Good morning and welcome to the KNOT Offshore Partners Fourth Quarter 2019 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gary Chapman. Please go ahead.

Thank you. Welcome everybody. The earnings release and slide presentation are both available on our website. By way of a recap KNOT Offshore Partners, KNOP focuses on the shuttle tanker segment, whereby, our ships transport oil from production units to shore side often loosely described as a mobile pipeline business, and therefore an essential part of the supply chain for our customers. As before, 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, EBITDA. The earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Please remember that any forward-looking statements made during today's call are subject to risks and uncertainties and these are discussed in our annual and quarterly SEC filings. Actual events and results can differ materially from those forward-looking statements and the Partnership does not undertake a duty to update any forward-looking statements and I refer you to slide 2 for further details. Today, I'd like to run through the numbers and where we are today and then move on to try to give more details about our market and our outlook that I hope will be useful. So, turning straight on slide 3. Q4, 2019 financial highlights and recent events. KNOP's results were very strong and much in line with expectations. Total revenue of $70.1 million, operating income of $31 million, net income of $23.8 million, and adjusted EBITDA of $53.6 million, distributable cash generated of $26.4 million giving a distribution coverage ratio at the end of the quarter of 1.46 times and a continuation of the cash distribution of $0.52 per unit, returning an annual yield of some 13% based on a $16 unit price. During the quarter, the fleet operated with 99.7%…

We will now begin the question-and-answer session [Operator Instructions] The first question comes from Igor Levi with BTIG. Please go ahead.

Thank you, guys. So you have two vessels set to roll off before the end of the year, the Windsor and the Torill. So, how likely would you say based on your current conversations with Shell and Eni, are these options to be exercised? And if they're not to be exercised, could you talk about whether you would expect to recontract these vessels and how market rates today compare to what these vessels are currently earning?

Sure. I think that commercially, if you speak to our chartering department and commercial department, they're very confident particularly for the Windsor. It's a very good vessel for Shell. It's operating in a particular way on a particular field. It's the right size for them. We see no reason why they wouldn't carry on taking it and wouldn't carry on taking the options and actually the same goes for Torill. Both of those vessels have recently been extended. And as we sit down today, we've got no reason to believe that they won't carry on doing that given the operational profile that those vessels have and where they're operating.

And what would you say the rates are today compared to what these vessels have been earning, if they were to be re-contracted?

Well, we've seen charterers taking rates that are in line with the option pricing that is currently in the charters that we've got. It's actually quite difficult to give a market rate for a shuttle tanker, because it depends on its size and where it's operating and the specification and the value to the charterer. So to some degree, we're not in a homogenous market where one shuttle tanker is directly comparable to another. And actually that works in our favor, because when you have a, like, with the Windsor, a vessel operating in a particular field and doing very, very well, there's a cost involved for the charter to start changing that. And what we're finding typically is that we don't get huge amounts of pushback on rates provided we're operating properly and the vessel is performing. So, clearly, that's a generalized statement. But I'm afraid I can't give you particularly numerical answer to your question.

Great. Thank you. And then, just as a follow-up on the topic of your drop-downs. I know you mentioned that you may not take drop-downs at all. It's just based on where the market will be. Based on the current dividend yield, assuming you don't use -- you don't issue equity to finance drop-downs, do you have alternative forms of financing that you're looking to pursue, if you determine that drop-downs are an attractive option for you?

At the moment, I don't think it's a surprise if I say that it's difficult in the market today. The volatility that we're seeing at the moment is terrible for everyone. I think, we're hoping that things will at least settle down. And by the time we have to do anything, which is, not before the third quarter, we'll be in a different position, both globally and for us as an entity and as a business. But we are looking into alternative options. And we're, obviously, talking a lot with the sponsor about what they are prepared to do. And they're quite happy as a sponsor to be flexible on timing. So that is very helpful for us, so that we're not forced into making decisions before we're ready or the market's ready. And at the moment, again, it's probably not a particularly satisfactory answer, which has a very difficult question to answer, where we are today. We're looking at everything that's open to us. And that, as I say, could be from doing nothing for the whole of 2020 through to seeing what other alternative options there might be that our investment bank friends can be creative about. But, obviously, the numbers need to work for the partnership as well as for the sponsor and the whole thing needs to be accretive for the partnership, and the right strategic timing and decision as well. So, I don't think there's an easy answer to your question right now. I'm hoping that as the year progresses and we get closer to Q3 that we'll have more clarity on what options we've got and maybe one of those options will start standing out as being the right one.

Great. I appreciate your color on this, especially, given the circumstances today. Thank you and I'll turn it back.

Thank you.

The next question comes from Richard Diamond with Castlewood Capital. Please go ahead.

Good morning, Gary. I actually started buying KNOP at these levels back in 2016. And I think the current market price is a gift to long-term investors. I just want to check if some of the original work I did still holds true. And I know -- right now my understanding is that there're MLP owners who are getting margin calls, and they're just selling what they can as opposed to what they want to. But if you look at the fundamentals of the business, the cost of producing from an existing platform is -- the marginal cost is in the mid-single digits, because a lot of the capital has been spent in building the platform. So, I just want to confirm that's still true.

Yes. I mean, certainly, Richard, thanks for the question. We're not obviously entirely party to our customers' individual positions, but that does sit with our understanding as well.

And one of the -- I'm just curious, VLCC rates are going through the roof right now. And I understand a ship was chartered at world-scale 170. And there is really a shortage of storage. Has anyone approached you about using one of KNOP's ships just to hold product? Is that a possibility given the –

It's a possibility. But to the best of my knowledge, no one's approached it. And actually we don't have any spare vessels. So particularly, our vessels have charters and options attached to those charters. So the charters have control of them even the shorter-term ones. So, I guess that's more possible for our sponsor KNOT that has some older vessels as well. But now to the best of my knowledge that's not something that has come across KNOP at this stage.

Thanks for the great detail.

But it's an interesting idea.

Well, a lot can change in a week?

Yes, completely. Exactly.

Thank you.

Thank you, Richard.

Our next question comes from Robert Silvera with R.E. Silvera. Please go ahead.

Hello, gentlemen. I wanted to thank you very much for a very well-run company during this past year. And my question is at the point, we are with coverage of over 1.4 on the existing dividend. Has the board given any thought in this crazy market to buying in some of the preferreds and some of the common, I can't see a better investment in our own company than buying our own shares back right now. Has that been addressed at all?

We have talked about that. And at the moment, I mean, part of the difficulty Robert to some degree as the share price is all over the place.

Right now it's $10.70 on the common units. So I mean, this is crazy, down a $1.92 today as I look at my screen, and it's selling at $10.70 a unit. And that to me is bizarre to say the least we should be scooping this stuff up. What a return for this is well close to 20% return for our investment, if we buy our own stock back not to sell what the preferred is I don't know, what the preferred is selling for. I don't have the symbol for that so.

Well, it's not listed. It's private.

That's what I thought. That's why I could never find it. We need to strike while the iron is hot, the board needs to take positive quick action by looks of it and grab as much as we can at a level like this what a return for us.

Yes. And I hear you, Robert, and then thank you for your comments. I will take it back and I'll discuss it with the directors and we need to move fast, if we're going to do it.

Good. I'd love to see that. I mean I think that's one of the smartest investments you can make investing in yourself. You've done a great job. The future is good for us regardless of the price of oil. I mean, this is literally to me, it's like if I want $1, I can spend $0.50 to get $1. That's what it amounts to. So, it's crazy just think of it in those terms. Literally, I can spend $0.50 to get $1. So with this kind of a yield. Okay. That's it for me. I'm so pleased with the way you've performed, the way you guys have navigated through this market.

Thank you.

That's it for me.

The next question comes from Jim Altschul with Aviation Advisory Service. Please go ahead.

Good afternoon, gentlemen, and thank you for this informative call and also thank you for my call – my question. Actually, I got a couple of questions. First of all, I don't – I mean, I don't doubt anything you're saying but particularly in times like these you want to look at the absolute worst case. So with regard to the two ships that are currently – the current charters are scheduled to terminate this year. A couple of related questions. First of all, if the oil price remains at the current level or even drop some more, is there any chance that the operator of the offshore fields in question would choose to shut in or temporarily spend production and therefore not want to exercise the option just because I wouldn't need a ship?

Jim thanks for the question. We don't believe that's likely at all, first of all. And even, if it was to happen, we believe there are alternative uses for those vessels. So at the moment even under a worst-case scenario we're not actually particularly concerned given the market volatility and all that we're seeing with oil prices. As a company, we had our Board meeting yesterday and to be honest the oil price wasn't a big deal for us. I think if it persists and there's a fundamental shift in the market somehow, we may see some longer term changes. But I don't think we're expecting that at the moment who's to say. But short-term we're really not expecting any changes. And I think a lot of the fields that are using our vessels will carry on because I think as I think one of our previous calls Richard was mentioning that the marginal cost of producing is also low. And so there's -- it seems unlikely to us that our customers would decide to stop producing in a particular field when they've invested billions of dollars to do so.

Okay.

It's easier to take the oil out and store it than it is to sort of cut the field and try to come back later in my understanding.

Okay. Continuing along in a similar vein let's assume that -- I mean I don't think and I'm not doubting the accuracy of what you just said. But let's assume in fact that with regard to the two ships for which the current contract terminates this year. If the option were not exercised what kind of alternatives I guess I'll give you both questions. What alternatives would you have without being too specific? And second assuming really the worst case namely you don't find a new customer. If both circa by the end of 2020 Windsor Knutsen and Torill Knutsen all hire, what would be the impact on EBITDA?

Well, unfortunately I'm sorry I don't have the -- I can't give you figures off the top of my head. But I think -- first of all, I'll repeat my point before that we don't think that's likely at all. And secondly, our next port of call would be to find another use for the vessels. We're receiving requests from charter -- for potential charters on a very regular basis either for tender opportunities for new vessels or questions around taking shorter term charters to cover other vessels while they're in dry dock for example which is always a difficult thing for our customers because there are no free vessels really in the shuttle tanker market. So, it's -- that would be our second. And the third option could be that we charter it to the sponsor to use in their pool in the North Sea. So, we've got options on some of these vessels. But to be honest and I appreciate it's easy for me to say and I'm asking for you to believe is we don't believe it's likely that we're going to be in a position where we have to do either of the alternatives. We do believe the charterer is going to take those vessels. The EBITDA on a vessel is significant. And if your worst-case did come about, then clearly we'd have some maths to do very quickly. But the nature of the market and for some of the reasons that I outlined before, we believe we're somewhat protected from this re-chartering risk for all kinds of different reasons. And a lot of things would need to fall against us for those sorts of scenarios that you described to actually come about. That's not to say they can't and they weren't, but equally we feel that we're relatively protected.

Okay. Well, I mean I don't doubt the actually I just -- particularly in these times you want to look at the worst case. I don't want to take too much -- pass the floor but just one more thing in a more positive vein since you have a good chunk of your debt is floating rate and that's subject to swaps. If interest rates remain where they are, are we going to see a meaningful impact on the bottom-line as a result of the drop in interest rates?

Yes, certainly. We're -- constantly have a discussion about our hedging strategy and what we ought to be doing and what we think is right. I mean clearly interest rates are not going to go up in the near-term far from it. So, I think we'll all benefit if rates continue to fall and we have done in this quarter. And I think you'll probably see -- I'd expect to see a benefit in Q1 of 2020 as well given rates have fallen even further. So, yes, we will benefit. Whether it's hugely material, I guess, it depends how long they stay low we'll benefit if -- on a quarterly basis, it's important and interesting, but it's not going to move the needle too much on just one quarter. But if they stay low for an extended period of time, then clearly that's very good for us.

Thank you very much for giving me so much time and such detailed answers.

No problem Jim. Thank you for asking. Thank you for your interest.

Our next question comes from Marc Solecitto with Barclays. Please go ahead.

Hi. Good morning. Gary, just wanted to ask with respect to capital allocation in the distribution policy. Just wondering if you could provide an update on how you're thinking about that with units yielding close to 20%? Is there any thought of maybe recycling some of that into buybacks or conserving cash to fund future drop-downs? Just curious how you're thinking about that.

Yes. That's a very good question. I think when we think about this, we are very concerned about the yield that we're generating. It's very expensive for us. But equally we understand what our unitholders bought the box for principally interest, and hopefully, some growth, sounds like a long way at the moment when you're down at $10. But I guess, hopefully, the only way is up. I think at this stage, we're clearly not about to increase the distribution in the near term given the yield and given the market and that would be probably the wrong thing to do. At this time, we've always tried to run the company in a very stable and predictable fashion. And so we've seen what some other MLPs have done when they've cut their distribution. And where we sit today, we don't want to do that. I think it's an interesting time that we live in at the moment. But what we're trying to do is run this company as responsibly and as stably and as securely as we can. But there are opportunities that come up like stock buyback as the other caller mentioned and we're looking at it. But at this stage, we were tending to prefer that we keep the stability and the predictability of the MLP more than trying to surprise people by doing something clever that perhaps may or may not work particularly given that we could do something and then find three to six months later our yield is back where we started. So whilst we're considering all the alternatives, if we don't come out with a consensus of the board where we believe that we are definitely going to get something out of a certain action then to be honest we tend to fall back on the stability and the predictability of what we're doing. Given the fact that we've got a long-term business and given the fact that we are trying very hard to run a very good and stable operation both financially and operationally.

Got it. Thank you.

[Operator Instructions] Our next question comes from William Watson [ph], who is a private investor. Please go ahead.

Hi there Gary. How are you today?

Hello. I'm very well. Thank you very much. Although, I could be better for.

My question is that there has been some bantering around of a potential IDRs buyout in this market. Why are you -- is that in our future? Or has there been any discussion of it?

There has -- we discussed that on a very regular basis. We've seen what other MLPs have done in terms of eliminating their IDRs. I think we understand that it's probably a drag on us as a business. However, the amount of money that is going out through IDRs today is not huge. We're not in the top-tier of payout. So there's an acknowledgment that I think we need to do something. And I think it's really about timing and about the combination of maybe the IDR with something else and thinking about cash flow and how we do it and discussing with the sponsor, but it's very, very much on our radar to address as a point. But I guess over the last three to six months it's probably admittedly not been the top of our agenda simply because as I say, we're not paying out huge amounts into the IDR and we weren't sort of having any further drop-downs about to happen. But over this 2020 and into 2021 if we do have more drops then I think that might be the time where we try to do something about.

Okay. Thank you. That's very helpful. We've seen this move before in 2016. And I hope that folks can allocate some capital to buy the units and throw the minister a few shares. Please have a great day. Thank you.

Thank you very much. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Gary Chapman for any closing remarks.

Yeah, thank you everybody that's listened in and some really good questions there and some things for us to think about. And then let's hope for some stability. I'm not sure we'll get it just yet, but thank you very much and good day to everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.