Knot Offshore Partners LP (KNOP) 2015 Q2 法說會逐字稿

Good day, and welcome to the KNOT Offshore Partners second quarter earnings conference call.

(Operator Instructions)

Please also note, today's event is being recorded.

I would now like to turn the conference over to John Costain, CEO. Please go ahead, sir.

Good afternoon. KNOT Offshore Partners LP has only one 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, in effect, a 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 bulk 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 KNOT MLP fleet has gone from four to nine vessels and our unit distribution 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 of the vessels in the Knutsen sphere exceeds $5 billion. Today, Knutsen's fleet comprises of shuttle, product and LNG tankers, many of which are on charter for periods of between 20 and 25 years as the shipping Company has a philosophy like NYK to offer advanced vessels on long-term charters to first class charterers. Knutsen has been involved in the design and supervision of construction of shuttle tankers from the start more than 30 years ago.

Now moving on to the presentation. I'll draw your attention to Page 2 which is a bit of a 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 a 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 that 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 our 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-off, earnings would have been $0.53 per unit. This is 20% above market expectations.

Now if you move to point five and six, the balance sheet. Because of the recent offering by KNOT, we have plenty of cash to expand our business in the near-term. Ironically, this offering has probably contributed to the underperformance of the stock, as partnerships have done recent equity offerings, KNOT in particular, have been hit disproportionately. 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 their contracts, are aggregated or grouped together to estimate their fair value of the reporting units and this is compared to total carrying amounts including goodwill. In simple terms, if we look at the 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 in excess of the current market price.

We have a young, expansive 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 levels 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 7. The distribution 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 markets seemingly ignored by investors, we trade at a discount to other marine MLPs, our peers, probably because of our relatively small market cap and youth with regard to the New York Stock Exchange.

Page 8 and 9. We can show strong, stable growth with adequate cover for our distributions since 2013. Our distribution has increased by 36% above the minimum [core] for distribution. Turning to Page 11. Since 2013, the KNOT fleet has gone from four to nine vessels, and today we have a further comparable inventory of six vessels giving good growth visibility. Pages 12 and 13. We have long-term contracts operating in developed fields. Our tankers are an integral part of this financially stable and secure area. There is no speculative new building. All orders the sponsor undertakes have long-term contracts attached.

Page 14. This is a Fearnley report extract. And Fearnleys, at the end of July, research indicates that the 40 vessel requirement by 2020, one-third for new development. We believe this should drive MLP growth, our MLP. 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 paring back of expectation as a negative factor.

Page 15. Financial resources, coupled with commercial and technical resources, leaves us well placed for future capital growth. Page 16. Today, we are a market leader, obviously one of the two main shuttle tanker operators. Page 17. Sorry, Page 18. 17 shows our banking situation. Perhaps Oystein would like to talk about that. And it's certainly a very stable and secure portfolio of debt and we're well within our covenants, which is great to see.

Just to comment on the bank financing. We have basically stated since the loan purchase, we have good diversification in terms of the geographical spread on the banks and also in terms of their ticket size. So at the moment, now with nine vessels, we have eight banks all the way from Australia, Japan, European banks, and Nordic banks. 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 7 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 and available credit facility.

So we have a very comfortable financial situation. We also have fairly long profiles on the loans. 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 about 7% of that outstanding amount of the banking finance. I think that gives you a profile of 14, 15 years, which is comfortable. And we don't have any refinancing before 2018. Of course we are always in the market discussing with banks the opportunities. But we are fairly happy with the financial structure we have today, and we have [support] from the leading shipping banks in the world.

Okay, back to you, John.

Thank you, Oystein. Yes, I'm just going to quickly run through the highlights, but this MLP is a pure play in a niche space with limited charter renewal risk. And as the market is expanding and there is a projected shortage of tankers with the barriers to the market remaining high, the vessels are built to specific field requirements 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 a developed oil field and that is important in the current market environment, and 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 requirement for new shuttle tankers. With our great sponsors bringing 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 while maintaining a strong balance sheet.

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 a revenue backlog of $672.3 million and an average contract duration of 5.2 years. That revenue backlog is substantially below market cap. Two, modern shuttle tanker fleets with an average age of 3.3 years versus the industry average of 9.7 years. Three, we have excellent operating results. In this quarter, we had 100% utilization. On average since the IPO, we've had 99.6% utilization. Four, we have a large sponsor asset base providing substantial drop down growth potential. That's it really. Any questions I guess, next? Thank you.

(Operator Instructions)

Our first question comes from Donald McLee of Wells Fargo.

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 want to answer that, Oystein?

Yes, we have. We will just say that of course a couple things. First of all, there are options attached to the boat extension and of course, there's no charter as declaring any options before they are close to expiring because they still have optionality, so that is not how this market works. As far as we see it, they have a need for this vessel which is a very advanced vessel. This is probably one of the most advanced shuttle tankers ever built. It is a high class vessel with a very large height; it's 160,000 [beds] with a 1.1 million-barrel capacity.

Furthermore, because when we did the IPO, we also anticipated questions about the kind of declaration of extension options. So the sponsor had [came up], they had gone in, as you might know, to guarantee for the charter for five years following the IPO. I see that you're saying there is -- it's not, even though it's not declared, there is a [KNOT] guarantee. And I think we have a fairly good track record on this because we also have (inaudible) we're on charter with BG when we did the IPO. It was there delivered to us from BG because they have a gap in demand 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 delivery in Brazil.

And not very long after that vessel was redelivered from BG, they also managed to secure a new contact, [ordering partner] for the top off in the fourth quarter of this year. And that contract is now for two years with six additional optional years. So I think we have a very good track record in securing contracts for these vessels. There is a guarantee and we have that. Of course, this [index] is guaranteed because we have the sponsors who is fairly comfortable with the chartering of that particular vessel. Okay? I hope that answers it as well.

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 at this 15%. We could work -- the numbers are lower than that. But as far as the existing MLP is concerned, in effect, what you are creating with pushing the unit price down so much, the market pushing the price down, it becomes more of a closed fund. It's perfectly sustainable at this size. But when you start talking about growth, we have first class charters. We can't go to them and ask them for 12%, 13% [WAC]; it won't work. And this is basically what the market is saying. People are expecting 18% and growth then this is commercial organization. You have to be realistic.

We can achieve WACs of about 8% or 9% on our contracts and we drop them into the MLP. You can't expect the MLP to grow when its giving 15%, 20% yield, which is just one of the reasons why the buyback programs in place at the [slip up] because obviously, if unit price slides a long way then it becomes a closed fund anyway and we might as well just manage it. But we don't believe -- we have got a lot of positivity about the MLP market and we don't believe that this will last indefinitely. To be honest with you, we've got to see the evolution of the unit price to evaluate how the drop down portfolio and inventory is going to work going forward. If we stay at this level, it's like a lot of MLPs, I would guess.

Fundamentally, I look at KNOT and I think with the first class sponsors we've got, our position in the logistics supply chain, I sort of wonder when look at Shell for instance, as an MLP, what's the difference in a way? Shell has 3 times the market, the unit price to us, and has one-third the distribution. So in effect, you can say there was a problem space but how is Shell trading at 10 times our yield? How are we trading at 10 times Shell's yield, for instance? That's amazing the amount of disconnect there is there. I accept that you can accept some risk payment but that's just -- to me, I find it hard to understand. I find it hard to comprehend. But that's the markets for you. We have got to accept that, but all we can say is the numbers don't work at this level. But on the whole as an investment, it's 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?

The intention today is not the focus on buybacks. It's just a prudent backstop. We've seen the units drop $12.50. And what if it dropped to $10? Are we honestly going to leave it on the table of, say, 25% yield? The thing is, we've got to be honest about this, but we're not in the market to buy units back. We don't want to buy units back. But ultimately, we're businessmen, and we have to look at the yield on this and say, well, it's not working. We'll buy it back.

We obviously have a lot of strength, financial strength in our sponsors and they may very well take the view that 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 this unit is. How can Shell MLP trade with 0.75% on the unit at $40 and you're guiding to $50? And yet, we are looking at $2.08, $2.12 on a unit; and you're 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 shore side and we've got long-term contracts and we have a specialist knowledge in this area. I just don't get it. 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 is Spiro Dounis of UBS.

Hi. Good afternoon, John, and congrats on your first quarter in your new role.

I start off with a 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, to answer that. But we are mindful of the fact that -- this is an interesting area because we have discussions about what should the yield be on the drop. Because obviously we're getting nothing on the cash balance.

Right.

We have a process, a valuation 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 a fair price for the drop. The reason why we didn't do, there's a technical reason why we didn't do two vessels at once at the time and we -- this earnings call falls between basically the period when we took the money and we haven't done the second drop. But there is a good technical reason for it. We fully intended before this happened to do the next drop at a set price that we'd all agreed on, or had a pretty good idea about. Obviously, this complicates things. I expect us to do another drop. I don't expect that cash to be used 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.

Okay, well today, the US dollar is extremely strong and new build prices haven't really appreciated as much as we would have expected them to do because of the strength of the US dollar. Let's be honest about it. And obviously, new vessels with low interest rate environment that we're in basically price cheaper than they would in during a 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 even slightly lowering cost of the new build tanker.

These are tankers, at the end of the day; but they're special tankers, and they need a lot of special technology involved with building them but they still price off the bulk shipping markets. And with the way the rates are on the bulk [stacks], you would have expected a little bit of appreciation in the value of ships. But that's the reason why because the yen and the yuan have depreciated against the US dollar, which is mighty at the moment and does have an impact. We're looking at a US dollar investment in shipping. This is part of the problem, is the appreciation of the currency. So you've got an investor expectation which is diminished, the effects of the Company is diminished a little bit by the strength of the dollar. You know what I mean? There's a mismatch. But generally --.

John, could I just add some flavor to it?

Yes, definitely.

Because with regarding this reduction in the inflow, there was this BG contract. And one of the conditions for that contract was that the Windsor was docked before she ran on that two plus three years' contract because they wanted to have uninterrupted service for five years. And in order to do that, you have to dock the vessel before. But the vessel was due for docking in 2017.

But also, the sponsor we are also in discussion with KNOT regarding our third optional vessel. As you know, we have [new renewal links] with BG, and what the sponsor did was that okay, we will build a new vessel for delivery into BG in 2017. And then, you don't have the dock fee so before 2017. So then you can postpone that docking for two years. And of course that's an advantage because it's the time value of money.

What we simply said then is, okay, KNOT has the guarantee to BG, to pay the applicable rates. 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%] for something. And the reason why is that of course if you had to interrupt and [dawn the docking], by putting it back on the schedule 2017 there is a cost saving. And KNOT is basically taking that by giving a small reduction in the charter rates to BG and compensating KNOT 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, you have a loss of income and you have the actual cost of doing the docking. That is then postponed for two years. And when you calculate the time value of money we said okay, surely this is a benefit for us. It's also a benefit then that we could agree a third vessel to be delivered in 2017 when Windsor was due for the docking. And then KNOT is just reimbursing the KNOT for what for that reduction which we agreed. So it has no negative impact on KNOT because the KNOT is footing the bill. And also by doing this deal we are able to get our third vessel, which is also positive for them because the drop down pipeline has been taken down 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?

No.

As far as you're concerned, there's nothing we need to worry about here?

No, we only have finance leases anyway with Petrobras, and we haven't seen -- obviously they can't adjust those. And Brazil is an expanding market heavily. There's still a lot of BP launch shuttles out there and they've got a Libra field coming on, as well. We just see it as a major league expanding space and there's no real scope for them to trim anything back with us because we've got no direct day rates with Petrobras.

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

Thanks.

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

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 the last drop, 0.1 to 0.2 of course, 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 comment in the yield. So the next drop we'll probably be doing, will be put into the balance sheet and it will strengthen the Company because we'll 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, we'll send out 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 as I said before, it's hard to model financially at the moment with the unit the way it is, and it's difficult to know how to make things accretive.

I mean obviously if we're at $27 a unit, it's very easy to do accretive drops. But at $20, it sort of starts to get interesting; and at $13, it's just off limits, you know? So as the price goes up, the drops can be accretive. I mean, if you're in any business space, if you're having to pay 15% yield, there's no way you can make accretive drops. We could chase contracts that weren't secure and get much more revenue, but what's the point in that? We got after first class charters. That's all we deal with. We are straight [through] and you can't get better returns than we get. We have been in the market 30 odd years. We've 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 it's 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?

The next step is we'll drop the next ship in because we have got the finance to do that. And then after that, I think it will carry on because we will perform, we are going to perform the distributions and we're 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 -- this sponsor is not going to be -- the sponsor and the MLP aren't going to agree prices have dropped if we're at over 15%, 20% yield. It is not going to happen. It's just dishonest to say anything else. I'm just trying to be honest about it. I'm not on the complex committee of either Company, so I can't say, but you've got to be rational.

Okay.

Could I just fill in relation to your question? Of course if the Company, the partnership itself, buy back units that those units will be cancelled. There will be a de facto distribution to the shareholders through those people. When those units are cancelled, the earnings per share will increase and the corporate ratio in terms of the distribution you have to pay out. So if there is a buyback that will also be, in some way, our 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 not want to, I don't know. Ultimately we're not under any pressure to do anything. I think two to three weeks is a ridiculous window. I think it's more like -- because the next vessel drops down; then after that, the next time frame -- 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 four 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're not desperate.

I very much doubt we want to align the [ML period] and want to be aggressive on unit buyback. We don't want to knock the liquidity in the unit at all. That's my fear like everybody else. The last thing you want to do is diminish the capital base and reduce the liquidity in your trading unit. We have no intention of killing this MLP and there's no need. We're not under any pressure, we've raised the finance now, we can do the next drop and the next drop doesn't have to be done until 2017. So we can sit tight. We can pay the people who want to invest, if you buy now, you buy it at $14, you get 15% yield. If that's not good enough for you, then that's fine, don't buy the unit. We're a very secure Company. I don't know what to say. If the unit price picks up, then everything picks up normally and I can't see any reason why it wouldn't because we're going to perform.

Perfect. Okay, thanks.

Our next question comes from Richard Diamond of Strait Lane Capital.

Good afternoon, John.

Hi, Richard. Nice to speak to you 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, counterparties, your sponsors and the extraordinarily accretive buyback, there may not be any better value in any shipping stock or any MLP, but --.

You're on the sales team, Richard. (laughter)

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 from the 50/50 joint venture with the old Knutsen Company, and it's called Knutsen NYK now. NYK is a core member of the Mitsubishi family of companies. If you read The Economist article on NYK, I mean they basically were the founding member of Mitsubishi Corp. That's many, many years, 100 years ago or so, and they were one of the first companies listed. I think it was the first company listed on the Nikkei, wasn't it?

Anyway, so NYK is the third biggest shipping Company in the world. And when you compare it to something like the oil majors, it actually, the low oil price is obviously helping NYK, so it makes it financially stronger as a business. Knutsen, on the hand, has been in the business for over 30 years. It started off as a 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 has had a good core of its own design and built ships, and it has 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 a mobile pipeline, competitive fixed pipeline, the mobile pipeline is an expanding space and you can move the assets if the price isn't right, provided there is a demand for vessels, which there is. So it means, in effect, you're not necessarily stuck with the same customer if you're not happy with the rate. Whereas with a fixed pipeline MLP business, like Shell's for instance, then basically they take whatever the customer pays. They can't move the assets. We're in a way [hedged from] interest rate rises to a point. I can't see much downside to any of this, really.

Two years ago, when I was joined the Board of KNOP, the ships were running 55,000 to 65,000 a day and that still remains the case today. I made lots of reports on a lot of the crude space and their bulk space, and those tankers were only 10,000 a day at that time. Now they're earning 40,000 to 50,000, and people are asking why the OCC's got a better WAC than on the shuttle tanker. The plain and simple fact is, 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 a closed business totally, but there's not that many players. I really -- I wrack my brains.

The thing that I think about the price today is obviously we did the overnight in June, and that has a major impact on the share price because it's a tax basis. People sell their most recent addition. And also, we're pretty small in market cap terms on yields, stock market, and people don't really get it. We haven't got a long history either. That's why some of our peers are trading better because they have been through the last downturn. I don't think people understand us very well. But we've been around an awful long time in real terms. In the US markets, we've hardly been there very long at all, and people just look at that.

There's also a lot of charters working in New York stock markets. I've tried to correspond with one of two of them but it's very difficult. They don't talk with us. They just rate us as a sell because of the supposedly high leverage, our youth, our 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. Like, the unit's gone down 7% today, let's sell. No one gives a damn about the yield. No one gives a damn about the position of the Company in the world fleet. No one cares.

It's a case -- it just seems to me to be, because it seems to be a lot of units have been sold 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 are a bit highly leveraged and they are putting 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 an update on the unitholders very regularly. We get it quarterly, and 45 days after the quarter, so we can only speculate. We are doing a lot of speculating.

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 it's 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.

Our next question comes from Matt Niblack from HITE.

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?

It's from the general partner. John, I can take it since I already discussed the Bodil earlier today. The option is at the end of -- late in this year. Of course, the vessel is trading regularly. We are operating the vessel, so it's a fairly busy vessel. It's not like -- when the charter has option and they aren't doing a tender, of course they are usually waiting until a couple days before the expiry of the option. And then they call you up and say either they will want to declare or they will not deliver. But the North Sea markets for shuttle tankers has tightened quite a lot in 2015. And I don't think we had offset on this, and I read in the presentation that it has only been added the kind of the aggregate supply and demand. But if you look at the [bonus of sellers], it's fairly high utilization of the shuttle tanker fleet.

I think, especially from Teekay, it had some of the same comments that we had been in the market for maybe two years, last two years and there's demand supply of shuttle tankers has been a bit unbalanced because of particular delays, both in the 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 in end of 2013, but the Goliat FPSO has been delayed. It's finally in the field and they are commissioning that FPSO, but it's two years, or nearly three year after the schedule.

This is a fairly small market. The shuttle tanker market worldwide is around 75 vessels altogether. Most of these vessels are tied up from a long term charter, and we and Teekay are the only ones providing vessels on a context of replacement basis, accrual basis basically. So there are very few -- there is not really a spot market for shuttle tankers, even though they are on the contract or they are in [a pool]. And if you are small player and you don't have 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 there are a conventional and oil tanker. But of course with a higher fuel consumption on our shuttle tanker and the fact that the shuttle tanker sold nearly twice the price of our -- you have to have a fairly good tanker market to make the economics for [sailing] our shuttle tanker as a conventional tanker.

So the market is [tied to] Hilda 2, and we hope will soon commence operation on the Goliat FPSO. And then, two vessels to release the 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 is sinking quite a lot. So we think the fundamentals for Wodil in terms of vessel availability is really good, and we can't really see that Statoil has all the [running] vessels to the place her either. We are very comfortable with it. The sponsor is very comfortable with it, and we have guarantees that earnings of this vessel until April 2018 due to this fact. It's kind of a bit optimistic information because we know the market very well. And due to this fact, we were willing to guarantee the earnings of the vessel because we are fairly sure that we will get some employments for that vessel either with Statoil or someone 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, 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 instead of holds?

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 a creative strategy like that?

I cannot answer because you are going into the same vessel I just mentioned earlier. We have some contracts that you are correctly pointing out, maturing in 2018. Remember that when Eni built FPSO for the Goliat Field in the Barents Sea, they were expecting [softer then] in 2013. And they did [pipe on pipe] contracts with those for those vessels. The vessels have not been operating the two first years because the FPSO was not ready. So what Eni has been doing is to sublet those vessels to Statoil. And Statoil has utilized those vessels in the North Sea, so they have been sailing quite a lot, and they are qualified for most of the offshore fields in the North Sea.

So what will happen now is when the FPSO is in operation, those vessels will start doing the cargo for the Goliat Field. And just to be clear, we talk about specialized shuttle tankers, but these are very, very specialized. Because if you are in the Barents Sea, typically you can have minus 30 degrees; and of course, this FPSO is one of a kind. It's a Van Hauten. The design is more or less a prototype. So kind of the loading situation for that FPSO and the requirements of the vessels in terms of redundancy and in power being also fully [in the right]. There is only three vessels. as far as we can see, who can load on the FPSO in the world. It's the Hilda 2 and it's the American Eagle tankers which delivered the Barents vessel just recently to Statoil.

Because Eni has the 65% share of license, then Statoil and the two who are doing their loading with the American Eagle tanker. So there are basically three vessels that can load from the FPSO. This is very specialized. Eni of course, due to this fact, they also know that you cannot go to the market and just get these vessels. So they have the option then to prolong the charter. And remember, that FPSO, they have been thinking about production of up to 15 years. They missed the two first years, so they have only three years left of the contracts on these vessels once they get operation and production and going. Due to this fact, there are extension options, and we think we are not kind of sweating on that, given the fact that there are very few vessels that can operate in that particular [mine].

And then of course, you have Windsor, which also you mentioned has a termination of the contract. It will go on contract now for two fixed years in the Fourth Quarter 2015. But we had that initially at the two-year fixed contract with three optional years. BG has been very happy with this vessel. We were actually awarded the golden hat for the operation of and performance of that vessel, so they have really [pressed] to get additional options. The BG program is -- as it is today, the Windsor, and they have four vessels from Teekay. And then they have three new buildings with KNOT. So altogether they have eight shuttle tankers, once the new buildings are delivered.

In relation to their numbers of FPSOs, they are going to need to operate or participate in Brazil. They are just starting up to six. They will have a significant demand for shuttle tankers, and we think we have a very good relationship with them. And if it is so, that of course which we think that Shell will take over BG. We are -- Knutsen is a huge shipping company for Shell.

We have five LNGs with Shell. We also have contracts (inaudible) with them. So we have very good relationship with BG, and we also have that with Shell. And we think that the vessels we have in Brazil, the Windsor has been doing very well. So we are not that concerned about contracts coming to maturity, let's say 2018 and such, because all of the vessels have options attached to them. And as I mentioned, there are reasons for having these options in place.

In terms of further growth, we have to just see the unit price. KNOT has truly financed the vessels themselves. And of course the MLP has to have the opportunity [to tax] capital at the [sale] level in order to be competitive to acquire those vessels. But that's up to the 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 cost 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 very good source of capital. So we are not going to stop ordering vessels even though the yield on the MLP are high. We're 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 three 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, it's 31 vessels. So basically of all of the growth in the market, it's 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. We're not going to sit still. We're going to chase all the goals and we have very good opportunities for finding those vessels in the private KNOT Company. If those vessels are going to end up in the KNOP, it depends on the KNOP's ability to [attack cap sell] at a 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're probably going 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 twice 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 the vessels which are starting to get later in their life.

And the DP1 [is well out in the field]. So the quality isn't there.

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

Replacement. Yes, with better quality tonnage.

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

No, but if we aren't scrapping. It's somebody else. We've got a young fleet. So no, globally the revenue in the industry is not changing as much as it would suggest from that chart. But it's a growth potential for KNOP, because our ships are young and we are going to be competing for those ships that 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're older, obviously; but whether they are losers or not depends on where the contracts 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. Like Viken MOL is more like a leasing company when you have 15-year contracts, and they don't operate the asset themselves. But of course KNOT is a huge Company so the [tighter spot]. KNOT, the sponsor, we will have some vessels that are going to go for a time soon. However, it's a tight market. And also, we just recently did our docking in of Catherine Knutsen which was built in 1992, so she's nearly 22 years. So we docked her in order to operate her until she's at least 25. So we wouldn't normally do that unless the market had tightened. But asset curve shows it's less vessels in the market; and, therefore, we are docking her for further (inaudible).

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. So the KNOT, they had one vessel, Hanne Knutsen, going for conversion to FSO in October, and that will go on 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 a conversion, it's a bit of the X factor.

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

Thank you. Our next question comes from Matthew Phillips of Clarkson.

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? Was that really 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 rollovers 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 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 of 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 with what we require capital-wise like anybody else. We're part of the pipeline. 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 ought to do the deal out of sensible investment return or not. We're not exposed directly to them and we haven't got anything directly that's going to be affected.

If we were on time charter for Petrobras, on short-term time charters on vessels, we might be a bit more concerned or if we run the exploration side, we might be a bit more concerned. But that's not our position with them. We just see growth there and I don't think that's going to change. It's a massive amount of oil and it's cheap. If they don't do it, somebody else will. BG is operating down there, Shell BG, so it's a few of the charters. Basically we think a lot of the Petrobras business will go, will probably go to the oil majors if they don't want to expand aggressively enough. So it will shake out but it won't necessarily be a negative thing. And we're not exposed to it.

So you think it just maybe smoothes out the growth profile there? 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're quite right, if you followed the unit price, you'll see that week it fell over 20% the week that Petrobras made that announcement. So there's a lot of sentiment around it and it affects us quite heavily. But quite why it doesn't affect people like Shell, it's strange. It affects what is perceived to be small companies. I don't know. We're not directly affected by it and yet, it massively affects our enterprise. So there is massive amount of sentiment out there. There's no doubt when you look at the correlation between that statement and our enterprise, you can see a massive fall off but it's a disconnect with reality.

Okay, that's all I had. Thank you.

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

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

All right. Well, thank you. 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.