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…

[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.