KNOT Offshore Partners LP (KNOP) Q2 2015 Earnings Report, Transcript and Summary

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

Good afternoon. KNOT Offshore Partners LP as only reporting unit, the shuttle tanker segment. The shuttle tanker operates in a specialized niche market with proper long-term contracts yielding both stable and sustainable revenues. It is an effect of floating pipeline backed by long-term fixed contracts and therefore offers a secure revenue stream. To illustrate the point, when KNOT was formed in 2013, large crude tanker day rates were around $10,000 in the booked shipping space. For the KNOT fleet at this time day rates were between 55,000 and 65,000 a day and this still remains our earnings rate, i.e., we have stable sustainable long-term earnings due to our specialized nature. Since 2013, the MLP fleet has grown from 4 vessels to 9 vessels and our unit distributions has increased by 36%. There will be a minimum 2% distribution increase in the third quarter this will represent 39% increase over the minimum quarterly distribution. The company is itself trading very well and our sponsors are first-class. NYK is one of the top three shipping companies in the world with a diverse portfolio of more than 800 large vessels. It employs around 55,000 people worldwide. NYK is also one of the core members of the Mitsubishi family of companies. Knutsen has a long proud history in Norway dating back to 1896. The insurance value the vessels in the Knutsen sphere exceeds US$5 billion. Today Knutsen’s fleet comprises of shuttle, product and LNG tankers, many of which are on charter for periods of between 20 years and 25 years. As a shipping company has a philosophy like NYK to offer advanced vessels on long-term charters to first-class charters. Knutsen has been involved in the design and supervision of construction of shuttle tankers from the start, more than 30 years ago. Now moving onto the presentation. I draw your attention to page two, which is a bit of disclaimer really, I guess, and then Page 3 briefly these are the main highlights of the financials. And I would just like to draw your attention to the fact that these are our best ever quarterly results on both an adjusted EBITDA and distributable cash flow basis. The fleet has had an excellent operational performance. In view of the recent volatility in the market, we have announced along with the general partner, a unit repurchase program. This of course will be price dependent and we do not, therefore, guarantee to buy units back. Personally, I would hope the unit price development is such that this is avoided, however it is prudent to have the option. With the GP participating in the repurchase program, this signals us sponsor’s firm support for the action. Page 4, the revenue statement. Our earnings for the quarter are $0.28 per unit. KNOT Offshore Partners LP made a decision to write-off all goodwill in the balance sheet in the reporting quarter. This was due to significant reduction of the KNOT Offshore Partners LP common units. During the past few months, the partnership recorded a non-cash revenue charge of $6.2 million. Without the goodwill write-offs earnings would have been $0.53 per unit. This is 20% above market expectations. Now if we move to five and six the balance sheet. Because of the recent offering by KNOT we plenty of cash to expand our business in the near-term. Ironically this suffering has probably contributed during the performance of the stock has partnerships we have done recent equity offerings not in particular have been hit this proportionately. In periods of foreselling like we’re facing today, investors have looked to sell positions with the highest tax basis. As noted above, we have written-off all the goodwill in our balance sheet. The Partnership has only one reporting unit the shuttle tanker segment. Hence, all vessels including that contract are aggregated or group together to estimate the fair value of the reporting unit and this is compared to total carrying amount of including goodwill. In simple terms, if you look at June 30 balance sheet, we can see partnership capital of $525.6 million representing unit price of $18.85. After this write-off, it is still an excess of the current market price. We have a young expensive fleet with long-term stable high-value contracts. With our experience and history it is easy to finance to what you might consider significant levels. And hence our debt level seems to the non-professional and towards other shipping companies on a deadweight basis high. The sell off of the KNOP unit makes the business look significantly leveraged or alternatively, in my view, highly undervalued. Page seven. The distribution is approaching 14% yield on current prices. We maintain our published ratio of around 1.3. This is above Latham & Watkins guidance. With an average contract length of our fleet of over 5.2 years, 71 million in the bank and a further $20 million worth of undrawn revolving credit facility available, if you invest now we can meet the seven-year payback on these units without any charter renewals. With our sponsors great experience and relative position in world shipping and financial market seemingly ignored by the investors, we traded at discount through the Marine MLPs, our peers probably because of our relatively small market cap and youth with regard to the New York Stock Exchange. Page eight and nine. We can show strong stable growth with adequate cover for our distributions since 2013. Our distribution has increased by 36% above the minimum quarter distribution. Turning to Page 11, since 2013 the KNOT fleet has come from four to nine vessels and today we have a further comparable inventory of six vessels giving good growth visibility. On Pages 12 and 13, we have long-term contracts, operating and develop fields. Our tankers are an integral part of this financially stable and secure area. There is no speculative new building. However, this sponsor undertakes a long-term contracts attached. Page 14, this is a Fearnleys reports extract and Fearnleys at the end of July, research indicates the 40 vessel requirement by 2020, one-third for new development. We believe this should drive our MLP growth. Growth has been scaled back in the near-term in this segment. However, longer term it will lead to growth that is more orderly and also a more durable market for our vessels. So I do not necessarily see the pairing back of expectation as a negative factor. Page 15, financial resources coupled with commercial and technical resources fleet is well placed for future capital growth. Page 16, Today we are a market leader, obviously, one of the two, the two main shuttle tanker operators. Page 18, 17 shows our banking situation. [Pat Soyston] would like to talk about that. It certainly a very stable and secured portfolio of debt and we’re well within our covenants, which is good to see.

Just to comment on the banking financing, we have basically stated since the long purchase, we have good diversification in terms of geographical spread on the banks and also in terms of their ticket size. So at the moment, now with nine vessels we have a tank on all the way from Australia, Japan, a European Bank, a Nordic Bank. So, I think we have also a very, very good cushion in terms of covenants. We have equity of 44% compared to the 30% requirement. We have interest cover ratio of nearly seven when the requirement is 2.5. And of course, there is a cash covenant of $17.5 million, but we have $71 million in the balance sheet and 20 million further in undrawn on an available credit facility. So, we have a very comfortable financial situation. We also have fairly long more files on the loan. So, what is maturing in the next 12 months as you can see on the balance sheet is just a bit less than $43 million, which is above 7% of the outstanding amount of the banking finance. I think that gives you full file of 14 year, 15 year, which is comfortable. And we don't have any refinancing before 2018 and then of course we are always in the market discussing with banks the opportunities, but we are fairly happy with the finances what we have today and we have support from the leading shipping banker in the world. Okay, back to you, John.

Thank you Oystein. Yes, and I just kind of clearly run to the highlights, but this MLP is a pure play in the niche space limited charter renewal risk. And that's the market is expanding and there is a projected charge of tankers with the barriers to the market remaining high. The vessels are built in a specific field requirement and there is no speculative ordering. So, we have a low risk of substitution. The shuttle tanker is not an upstream energy service supplier, but part of logistics supply chain of the developed oil field and that is nice important in the current market environment remember that. These purpose-built vessels have long-term secure revenue streams and represent a very sound investment, especially given the projected increase in the requirements in usual tankers. With the great sponsors bring an ample expertise and financial strength, we have a clear pathway to increasing the size. In our short history on the New York Stock Exchange, we have achieved a record of accomplishment of distribution growth, whilst maintaining a strong balance sheet. Page 18, Just going to read this as presented really I want you to bear these points in mind. So, in summary, we have a solid contract base, with the revenue backlog of $672.3 million and an average contract duration of 5.2 years. That revenue come backlog substantially of our market cap. Modern shuttle tanker fleets with an average age of 3.3 years versus the industry average of 9.7 years. Three, we have excellent operations of. In this quarter we had a 100% utilization. On average since the IPO we have had 99.6% utilization. Four, we have a large sponsor asset base providing substantial short-term growth potential. And that's it really, any questions I guess next. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Donald McLee from Wells Fargo. Please go ahead.

Good afternoon guys.

Good afternoon Donald.

My first question is just about you have one vessel whose charter is set to expire next year. I was wondering if you've had any preliminary discussion of the Statoil around a potential extension on the charter.

Do you answer Oystein.

Yes, Okay. We will just state, as of course, a couple of things that – first of all there are options attached to the board extension and of course, no charter is declaring any options before they are close to expiry, because they still have option early so that is not how this market works. As far as we see they have a need for this shuttle which is a very advanced vessel. This is probably one of the most advanced shuttle tankers ever built. It's a high class vessel with a very large size, it's a 160,000 with 1.1 million barrels capacity. Furthermore, because when we did IPO, of course, we also anticipate these questions about the time of declaration of expansion option. So the sponsor had came up they have gone in as you might know that we guarantee for the charter rate for five-year following the IPO. So there is – I see that we're saying that there is a – it's not even though is not declared there is again a fee guarantee and I think we have a fairly good record on this, because that we have also had been [indiscernible] where on charter with BG when we did IPO it was there deliver to us from BG because they have they have a gap the man due to some delays. And KNOT has guaranteed the guarantee premium to KNOT for that vessel and has been able to employ that vessel with less impact since their the delivery in Brazil and not very long after the vessel was redelivered from BG. We also managed to secure a new contract for the Carmen Knutsen for start up in the fourth quarter of this year and that contract is now for two years with six additional optionally. So I think we have a very good track record and secure a contract for these vessels and there is a guarantee and we have, of course, [indiscernible] guarantee because we are responsible. It's fairly comfortable with the chartering of this particular vessel. Okay. I hope that answer is right.

Yes, thanks. That's actually pretty helpful. One more quick question. Just around your Q2 distribution coverage came in at 1.3 and I was interested in finding out how you guys think about future drop downs in distribution growth over the near-term given your current yield?

Well, it's not doable really this with 15%. I mean we could work at the numbers are lower than that. But As far as the existing MLP is concerned in effects what you creating with pushing the unit price down, which the market pushing the price down it become more of a close front amendment perfectly sustainable at the size. When you start talking about growth, we have first-class charters. We can't go from an 12% to 18% market it won't work and this is basically where the market is staying we people are expecting 18% in growth then this is commercial organization. You have to be realistic. We can achieve lack sort of 8% to 9% of our contracts. These are all meant the MLP. You can't expect the MLP to grow, when it's getting 15%, 20% yields I mean, which is one of the reasons why the buyback programs in place at the slip because obviously if the unit price like a long way then it becomes a closed from anyway and we might as well just manage it. We don't believe we call positivity about the MLP market and we don't believe that this will last indefinitely. But to be honest with you, we've got to see the evolution of the unit price to evaluate how healthy dropdown portfolio and eventually is going to work going forward. And if we stay at this level, I mean it's like a lot of MLPs I would get. Fundamentally, I look at not and I think with first-class sponsor we've got, our position in the logistic supply chain. I started to wonder when I look at Shell for instances of an MLP. I mean, what's the differences in a way, Shell has three-times the market, the unit price towards and has one-third distribution. So, in effect, you can say there was the problem space, but how Shell trading at a 10-times our yield, how we are trading 10-times Shell yield for instance I mean that's amazing the amount of disconnector is there, I accept that you can expect set some risk premium, but just to me, I find it hard to understand. I find it hard to comprehend, but that's the market for you. We've got to accept that. What all we can say the numbers don't work, but on the whole, if an investment is a great investment.

And I guess one last question would be so if this current elevated yield environment persists for longer than expected, could we eventually see you guys announce a fair amount of buyback?

Intention today is not - it's not to focus on buybacks. It just a prudent backdrop if I mean we see the unit drop $12.5. What if the drop to $10, I mean, we're going to honestly leave you on the table of say 25% yield. I mean the thing is we got to be honest about this, but we went on to the market to buy units back. We don't want to buy units back, but ultimately where businessman and we have to look at the yield on this and say, well it's not working, the buyback. We obviously have a lot of the strength, the financial strength in our sponsors and they may very well take the view with they expand the buyback program, but this is a very negative discussion. I would really hope that this is a blip and people will pick up and realize how cheap these units. I mean how can Shell and MLP trade with 0.75% on the unit at $40 and you're guiding to $50. I mean in the way we are looking at [indiscernible] on a unit. And you are saying we can go down to $10 and look at where we are in the oil supply chain. We're basically taking oil from the wellhead fuel side and we've got long-term contracts, and we have a specialist knowledge in this area. I just don't get it. I mean we are one of the best risks there is out there in my head. Obviously, I'm CEO of this company and that's how I feel about it.

All right, well that's all my questions. Thanks for taking the time.

No problem.

[Operator Instructions] Our next question comes from Spiro Dounis of UBS. Please go ahead.

Hey afternoon John and congrats on your first quarter and new role.

Start off with the congratulations.

Yes, well right. It can only get better right? I won't wade into that. I guess first question just around the leverage you can pull just to get the unit price trading higher and I realize nothing's a guarantee in share buybacks. I respect that you don't want to do it but it seems like maybe one of the most attractive alternatives. Maybe the only alternative at these levels. But if I look at your cash balance, fortunately, you over equitized the last drop down. And if I look at your liquidity too, when you tack on the credit facility, I'm just wondering would it be possible to do a drop down later this year without issuing any equity at all?

Yes, but we mindful of the fact that - this is an interesting area because we have discussions about what should be the yield on the drop because obviously we're getting nothing on the cash balance.

Right.

So, we have a process, evaluation process, which looks at the yield on the stock at the time of the drop. So, we have to factor that in and evaluate what’s the fair price for the drop. But we - the reason why we didn't do, it’s a technical reason why we didn't do two vessels at once at the time. And we sort of this earnings call fought between basically the period, when we took the money and we haven't on the drop. But there is a good technically reason for it. But we fully intend it before this happened to do the next drop at a set price that we’d all agreed on to had pretty good idea about, but obviously is complicate the things, but I expect us to do another job. I don't expect that cash to be useful for anything other than that.

Got it, that's helpful. Just as it relates to the Windsor Knutsen, the amendment with BG. I understand that the sponsor's going to compensate for the difference, that 3.4% lowering of the rate, but I guess I'm just looking for more color on maybe what precipitated the need to lower that charter rate? And I guess the concern is that maybe it sets a precedent and creates for other charters to come in and look for lower rate amendments too. Just want to get some color there.

Yes. Okay. Well, today the U.S. dollar is extremely strong and new build prices haven't really appreciate as much as we would expected them to do, because of the strength of the U.S. dollar let’s be honest about it. And obviously new vessels with low interest rate environment that were in basically is priced cheaper then they wouldn't or normal interest environment. So, you are right, the entry level vessels are cheaper than they would normally be in a normal market. Because we're seeing a flattening or slightly lowering cost of the new build tanker. I mean, these are tankers at the end of the day. But they're special tankers, and they need a lot special technology involved in building them, but they still price off the book shipping market. With the way that the rates are on the books that we would have expected a little bit of appreciation and value of ships but that's - the reason why is Yen one of the - have depreciated against the U.S. dollar which is mighty at the moment. And it does have an impact you're looking at. We're looking at our U.S. dollar investment in shipping. And thus this is part of the problem is the appreciation of the currency. So you go on investor expectation, which is diminished, either their effects of the - diminished a little bit by the strength of the dollar, you know what I mean, there is a mismatch. But generally

John, it's Oystein could I add some flavor to…

Yeah. Definitely, yeah.

Because regarding this reduction in the Windsor, there was this BG contract and one of the condition for that contract was that Windsor was docked before she went on that three years contract. Because they wanted to have it and in terms of good service for five years and in order to do that we have to the dock the vessel before. But the vessel was due for docking into 2017. So we're also in this – sponsor, we’re also in discussion with KNOT regarding our third optional vessel. As you know we have three new buildings with BG and what the sponsor did was that - we will be in our new vessel for the level to BG in 2017. And then you don't have to drop in so before 2017. So, then you can postponed that docking for two years. And of course that's an advantage because it's the time value of money and what we simply said, okay KNOT has to guarantee to BG to pay the applicable rate. So, of course, the MLP will not get a reduction in the rate because KNOT is going to compensate that small difference, which is like 3% or something and the reason why is that of course if you had to do - to interrupt [indiscernible] that by fitting it back on the schedule 2017. The rest are cost saving and KNOP is taking that by giving a small reduction in the charter rate BG and compensating KNOP for the difference.

Okay, that makes a lot of sense. So it had nothing to do then with the BG pushing back saying we want a lower charter rate? It's actually more time value money calculation related. That's helpful.

If you can postpone the docking for two years it's you have a loss of income and you have the actual cost of doing the docking that is then postponed for two years.

Yes.

And when you calculate the time value of money, we said, okay. Surely this is a benefit, for us this was a benefit than we could agree our third vessel to be delivered in 2017, when we - due to the docking. And then KNOP is just reimbursing the KNOP for what - for that reduction, which we agree. So, it has no negative impact on KNOP because the KNOP is shifting the bill and also by doing this deal, we were able to get our third vessel which is also positive for them. Because the top line pipeline has in case stand from five to six vessels.

Got it. That's helpful. Just last one for me. I realize it's difficult to quantify and we didn't talk about it that much but if we're thinking about things that maybe weigh on the name and other things that people bring up, it's Brazil and Petrobras and maybe what the risk is there. John, just wondering from your perspective is there anything that keeps you up at night that you're seeing on the ground in Brazil? And then nothing, okay. So, I mean as far as you're concerned, there is nothing we need to worry about here?

No. We only have finance leases anyway with Petrobras and we haven't seen obviously comp just both and all. Brazil is an expanding market heavily. There is still a lot DP 1 shuttles out there and they have got labor field coming on as well. We just see as a majorly expanding space and there is no real scope for them to chime anything back with us because we got no direct day rates with Petrobras.

Got it, excellent.

DP and both.

Great. Thanks a lot guys. I really appreciate the color.

Thanks.

Our next question comes from TJ Schultz of RBC Capital Markets. Please go ahead.

Hi great. I appreciate it. You really hit on most that I had. But I just want to make sure I heard it correctly. So there is a technical reason that you did not do two drops last time but you fully expect to do another drop without having to do equity. Beyond that, you really need the MLP stock to act better to do something beyond this next drop and you've got the buyback as a backstop. But I think the question is, as we think about getting more recognition in the market, what else specifically do you think you can do here? Would you consider giving any more definitive outlook on this next potential drop that you can do without equity? And I think also, would that allow for another uptick in the distribution or do you just feel that you're not getting any credit for growth right now anyway so you just take a wait and see approach?

Well, we guided for that the last drop 0.1 to 0.2 a quarter, I think, and we will go ahead with the guidance on the next drop after that. We don't see a lot of value at the moment in keeping commenting the yield. So the next drop will probably done, will be put into the balance sheet and it will strengthen the company, because we probably just take the cash flows to start with. The intention is to guide to all you analysts out there, in the next few weeks will send as some new revised figures of what we see the drop prices and take a conference call really on the OpEx and the dry docking and the drop prices for our vessels. But I just said before. It's hard to model financially at the moment with the unit the way it's difficult to know how to make things accretive, I mean, obviously for $27 a unit is very easy to accretive throughout. But at 20, it's also starts to get interesting and at 13 it's just off limits. So as the price goes up the drops can be accretive. I mean, if you are in any business space, if you're having to pay 15% yield, its no way you can make accretive drops. If we could chase contractors that one secure and get a much more revenue, but what's supplying that. We go at first class charters that we deal with straight fuel majors and you can't do, you can't get better returns than we have. We've been in the market 30-odd years. We got the experience, we've got the know how. The problem for us is, it's a differential pricing in the logistic supply space and is killing us a bit in a way as an MLP. Because these returns are not achievable in this quality of space, it’s a very high quality space.

Right, so if I'm hearing you correctly then, if you don't get any improvement from the market here, what's your next step?

We'll drop that next ship and because we've got the finance to do that and then after that, I think it will carry on because we are going to perform the distributions and we are paying over $2 a unit. We have a decent inventory, but it would be dishonest to say that if unit price stays at $12 to $15 then we're very keen on what the sponsor and the MLP are not going to be prices have dropped if over 15%, 20% yield. I mean it's not going to happen. It's a dishonest to say enough and just to be honest about it; I mean I'm not on the conflict committee of either company. So I can't say but you got be rationale.

Right, okay.

I just fill in also that, I will answer to your question it's of course if the company, the partnership itself buyback unit. Those units will be cancelled. So, there will be the factor distribution to the shareholder through those people when those units are cancelled, the earnings per share will increase and of course the cover ratio in terms of the distribution you have to pay up. So, there is a buyback that will also be some way around distribution to the shareholder.

Right. We'll get some more color in the next couple weeks it sounds like. If the price does not react as you do this next drop and give us more guidance, is the next step to materially increase that buyback program?

No, we haven't decided on that. We don't need to do anything. The MLP is self-contained and works, but we might I don't know, ultimately, we are not under any pressure to do anything. I think two to three weeks is ridiculous when I think it's more like because in the next vessel drops down, then after that the next timeframe, we haven't got to drop anything in 2016 if we don't want to. 2017 is the next vessel and then 2018, 2017 and 2018 we can start dropping in the last 4 new builds. So, we're not under any pressure to do anything. We've actually got an 18 month window. We don't have to do anything. So, we are not desperate I very much that one want to MLP period want to be aggressive on unit buyback. We don't want to knock the liquidity and unit at all. That's my fear obviously like everybody else. The last thing I want to do is, diminish the capital basically reduce the liquidity and new trading units. We have no intention of killing this MLP and there's no need. The only pressure we've raised the finance now, what we can do the next drop and the next drop doesn’t have to be announce it until 2017. And so we can sit tight. We can pay the people who want to invest. If you buy it $14 you get 15% yield. If that's not good enough for you and that’s find the body in it. We're a very secure company, I mean, I don't want to say. I can't see anything – if unit price picks up then everything picks up normally. And I can't see any reason why we wouldn’t, because we're going to perform.

Perfect. Okay. And thanks.

And our next question comes from Richard Diamond of Strait Lane Capital.

Good afternoon. John.

Hi, Richard, can you speak again?

We're sort of having what I call an Alice in Wonderland conversation because as far as I can tell, the current distribution is a gift whether you have accretive drop downs or not. Basically, you're an investment grade quality shipping Company and you're being priced at a crazy level. I'm thinking, given ship class, quality of Management, counter parties, your sponsors and the extraordinarily accretive buyback, there may not be any better value in any shipping stock or any MLP, but…

You can the sales team today.

Yes. It's so clear, I just can't figure out what I'm missing. So perhaps, I know it's beating a dead horse, but the investors are not aware of who your sponsors are. Would you mind at a high level just talking about your sponsors for a minute and their quality?

Well, NYK has basically come in and formed a 50-50 joint venture with the old Knutsen company and its called Knutsen NYK now. I mean, NYK is a co-member in the Mitsubishi family of companies. If you read the economist article and NYK came in, I mean, they basically were who are the founding member of Mitsubishi Corp. That’ many, many years, 100 years ago or so, and they were one of the first companies were starting and the Nikkei wasn't it. Anyway, so basically but NYK is the third biggest shipping company in the world. When you compare it to something like the oil majors, it actually the low oil prices obviously helping NYK so it makes it financially stronger as a business. Knutsen on the other hand has been in the business for over 30 years, it's started off the shuttle tanker construction phase and has been building vessels in-house. Mostly organic, but obviously it's acquired ships on the way, but generally it had a good core of its own design and build ships. And it's been 30 years in the market. It's the most solid of all the shuttle tanker operators in my view. And this is a great space. This is a mobile pipeline space. The other thing about our mobile pipeline compared to fixed pipeline, the mobile pipeline is an expanding space and you can move the assets, if the price isn't right, provided the market is going, provided the demand for vessels, which there is. So it means, in effect, you're not necessarily stuck with the same customers, if you happy with the rate, whereas with the fixed pipeline MLP business like Shell for instance then basically, they take whatever the customer pays. They can't move the asset. So, we were in a way from interest rate rises to a point and I mean I can't see much downside to any of this really. I mean, two years ago when I border of north, the ships are running 55 to 65 day and that still remains the case today. I mean there is a lot of reports and a lot's of the crude space and bulk space and those tankers were earning 10,000 a day at that time. Now they are earning 40,000, 50,000 and people asking why the [indiscernible] got a better whack on shuttle tanker. The plan is simple fact. This is a contracting business and always has been and always will be because it's quite specialized and there's not many - it's not closed business totally, but there's not that many players. So, I really - I recommend - the thing I think about the price today is obviously that the overnight in June and that has had a major impact on the share price because it's a tax basis people sell the most recent addition. Also we're pretty small market capital into our New York Stock market and people don't really get it and we haven't got long history either that's why some of our peers are trading back because they've been through the last downturn. I don't think people understand this very well, but we've been around on and off the long time in real time - in the US markets we have been in a very long at all and people just look at that. There is also a lot of charter working on - in New York Stock markets, I mean. I try to correspond with one or two of them, but it's very difficult to, they don't talk. They wait to sell because of the supposedly higher leverage value for small market cap and the way the unit price has dropped. That's what people look at. They just look at that simply and they look at it on a very short-term basis while the all the others come down 7% today by itself. No one gets a down about the yield. No one gets a done about the position of the company in the world fleet. No one cares. It's just a case of - it's just seems to me to be, because it seems to be a lot of units have been sold out the out of - the investor base into the retail base recently, we don't know why that is, we can suspect that some of the funds that would be highly leveraged and they are approaching stocks on the market and it means the MLP stocks are trading right down and retail investors are coming in and just playing with them. But I don't really know. It's difficult to get color on it because we don't get enough on the unit holders very regular. We get it quarterly and 45 days after the quarter, so we can only speculate, we're doing a speculating. I'm [indiscernible].

John, all I've mentioned is that at the current yield, even if you do nothing, which is the price doesn't move at all. $1 today will double in four and a half years and that's not, that's with very little risk. So I just think you folks, the stock market's a voting machine in the short run and its a weighing machine in the long run and if you keep doing the great job, the value will come. Thank you very much.

Thank you, Richard.

And our next question comes from Matt Niblack from HITE. Please go ahead.

Thank you. Certainly, agree that there's a lot of value and we're sticking with it here. Actually several questions here. So the Bodil Knutsen, when would you expect discussions on renewal to start?

Yeah. It’s from the general partner. John I could take it, since I've already discussed Bodil earlier today. The option is at the end of – late in this year, across the vessel it's trading regularly, of course, we are operating the vessel. So it’s a fairly busy vessel. It's not like you all, when the charter has option and they are not kind of giving a tender, of course, they are usually waiting until a couple of days before the expiry of the option and then the call you up and say either they will want to declare or they want to redeliver, but of course the North Sea market for shuttle tanker has of course, tightened quite a lot in 2015. And I don't think we added – we had update come from the list and I read in the presentation that has only been added the kind of the aggregate supply demand. But if you look at the Bolid, its fairly high utilization of the shuttle tanker. I think, especially from Teekay, it had some of the same comments that we had been in the market for maybe two years. The last two years the demand supply of shuttle tankers are still better and balance because of particular delay both in North Sea and in Brazil. We have experienced it ourselves with Hilda 2 which are sailing in the MLP. Those vessels were supposed to go to the Goliat FPSO in the Barent Sea after delivery and end of 2013. But the Goliat FPSO has been delayed and finally it's no asset field and they are commissioning that FPSO, but it's two years or nearly three year also the schedule. So, of course this is a fairly small market, the shuttle tanker market worldwide it’s around 75 vessel altogether. Most of these vessels are tied off from on a long-term charter and we and PK are the only one providing vessel from a contract of placement basis pool basis basically . So, there are very few – there is not really a spot market for shuttle tanker either they are on a contract or they are on a pool and if you are [indiscernible] we don't have a pool. Well then your option is either to sell the vessel, which happens from time to time. KNOT bought one vessel, such vessel last year or they can say that's a conventional oil tanker. But of course with highest fuel consumption on our shuttle tanker and the fact that shuttle tankers are nearly twice the price of our – you have to have a fairly good tanker market the kind of make the economic both adding our shuttle tanker as a conventional tanker. So that the market is tied to Hilda 2, we hope we will soon commence operation on the Goliat FPSO. And then two vessels will leave to North Sea and when you have this fairly small market with two vessels now leaving the North Sea and going and sailing in Barents Sea. The supply curve of shuttle tankers if of course shrinking quite a lot so, we think the fundamental for Wodil in terms of vessel availability is really good and we can’t really see that Statoil has order any vessel to the place or either. So, we are really comfortable with this sponsor very comfortable with this and we have guarantee that earnings of this vessels until April 2018 due to this fact this kind of a bit estimate like information because we know the market very violent due to this fact, we were willing to guarantee stop the vessel because we are fairly sure that we will get some employment for that vessel with other or somebody else.

Great, and then one of the other things that might be weighing on the units is the contract expiry, the series of contracts expires that happened in 2018 which for MLP investors that are used to 15-year, 20-year contracts from any MLPs, those contracts are pretty early in the cycle. 2018 seems, could seem, relatively soon and a lot of fleet does expire then. Is there any thought that there could be some kind of asset exchange? If drops are going to be put on hold to some extent beyond the next one because of the asset price, maybe there could be something like an asset exchange trading the Carmen Knutsen for the Raquel Knutsen with some appropriate cash influx perhaps for whatever value of the longer contract would be appropriate. So that you can really get your contract maturity to be a seven, eight, nine year time horizon instead of -- I guess the average of five doesn't sound too bad but then you really in three years there's a lot coming off. Is there any thought to creative strategy like that?

I cannot answer on that because you are going into the same vessel I just mentioned that you. We have some contracts that you are correctly pointing out, maturing in 2018. Remember that when ENI with FPSO for the Goliat Field in the Barents Sea. They were expecting cost of 2013 and they did have these five contracts with those for those vessels. Of course, the vessels have not been operating the two both yes, because the FPSO was not added, so what ENI has been doing is the several at those vessels with Statoil and Statoil has utilized those vessel in the Barents Sea. So they have been sailing quite a lot and they have a told a price for most of the off-shore fields in the Northeast. So what will happen now is when the FPSO is in operation, those vessels will stop doing the cargo for the Goliat Field. And just we talk about specialized shuttle tankers but these are very, very specialized. Because if you are in the Barents Sea, you typically, you can have minus 30 degrees and then of course, with FPSO it's a one of a kind. it's a demand policy, the time is more or less a four to five. So kind of loading situation for that FPSO and the requirement of the vessels in terms of the redundancy, engine power, being also fully right. There is only fee vessel as far as we can see. We can load on the FPSO in the water and its hilled and it – tankers which deliver the Barents vessel just recently it also so because ENI as 65% share of license and are doing that loading with American Eagle tanker. So they are basically sea vessels that can load from FPSO and so this very specialize so ENI across due to this fact they also know that you cannot go through the market and just get these vessel. So they have the option then through prolonged Knutsen and of course remember had that’s they have been thinking about production of 2015 yet and of course they missed two – so they have only sea is left of the conflux on these vessels want to get operation and production going. So that due to this fact off extension options and we think we are not kind of swatting on that given the fact that there are very few vessels that cannot in the particular mine. And then of course you have and so which also you are mentioned I have termination of the contract it will go on contract an opportunity here in the both quarter 2015. As you know we have that initially at the two-year fixed contract with optional. Yes, but you know BG has been very happy with this vessel. We were actually awarded a Golden Hat for the operation and performance of that vessel. So they have requested to get additional option. The BG program is that today is Windsor and they have four vessels for Teekay. And then they have three new buildings with KNOT. So all together they have eight shuttle tankers, once the new buildings are the level. So in relation to their numbers of FPSOs they are going to need to operate or participate in Brazil. They are just talk about the six, they will have significant demand for shuttle tankers and we think we have a very good relationship them. And if it so that of course, which we think that Shell take over BG. We are - Knutsen is a huge shipping company for Shell. We have five LNGs with shell. And we also have contract – with them. So we have very good relationship with BG. And we also have that with Shell and we think that you know the vessels we have in Brazil, Windsor has been doing very well. .. So we are not that concerned about contracts coming to maturity, let’s say 2018 and thus because all of the vessels have options attached to them. And as I mentioned there are reason for having these options in place. In terms of further growth we have to just see the unit 5, KNOT has fully financed the vessels, themselves and of course, the MLP has to have the opportunities that attract capital at a fair level in order to be competitive to acquire those vessels. But you know that's up to market to decide not us.

Right. Helpful. Now the last question here. When you look at the demand for shuttle tankers and you've got a chart back in your presentation here, slide 14. So you're expecting the market because of the delivery of some of these new FPSOs to effectively tighten completely in the next six months or so it looks like. And I get that, that's the delivery of these FPSOs and it sounds like that's going not according to original plan but now we're getting very close to when they'll be commissioned.

I think if you call a broker now and say you want a shuttle tankers for delivery next month, you will have some trouble getting the availability because as I mentioned, the market has tightened here.

Right, and then in addition, I'd assume that ordering new shuttle tankers at this point is going to be pretty constrained at the current pricing. Because not only do you have a high cot of capital but so does your main competitor and your main competitor doesn't - they have some levers they can pull but they don't have a private parent that has its own financing capability.

But the MLP also has a private balance that’s of concern. And we have a lot, we have a very good sources of capital. So we are not going to stop ordering vessels, even though the yield on the MLP are high. We are going to chase all the contracts we can. And we have been the company that has been growing. When we went to the stock exchange a bit more than two years ago, the KNOT fleet was 22 vessels and then of course we did the IPO and today KNOT and KNOP with the new building is 31 vessels. So basically of all the growth in the market is more or less we have been taking all of that. We've done that by buying vessels. We've bought four vessels in the market and then we have been ordering vessels. So we’re not going to sit still. We're going to chase all the goals and we have very good alternative for finding the source vessels in the private KNOT company. If those vessels are going to end of in the KNOT depends on the KNOT’s ability to attack cap sell at the reasonable level.

Right. But even at the parent, you're not ordering vessels without contracts?

No this is not a market where you do speculation. There are no speculative orders. You don’t want to miss on the specification because a field might have certain features or certain requirements, as I mentioned, like in the Barents Sea. So if you are holding a vessel on speculation, you are fairly crazy because you are probably go to pay up to $130 million to $140 million. And then if you don't get the contracts, you have to trade it at the [Suez market] and you have to rise the CapEx. And also higher fuel consumption because you have the extra capacity. So there isn't really any, this is a contract market as John Costain was telling.

Right, could you provide some more color on how vessel demand is growing so much in, beyond 2016? Particularly 2017, 2018, 2019?

It’s a lot of competition of course. You have the regular competition and two-thirds of the growth here is basically replacement of all of vessels which are starting to get later in the life. Of course on the DP1 as well on – the DP1 as well on [indiscernible] so that not to be quality…

So these aren't net new vessels? These are – a lot of this is replacement of existing?

Yes with better quality tonnage.

With better quality tonnage, right. But that doesn't increase industry revenue does it?

No, but we are not scrapping with somebody else. We've got a young fleet. So globally the revenue in the industry is not changing as much it would suggest on that shelf, but it’s a growth potential for KNOP because our ships are young and we are going to be competing for those ships are being replaced.

So it seems like Teekay has I guess some potential for scrapping or dry docking. But it must also be the case that when you look at all these competitors that are small, are their fleets on average much older? So are they the real losers in this market?

Well, they are older obviously, but whether they are losers or not hence where the contract go.

Now, it’s a mixed picture. You some have older players who hire the vessels that are aging like Good Luck, you have new players like American Eagle Tankers and Viken MOL. That’s a young fleet, but like Viken MOL it’s more or like the leasing company when you have 15 years contracts and they don't operate the asset themselves. But of course KNOT is a huge company so the tighter spot. KNOT - we will have some vessels that are going to go for the times soon. However, it’s a price market and also we just recently did docking of Catherine Knutsen was really 92 so she is nearly 23 years. In order to operate until she is at least 25 so we would normally do that unless the market has tightened, but asset curve shows less vessels in the market and therefore, we are docking here before for the sake. And of course we also have the conversion market where some vessels are leaving the market so in that market you have to remember that there are some vessels being converted from FPSO or FSO. In KNOT they have one vessel, Hanne Knutsen, going for conversion to FSO in October and that will go along FSO contract with Total for APFS option commencing end of 2016. Teekay has Rangrid which has already entered the yard for conversion as an FSO to Statoil. And you have also Teekay done some other conversion to FPSO, so there are some vessels leaving the market because of age or so forth, conversion and of course that conversion is a bit of the X factor.

Got it. I think that does it. Thank you very much.

Thank you. And our next question comes from Matthew Phillips from Clarkson. Please go ahead.

Afternoon, guys. Obviously, most of the topics have been covered here. But I did have a follow-up on Brazil and Petrobras and realize that you don't have any near-term exposure there. But at the end of June, they did cut CapEx and production guidance significantly. Were the cuts already pretty much baked into your dealings with them earlier in this year and ongoing? I mean was that really just kind of the public announcement of what everyone that on your side of the fence already knew? And what time frame would you expect these sort of things to really come to fruition? I'm thinking obviously, you don't have any real roll overs until 2018 with Petrobras or Transpetro, nothing near-term. Is there still continued opportunity to add vessels to this relationship in the back half of the decade? Or do you think there's going to be kind of a gap there until they start to – until oil price normalizes?

We're thinking the growth has tailed off a bit in Brazil. But as we said before, there is growth there. The Libra Field starts just after 2020 and there's quite a lot of oil fleet down there. So actually, don't think that it impacts us that much. It just moves the projects out a bit. We just don't see the big bubble of ships coming that we did before potentially in Brazil. But actually, I don't personally don’t think it’s necessarily a bad thing because you don't want a massive level of building. It's quite a small market. Do you really want to build 20, 30 ships within the space two or three years. Far better to have a steady replacement and a sustained regular growth. We won’t take on projects if they don’t match up we require or capitalize like anybody else. So and we’re part of the pipeline. So it’s more on the exploration side, where there's a problem. We're just part of the logistic supply chain where we're building to contract based on winning a tender. It shouldn't really impact us. We’re not going to go into a deal with Petrobras just because it's Petrobras. We're going to lose money. So it doesn’t make any difference we are the do the deal at a sensible investment return or not, but have been exposed to them and we haven't gotten directly of this going to be affected if we were on time chart Petrobras will shorten time charter on vessels we might be more concerned or if we run the expiration side I mean look at some of the opposition with them. We just see growth on does going to change and cheap.

Sure.

If they do some of the Shell operating down Shell BG. So sure the chart it’s a basically we think a lot of the Petrobras business ago will probably go through own agent say don't want to expand aggressively enough. So it will shake out but it won’t necessarily be a negative thing. And we are not exposed to it.

So you think it just maybe smoothes out the growth profile there? I mean obviously, you're not dealing with the exploration side of the business as much.

No, but what is interesting is when the announcement came through and you are quite right, if you followed the unit price will see that week over 20%. The week that Petrobras made that announcement so there is a lot of sentiment around that and that affects us quite heavily but quite why it doesn’t affect people Shell is strange effect what is perceived to be small companies I mean I don’t know. We just went out affected by get a massive effect while unit prices the mass amount sentiment other there is no doubt when you look at the correlation between the statement for that unit price because the amount but it still is a disconnect with reality.

Yes, okay, that's all I had. Thank you. End of Q&A

This concludes the question-and-answer session. I would like to turn it back to Mr. Costain and rest of the team for any final remarks.

Well I would like to thank you all for attending and thanks for all of your interesting questions and I hope we added a bit of color on the evolution of the KNOP fleet and go out and buy units is all I can say really. Anybody else want to add anything.

All right. Well thank you sir. This concludes today’s conference. We thank you all for attending today’s presentation. You may now disconnect your lines. And have a great day.