and therefore we believe in increased activity also in the period from '17, '18, '20 onwards, and that is. And in combination with the fact that we already have a very strong portfolio of dropdown candidates, we think we should pass through this period of let’s say some uncertainty in relation to the offshore exploration in a good way. On page 17, we are just summarizing the numbers quarter-by-quarter. And as we see in the fourth quarter, we now of course have full effect of Hilda and Torill Knutsen, which we had in third quarter as well and we do not really have an effect of Cisne that will come in the first quarter of ’15. And we see that we’ve had a consistently good coverage ratio in the range of 1.3, except for the second quarter ’14 when we had this situation, there was no effect of this acquisition that was made very, very early -- late in that quarter and didn't affect our cash flows. So operation has been better than forecasted, earnings on the EBITDA level has been stable for our fleet. And we -- accordingly then see strong performance in terms of low ballpark. And therefore stable topline results and really it is the -- there is some -- let say unstability created by the hedging activity that we have done, but that evens out overtime. On page 18, we’re just showing the development in distributions and coverage. And as that really reflects what I said on the former page, we have now recommended -- management has recommended to increase Q1 distribution between $0.010 and $0.015 per quarter with effect from first quarter ‘15. And so we well within the expected distribution growth, which we advised at a time of IPO. And that concludes my presentation. So from then on I’d be happy to take any questions.

[Operator Instructions] And our first question comes from Spiro Dounis of UBS. Please go ahead.

Hey. Good afternoon, Arild. Sorry to see you go, but just want to wish you best of luck in whatever you end up doing.

Thank you. Thank you.

So, first question, just wondering if you could talk to the tendering activity and maybe frame it relative to the level of activity that you saw before the global E&P CapEx cuts, so I realize that your business is largely locked in. But just trying to get a sense of how quickly the dropdown inventory can grow in this current market?

Well, I think that if we look at the projects that we were expecting to bid for the next couple of years, they’re already ongoing. So I don’t really see that there is a huge difference in what’s going to happen over the next couple of years. It’s more, of course, the long-term growth that is to be affected if the oil price should stay at low levels. I’m not really sure if current, which is that low anymore, I think, we are expecting fairly -- we are expecting some volatility on the oil price, obviously, the oil companies would then spend some time thinking through this. So but really in terms of what we would expect for the next couple of years. I don’t really see that this will affect us substantially, but then obviously, we’ll need to see what -- where the offshore oil business goes over the years. But even the replacement requirement is quite substantial and remembering that this is a small market. It --we are pretty confident that the growth in new project will be sufficient to sustain the good size growth here.

Great. Make sense. And I was just wondering, how should we be thinking about the timing and pace of dropdowns. Realizing it's somewhat unit-price dependent, unit price with the oil price drop took a hit, but now has bounced back pretty nicely. Just wondering if it's come back to a level where you'd feel comfortable issuing equity again to find drop-downs? And maybe how aggressive you'd be and how many drop downs you do per year at the current price or unit price environment?

Well I think there is a something we follow closely. We do -- lets say unless we step backwards in terms of pricing, we do envisage that something will happen during this year. But it’s obviously a continuing assessment that we are making. And I think that if you look at the six that’s now there, I suppose the best way of looking at that is that it will be spaced over the next couple of years.

Yeah. Thanks Arild.

[Operator Instructions] Our next question comes from Theresa Chen of Barclays Capital. Please go ahead.

Hi Arild. Just also wanted to echo and say thank you for your service and partnership and I wish you luck on all your future endeavors.

Thank you.

Going back to slide 16 of your presentation, when you talk about revising your long-term growth scenario, when do you think you’ll have an update more quantitatively on your growth projection for cash distribution?

Well, I think the issue now is that since the oil price move came pretty quickly or moved quite quickly end of last year. We’re seeing that the oil companies are now sort of reassessing their -- meaning that’s okay. For the next couple of years, I don’t see a lot of change. But obviously I think if the oil price stabilizes at levels 70 plus just to pick a number and then we will not really be that affected. And we are counting through now the number of vessels that we believe will -- we can rely on based -- using same methodology as we used when we did the IPO. And so far the number doesn’t look that different to us, but of course there are -- there is some more uncertainties especially when it -- you come to the oilfield that are far north and is more expensive to take out. So we don’t see any as I said any -- there is not a whole in the activity for the next couple of years. I think that’s the most important thing to say. And then, we will be -- based on when we get feel for what the oil companies are thinking in terms of their longer -- in the longer view, we will come up with that. And I would imagine we would come up with something within summer or something like that.

Got it. That’s very helpful. And then in the same line of thought, with backdrop of lower crude price environment, has this affected the market for third-party acquisitions at all?

That’s a good question. There are only a few -- we would be on the buying side, I think, something like that.

Okay.

We are not on the selling side. And basically, you have to ask the other guys. As you can see, when you look through the market space, there are very few there and whether they feel now that is going to take a longer for them to actually gain traction in this space. I really don’t know, I mean -- I think that’s the best answer I can give you.

Hi, Theresa. This is Bjorn. I just want to add that based on the review that we are not really hit by this oil price. We see activity continuing as normal. We see the next couple of years expanding as expected and when we say, we are going to revise our projections going forward that’s more to do with the growth from 2018 and onwards, how large the growth will be. We are quite sure there will be growth. So, we don’t see that this will tilt in the oil price. It really opens up lot of discussions in the market. Of course, we will always be interested as stated earlier.

Understood. Thank you very much, gentlemen.

Thank you.

At this time, I see no further questions. I would like to turn the conference back over to Arild Vik for any closing remarks.

Yes. Thank you very much. We appreciate that you have taken your time to be with us to go through our fourth quarter results. And we remain, as Bjorn says, we remain very confident that the shuttle tanker market is going to stay reasonably strong. In the short-run, we don’t see any major issues. In the longer term, we are also -- it is more the level of growth than anything else that we would be looking at. And again, thank you very much and we look forward to talking to you all again in three months time.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.