John Costain - Chief Executive Officer

Hillary Cacanando - Wells Fargo Chintan Desai - UBS Lin Shen - HITE David Starkey - Morgan Stanley Richard Diamond - Strait Lane Capital Eric Walker - Bank of America

Good day, and welcome to the KNOT Offshore Partners LP third quarter earnings call. [Operator Instructions] I would now like to turn the conference over to John Costain. Please go ahead.

Good afternoon. KNOT's Offshore Partners' focus is on the shuttle tanker segment. Consequently, we only have one reporting unit. KNOT Offshore's current unit price, currently has a tight correlation to the oil price. Investor perception seems to be that the shuttle tanker demand will vary with crude oil prices and the resulting appetite for offshore drilling. They perceive charter rates will come under pressure, if the low oil price persists. Perception is not reality. KNOT Offshore Partners LP is, in essence, a midstream mobile pipeline business, with fully contracted revenue streams and the market is expanding, so supply should tighten irrespective of the oil price. The shuttle tanker transports oil from the offshore oil production unit to shore side. It provides a vital mobile pipeline service, and it therefore operates in a premium midstream space. The forthcoming offshore oil developments are deep sea oil fields, where the traditional MLP investment in fixed pipelines is not an option. Even where a fixed pipeline is viable, shuttle tanker still have substantial advantages over a normal pipeline. These include a much lower initial investment and greater destination flexibility. Before ordering a new vessel, KNOT Offshore will always agree a long-term employment contract for the vessel. There is no speculative ordering, so our MLP will yield both stable and sustainable revenues. Now, turning to the presentation; Page 3, highlights and recent events. For the third quarter of 2015, the partnership generated revenues of $39.3 million, operating income of $19.7 million and a net income of $8.8 million. We had an excellent operational performance of 99.6% utilization. In addition, we reduced normal daily operating cost with around 10% savings to what KNOP originally registered. We declared a 2% increase in distribution to $0.52 per unit for this third quarter. We have extended the duration of the Carmen Knutsen time charter to Repsol for five years until 2023. In October, the partnership acquired Ingrid Knutsen. Slide 4, shuttle tankers, a special asset class. We compare our specialized mobile pipeline with other more standardized classes in the marine space. Here we see the shuttle tanker world fleet is small, but likely to expand significantly in the near-term. Specializing and focusing in this area, KNOP is favorably positioned to take advantage of this opportunity. There are higher barriers to entry in this asset class compared to most moving sectors, and KNOP keeps a low profile, quietly going about its core business. Shuttle tankers are a cost-effective solution to transporting oil from the offshore oil production unit to shore side, and therefore a critical and essential component to the development of and exploitation of offshore oil fields. Pipelines in deep sea oil production areas are not a cost-effective or practical alternative. Specifically tailored to different fields, the individual vessels yield both stable and sustainable revenues with minimal renewal risk at the end of the long-term contracts. The KNOP MLP offers a long-term predictable revenue stream. Most of the shipping segments are more volatile with regard to earnings, and today for instance, large conventional tankers are producing high earnings, which are likely not sustainable. We base our business model on properly pricing long-term contracts; knowledge gained through many years of practical experience. These contracts have stable and logical long-term price structures. Therefore, we have minimal downside risk at renewal. We did not achieve the real highs in more conventional shipping, but overtime our assets have financially outperformed most midstream shipping sectors. This is because we did not build new assets without first securing a long-term contract. Even when cost are comparable, the shuttle tanker has substantial advantage over normal pipeline, the classic MLP investment. These include a much lower initial investment, greater destination flexibility, re-deployable easily at the end of the field's life with minimal downtime maintenance. Whilst we have seen a limited softening of day rates on our recent renewals, primarily because of the subdued appreciation in capital values of our tankers and lower long-term interest rates, because of the niche market in which we are based, we remain exceptionally well-positioned. Despite a young fleet, minimal renewal risk and a very firm market outlook, today the yields on our MLP unit is higher than all larger midstream marine asset classes. For these other marine partnership companies, earnings have traditionally been much more volatile and on average their fleets are much older and their market outlook much less certain. Slide 5, the Ingrid Knutsen. We'll go through this as well, because there could be some questions on this. On the October 13, 2015, we were pleased to announce the purchase of Ingrid Knutsen from our sponsor for $115 million. Originally delivered to the charter by our sponsor Knutsen NYK in December 2013, the vessel is on a 10-year time charter to Standard Marine Tønsberg AS, a Norwegian subsidiary of ExxonMobil. The charter contains a day rate escalator of slightly over 1% per annum. The charter expires in the first quarter of 2024, although the charter has options to extend up to five more years. We financed the acquisition by the assumption of $104.5 million of outstanding indebtedness and cash in hand. The partnership has since repaid $27 million on closing of the acquisition. Today, we have an aggregate of $77.5 million of secured debt related to Ingrid Knutsen. This is higher than the fleet average, but reflects the tenure of the time charter and excellent counterparty. On communicating the news for the vessels drop down into the MLP, initially the unit price reacted favorably. It was a quiet period for MLPs and very few MLPs were conducting any financial transactions. So we attracted significant interest among analysts that follow us. The transaction received mix reviews on the asset price and the analyst views about what is accretive seem to vary. Several influential analysts gave downbeat assessment for the transaction, and we were soon trading at a discount. Related, but not full correlated to the evolution in price for large shuttle tankers, our large tankers, the big tanker sector in the last 12 months have shown very strong cyclical earnings. However, there has been subdued value increase. According to vessels value, in terms of value increases, mid-age Aframax and Suezmax are the best performing tanker types, with value increases of approximately 22% over the last 12 months. Modern vessels, VLCC's and product tankers have risen, but at a slower pace, between 5% and 10% in value. And in dry bulk and general offshore areas, vessels value note that, unlike tankers capital values have reduced by 15% to 30%. The cause of these subdued new build price movements have been significant yard overcapacity, a strong U.S. dollar and low commodity and rapid steel prices. Nevertheless, these prices do not appear sustainable, as many shipyards are making substantial losses. Only last week, DSME Daewoo, Korea's second largest shipbuilder, announced their three quarter losses for 2015 of more than $3 billion. Added, struggle with order delays, they also announced a $3.7 billion bailout package from two of their banks. If the U.S. dollar does weaken, all vessel values can increase significantly. The sponsor received third-party valuations for Ingrid Knutsen, an Aframax-sized shuttle tanker, from both Fearnleys and Lorentzen & Stemoco at the end of June 2015. Fearnleys estimated a fair value in the range of $110 million to $115 million. Lorentzen Stemoco estimated a fair value of $117 million for shuttle tanker. The drop down price was in line with the charters broker valuations. To protect unitholder interests, we always obtain an independent third-party fairness opinion. And the financial experts, who did the fairness opinion, noted the following. The broker valuations assume, among other things, a willing seller and a willing buyer, the vessel being in sound condition and oil majors approved, with the vessel being delivered charter-free and clear to the end. Our financial expert stated in the fairness opinion that the existing charter contract with Exxon was likely to be at times more favorable than what was achieved in today's market. This alone would justify an additional vessel premium compared to the broker valuations. In addition, they performed typical valuation assessments and found the transaction accretive to the partnership. This is also the assessment of the board, as distributional cash flow from this purchase will bring them back to cover ratio of the partnership to a little over 1.2 in the fourth quarter versus 1.07 in the third quarter. Looking at the transaction and around, a long-term charter to Exxon with the remaining period of up to 13.5 years, the largest energy major in the world, and given the fact that we are backed by a sponsor, which is part of the third largest shipping group in the world, the transaction should have been well received. It is in our view in line with what we have guided to the market. The financing structure, two-third debt and one-third equity, gives a long-term equity yield above 14%, a significant plus for this MLP. Six; significant fleet growth since the IPO. Today we have a very modern fleet with an average age of under three years ten months, and all backed by long-term charters. This, combined with a strong balance sheet, makes us very well-placed to expand in the medium-term, as the MLP market recovers. Younger assets appreciate more per dollar invested, as the MLP yield reduces; or put another way, as the rate of discounting cash flows reduces, backend cash flows from younger assets appreciate the most. Many of our vessels have been deleveraged when placed in the MLP compared to the sponsor, and therefore potentially have significant untapped borrowing capacity. Conservatively managed, we prefer not to over-leverage the partnership and we maintain our debt at stable levels. The acquisition of the Ingrid Knutsen, together with extension to the Carmen Knutsen time charter, are very positive developments for the partnership, as they increase the average fixed employment of the fleet from 5 to 5.8 years, an increase in the revenue backlog of $238 million. During the two-and-a-half years since the IPO, the partnership fleet has increased from four to 10 vessels. However, because of the drop downs performed by the sponsor tune-up, the age fleet has only increased by 1 year. Today we have a further drop down inventory of five vessels, the same as when we did the IPO, even though we have added six vessels to the fleet. Seven; long-term contracts backed by leading energy companies. Since July 29, 2014, the Windsor Knutsen has been employed under time charter with Knutsen NYK. This has since been replaced by a two year time charter from October 13, 2015, with Brazil Shipping I Ltd., a subsidiary of BG Group PLC, with options to extend to further six years. Knutsen NYK agreed to guarantee the payments at the higher rate at the original level on this charter for a period of five years to April 15, 2018. After this date, if all options are exercised, we will see a reduction in the charters rate of 3.8%. The Bodil Knutsen is under charter to Statoil until May 2016. We expect to hear this month from Statoil, whether they wish to declare an option to extend. And we expect them to exercise a one year extension. Either way, the charter is guaranteed until April 2018 by Knutsen NYK, by which time the North Sea outlook will have changed significantly. In the U.K. sector, there are potentially three new fields, Mariner and Bressay, both Statoil; and Bentley, Xcite. These are complex heavy oil field developments. Statoil have made an investment decision for the Mariner project, which entails a gross investment of more than $7 billion. The development of the Mariner field will contribute more than 250 million barrels reserves with an average plateau production of around 55,000 barrels per day. The field will provide a long-term cash flow over a 30-year field life, with production expected to commence in 2018. Statoil has identified a revised way forward to develop Bressay, 100 million to 300 million barrels, and will make a final investment decision in 2016. The field development has been redesigned and Statoil to a certain extent is cooperating with Xcite on common challenges for the Bentley and Bressay fields. Combined, the three fields will produce 185,000 kilo barrels per day; 595,000 barrels per day. Fearnleys stated these three fields will require about five shuttle tankers. There are a couple of other North Sea oil projects requiring shuttle tankers. In September 2015, the partnership entered into an amended time charter with Repsol Sinopec for Carmen Knutsen, extending the duration of the charter for five years. The amended time charter is effective until February 2023, during which period the average charter rate will be reduced by 6.2%. As mentioned previously, the Ingrid Knutsen is also operating in the North Sea under a 10-year time charter. This will expire in the first quarter of 2024. The charter has options to extend the charter for one three-year and one two-year period, five years in total. The acquisition of Ingrid Knutsen, together with the extension of the Carmen Knutsen time charter, are very positive developments for the partnership, increasing the average fixed employment of the fleet from five to 5.8 years, demonstrating excellent contract coverage and near-term financial stability, whilst growing the partnerships fleet to 10 vessels. Eight; drop down inventory; five potential acquisitions. The building time for shuttle tanker is less than two-and-a-half years. Our inventory for delivery over the next two years comprises of five vessels, with delivery up to late 2017. This maps out stable, solid growth. Contracted around a year after the FPSO, shuttle tankers are late cycle and they achieve normal financial returns, as there is very low re-contracting risk. We have given BG a range of options for chartering their three new builds, with the firm periods running from a minimum of five years to a maximum of 10 years. The presentation conservatively assumes they take five years. However, BG has the option to utilize the vessels for up to 20 years. There is therefore no commodity risk. We receive a fixed fee for contract performance yesterday, the MLP unit prices off the oil price. The correlation of our unit price to the spot oil price is a bit puzzling and maybe a bit on sophisticated, given our long-term fixed contract revenue drawn from the midstream space. Nine; Petrobras shuttle tanker fleet. Four of our vessels, 40% of the fleet are on long-term bare-boat charters with Transpetro, all running through to 2023. These four vessels are amongst the youngest in the Petrobras fleet, all are DP2. Dan Sabia and Dan Cisne are a unique size, and Fortaleza Knutsen and Recife Knutsen have shallow drafts with lots of thruster capacity. The Petrobras vessels are also heavily utilized by the charter, as these vessels are an integral and important part to the value chain, bringing the oil to the terminal and thus monetizing it. These hell or high water leases have no off-hire provisions and the charter takes full legal and financial responsibility for the vessel's long-term operation. English law regulates the leases. The vessels are well-maintained. KNOT management, a subsidiary of the sponsor, technically manages these vessels for Transpetro under contract. This level of passive income at 40% of our fleet give substantial stability and predictability to our cash flows and should give major comfort to our unitholders. Delays in field developments of between one to four years have occurred, because of the corruption scandal within Petrobras. The build up in the Brazilian shuttle tanker demand has therefore been delayed, but not cancelled. The Libra field post 2020 is operated by Petrobras, but unaffected by the corruption scandal. This field alone will demand 12 to 16 shuttle tankers. It is a completely separate organization, with no links to Petrobras, other than at Board level. This development will move forward and licensees have substantial inducement to move ahead according to schedule, as the royalties payable will increase substantially for projects completed after 2022. Slide 10, this is from the BG investor presentation. Regarding our BG new builds, BG Group's October press release states, in Brazil there is significant resource space. BG note that development is well underway with record production being achieved in October 2015, a 175,000 barrels a day or equivalent, as their sixth FPSO has come on stream. This compares to 40,000 barrels a day in the fourth quarter of 2013. BG has found a low-cost development with excellent reservoir characteristics. Flow rates have exceeded expectations and fewer wells than expected drilled. The breakeven is below $40 a barrel. They state elsewhere that by 2018, 15 floating storage and offloading units, FPSOs, for oil and natural gas will be operating in the Santos Basin, with a total production capacity of 2.6 million barrels of oil equivalent per day. BG states that they charter shuttle tankers with state-of-the-art dynamic positioning systems to transport the oil produced in their concession areas. BG believe they have an equivalent of 8 billion barrels of reserves available to them. Media reports on Shell's CEO, Ben Beurden, site the Brazilian offshore activity as one of the main reasons the BG merger deal is attractive to Shell. He claims the deal will help reshape Shell for the modern era, by enabling it to focus on fewer and more profitable areas, such as deep water exploration, where massive reserves are still being uncovered. 11; significant demand for new shuttle tankers. Fearnleys see a significant demand for new shuttle tankers, although they have scaled back their near-term expectations in the next five years by 20 vessels to 40 vessels. Going forward, these reduced growth projections are purely a delay. There is still the same amount of oil in the ground economically extractable. Fewer vessels means less renewal risk. An optimistic investor would see this as a positive, as it will lead to more orderly growth and more stable and secure long-term prospects. But judging by our unit price evolution, these investor types seem to have deserted the MLP space. Worldwide oil consumption has increased at double its long-term rate in the last year, because of the much lower price. 12; traditional MLP model, strong growth generator. We are an expanding mobile pipeline company. On the demand side, we have seen remarkable turnaround at both refinery and end-user level, leading to demand growth accelerating well above the long-term trends. U.S. shale production will decline in 2016, and the oil price should start a gradual upward path, underscoring the desirability of investing in our areas of operation. The market is rebalancing with lower oil prices. Our sponsors are first-class. NYK is one of the top three shipping companies in the world. With a diverse portfolio of modern 850 large vessels, it employs around 855,000 people worldwide. NYK is also one of the core members of the Mitsubishi family of companies. Publicly listed in Japan, it has a market capital of over $4.8 billion. Knutsen has a long, proud history in oil, dating back to 1894. The insurance value of the vessels in the Knutsen's sphere well exceed $5 billion to date. Knutsen fleet comprises of shuttle, product and LNG tankers, many of which are on charter for payout of between 20 and 25 years. As a shipping company has a philosophy, like NYK, to offer advance vessels on long-term charters to first-class charterers. 13; Knutsen NYK, a market leader. Knutsen NYK is backed by two of the leading sponsors in the industry, TSSI and NYK. Knutsen NYK is a leading shuttle tanker operator with 28 years experience. And this further reinforces our ability to take advantage of growth in the midstream logistic supply chain as the oil price recovers. Financial performance Q3. 14; the income statement. Total revenues were $39.3 million for the third quarter compared to $37 million for the second quarter. This is due to a full quarter of operation of Dan Sabia compared to 15 days in the second quarter. The inclusion of Ingrid to our fleet should increase our revenues for the fourth quarter in a similar way. All nine of the partnership's vessels operated well through Q3, achieving 99.6% utilization three days or higher. Operating income for Q3 was $19.7 million compared to $11.1 million for Q2. The increase is mainly due to the result of a full quarter of operation of Dan Sabia and KNOP's one-off cash charge for impairment of goodwill of $6.2 million in the second quarter. After the Q2 impairment, there is no longer any goodwill in our balance sheet. Net income for Q3 was $8.8 million compared to $6.9 million for Q2. Affecting net income was the recognition of losses on derivative instruments of $6.5 million in the third quarter compared to a gain of $0.3 million in the second quarter, because of a decrease in long-term interest rates and realized loss in foreign exchange contracts and the unrealized non-cash element of $2.2 million loss. Lower long-term interest costs are beneficial, as they have increased the present value of our contracted revenues. The balance sheet, Slide 15. At the end of September we had a solid treasury position, cash and cash equivalents of $67.2 million and undrawn credit facility of $20 million. We utilized $37.5 million of which to acquire Ingrid Knutsen. But this still means we have about $50 million of available liquidity, which we think is very comfortable, given our predictable cash flow. In the third quarter, in view of the volatility in the market, we announced along with our general partner, unit repurchase program. The partnership view this as an attractive investment opportunity. The program is price dependent and will stay in place for a year. But to date, we have not made any new purchases. With the GP participating in the repurchase program, this signals our sponsor's firm support for the action. Balance sheet; 16. Total interest-bearing debt outstanding is $610 million. We do not have any refinancings due before 2018 and our current cash flows indicate we will comfortably maintain our distribution. The cover ratio in the third quarter is lower than usual, but this is due to the large cash balance carried by KNOP for that quarter, which earned no interest. This has been normalized in the fourth quarter with the acquisition of Ingrid Knutsen. The cover ratio will improve significantly. Total partners equity stood at $520 million at end of September in the MLP balance sheet, equivalent to a unit price of $18.64 per unit. At this level, we will have a calculated [ph] deal of 11.2%, 1% above stable no growth traditional MLP. An example of which is Ferrellgas Partners. It has not increased its distribution for 10 years and today yields about 10%. Despite straight-line depreciation of our assets in the accounts, not from annuity MLP model, we are still trading a further significant discount. Given our growth prospects, our advanced fleet, our long-term contracts, we feel we offer a very attractive investment opportunity in this low-yielding environment. 17; distributable cash flow. Distributable cash flow was $16.1 million for the third quarter compared to $16.2 for the previous quarter. It is slightly lower due to realized exchange losses on FX swaps. These have since been extended. We have a coverage ratio of 1.07 in the third quarter, which is below normal. But as we mentioned, the Ingrid acquisition will improve this ratio significantly. Distribution for the quarter was $0.52 per unit, equivalent to an annual distribution of $2.08. This represents a 2% increase over the previous quarter distribution of $0.51. The management and Board are still evaluating whether to increase distribution levels for the fourth quarter and [indiscernible] in due course. The cover has declined since the previous quarter, because of the distribution increase. And for the last two quarters it is lower than the long-term average, because of timing differences between raising equity and dropping assets. 18; generated adjusted EBITDA of $32 million. Adjusted EBITDA refers to earnings before interest and other financial items, taxes, goodwill impairment charges and depreciation. Adjusted EBITDA is a non-U.S. GAAP measure used by investors to measure KNOP's performance. The annualized EBITDA basis Q3 is $128 million. With a wasting asset like a vessel, none of the fleets, in theory, should produce lower EBITDAs for every dollar invested. The annuity effect reduces the value loss in the early years. Younger fleets or assets also have longer to enjoy any MLP correction, which may come about in the near to medium term, ignoring drop downs, which in anyway are not occurring to any great degree in the current markets. KNOP's fleet has an average age slightly over 3.8 years compared to the industry average of around 10 years. Stable financial performance; 19. Since the IPO in April 2013, our unit distribution has increased by 39% above the minimum oil distribution, as our fleet has grown from four to 10 vessels. The distribution however has generally been very healthy, but has declined, as said previously, given its long-term average because of timing differences. We should see it increase to above 120% in the fourth quarter with the contribution from Ingrid Knutsen. Now, in summary, Slide 20. We have a very solid and highly profitable contract base. We have a very modern shuttle tanker fleet, well-placed and highly focused on expanding in the medium term, as both the MLP and oil markets recover. As the MLP market recovers, yields reduce the annuity curve, by which wasting assets are valued is flatten, and modern fleets gain most value for each dollar invested. As the oil market recovers, Shell site, the BG offshore activity is one of the main reasons their BG merger deal is so attractive. They intend to focus on fewer more profitable areas, such as deep water exploration, where massive reserves are still being uncovered. BG charter shuttle tankers to transport all of the oil they produce in the deep water exploration concession areas. No one has more experience in operating the sophisticated shuttle tankers than Knutsen offshore, and we operate these assets with real expertise We had only three days off hire in the last two quarters and have kept operating costs well under control. This year we are running a fleet with around 10% operating cost savings to budget. We have a large sponsor asset base with an ability to capture significant good portion of the expanding market. Finally, with both demand for and consumption of oil picking up worldwide, because of the much lower price coupled with lower commodity prices elsewhere and worldwide central banks stimuli, we may actually see real economic growth in the next two to three years. That's it. That's the end of the presentation. So if anyone's got any questions, please ask now.

[Operator Instructions] Our first question comes from Hillary Cacanando of Wells Fargo.

My first question is, you've been able to acquire two drop-downs in the past six months, and I think in 2014 you were able to do three. But just given the challenging environment, I was wondering what's the more realistic, I guess, pace of the drop-down? Could we continue to see three or two per year or do you think this would slow down a little bit?

At the moment, we've got one ship on the water, which we can put into the MLP. But looking at the unit price evolution and the multiples, we need to achieve for these drops, it is next year, I would say, one asset would be sufficient. I mean, we don't want to reduce the -- we don't increase the gearing of the business, really. So we'd like to raise some equity when we do the drops. But one ship is quite small amount of equity. We feel generally, the 9.5 to 10 EBITDA multiple on new ship is probably as low as we can go. So you could work out the numbers yourself on whether or not we would like to do drops, and let's continue to do drops. We have one next year and we have four in the following year. So it's a bit lumpy. Can't really say how we'll do year-over-year. I think, realistically, we expect market to recover. We don't expect this level within six to 12 months. And then we will probably look to raise quite a lot of equity and do a significant number drops, all at once. That's what I would really hope would happen.

I was just wondering, what about just given the current environment, whether maybe about better value in terms of third-party acquisition. Is that something that you would also consider or look at?

It's quite difficult. It's quite challenging at the moment, because when you look at the Ingrid, the charter fleet by the Ingrid is what we dropped at. So we'd always look at acquisitions. But we couldn't, the sponsor may be do them, but the MLP can't sustain an acquisition. I don't think anyone on these multiples would be interested in selling to us. It doesn't really work. This business is too, basically, investment grade. I feel that the shuttle tanker business is pretty close to investment grade quality. And you can't achieve 17%, 18% yield on equity. It's just too expensive. The main carry out from this presentation is, as you've seen, the holders should be comfortable with everything. We can sustain the business as it is. But as far as expansion goes in the current environment, it's pretty tough.

Our next question comes from Spiro Dounis of UBS.

This is Chintan filling in for Spiro. Just a couple of quick questions from me. One, kind of following-up on the drop down pace. So you mentioned, realistically, you could probably do one drop next year. How should we think about that in terms of your distribution guidance going forward?

Well, we look at the distribution, but to be frank with you today, we are comfortable with the distribution levels on the basis of unit price. And we would like to grow the distributions, but obviously if you don't see any appreciation in the unit price, then there's no real benefit for us to push the distribution up. We can easily increase the level of gearing in the business and increase distributions book, but we'd rather be more conservative on that. And we don't frankly see in the very short-term that there is any benefit in pushing the distributions much. We'd like to look at it going forward. We have to review how market is moving and it happens to be in our space really. But we certainly got the capacity to increase distributions. It's just whether it's a right thing to do right now, what we think internally. It's something I have to discuss with the board basically.

That makes sense. And then just jumping over to the purchase program, notice that you guys haven't purchased any shares yet. And I understand from the liquidity standpoint that's not ideal. But how should we think about when you guys maybe potentially pull that lever?

Well, we're quite small. We don't really want to compress the liquidity in the units. The thing with the MLP is, the rules, we're applying the Safe Harbor rules on the repurchase. I mean, obviously, you don't have to that, but it makes it much more straightforward. It's actually that compresses your time scale, when you can do the repurchases. And the rules are quite onerous, so you can't actually do a lot of volume anyway. But we would look at it when we can do it. At this time, the unit price is trading fairly well actually, and then suddenly they collapsed again towards the end of the month, after the last two or three weeks, [ph] knocking a bit close under the Safe Harbor rules to actually repurchase units. But it was at a level where we would have considered our deal towards end of the quarter. But when you look at the price evolution over the full quarter, and you look at us, because we're in a time charter business, we're straightforwardly pretty predictable. We know what the results are going to be. When you apply Safe Harbor rules, you got to be quite careful. If you know what you're going to achieve, then it makes it more difficult. But generally speaking, it's not a big area, really. We will purchase units, no doubt about it, because we can leverage off this business, if the price drops to a level where we're not happy, we'll just go and buy. But fundamentally, it's not a very positive message to send out to the unitholders, because their liquidity is compressed. So it's a balancing act, really. We want that too in the armory, obviously.

Our next question comes from Lin Shen of HITE.

I have two questions. First of all, is that, for the drop down next year, you mentioned that probably one vessel next year, and you probably need some equity to finance drop down. I'm just wondering like if the capital market is as low as now and to continue for some time, is that possible for the parent to take more equity back or maybe you'll lever up more to a temporary?

Yes, I mean, obviously both of those things are possible. The sponsor could take equity and we could lever up. We have one ship, I think it's about $30 million probably.

Just want to comment that. Situation now is actually that the sponsor has cheaper cost of capital and MLP. So right now, of course, it's better for the sponsor to own the asset rather than the MLP. But you might ask then, why the hell did we do the Ingrid [indiscernible]. The thing is that we raised sufficient money in the MLP to buy two vessels. And it just didn't make sense to sit on a lot of money, earning no interest and depressing our cover ratio. So it was more beneficial than to actually buy Ingrid. And I think we are dependent on the capital markets coming back in order for the MLP to be able to acquire vessels from the sponsor. So this really apply on the capital markets and the cost of capital. And I know the MLP is not able to raise money at a level which we think is sustainable. But, of course, if that turns on, then we have five more vessels that MLP can acquire.

And also -- go ahead.

So I should say one small thing, we're not obligated to purchase the vessel or the sponsor obligated to sell the vessel until two years after it's delivered. So we do actually have all of the 16 and nearly 17 to make, because we have to make a final decision on that.

Yes. So you have flexibility on their part, good. And also, can you talk a little bit about what you are seeing for the charter market for the last three months or now do you see a slowdown as you expected? And also especially for the Brazil market, because we all hear some negative news around offshore trading in Brazil area because there Petrobras is cutting cost?

It's more on the offshore side rather than midstream, and that's why I've tried to emphasize that we are a midstream business. And if you look at what Petrobras is doing, they do want to maintain their oil close, they need the income. So it's not affecting us. We're not on the offshore space, really. We're not in that area where Petrobras is cutting cost back.

Should I come up with an anecdote here, because we just recently extended the vessel the Catherine Knutsen, which is 23 years old. We extended the charter for two years, until the vessel is 25 years. And we did some digging in our archives to find out what kind of rate that vessel had, when she went on charter initially as a shuttle tanker. And the rate she had then was the same rate as she had when she was 23. And when we renewed the charter, just recently, for two more years until the vessel is 25, the rate was actually increased by 8%. So we have been in some situations where the rate has gone down, but it's not only rates going down. For that vessel the rate is actually going up and the rate is higher today than when the vessel was delivered and when the vessel was trading one year ago. So it depends based on the market situation. This is a niche market, so it's not like a commodity market. Vessels are unique for different fields. Charters may have different preferences in terms of specification size, technical specifications. So it varies. And it's nothing like the drilling segment, although [indiscernible] segment. That's a totally different segment from the midstream shuttle tanker segment.

Just talk about this two year extension you just did, which is a higher rate. Is that your choice to extend for two years instead of five years or even longer time or is that the producer's choice?

So this vessel was 23 years, I was talking about this vessel and the sponsor. And of course tends to trade until they are 25, so two years was a natural selection of time period. So it was just to kind of tell you that rates are not only going down, some vessels actually the rate is going up.

I understand that some are going up. But I'm just wondering like, does a producer or your client have their appetite to extend or some longer term of their contract, is that only like one or two year extension?

It depends totally on the situation. Some do a five-year charter, some you do 10. For older vessels, you might do two or three. It's not easy to give a clear answer.

Our next question comes from David Starkey of Morgan Stanley.

I've listened to a few conference calls now, and you do a great job on the calls of explaining your situation and how people need to be a bit more optimistic about your outlook and your current situation looks very sustainable. And why is it that the analysts continue to sort of downplay everything. I noticed last time they cut targets and things and I'm like -- it seems like you would want to own it more when it's cheaper?

I could tell you one of few stories, but really I don't want to talk about it on the phone. But it's difficult, I mean, ultimately people talk to each other and to your unit holders and they all say whether they're happy or not. The problem is, I mean, this enterprise value over EBITDA seems to be a measure that a lot of people are using in the States. And to be honest with you, if you've got an old fleet, the multiples look much better. If you got a very young fleet, like us, then the multiples don't look so good. And also people don't seem to take into account the quality of the counterparties we have and the renewal risk that we field. We do not field a very high renewal risk compared to a lot of companies. We're just lumped into this general marine space.

Is there a number of conferences that you can head to and sort of get the story out in that respect without taking up too much of your time?

Well, we did try once a quarter, when we got the quarter results and had to go somewhere, it was an MLP conference. That's what we tend to aim to do and we might try and do a few more things. But we've taken advice from bankers, and they basically say today, the market is so weak that investors are just going to -- they've closed down. I've also talked to practitioners in the U.S., and they say that the MLP space, unfortunately it's not right. There is three things wrong with this. The cost is offshore, that we're in the marine space and we're also a bloody MLP. Actually, it's a fantastic investment, but because of those three things we just discount it heavily. People just don't like offshore, don't like marine, don't like MLPs. Look into Morgan's list, you know.

Yes, well, that's the thing. And since they changed from that, it's gone down 30%. So can you realistically consider taking that status away and doing it like a REIT or something that would be less complicated to explain to people, less K1s, that kind of thing, make it easier for people to buy by the company?

You want to take over the company at this price. You don't know it's a fantastic business. It's not going to happen, because basically we're institutionally held and the shares trade at the margin.

Your shares are based on the exchange traded funds that own you, and they tend to just lump everybody into the same boat and sell at the same time to everybody and distribution also is very hard.

Exactly. And I've talked to analysts and they say, well, that's just your opinion. They don't get the story. That's how I feel about it. I find it extremely frustrating. This is a fantastic business, I believe. And I believe the growth story is going to be here. The Brazilian deep water wells are fantastic. And I don't know why we're hammered. Well, we're quite niche, we're very small and niche in terms of the U.S. listings. We're lumped into the marine space. And because we are small, people aren't interested and they just put us in the general field and that's it. When you look at the use of the fleet anyway, the fact that we've got such a young fleet, we should be operating on better multiples. People have sensed the MLP space. They will look for short and near-term contract coverage and the use of a fleet. We are mostly on those two categories, we are pretty marvelous. And then on the basis of what our actual space is, the outlook for this space is phenomenal.

How many years of predictable sort of cash flow in front of you here?

Well, we are fine until '18, and then refinance. We have to refinance a significant portion of fleet anyway, and then the charters come to an end as well. So it's a natural ending. Basically, the one MLP was set up in '13. It was set on for a five-year period and the financings come to an end and the charters come to an end. So that's part of these melting down price as well. But I do find it hard, because people -- I mean, I find it hard because people talk to each other and then they get uneasy. Well, I do get point of the enterprise value over EBTIDA model, but it doesn't really stack up, because if you've got a young ship like the Ingrid, which is like on chart to Exxon for 15 years and people turn at you, and say, well, you know, in the offshore space the enterprise or EBITDA multiples are 7 to 8 and you're doing 10. But you know yourself that in the offshore space people have written contracts two years ago and the asset price has fallen 30%, so there you get your 8%, your 8 or 7 multiple. In the general midstream space the asset prices haven't really dropped. So we're being looked at as offshore, aside from the fact that we're midstream, but the assets in the offshore space has fallen quite heavily, the cost of them. So you might have written a contract here, although you know there's an awful lot of residual risk, because it's offshore as well. I mean, it's just a completely different outlook. And yet, we are seen as offshore. We should be doing offshore multiples on our drops, and it's like [multiple speakers].

Can you drop the word offshore out of the partnership?

I would like to. I would like to be called a mobile pipeline company. But next year or two years down the line, with some smart Wall Street banker told us to use the word offshore, because we had moved to offshore three years or four years ago.

Our next question comes from Richard Diamond of Strait Lane Capital.

Yes, I want to follow up with Dave Starkey and clearly the market is pricing in a distribution cut, when that is clearly not the case. And quite frankly, you're giving investors private equity type returns with public market liquidity. I have two brief questions. One is, I'm assuming, under your charter parties if someone was not to perform that you would have the ability to arrest a cargo. And I just want to understand if that's correct? So for example, if Exxon decided not to pay you, you have other options? And secondly, have you thought about doing an Investor Day in New York in 2016 to highlight some of the positives of the story?

First of all, I've been in the big tanker business for 25 years. So I can tell you, if you are dealing with a shipper of the cargo, then you don't have an issue with payment. It never happens, because basically they know, they own the cargo and they know they have to pay you, if they want to receive it or if they're a long-term time charter, why this. If it breaks down, the oil doesn't move. Where you have a problem in the oil industry is where you obviously have relapse to a long-term time charter with an intermediary. And that's why KNOT is such a powerful and good story, because basically it's chartering directly with the oil major. With other shipping companies whether it is time charters to an intermediary, like for instance, like we had the KGs in Germany, where [indiscernible] lost loads of money, because lots of peers backed our story as a big one, where the charter just couldn't perform because the market won't. People don't want to reneg on contracts and don't want to not pay. But when the boat markets move away from you, there's nothing you can do. But with this situation, it's not like that. We're basically chartering out to all majors. It's also the same in the spot freight market, you always get paid because the shipper needs to receive the cargo. So it's only where you've got someone in the middle that you have a problem with performance. So that's the first point. The second point, with investors, we probably want to do something, but we do tend to go to the MLP conferences, the big ones, if we can. And we tend to do something, after the quarter results, we tend to go to the States. We can say, hey look, we're doing that. But we've been advised by our lead bankers that today isn't really the time to talk to investors. There's not a lot of optimistic investors out there. It's probably better next year, like we say, in '16 when everyone is recalibrated after the end of the tax year. So we'll look at that. We're always interested in talking to serious investors.

Last question or this is just a request. Since there are only two publicly traded shuttle tanker MLPs, would it be possible not to have the calls coinciding with each other?

It's not my fault. It's their fault. We came out here first. But at the same time, it's a very good point. I don't know what TK looked in. I'm sorry, I shouldn't mention their name though.

I plan to ask on their call tomorrow, but it would be nice, given there are only two vehicles.

Normally, they put them on earlier. We deliberately put our call on 12 of the hour, when we set the company call. It's good around mid-day, because everyone is finished by then. But TK seem to move theirs later in the day now. I don't know why that is. I really don't know what's going on there. But having said that, I would like to correct you on that, we're the only pure shuttle tanker company in the world. TK has a lot of other stuff in their business.

You're right. You're the pure play.

Yes, I don't know why. We should not be at the same time. It doesn't make any sense. But I'm glad you turned up for our call rather than theirs.

You're doing a great job. I'm grateful. I can't find many companies that pay 13% effectively or investment grade. And so I'm enjoying it. Thank you very much.

All right. Thanks.

Our next question comes from Eric Walker of Bank of America.

Just two quick ones from me, I guess, just wanted to follow-up on the Bodil extension. I think you've said it's going to ramp up either this month or next. And I just want to see if there is any kind of nuances to those discussions? And I think you said they wanted to extend just one year. Is that just sort of a kind of standard protocol or I guess what's the different between extending further out than the one year?

Well, I mean, obviously Statoil will decide what they do with those three fields. I mean, if the three fields are developed, then probably we're talking about longer-term extensions. And the Bodil has been an unusual ship, and the fact that Suezmax, it's an interesting vessel. But we haven't really discussed it with, because obviously if you discuss things heavily in the shuttle tanker business, basically if you want a long-term deal you have to pay for that. And we just don't think that at the present moment in time, the way Statoil is positioned over there, with their new fields coming on. It's the best time for us to talk to them tactically, so we've left it with them and they will decide themselves whether they want to extend or not. I think when we know what's happening with those three fields, then we'll probably talk to Statoil properly about it in terms of Bodil. But until that point, I guess we'll just wait and see. So they're using the ships, but it's up to them. We haven't had direct contact with them. The original structure of the charter, I think, it was three one-year options. So we'll just let them run. And when they redeliver the ship, we'll talk to them probably about an extension. But today, we don't really know what they're going to do, because they haven't told us. So that's all I can say. But we expect them to, because normally we would probably have heard from them, if they weren't going to.

And then just a little bit longer term question. I guess as the industry fleet ages and you see some attrition may come to their end of useful life, I think they either get scrapped or could potentially be converted over to an FSO. I guess do you guys have any appetite to maybe look at some of those vessels that maybe at the end of their useful life and perhaps diversify from shuttle tankers and to, say, the FSO business?

Well, we already do that effectively with our own ships. We wouldn't use other peoples', because we've maintained our ships all their lives. We know what kind of condition ours is are and we are comfortable with the vessels that we have designed and developed. We wouldn't be comfortable on using somebody else's tonnage for that sort of project. We've got plenty of our own quality tonnage that we would use. And the sponsors do that sort of business. But we're not dropping the MLP. We've kept the MLP focused on the shuttle tanker business.

The platform and the sponsor, we actually have one vessel at the yard in Remontowa Poland being converted to FSO and all in a $400 million project. And our sister ship is operating as FSO for Statoil in the North Sea, and has been operating for more than 15 years on the same field. So we are in the FSO business. We aim to do more than that business. So far we have only done that in the sponsors, down the road. And we will of course evaluate whether to do an FSO project in the MLP as well as the vessel's age. But that isn't really our issue now, because the average age is three years and ten months for the vessels in the MLP fleet.

And this concludes our question-and-answer session. I would like to turn the conference back over to John Costain for any closing remarks. End of Q&A

Thank you all for attending. I hope you enjoyed the presentation and I hope it give some early unitholders hope, because really there's nothing wrong with this company, it's been trading extremely well and it's just the volatility on the unit prices is a concern. But the outlook for the industry is extremely positive and we are extremely well-positioned to take advantage of that. And I hope you all stick with us. Thank you. Good bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.