Knot Offshore Partners LP (KNOP) 2015 Q3 法說會逐字稿

Good day, and welcome to the KNOT Offshore Partners LP Third Quarter Earnings Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

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

Good afternoon. KNOT Offshore Partners' focus is on the shuttle tanker segment. Consequently, we only have one reporting unit. KNOT Offshore's unit price currently has its high correlation to the oil price. Investor perception seems to be that the shuttle tank demand will vary with crude oil prices and the resulting appetite for offshore drilling. They perceive charter rates will come under pressure if 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 the premium midstream space. The forthcoming offshore oil developments are deepsea oilfields, whereas the traditional MLP investments 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 investments 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 the net income was $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 (inaudible). We declared a 2% increase in distribution to $0.52 per unit for this third quarter. We have extended the duration of the Carmen Knutsen time charter with Repsol for five years until 2023. In October, the Partnership acquired Ingrid Knutsen.

Slide 4, Shuttle Tankers, a special asset class. We compare our specialized mobile pipeline with other more standardized classes in the marine space. Here we see the shuttle tanker world fleet is small, but (inaudible) to expand significantly in the near term. Specializing and focusing in this area, KNOP is favorably positioned to take advantage of this opportunity.

There are higher barriers to entry in this asset class compared to most moving sectors, and KNOP keeps a low profile, quietly going about its core business. Shuttle tankers are a cost-effective solution to transporting oil from the offshore oil production unit to shore side, and therefore, a critical and essential component to the development of and exploitation of offshore oilfields. Pipelines in deepsea oil production areas are not a cost-effective or practical alternative.

Specifically tailored to different fields, the individual vessels yield both stable and sustainable revenues with minimal renewal risk at the end of the long-term contracts. The KNOP MLP offers a long-term predictable revenue stream. Most of the shipping segments are more volatile with regard to earnings and today, for instance, large conventional tankers are producing high earnings, which are likely not sustainable. We base our business model on properly pricing long-term contracts, knowledge gained through many years of practical experience, these contracts have stable and logical long-term price structures, therefore we have minimal downside risk at renewal.

We did not achieve the real highs in more conventional shipping, but over time, our assets have financially outperformed most midstream shipping sectors. This is because we did not build new assets without first securing a long-term contract. Even when costs are comparable, the shuttle tanker has substantial advantage over normal pipeline to classic MLP investments. These include a much lower initial investment, greater destination flexibility, re-deployable easily at the end of the field life with minimal downtime maintenance.

We're still seeing a limited softening of day rates on our recent renewals, primarily because of the [subtle] depreciation in capital values of our tankers and lower long-term interest rates because of the niche market in which we are based. We remain exceptionally well-positioned. Despite a young fleet, minimal renewal risk and a very fair market outlook, today the yields on our unit -- on our MLP units is higher than all the larger midstream marine asset classes. For these, all the marine partnerships companies, earnings have traditionally been much more volatile, and on average, their fleets are much older and their market outlook much less certain.

Slide 5, the Ingrid Knutsen. We (inaudible) could be some questions on this. On the October 13, 2015 we were pleased to announce the purchase of Ingrid Knutsen from our sponsor for $115 million. Originally delivered to the charter by our sponsor Knutsen and (inaudible) in December 2013, the vessel is on a 10-year time charter with Standard Marine Tonsberg AS, a Norwegian subsidiary of ExxonMobil. The charter contains a day rate escalate of slightly over 1% per annum. The charter expires in the first quarter of 2024 although the charter has options to extend it five more years. We financed the acquisition by the assumption of $104.5 million of outstanding indebtedness and cash in hand. The Partnership has since repaid $27 million on closing of the acquisition.

Today, we have an aggregate of $77.5 million of secured debt related to Ingrid Knutsen. This is higher than the fleet average, but reflects the tenure of the time charter and excellent counterparty. On communicating the use of the best of [stock] into the MLP, initially the unit price reacted favorably. It was a (tight) phase for MLPs, and very few MLPs were conducting any financial transactions. So we attracted significant interest among the analysts that follow us. The transaction received mixed reviews on the asset price and the analysts' views about what is accretive seem to vary. Several influential analysts gave downbeat assessments to the transaction, and we were soon trading at discounts.

Related, but not fully correlated to the evolution in price of large shipping tankers or large tankers. The big tanker sector in the last 12 months has shown very strong cyclical earnings. However, there has been a subdued value increase. According to vessel's value, in terms of value increases, mid-age Aframax and Suezmax are the best performing tanker types. The value increases of approximately 22% over the last 12 months. Modern vessels, [POCCs] and product tankers have risen, but at a slower pace between 5% and 10% in value.

In the dry dock and general offshore areas, vessel's value (inaudible) unlike tankers capital values have reduced by 15% to 30%. The cause of this subdued new build price movements has been significant yard overcapacity, a strong US dollar and low commodity and steel prices. Nevertheless, these prices do not appear sustainable as many shipyards are making substantial losses. Only last week, DSME Daewoo, Korea's second largest ship builder announced three-quarter losses for 2015 of more than $3 billion.

As it still has got order delays, they also announced $3.7 billion bailout package from two of their banks. If the US dollar does weaken, all vessel values can increase significantly. The sponsor received third-party valuations for Ingrid Knutsen, an Aframax size shuttle tanker from both Fearnley and Lorentzen & Stemoco at the end of June 2015. Fearnleys estimated a fair value in the range of $110 million to $115 million, Lorentzen & Stemoco estimated a fair value of $117 million for the shuttle tanker. The drop down price was in line with the charter's and broker valuations.

To protect unit holder interest, we always obtain an independent third-party fairness opinion and the financial experts' (inaudible) opinion noted the following. The broker valuations assumed, among other things, a willing seller and a willing buyer, the vessel being in sound condition and all [measures] approved. With the vessel being delivered chart-free (inaudible) and financial experts stated in the fairness opinion that the existing charts contracted Exxon was likely to be at times more favorable than what was achieved in today's markets.

This alone would (inaudible) additional vessel premium compared to the growth of our relations. In addition, they perform typical valuation assessments and found the transaction accretive to the Partnership. This is also the assessment of the Board as the distribution of cash flow from which purchase will bring them back to cover ratio of the Partnership to a little over 1.2 in the fourth quarter versus 1.07 in the third quarter. Looking at the transaction and around, a long-term charter to Exxon for the remaining period of what was 13.5 years, the largest energy major in the world and given the fact that we're backed by a sponsor which is [possibly] the third largest shipping group in the world.

The transaction should have been well received. It is in our view in line with what we have guided to the market. The financing structure, two-third debt, one-third equity, gives a long-term equity yield about 14%, a significant plus for this MLP.

Slide 6, significant fleet growth since the IPO. Today we have a very modern fleet with an average age under three years, 10 months and all backed by long-term charters. This combined with a strong balance sheet makes us very well placed to expand in the medium term as the MLP market recovers. Younger assets appreciate more per dollar invested as the MLP yield reduces. Or put in other way, as the rate of discounting of cash flows reduces, backend cash flows from the younger assets appreciate the most. Many of our vessels have been deleveraged when placed on the MLP compared to the sponsor and therefore potentially have significant on the top borrowing capacity. The service will be managed, we prefer not to over leverage that Partnership and we maintain our debt at stable levels.

The acquisition of the Ingrid Knutsen, together with the extension to Carmen Knutsen time-charter are very positive elements for the Partnership as they increase the average fixed component of the fleet from 5 years to 5.8 years, an increase in revenue backlog of $238 million. During the 3.5 years since the IPO, the Partnership's fleet has increased and bought ten vessels. However, because of the drop downs performed by the sponsor to KNOP (inaudible) actually it is only increased by one year. Today, we have a further dropped down inventory of five vessels, the same as when we did the IPO even though we have added six vessels to the fleet.

Seven, long-term contracts backed by leading energy companies. Since July 29, 2014, the Windsor Knutsen has been employed on the time-charter with Knutsen and [Marque]. This has since been replaced by a two-year time-charter from October 13, 2015 with Brazil Shipping I Limited, a subsidiary of BG Group Plc, with options to extend it further six years.

Knutsen NYK agreed to guarantee the payments at a higher rate at the original level on this charter for a period of five years to April 15, 2018. After this date, if all options are exercised, we will see a reduction in charter rate of 3.8%.

The Bodil Knutsen is under charter with Statoil until May 2016. We expect to hear this month from Statoil, whether they wish to declare their option to extend and we expect them to exercise a long new extension. Either way, the charter is guaranteed until April 2018 by Knutsen NYK by which time the (inaudible) outlook will have changed significantly.

In the UK sector, there are potentially three new fields, Mariner and [ESS], both Statoil and Bentley Xcite. These are complex heavy oil field developments. Statoil have made an investment decision for the Mariner project, which entails a gross investment of more than $7 billion. The development of the Mariner field will contribute more than 250 million barrel reserves with an average (inaudible) around 55,000 barrels per day. This deal will provide a long-term cash flow over a 30-year period with production expected to commence in 2018.

Statoil has identified a revised [ESS] 130 million barrels and will make a final investment decision in 2016.

The field development has been redesigned and Statoil, to certain extent is cooperating with Xcite on common challenges over the Bentley and Bressay fields. Combined, the three fields will produce 185,000 kilo barrels per day, 595,000 barrels per day. Fearnley stated these three fields will acquire about five shuttle tankers. There are a couple of other North sea oil projects requiring shuttle tankers.

In September 2015, the Partnership entered into an amended time charter with Repsol Sinopec for Carmen Knutsen, extending the durations of charter for five years. The amended time charter is effective until February 2023, during which period the average charter rate will be reduced by 6.2%.

As mentioned previously, the Ingrid Knutsen is also operating in the North Sea under a ten-year time charter. This will expire in the first quarter of 2024. The charterer's options to extend the charter for one three-year period and one two-year period, five years in total. The acquisition of Ingrid Knutsen, together with the extension of Carmen Knutsen time charter are very positive developments for the Partnership. The increase in the average fixed employment of the fleet from 5 years to 5.8 years, demonstrating excellent contract coverage and near-term financial stability, whilst growing the Partnership's fleet to 10 vessels.

Eight, drop down inventory, five potential acquisitions. The building time for shuttle tanker is less than 2.5 years. Our inventory for delivery over the next two years comprises of five vessels. With deliveries up to late 2017, this maps out stable, solid growth. Contracted around the year after the FPSO, shuttle tankers are late cycle and may achieve normal financial returns as there is very low recontracted vessels. We have given BG a range of options for chartering their three new builds, with the term periods running for minimum of five years to a maximum of 10 years, the presentation conservatively assumes they take five years. However BG has the option to utilize the vessels for up to 20 years. Therefore, no commodity risk, we receive a fixed fee for contract performance, yesterday, the MLP unit prices -- the oil price. The correlation of all unit price to the spot oil price is a bit positive and maybe a bit unsophisticated, given our long-term fixed contract revenue drawn from a midstream space.

Nine, Petrobras shuttle tanker fleet. Four of our vessels, 40% of the fleet are on long-term bareboat charters with Transpetro, all running through to 2023. These four vessels are amongst the youngest in the Petrobras fleets, all are DP2, Dan Sabia and Dan Cisne are unique size and Fortaleza Knutsen and Recife Knutsen have shallow drafts with lots of [extra] capacity. The Petrobras vessels are also heavily utilized by the charterer, as these vessels are (inaudible) and important parts of the value chain bringing the oil to the terminal and thus monetarizing it.

The hell or high water leases have [novo hire] provisions and the charterer takes full legal and financial responsibility for the vessel's long-term operation. English law regulates the leases. The vessels are well maintained, not management, a subsidiary of the sponsor technically manages these vessels for Transpetro under contract.

This level of a passive income at 40% of our fleet gives substantial stability and predictability to our cash flows and should get major comfort to our unit holders. The latency of developments are between one year to four years have occurred (inaudible) Petrobras, the builder putting the Brazilian shuttle tanker, the demand has therefore been delayed, but not canceled.

The Libra field post 2020 is operated by Petrobras, but unaffected by the corruption scandal, this field alone will demand 12 to 16 shuttle tankers. It is a completely separate organization, no links to Petrobras although on a Board level. This development will move forward and licensees have substantial inducement to move ahead according to schedule as the royalties payable will increase substantially for projects completed after 2022.

Slide 10, this is from the BG investor presentation. Regarding our BG new builds, BG Group's October press release states, in Brazil there is significant resource base. BG note that development is well underway with record production being achieved in October 2015, a 175,000 barrels a day oil equivalent as the FPSO has come on stream. This compares to 40,000 barrels a day in the fourth quarter of 2013.

BG has found a low cost development with excellent reservoir characteristics, flow rates have exceeded expectations and fewer wells than expected drilled. The breakeven is below $40 a barrel. They states elsewhere that by 2018, 15 floating storage and not floating units FPSOs for oil and natural gas will be operating in the Santos Basin with a total production capacity of 2.6 million barrels of oil equivalent per day. BG states they charter shuttle tanker with state of the art dynamic positioning systems to transport the oil produced in their concession areas. BG believes they have equivalent of 8 billion barrels of reserves available to them.

Media reports on Shell CEO, van Beurden cite the Brazilian offshore activity as one of the main reasons why the BG merger deal is attractive to Shell. He claims that they will help reshape Shell for this modern era by enabling it to focus on fewer and more profitable areas such as deep-water exploration where massive reserves are still being uncovered.

11, significant demand for new shuttle tankers. Fearnleys see a significant demand for new shuttle tankers although they have scaled back their near-term expectations in the next five years by 20 vessels support to 40 vessels. Going forward, these reduced growth projections are purely a delay. There's still ten months of oil in the ground economically extractable. Fewer vessels needs less renewal risk, an optimistic investor will see this as a positive as it will lead to more orderly growth and more stable and secure long-term prospects. But judging by our unit price evolution, these investor types since have reverted MLP space. Worldwide oil consumption has increased at triple its long-term rate in the last year because of the much lower price.

12, traditional MLP model strong growth generator. We are an expanding mobile platform company. On the demand side, we have seen a remarkable turnaround, both refinery and end user level, leading to demand growth accelerating well above the long-term trends. US shale production will decline in 2016 and the oil price should start to gradual upward path, underscoring the desirability of investing in our areas of operation, the market is rebalancing the lower oil prices.

Our sponsors are first class. NYK is one of the top three shipping companies in the world. With a (inaudible) portfolio of more than 850 large vessels, it employs around 55,000 people worldwide, NYK is also one of the core members of the Mitsubishi family of companies, popular (inaudible) in Japan, it has a market capital of $4.8 billion.

Knutsen has a long proud history and knowledge dating back to 1894. The insurance value of the vessels in the Knutsen will exceed $5 billion today. Knutsen fleet comprises of shuttle products and LNG tankers, many of which are on charter for payouts of between 20 years and 25 years. As the shipping company has a philosophy like NYK to offer advanced vessels on long-term charters to first-class charterers.

13, Knutsen NYK; a market leader. Knutsen NYK is backed by two of the leading sponsors in the industry, TSSI and NYK. Knutsen NYK is a leading shuttle tanker operator, 28 years' experience, and this further reinforces our ability to take advantage of growth in the midstream logistic supply chain as the oil price recovers.

Financial performance Q3, focusing in the income statement. Total revenues were $39.3 million for the third quarter compared to $37 million for the second quarter. This is due to a full quarter of operations of Dan Sabia at 15 days in the second quarter. The inclusion of Ingrid to our fleet should increase our revenues for the fourth quarter in a similar way. All line of the partnerships vessels operated well through Q3, achieving 99.6% utilization, three days off hire.

Operating income for Q3 was $19.7 million compared to $11.1 million for Q2. The increase is mainly due to the result of a full quarter of operation Dan Sabia and not -- cash charge for impairments of goodwill of $6.2 million in the second quarter. After the Q2 impairment, there is no longer any goodwill in our balance sheet.

Net income for Q3 was $8.8 million compared to $6.9 million for Q2, affecting net income was the recognition of losses on derivative instruments of $6.5 million in the third quarter compared to a gain of $0.3 in the second quarter, because of a decrease in long-term interest rates and realized loss in foreign exchange contracts. The unrealized non-cash elements of $2.2 million. Lower long-term interest costs are beneficial as they have increased the present value of our contracted revenues.

The balance sheet, slide 15. At the end of September, we had a solid treasury position, cash and cash equivalents of $67.2 million, an undrawn credit facility of $20 million. We utilized $37.5 million of this to buy Ingrid Knutsen, but this still means we have about $50 million of available liquidity, which we think is very comfortable given our predictable cash flow.

In the third quarter, in view of the volatility in the market, we announced, along with our general partner, a unit repurchase program. The Partnership view this as an attractive investment opportunity, the program is price-dependent and (inaudible) but today, we have not made any new purchases. If the GP participates in the repurchase program, this signals us some sustained support for the action.

Balance sheet, 16. Total interest-bearing debt outstanding was $610 million. We do not have any refinancings due before 2018 and our cash flow indicate we can comfortably maintain our distribution. The cover ratio in the third quarter is lower than usual. But this is due to the large cash balance carried by (inaudible) earn no interest. This has been normalized in the fourth quarter with the acquisition of Ingrid Knutsen, the cover ratio will improve significantly.

Total partners' equity stood at $520 million in the September in the MLP balance sheet, equivalent to unit price of $18.64 per units, at this level we would have a calculated over the 11.2%, 1% above the stable no growth traditional MLP, an example of which is [Statoil Gazprom] it has not increased it's distribution to 10 years and today, we have about 10%. Despite straight-line depreciation of our assets in the accounts, not from an annuity model, we are still trading at further significant discounts. Given our growth prospects, our time fleets, long-term contracts, we feel we offer a very attractive investment opportunity in this low yielding environments.

17, distributable cash flow. Distributable cash flow was $16.1 million in the third quarter compared to $16.2 million in the previous quarter. It is slightly lower due to realized exchange losses on FX swaps, these have since been extended. We have a coverage ratio of 1.07 in the third quarter, which is below normal, but as we mentioned, acquisition will increase this ratio significantly.

Distribution for this quarter was $0.52 per unit, equivalent an annual distribution of $2.08. This represents a 2% increase over the previous quarter distribution of $0.51. The management and Board are still evaluating whether to increase distribution levels for the fourth quarter (inaudible) in due course. The coverage declined in the previous quarter because of a distribution increase and for the last two quarters, it is lower than the long-term average because of timing difference between merging assets and (inaudible) and dropping assets.

18, generated adjusted EBITDA of $32 million. Adjusted EBITDA refers to earnings before interest and other financial items, taxes, goodwill impairment charges and depreciation. Adjusted EBITDA is a non-us GAAP measure used by investors to measure performance. The annualized EBITDA basis Q3 is $128 million.

With a wasting asset like a vessel in the fleets and where you should produce lower EBITDA dollar invested. The we annuity effect reduces the value loss in US, younger fleet of assets also have longer term duration and MLP correction, which may come about in the near to medium term, ignoring drop downs which in any way are not recurring (inaudible) during the current markets. KNOT's fleet has an average age slightly over 3.8 years compared to the industry average around 10 years.

Stable financial performance, 19. Since the IPO in April 2013, our unit distribution has increased by 39% above the minimum distribution as obviously it is going from 12 to 10 vessels. The distribution cover has generally been very healthy (inaudible) client has said previously (inaudible) average because of timing differences. We should see an increase to about 120% in the fourth quarter in contribution from Ingrid Knutsen.

Now in summary page, slide 20. We have a very solid and highly profitable contract rates. We have a very modern shuttle tanker fleet, well placed and highly focused on expanding in the medium term as both the MLP and oil markets recover. As the MLP market recovers, yields reduce (inaudible) values bottom and modern fleet gain most value for each dollar invested.

As the oil market recovers, shale site, the BG offshore activity is one of the main reasons that BG deal still attract us. They intend to focus on fewer, more profitable areas such as deep-water exploration where massive reserves are still being uncovered. BG charter shuttle tankers to transport all the oil they produce in the deep-sea exploration concession areas.

No one has more experience in operating this sophisticated shuttle tankers and Knutsen offshore and we upgrade the vessels with real expertise, we had only three days of hire in the last two quarters and have kept operating costs well under control, this year we're running at around 10% operating cost savings budget. We have a large sponsor asset base with an ability to capture significant portion of the expanding markets.

Finally, with both demand for and consumption of oil ticking up worldwide because of a much lower price because of the lower commodity prices elsewhere and worldwide central banks (inaudible) economic growth in the next two years to three years.

That's it. That's the end of the presentation. So if anyone's got any questions, please ask now.

(Operator Instructions) Hillary Cacanando, 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 (inaudible) 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. 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 (inaudible) but one ship is a quite small amounts of equity. We feel generally, the 9.5 to 10 -- ship is probably as low as we can go. So you could work out (inaudible) on whether or not we would like it to drop and let's continue to do drops, we have one next year, and we have four the following year. So it's a bit lumpy, can't really say how we do year-over-year, I think realistically, since we expect market to recover, we don't expect to be at this level within 6 months to 12 months and then we will probably look to raise quite a lot of equity and do a significant number (inaudible) that's what I 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 maybe, the MLP can't sustain an acquisition, we couldn't -- I don't think anyone on these multiples would be interested in selling to us. Just doesn't -- it doesn't really work. This business is too -- basically investment grade, I feel that the shuttle tanker business is investment grade quality, and you can only achieve -- you can achieve 17%, 18% on equity, it's just too expensive. So -- but the main carry out from this presentation is as you've seen, holders should be comfortable with everything. We can sustain the business as it is, but as far as expansion goes in current environment, it's pretty tough.

Spiro Dounis, UBS.

This is (inaudible) filling in for of Spiro. Just a couple of quick questions from me. One, kind of following up on the drop down base. 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're comfortable with the distribution levels on the basis of the unit price and we would like to grow the distributions, obviously, if you don't see any appreciation in the unit price, then it's -- 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 in that. And we don't frankly see in the very short term there's any benefit in pushing the distributions much. We'd like to look at it going forward, we have to review how markets moving (inaudible) really, but certainly cover the (inaudible) distributions. It's just a matter of -- a lot of things we do right now, what we think internally, we have (inaudible).

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 so much more straight forward, it's actually that compresses your time scale when you can do the repurchases and the rules are quite onerous, you can't actually do a lots of volume anyway. And so -- but we would look at it when we can do it. When there was -- this time, 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, not going to be close under the Safe Harbor rules to actually purchase units. But it was at a level where we would have considered a 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 are going to achieve. Then it makes it more difficult. But generally speaking, it's not a big area, really, we could -- 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 with this current buy, but fundamentally, it's not a very positive message to send out to the unit holders because our liquidity is compressed. So it's a balancing act, really. We want that too in the armory, obviously.

Lin Shen, 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, those are, I think possible. The sponsor could take equity and we could lever up, we have one ship. (inaudible)

This is (inaudible) General Partner. Just want to comment on that. Situation now is actually that the sponsor has cheaper cost of capital and MLP. So right now of course it's -- that's for the sponsor to own the asset in the MLP, but you might ask, then, why the hell did we do (inaudible) that is the case, but the thing is that we raise sufficiently money in the MLP to buy two vessels and that didn't make sense to sit on a lot of money, earning no interest and depressing our cover ratio. So it was more beneficial then to actually buying the (inaudible) 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 is really apply on the capital markets and the cost of capital and right now 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 the MLP can acquire.

Okay, great. And also -- go ahead.

So I should say one small thing, we have -- we're not obligated to purchase the vessel or the sponsor not obligated to sell the vessel until two years after it's delivered. So we do actually have all of the 16, nearly 17, 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're 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 in the 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, we are even not in area where Petrobras is cutting cost back.

Should I come up with an anecdote, because we just recently extended the vessel Catherine Knutsen, which is 23 years old, we extended that charter with two years until the rest of the 25 years. And we did some digging in our archives to find out what's kind of rate that vessel had when she went on charter initially as the shuttle tanker. And the rates you had then was the same rate as you had when she was 23 and we renewed the charter just recently for two more years until the vessel 25. The rate was actually increased by 8%. So we have been in similar situation where the rate has gone down, but it's not only -- it's going down, for that vessel, the rate is actually going up and the rate is higher today than when the vessel was delivered and vessel was trading one year ago. So it depends a bit on the market situation, this is a niche market, so it's not like a commodity market, vessels are unique, so different fields (inaudible) may have different (inaudible) in terms of specification size, technical specification, so it varies. And it's nothing like the drilling segment although it's a segment that are -- two totally different segments from the mid-stream shuttle tanker side.

Yes. Just talk about this two years extension you just did, which is at higher rate, is that your choice to extend for two years instead of five years or longer, even longer time, or is that the producer's choice because --?

So this vessel was 23 years, I was talking about this vessel and the sponsor, and of course they're likely to tend to trade on till they are 25, so two years then natural selection of time period. So it was just a kind of to tell you that rates are not only going down, somewhere (inaudible) actually rate is going up.

Yes. I understand that some really going up, but I'm just wondering like does the producer or your client have their appetites to extend or some longer (inaudible) most of their contract you started only like one or two years extension?

It depends totally on the situation. Some you do a five-year charter, some you do 10-year, for older vessels, you might do two years or three years. It's not that you get a clear cut answer.

David Starkey, 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, this -- it seems like you would want to own it more when it's cheaper?

I could not -- tell you one of few stories, but really I don't want to talk about it on the phone. It's difficult, I mean ultimately people talk to each other and some senior unit holders and they all say whether they're happy or not. The problem is, I mean, this enterprise value overhead, but there seems to be a measure, not a lot people using in the States. And to be honest with you, if you got no fleet, the multiples will look much better, if you got very young fleet, like us, then the multiples don't look so good. And they also -- people don't seem to taking into account the quality of the counterparties we have and the renewal rates we fill and we do not see a very higher renewal risk compared to a lot companies, which is linked 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 had to go somewhere, that was an MLP Conference, that's what we tend to aim to do and we might find a few more things. But we've taken advice from bankers and they've actually say today the market is so weak, the investors are just going to -- they're closed down. I've also talked to practitioners in the US and they say that the MLP space unfortunately it's not right, the three things wrong with this, the cost is offshore, not we're in the marine space and we're also a bloody MLP that today is a fantastic investment, but because of those three things, we just discounted heavily, people just don't like offshore, don't like marine, don't like MLPs, look into Morgan's list.

Well, that's the thing. And since they change 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 that's actually (inaudible). It's not going to happen because -- basically we're institutionally held and the share escalated the margin.

Your shares are based on the exchange traded funds that own you and they tend to just lump everybody into the same board and sell the same time everybody and distribution also is very hard.

And I spoke to analysts and -- yeah, and I talk to analysts, and they say well, that's just your opinion, they don't get the story, that's how I feel about it, it's extremely frustrating. This is a fantastic business, I believe and I believe the growth story is going to be -- the Brazilian deep-water wells are fantastic and I don't know why we are hammered although the fact that we're quite niche, we're very small, we're niche in terms of US listing. Well, long since (inaudible) because we're small people aren't interested, they just goes into general fields and that's it. But when you look at the use of fleet, anyway that's also a young fleet. We should be operating on better multiples. People have sense in MLP space, they look for short near term contract coverage and the use of a fleet. On those two categories, we're pretty marvelous. And then on the basis of what the actual space is, the actual -- the outlook for this space is phenomenal.

You have -- how many years predictable sort of cash flow in front of you here?

Well, I mean we respond to a team and that's -- when we refinance, we have to refinance this unfortunately anyway and then the charts come to an end. This is also natural ending. Basically, the one MLP that was set up 2013, (inaudible) the finances come to and the charters come to and so that's part of these melting down prices 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. So I do get point of this, the enterprise value around EBITDA model.

But it doesn't really stack up because if you got a young ship like the Ingrid, which why it become charters. So Exxon 15 years and people turn around and say, in the offshore space the enterprise of EBITDA must be close to $7 million to $8 million, not doing $10 million. But you know you sell it. 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 eight or seven multiple. But in the general midstream space, the asset prices haven't really dropped. So we are being looked as offshore aside from the fact that we are midstream, but the assets in the offshore space has fallen quietly heavily because of them.

So you might have written a contract a year ago, you know there is awful lot residual risk because it's offshore as well. I mean it's a just a completely different outlook and yet, we're seen as offshore. We should be doing offshore multiples on our drops and it's like and they are --.

Can you drop the word offshore out of the Partnership?

I would like to, I'd 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.

Richard diamond, 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 are giving investors private equity market -- private equity type returns with public market liquidity. I have two brief questions, one is, I'm assuming if there was -- 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 assume -- 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?

Thank you, Richard. First of all, I've been in the big tanker business for 25 years. I can tell you, if you're dealing with a shipper of the cargo, then you don't have an issue with payments, 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 there -- long-term time charters like this, and if it breaks downs, the bill doesn't move. Where you have a problem in the oil industry is where you actually have relapse to a long-term time charter with an intermediary and that's why not such a powerful and good story, because basically it's charting directly with the oil major.

With other shipping companies, whether it is the time-charters to an intermediary, like for instance, we have KGs in Germany where lot of contenders lost loads of money because lots of peers backed up (inaudible) is a big one where the charter just couldn't perform because the market variance. And people don't want (inaudible) contract and they want to not pay but when the bulk markets move away from you, there is nothing you can do. But with this situation, it's not like that, we're basically are charting out to oil majors.

It's also the same in spot trade 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 the payment scenarios. So that's the first point.

The second point with investors, we probably will want to do something, but we do tend to go to all the MLP conferences, the big ones if we can and we tend to do something after the (inaudible) going to the States. We can certainly look at doing, but we've been advised by our lead bankers that today isn't really time to talk to investors, there's no optimistic investors out there; it's probably better next year like the same 2016 when everyone's recalibrate and after the end of the tax year. So we will look at that. We're always interested in talking to serious investors and need to.

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 calls coinciding with each other?

It's not my fault, it's their fault. We came out here first, we can (inaudible) but at the same time, it's a very good point. I don't know what TK looked in, sorry, I shouldn't mention that name.

I plan to ask on their call tomorrow, but it would be nice if -- given there are only two vehicles.

It's probably -- if we -- earlier -- we normally we put them on early, because as we got (inaudible) you said to do it on a mid-day because everyone's finished by then. But TK seem to move that way through in the day now, I don't know why that is, I really don't know what's going on there. But having said all that, I'll have to correct you on that we are the only pure shuttle tanker company in the world. TK have a lot of other stuff in their business, anyway.

You're right, you are 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 on 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.

Eric Walker, 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 a standard protocol or I guess, what's the different between extending further out than the one year?

Well, I mean, obviously, I'll start with giving you those three fields, I mean, if those three fields are developed then probably we're talking about longer term extensions. On the Bodil, they have an unusual ship and the fact it is a Suezmax and it's an interesting vessel. But we haven't really discussed it with them, 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 at the present moment in time, the way Statoil is positioned with the new sales coming on, that 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 probably about it and same to the Bodil. So until that point, I guess we'll just wait and see. So they're using the ship so -- but they would talk to them. We haven't had direct contact with me. There recent structure of the charter was, I think it was three one-year options so it will (inaudible) deliver the ship we will talk about -- we will talk to them probably about an extension. But today we don't really know what they are going to do because they haven't told us, so that's all I can say that we're expecting something new because normally we would probably have heard from them if they weren't going to.

I appreciate that and then as 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 actually with our own ships, we wouldn't use other people's because we maintain that our ships all their lives with no (inaudible) and we're 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 sponsor does do that sort of business, but we're not dropping (inaudible) we are only focused on the shuttle tanker business.

The platform the sponsor -- we actually have one vessel at the yard in Remontowa in Poland being converted to FSO in a $400 million dollar project and I think the ship is operating as a (inaudible) in the North Sea. It 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 sponsor, down the road we will of course evaluate whether to do a FSO project in the MLP as well as the vessels 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.

Thank you, all for attending. I hope you enjoyed the presentation. And I hope it gives some (inaudible) unit holders 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're 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.