Good day, and welcome to the KNOT Offshore Partners fourth quarter conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Costain. Please go ahead.

Thank you. If any of you have not seen the earnings release or slide presentation, they are both available on the Investors section of our website. On today's call, our review will include non-U.S. GAAP measures such as distributable cash flow and adjusted earnings before interest, taxation, depreciation, and amortization -- the 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 duty to update any forward-looking statements. And now on to the presentation. KNOT Offshore Partners, KNOP, focuses on the shuttle tanker segment. The vessel is field-specific and an integral part of logistics supply chain. On the non-volume-based contracts, we transport oil from the offshore oil production unit to shoreside, in essence, the midstream mobile pipeline business. Shuttle tankers operate in a niche space and being built to the charter's requirements, they are generally used on specific oil fields. In our sector, there has been no speculative ordering. So the partnership should yield both stable and sustainable revenues longer term. As oil production moves further offshore, these tankers operate in a space which will see substantial growth in the coming years. Some of the largest discovered oil reserves in southern hemisphere are in the pre-salt layer, 130 kilometers off the coast of Brazil. The average annual production operated in the pre-salt layer, which includes portions of Petrobras and its partners in 2017 was the largest in the company's history, reaching a mark of 1.29 million barrels per day. This volume exceeded…

[Operator Instructions] The first question today comes from Michael Weber with Wells Fargo.

John, I wanted to touch first on the charter portfolio. You kind of went through a lot of the recent drops. But looking at the firm periods that are starting to roll in '18, I know you extended the option period already for, I believe, it was the Bodil, but the Windsor, the Hilda, the Torill, all have option period -- firm periods that are ending in 2018. So I guess, one, if you can refresh us on when your charterers actually need to let you know about whether they'd be picking up those options or anything? And then -- I'm sorry. Go ahead. Sorry. Go ahead with that one and I'll continue.

Yes, okay. I was just going to say, normally the Torill, Hilda and the Windsor, they are all 3 months, sometimes it's 6 months. But for those 3, it's usually 3 months. Given the fact we've refinanced the Hilda and Torill, there is no real pressure on us to fix any long-term periods with them. They're all fairly well financed. So we're quite relaxed. And it was about 2.5 probably to build the Hilda and Torill again. All vessels of a similar nature would be about 2.5 to 3 years, because they require specialists. There are 4 ships more or less that can do that contract. And I mentioned that the contract hasn't gone very well for Eni. I mean, they don't close [indiscernible]. Over time, those vessels are all moving on that contract. And we don't foresee a problem there. And on that basis, we've been able to refinance the ships quite comfortably. Charterers seem to like -- to have short periods. Obviously, Shell have got 8 shuttles today. We understand from talking to them, they are in the market or going to be in the market soon looking for another tanker. But that's unofficial, so I can't say for sure. It's not on [ the tender ] out there. But they are looking [ to ] deliver ships. They are expanding quite rapidly in Brazil and they need more tankers, not less. The Windsor is an older ship admittedly, but it's also a pretty well spec'd and well liked. And the charter rate is at the lower end of the range for those ships. So it's actually relatively cheap compared to what a new ship would be. So you can never say never was an option, but to me it looks quite decent and the outlook for the market is pretty good. There's a lot of ships coming out 20 years, so we're quite relaxed about them all. I mean, I think the way accounting standards have gone, realistically, the days of real long deals, 10-year deals, is getting more and more difficult because of the base accounting. And I think people generally like shorter deals. It's less -- it's more off balance sheet. But, I mean, that's my speculation and [indiscernible]

Those strings are all 1 plus 1 plus 1, right? That is, they are annualized.

That's right.

Now with the deal, I think, they extended -- you've been extending it for a couple of years and then there was a new 5-year string put on the end of that.

That's right.

We do expect a similar structure, like, in terms of that contract tenor kind of coming down. You think, if they were to look at those options, and I guess, the first question would be, are they -- you think -- are they getting closer to being incrementally in the money they held in the Torill?

I mean, if you look at the general tanker market today, well I think it's conventional, because the newbuild process have -- they're probably bottoming out again. This is when you start to see orders going and people -- charterers aren't daft. I mean, they see -- they do follow the general tanker market. The newbuild costs a bit. Obviously, the shuttle tankers are a different beast. But it does run off by a little bit. And they tend to go in with their charters or contracts or tenders, when they see that there's a spike-up in newbuild prices because they don't -- they want to get the low point. Because, obviously, when we're tendering as well, owners as well, they quite align with the bottom of the market as well, because the IRRs will come down as well as the base price being low, the IRRs are quite low, because the tail risk is removed on the contract, if your asset price is going up. So that tends to be a bit of a game that charterers play. So I can't -- I would never want to say this market is similar to the tanker market. It's very different, but that there are certain things in there that are impacted by the general shipping market, and that's one of them. So I mean, I'm quite relaxed about -- I mean, we could potentially see the partnerships really delivering. But the way they both -- all these charterers need ships, I think it's highly unlikely. We have the crew, we have the technical expertise. And I think it'd be better for them to go out and get another tanker. But it's not impossible, and you have to respect the market. You can't just say -- I wouldn't like to say that the rates -- the time charts rates are at the bottom, because when the new tendering come out, it could be a bit lower than last month because basically, the rate -- the newbuild contract prices have gone down a bit. But the interest rates are going up, so that's the counterpoint. And the OpEx certainly started to go up as well, so [ that could impact shipping times ].

Right. So I guess, if it's unclear how close to the money those options are and this seems like they are -- kind of done on a case-by-case basis. But when you look at cash-on-cash returns for a newbuild, if you're going to kind of participate in one of these tenders, where are cash-on-cash returns right now relative -- on an absolute basis then where are they relative to where they were a year ago?

Well, the bottom of the market a year ago, Michael. I think -- they tend -- the market tends to come in waves. I mean, the last time the market was probably about 2014 and '15, 52 around, will be down to about 49 now, I think that's a sort of -- we're not looking at massive reductions. We're looking at -- because the ships cost about $14,000, $15,000 a day OpEx, and then the newbuild prices are probably about [ 95 ] as opposed to [ 105, 110 ] for Chinese-built ship, before -- the contract price. So I would have said, looking at -- on the CapEx, it's probably about 10% reduction. It's difficult to say. That's probably about -- you're looking at maybe slightly less than that. It's very unique though and correlated to the whole cost for a newbuild shuttle tanker, I guess, and that's probably about, compared to 3 or 4 years, it's about 5% to 10% [ down ]. I think with interest rates going up, it would be interesting, because obviously, IRRs need to go and it's good for an older tanker actually, differential interest rates, because on an older vessel you do get a bit of an interest saving, because there's less capital wrapped in there. And so older ships, again, become a little bit more competitive with higher interest rates. So ironically, an older portfolio looks better, a bit better than it did with a lower interest rate. [ This is all news. ] But what I'm trying to say, really, is this is what we've built the [indiscernible] one of the reasons because, obviously, we're going to actually slide down with shocks, I guess, and it's better to have a [ 140 cover ].

If anything, it seems like -- if I kind of look at Slide 11, if anything, I guess, it seems that while there might not be a ton of data points, in some liquidity end markets, it seems like the next -- the second derivative change on a cash-on-cash returns might actually be positive. So, and I guess, maybe just before I turn it over, like along those lines, as I look at Slide 11 and I look kind of -- when we look at the fact that, especially given relatively firmer demand environment than most are expecting, that we're starting to see a pretty noticeable gap, or an implication that utilization rates should be moving higher. When do you think we'll actually start to see that materializing?

[indiscernible] have seen this graph for a few years now. But you don't want to start it. [indiscernible] ordering by now. Some of us are a bit skeptical about it. I mean, we don't know -- I genuinely think it will happen fairly soon in the next 6 months, because unless we start to see -- people will hang on. I think charterers will hang on. They will monitor the newbuild market a bit and they tend to do that. I mean, last time we got the orders in 2014, '15, when we got on the BG ships, and [indiscernible] [ 5 ] ships. And it was an inflection point. And then suddenly, the offshore market collapsed about a few months afterwards. So the newbuild prices on contracts on all ships went down because, obviously, everyone was competing for tonnage rather than -- because, obviously, we were wrapped up in offshore projects. Certainly, they're competing with ships and rather than you see in a tanker general bulk shipping recovery, I just start to see at the beginning of 2014. It shot down again and the market went quiet, I'm sure. So I think it's a bit -- I mean, obviously, I think the market is very, very tight. I mean, Teekay were ordering speculatively and you see -- I shouldn't mention Teekay, but you just see -- look at their CoA portfolio. They say it's really good if you look at their earnings call. So I believe them. So I think, that's all I can say. That's just circumstantial. I know our own CoA fleet is very limited, so we're not that exposed to it. We've had no problems lately. I mean, in the past, sometimes when the market is weak, you have waiting and difficulty fixing vessels, but the actual [ period ] business is [indiscernible] and CoA fleet. In terms of Knutsen, we have smaller product tankers [ owning ] the vessels. So it's actually quite decent in the market.

The next question comes from Nick Raza with Citi.

But just thinking about the last question. In terms of pricing competitiveness and softer pricing, perhaps as a result of newbuild costs coming off, do you expect regional differences, like maybe in Brazil versus the North Sea versus in East Canada. Can you just comment on that?

Yes. Obviously, the main differences, there are several reasons. Obviously, spec can be -- spec varies [indiscernible] shuttle tankers. But I would suspect Petrobras to be more compatible with Chinese-built ships than, say, Statoil. So it depends on the charterer. I mean, a lot of the rest [indiscernible], some of them are comfortable with Chinese-built vessels. I don't -- there's nothing wrong with them at all. But some charterers like, they do spec where the yard is for the vessel. So that tends to have an impact on cost because, obviously, the Chinese ships is probably about $10 million cheaper than the Korean vessels, which are probably, I don't want to say, better quality, but they tend to be preferred. And I know, it's obviously got a dual fuel. I know Teekay bought dual fuel ships, and they are significantly more expensive. I think when you got weathering on the ships, like in the Barents Sea with the 4 Eni ship -- the Eni and the AET tankers and Statoil on the Goliat field, they are definitely more expensive as well. So these ships are -- the specs tend to dictate a little bit. So if you take the basic ship and [indiscernible] Suezmax, [ you quote now ] [ 50,000 ] a day now, maybe a bit less. I wouldn't like to say, the tendering could be quite aggressive. So it's difficult. You get an idea when you see when it happens. But I mean, that's the sort of number you're normally looking around, I would think. And then it goes on from there [ to the Suezmax size ].

Right, right. I mean, just to clarify then. If you do see some of the vessel contracts come off, do you expect any movement, say from the North Sea to Brazil? Or do you expect your fleet to essentially stay in place?

No, I would expect the fleet to stay in place. So obviously, the Windsor has moved to Brazil. That was because we had better [indiscernible]. But generally, it's because the Windsor is ice class. So it's a bit unusual to have an ice class tanker in Brazil. Generally no, not in the need of the bunkers, [ but ] markets are pretty tight. So you wouldn't ballast the ship. We could take one from Brazil because, obviously, it's going to drydock in Europe. But the Brazil -- it's all fairly tight. So it's not -- certainly, from the North Sea to Brazil is a problem in actually drydocking ships first. I think you wouldn't move ships around. But, obviously, the ships from Brazil at the moment, they still drydock in Europe. There's no -- there's not available facilities in Brazil to drydock the ship, which is quite -- I can't see that lasting forever. But today, all our drydocks are done in Europe, in France or Spain or Portugal, which is pretty stupid, right, commercially, but that's how it is. But, I mean, you are going to have 50 [ or so ] tankers down there potentially. You can't be keeping drydocking in Europe. It's not sensible. It's like 40, 50 days ballast.

[Operator Instructions] Next question comes from Ben Brownlow with Raymond James.

Just a follow-up on the scheduled o1ffhire for -- in the second quarter for the Brazil Knutsen. That 50, 55-day range. Does insurance cover the offhire past, say, that 14 day deductible?

No, that's not. That's the scheduled offhire. There's nothing wrong with that. We would maybe get a cargo [ for a lookie ]. But really, the vessel has to go to Europe. As they say, the vessel has to go to Europe to dry dock, and that's just to schedule an offhire. You have to accept that in the earnings of the ship. I mean, that was taken into account when we acquired the vessel. So it's just -- that's the part of the trading pattern on the vessel. We hope in the long run to make a bit of a saving there. Hopefully in the next 5 years, there will be a facility in Brazil or close -- much closer to Brazil where we can drydock the ship, because, obviously, that amount of offhire is quite a killer really. It's a lot of revenue.

That's what I thought. I just wanted to make sure. And then just from an accounting perspective -- most of my other questions were answered. But on the insurance recovery, that $1.8 million in the fourth quarter, was that only reflective of the lost charter days? Or is that filing partially to recover some of the repair cost that was expensed during the quarter?

No, just the loss of hire days, the repair cost on the vessel, they have to be submitted to the insurer and they are only accounted once we get confirmation that they have accepted the costs. There is an estimate of around $2.3 million for the repair cost, $150,000 deductible, but that's not confirmed. And obviously, we can't account for something that hasn't been agreed with an insurer, so it's left outside. So hopefully, if say they [ have left ] in the first quarter or second quarter, once that's been agreed, if it has been agreed. But today, we have to account purely for the loss of hire because I couldn't have known about and be able to accept that as a legitimate receipt.

This concludes our question-and-answer session and our conference. Thank you for attending today's presentation. You may now disconnect.