John Costain - CEO and CFO Øystein Kalleklev - Chairman of General Partner and CFO of Knutsen NYK

Hillary Cacanando - Wells Fargo Spiro Dounis - UBS Ben Brownlow - Raymond James

Good day and welcome to the KNOT Offshore Partners’ First Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to John Costain. Please go ahead, sir.

Thank you. If any of you have not seen the earnings release or slide presentation, they’re both available on the Investors section of our website. On today’s call, our review will include non-US non-GAAP measures such as DCF and adjusted EBITDA. The earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. A quick reminder that any forward-looking statements made during today’s call are subject to risks and uncertainties and these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from those forward-looking statements. The partnership does not undertake a duty to update any forward-looking statements. And now with the presentation. KNOT Offshore Partners focuses on the Shuttle Tanker segment. Consequently, we have one reporting unit, the shuttle tanker which transports oil from the offshore oil production unit to shore side. It provides a vital service and operates in a premium midstream space. KNOT Offshore Partners is in essence a midstream mobile pipeline business with fully contracted stable non-volume based revenue streams. The market will expand significantly in the coming years. Low oil prices are beneficial to shuttle tanker demand when compared to a fixed pipeline solution as there are significant lower startup costs. Nevertheless, in 2015, we covered many volume based midstream contractor business. Our partnership unit price was strongly and -- correlated to the oil price. Recently, we have seen a start of a recovery in our unit price, although not without the expected volatility in today’s markets. Despite this, we continue to trade at a significant yield premium to the Alerian index. We have many positives, a solid coverage ratio, a young fleet, a stable financial situation, excellent sponsors and more stable to many MLPs and solid growth prospects. The forthcoming offshore developments are deep sea oilfields where the traditional MLP investments in fixed pipelines are not an option. Shell had this to say in March when launching Phase 3 of the Parque das Conchas off Brazil, these barrels like other subsea tieback opportunities across our deep water portfolio have development cost advantages and will contribute to the strong production growth we expect from offshore Brazil. Our sector is unique amongst many MLPs in that there are no speculative ordering of shuttle tankers, so the partnership should yield both stable and sustainable revenues. Before ordering a new vessel, our sponsor, Knutsen NYK, will always agree a long term employment contract with the charter. Now, turning to the presentation, slide 3, financial highlights. For the first quarter of 2016, the partnership generated revenues of $42 million, adjusted EBITDA of $33.1 million and distributable cash flow of $17.9 million. We declared a stable distribution of $0.52 for this quarter with a coverage ratio of 1.19. We had an excellent operational performance of 99.8% utilization in line to date for scheduled operations and 97.5% utilization taking into account the Bodil drydocking. Due to an increase in the price of the partnership’s common unit from $13.49 in December 31 to $16.40 on March, the 31, the partnership elected not to repurchase any common units under its repurchase program during this quarter. Slide 4, drydocking. In February 2016, the Bodil Knutsen completed its first special survey drydocking on time and on budget. This is the only scheduled off-hire for the partnership in 2016. Four of our vessels are on hell-or-high-water long term bareboat charter to Petrobras Transporte, Transpetro. The contracts are regulated by UK law. This means that except in the case of an event or loss as defined in the charter, the charter is required to pay agreed hire every month. So these four vessels Transpetro is responsible for all operating and logistics expenses, including drydocking costs. Transpetro elected to subcontract all of the technical operation and management of these vessels to our sponsor, Knutsen NYK, as well as having a good overview of their maintenance program, our sponsor can ensure that the vessels are well maintained in accordance with the contracts. Fortaleza Knutsen completed its five year special survey drydock in April. Recife Knutsen and Dan Cisne are also expected to complete their first special surveys during 2016. These drydockings will not result in any off-hire or cost for the partnership and therefore will not impact results of the partnership. Slide 5, Torill and Hilda Knutsen, Goliat field. It is estimated that the Barents Sea contains nearly half of the discovered oil reserves in the Norwegian shelf. Goliat is the first field to be developed in the Barents Sea and represents the world’s most northerly offshore development. According to the operation of the field, its estimated lifetime is 15 years and recoverable reserves equivalent to approximately 178 million barrels of oil. Startup production volume is expected to be approximately 100,000 barrels per day. The Hilda and Torill Knutsen are two of three specially designed shuttle tankers built to operate in this arctic environment. Never before have shuttle tankers had to meet such strict requirements, our vessels are ice class and heavily winterized, allowing the crew and hence the vessels to operate safely in temperatures down to minus 30 degree C. Our experience and expertise positions the partnership for future business in this harsh environment segment. An important milestone for the partnership is reached in March 2016 when the first oil is loaded from this field to Hilda Knutsen. Both Hilda Knutsen and Torill Knutsen are now deployed in their design capacity on the Goliat field. Prior to this, they were utilized in the general stature of shuttle tanker program. Slide 6, income statement. Total revenues were $42 million for the three months ended 31 March, 2016, Q1 compared to $42.5 million for the three months ended December 31, 2015, Q4, a decrease of $0.5 million. The decrease was mainly due to reduced revenues from Bodil Knutsen as a result of its drydocking during Q1. This decrease is partially offset by the full quarterly earnings for the Ingrid Knutsen in Q1 compared to 77 days in Q4 as the acquisition of Ingrid Knutsen took place in October 2015 [ph]. Vessel operating expenses for Q1 were $7.6 million, in line with Q4. But included within Q1 expenses is a $200,000 charge for bunkers consumed during the mobilization before and after drydocking of the Bodil Knutsen. Q1 general and administrative expenses were $1.3 million, an increase of $0.2 million from Q4 mainly due to the year-end close expenses. Operating income for Q1 was $19.2 million compared to $20.4 million. Net income was significantly impacted by the recognition of realized on unrealized losses on derivative instruments of $3.2 million in the first quarter 2016 as compared to a gain of $2.1 million in the fourth quarter of 2015. The unrealized non-cash element of the mark-to-market losses was $2.3 million for Q1 compared to a gain of $4.9 million in Q4. Of the unrealized loss for Q1 2016 $4.4 million relates to mark to market losses on the interest-rate swaps due to decrease in long-term interest rates. This was partially offset unrealized gain of $2.1 million on a foreign exchange contracts due to strengthening of the Norwegian kroner against the US dollar. Net income for Q1 was $10.7 million compared to $17.6 million in Q4, this equates to an earnings per unit of $0.38, if we adjust for the unrealized non-cash element of the derivates, $2.3 million loss, earnings per unit become $0.47. Slide 7, adjusted EBITDA, in Q1 the partnership generated adjusted EBITDA of $33.1 million compared to $33.8 million for Q4. Adjusted EBITDA refers to earnings before interest, taxation depreciation and amortization. It provides a proxy to cash flow and adjusted EBITDA is a non-US GAAP measure used by our investors to measure the partnership performance. While weighing asset like a vessel, younger fleets in theory should produce lower EBITDAs for every dollar invested. The annual effect reduces the value loss in the early years, younger fleets or assets also have longer term anticipated improvement in these markets. Much fleets have an average age of 4.3 years compared to the rest of the industry average for shuttle tankers excluding KNOP of slightly over 11 years. Slide 8, distributable cash flow. Distributable cash flow is $17.9 million in Q1 compared to $18.1 million in Q4. The decrease in distributable cash flow is because of reduced earnings on the Bodil Knutsen due to drydocking partially offset by fourth quarter earning on the Ingrid Knutsen. There are no further scheduled off hires in 2016, we maintain our highest distribution level which for the quarter was $0.52 per unit equivalent to annual distribution of $2.08. This distribution had a coverage ratio of 1.19 in Q1. Slide 9, balance sheet. At the end of March we had a solid treasury position, cash and cash equivalents of $28.8 million and an ongoing credit facility of $20 million. The revolving credit facility is available until June 2019. We have about $48 million on available liquidity, which we think is very comfortable given our predictable cash flow. Total interest-bearing debt outstanding was $653 million, annually we currently have scheduled repayments of $49 million this compares to replacement CapEx charge of $28 million when computing distributable cash flow. We do not have any loan maturity before the second half of 2018 and our cash flow indicate that we will maintain our current distribution level until this time. The coverage ratio has been normalized in the fourth quarter and that 1.2 is the acquisition of Raquel Knutsen. At the end of March, total partner's equity was $516 million with 27.7 million units issued, this equates to $18.60 per unit. Slide 10, stable operational performance results in stable financial performance, since the formation of KNOP, we have had very strong levels of customer utilization which means continuingly high and increasing predictable revenue, adjusted EBITDA, and discounted cash flow as more vessels added to the fleet. In Q1, we had a distributable cash flow of $17.9 million and we’ll make $15 million distribution. Slide 11, unit price impacted more than the Alerian Index by falling oil price. The Alerian Index has 50 constituents representing approximately 75% of the total MLP market capitalization and it therefore gives a benchmark of unit price and distributions for comparison and evaluation of our MLP performance. After the IPO in April 2013, initially KNOT unit price had a strongly correlated to the Alerian Index as a partnership yield was comparable. However, since the oil shock we had traded significantly up the oil price evolution throughout 2015 and our yield has become significantly elevated compared to the Index. In the current year, although we have seen significant recovery in unit prices, we have a weakening correlation of the oil price, we still trade an elevated yield compared to the index. Slide 12, earnings per unit of KNOP climbing throughout downturn, despite the sizeable flow in the price of oil, our contracts continued to generate stable cash flows and as a consequence of further acquisitions, our earnings per share have climbed stably. Profitability is not dependent on the price of oil. Slide 13, low oil price, more cost focus, today we have a low oil price environment and to exploit deepwater reserves, oil majors are moving away from fixed pipeline investments towards the shuttle tanker, with a much lower initial capital investment requirements, and greater flexibility. The current oil price will not reduce demand for shuttle tankers. Slide 14, long-term contracts backed by leading energy companies. The Windsor Knutsen has been on three year contract from 13 October, 2015 with as Brazil Shipping I, a subsidiary of Royal Dutch Shell with options to extend for further six years. This relationship has broadened, as BG now is part of Royal Dutch Shell have agreed charters for three further vessels all rebuilds [indiscernible]. As previously discussed, Hilda Knutsen and sister ship Torvill Knutsen have commenced employments on the Goliat field, of the original five year contracts on the two vessels on average of 2.5 years of the former charter period remains. Given the specialized nature of this contract, we would expect the vessels to update on this field throughout its life. The Bodil Knutsen, the largest shuttle tanker operating in the North Sea is ice-class, and on charter to Statoil ASA until May 2017. There are two further years of options to extend and to extend, and the sponsor in any event, guarantee income at the current level until April 2018. Statoil has been given permission to proceed with the development of the Johan Castberg oilfield in the Barents Sea, 240 km north of Hammerfest. This should provide medium term employment and security for the model. Four of our vessels are on long-term bareboat charter to 2023 with Petrobras Transporte. These vessels are the youngest in the Petrobras fleet delivered between 2011 and 2012. Dan Sabia and Dan Cisne are of unique size and the Fortaleza Knutsen and Recife Knutsen have shallow drafts, with lots of thruster capacity. Three of these vessels will take their five year special survey in 2016 one of which is completed. These vessels are heavily utilized by the charterer. Delivered in 2013, Carmen Knutsen is on charter direct for Respol Sinopec until 2023. The Ingrid Knutsen was delivered in December 2013 is operating in the North Sea on a time-charter for Standard Marine Tonsberg AS, a Norwegian subsidiary of Exxon Mobil. This will expire in the first quarter of 2024. The charterer has options to expand the charter to five one-year periods. Slide 16, significant fleet growth since IPO, since the time of the IPO, our fleet of four vessels had average age of about 3 years. Now three years, we have a fleet of ten vessels which have an average age of about 4.3 years, all are backed 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. The younger assets appreciate more per dollar invested as the MLP yield reduces. [indiscernible] as the rate of discounts in cash flows reduces back end cash flows from younger assets appreciate the most. The average fixed employment of the current fleet is 5.3 years. Slide 16, dropdown inventory, five potential acquisitions. Today we have a further potential dropdown inventory in five vessels, the same as when we did the IPO even though we’ve added six vessels to fleet. The fixed contract period for the dropdown fleet is a minimum of 5.9 years on average. It could be longer depending on the which service and options the charter elects to take on delivery. Slide 17, summary. In summary, we have a very solid and highly profitable contract base. With a revenue backlog of $790 million on an average contract duration as of the 31st of March of 5.3 years, we have a modern shuttle tanker fleet with an average age of 4.3 years versus the rest of the industry average of 11.1 years. The partnership is well placed and highly focused on expanding in the medium terms both the NLP and the oil markets recover. No one is more experienced enough both in the shuttle tanker market and offshore and we operate these assets with real expertise. We’ve had minimal of 99.8% utilization in last quarter and 99.7 since the IPO excluding schedule dry-docking. We have a large sponsored asset base with regards to capturing good portion of the expanding market. And that concludes the presentation. Please feel free to ask questions now.

[Operator Instructions] And our first question comes from Hillary Cacanando of Wells Fargo. Please go ahead.

Hi, John, thanks for taking my question. So during last quarter, the last call you said that you won’t consider another dropdown until your unit price reaches at last $20, so now that your stock is trading above $18, it’s getting closer to $20, how should we think about a potential dropdown? Is this something that we could see sometime this year or is this something that you are kind of a wait and see approach?

Thanks for the question, Hilary. Well, first I have to we are very, very happy with the prices going up in the last quarter. I think what you got to see basically is a settle down in the volatility and then we will evaluate what to do, but I think generally we are bit optimistic about the MLP now and we do see a growth story again. I think when we traded below $10 at the end of last year, you have to say, well, this is crazy, but today the markets have really recovered. When you look at the general loan index, the loan index is below 10% yield now. Ours is still about 12% yield, so we feel that we can – this difference disappears and now we are over $20, even if that’s $22, $23 if we go to the mean rate again which you are up for the first year and a half and at that sort of level it is definitely accretive, easy to do jobs. I think today it’s pretty marginal. The problem today is the fleet market has been so volatile for so long with the sharp ratios throughout when you look at the units, however the units have been very stable and growing, the market perception is different and they are acquiring liquid small units. There were lot of volatility in the price and it has – it would make fairly heavy discount if we put on to the market and try to raise money against the company today. I mean typically if we are looking at 10%, 15% discounts of a gross possible units which just raise equity. So we are very optimistic. I mean we love the way that the unit price has come back and I do generally think that the MLP is viable again and we will look at it closely in the few months. I guess it’s have to wait till we pay the loans.

Okay, sounds good. And then just around your debt maturity due in 2018, I know it’s still early, but I think a lot of companies that are starting to kind of start discussions with the lenders already for longer term maturity. I was wondering if you could have started any discussions with the lenders yet. I know it’s still early, so it’s –

We are always talking to the banks. As far as the maturity in 2018, we are looking at how the fleet is developing and it’s basically around Hilda and Torill and obviously there is charters. We firmly believe the charter is big and there is just no way with those ships are going to continue on that field. There is no indication that there weren’t any, there is no reason why they shouldn’t and there is nobody I don’t think that could provide that level of service that we do. And genuinely when the extension comes on these two charters, we will go and talk to the banks talking about refinancing, but today because the charterers have only got - next two and a half years, I mean this renegotiation will occur before them in the charter, that’s for sure and then we will really finance system [indiscernible]. Øystein Kalleklev: Yeah, John, if I could just also add. This is Øystein, GP Chairman. We also got this question on the Investor Day. Basically what we said is that we don’t like to pay unnecessary fees to bankers and lawyers to refinance our debt. Now there is two and a half years left of the loan, it’s actually just in - running for half of its life, because it’s a five year loan. So these vessels have just started operating on the wheel, so really no rush to refinance this. No, we have plenty of cash on the balance sheet and refinancing will just incur a lot of refinancing cost then. I think it’s better to pay it out as dividends.

Okay, sounds good. Okay, that’s it from me. Thanks a lot.

And our next question comes from Spiro Dounis of UBS. Please go ahead.

Hey, good morning or good afternoon. Just want to maybe go back to the potential for a dropdown and we are not going to be too presumptuous but of course the [indiscernible] I guess this one option obviously I guess really the only one at this point and just in terms of the financing, obviously capital markets needs to open up again and to your point, you are sort of waiting for that, that price to hit the right point. But just from the debt side of things, could we see I guess – is there debt currently attached to that vessel and would that simply just flow through to you? I am not sure if you can disclose how much debt is actually fixed to the vessel itself. A - Øystein Kalleklev: Jon, I can answer. This is This is Øystein. The vessel in KNOT, of course all the vessels we charter we finance and all the vessels we order in KNOT is sponsor when we do the loan agreement with the banks we pre-accept KNOT as a new owner and we also pre-accept the financial covenant of KNOP, so we can just – when you sell the vessel to KNOP, they can take over the loan after I have done with all the other dropdowns. And all the vessels in the dock or inventory, the five vessels are financed, so there is no – that’s not like we are running our own missing money, so they are all truly financed and that cost to vessel today is a bit above $80 million. So in both those situation, KNOP are free to decide whether they want to discuss with the banks to take over as a guarantor or whether they want to refinance the vessel in connection with the dropdown. Of course taking our loan means that you don’t have pay another set of arrangement fees and lawyers, so of course it’s cheaper to take over the loan, because they can do it for free.

Got it. That makes sense. A - Øystein Kalleklev: Yeah, the margin is 200 basis points and the tenure is nine years, so you get a nine year loan at 200 basis points and you get that loan for free, so that’s the benefit of course, but I repeat that all the vessels they take over are fully financed. And KNOP gets the options just to take over that or they have to do – to pursue their own financing.

Got it. Perfect. And then just want to follow up with second question here on tendering activity. And I guess trying to figure out, John, I think you kind of spoke about this little bit in your prepared remarks just around the fact that this is a less capital intensive way to move the crew at least initially. And I am just wondering more in the 2019 timeframe, if capital budgets are getting cut now presumably that’s really going to impact the production that comes online in the later years. And I guess, I am just wondering what sort of tender activity are you seeing, one of the next big win going to come in for you guys and maybe is that going to be the North Sea or Brazil?

I think both places. I mean, Brazil, Shell has started the third phase of the Parque das Conchas project, almost 20,000 barrels a day, I mean, and they are quite high percentage, where we have obviously got three ships allotted for them. I suspect for the oil majors, they will wait-and-see how the old market and the new build markets stand the next year. I think that there has been so much volatility in the markets in the last few months, but they will wait and order quite late, because they want to see some further price sentiments on the crude price really, but we don’t see any pushing back on production, I think it’s ramping I would say. If you read the Shell messages, they are very positive, and no doubt that Brazil will definitely expand. I mean, if you look at the whole Latin America in the last 10, 15 years, it’s the only part of the world where oil productions declined, and yet the Lula field in Brazil is one of the five biggest offshore oil deposits and there is further fields in Brazil. So there is no reason for Latin America to be declining in oil production. I know Brazil has ramped up a little bit, but we don’t see any reason for Brazil to go back. I mean -- and in the North Sea, as part of the low oil price, what’s happened with Statoil, Statoil switched to the Johan Castberg field from being a fixed platform solution to FPSO shuttle tanker solution, so $40, $50 and the shuttle tank, it makes a lot more sense in the fixed pipe solution. And in Brazil, it’s always been shuttle tanker regime. So generally -- Øystein Kalleklev: Yes, Spiro, just to give you an idea, how big we are talking about. The Libra field, there are nine FPSO coming for that field to operate, nine FPSO producing more than 1 million barrels a day. With the ton mileage, you probably need 12 to 15 shuttle tankers, just for that one field and then in addition you have Sanco [ph] and you have Lula, so demand of course from Brazil will be staggering. And in addition to this, you have a fleet which has an average age of around 11 years, and that means there is also quite a lot of demand for attrition. So what we said also at Investor Day, I could only say their projection is 48 new vessels within 2020, and half of this will come from attrition. So attrition demand is also fairly large.

Okay. So I guess basically, if oil were to stay around the $50 level, which I think is arguably conservative, I guess, but let’s say, we just sort of get stuck in this band, 2019, 2020, it sounds like you should still – your expectation would be there would still at least a few tenders every year that you would probably win, I guess at least half of them, is that the right way to think about it?

Yes, I think – okay, currently it’s at $48, but generally in Brazil and Johan Castberg can easily produce at $40, $45. So let’s say demand is positive until 2020 and half is attrition and half is new, we have a market share of around 30%. So if we have to maintain the market share, we probably need to – in terms of – probably to build at least 10, 15 new vessels.

All right. That’s good color. Appreciate it. Thanks guys.

[Operator Instructions] Our next question comes from Ben Brownlow of Raymond James. Please go ahead.

Hi, thanks for taking the question. You guys have made a number of comments around the production and outlook, you’ve pretty much, to some degree answered this. But I was wondering – I mean, when you think about -- obviously encouraging data points around the Hilda and Torill, but when you think about the Windsor and the Bodil, how are you thinking about those as being well positioned for tenders past 2018, and what do you think is the re-charter potential for those vessels?

Well, we were particularly pleased with Bodil, because it’s a nice flagship and with the Johan Castberg field, I think it’s a quite a good fit for that. We can’t obviously say what status preference would be, but the life of vessel and they have charted consistently since delivery and look at the first option on the ship. For next two years, we got two further options up to 2019 and when you think the three ships have been removed from Statoil program in the North Sea, the tonnage for them is quite tight today, so there is not really a lot of surplus and that vessel is very heavily weighted in the Statoil program, so we don’t see that being an issue. The Windsor is based in Brazil with BG, they like the ship, they have boarded three more on the back of use in the Windsor and they need – they really have – the amount of expansion that Shell are doing, they really have a massive need for these shuttle tankers, we don’t see an issue with Windsor either. Well, obviously, the [indiscernible] for the time-charters, but that doesn’t need to say that there is not an opportunity to be fully employed for the next five to seven years, very minimum [ph]. I mean, you with these charters, there is nowhere else to go and they don’t really particularly like the ships, there is no reason to not use them. So we are very confident about both ships. The market is expanding, ultimately that’s the big driver. If you’re looking at contracting business, there are too many vessels around, there is the complete opposite of that, you can expand the business and heavily utilize ships. So we are pretty comfortable with the situation on both vessels. Øystein Kalleklev: And I can also add that the market for shuttle tankers are extremely tight. If you call [indiscernible] shuttle tanker, he will tell you it’s no chance because there has been very little replacement of , I would call it, attrition demand or the new buildings, the order book now is 8 vessels where KNOT has four of them, but all of these vessels are going for new projects. So there has not been a lot of replacement of older [indiscernible] contractor for replacement in the North Sea. So basically the only – last time anybody ordered some vessel [indiscernible]. So of course, with that fact, you see that Shell have requested to get more options on the Windsor, so they have a better predictability of vessels in the fleet, and also of course Statoil also has a requirement in the North Sea. Right now, it’s impossible to get any vessel.

Great. Thanks for the color.

I am showing no further questions. I would like to turn the conference back over to John Costain for any closing remarks.

Thank you for all attending, and I hope it clarified a few things and [indiscernible]. I haven’t much else to say really. Okay. Thanks.

And ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.