KNOT Offshore Partners LP (KNOP) Earnings Call Transcript & Summary

Good afternoon. My name is April, and I will be your operator today. At this time, I would like to welcome everyone to the KNOT Offshore Partners LP 2021 Virtual Investor Day. [Operator Instructions] I will now turn the call over to Gary Chapman, CEO and CFO of KNOT Offshore Partners LP. You may begin your conference.

Good morning or good afternoon to everybody. We're so pleased to be able to hold this event today. It's great to see so many people logging in from around the world. And whilst we like to prefer -- we'd much prefer to do this in-person, a virtual event does at least allow more people to attend. I hope you're all doing well today. As it's customary, I do need to point you towards the notice on the slide here concerning the nature of this presentation and its content. In particular, that the presentation includes forward-looking statements that we make in good faith today, but which contain risks and uncertainties, meaning that actual results may be materially different. We do require that we take this slide on board as part of our presentation today. And you can see further materials on our website and on the SEC's website if you need further information. As to our agenda today, we recognized that there will likely be a wide spectrum of people here, some of who know KNOP very well and some for whom this may be their first introduction or their first for some time. So we've tried to build something in for everyone. We also don't want you to just hear from us. So we've asked 2 third-party experts to join us to give you further comfort that what we're saying is supported by both data and experienced professionals from outside our organization. So we will first have a strategic overview from our Chairman, followed by a session on shuttle tanker fundamentals given by Sverre Bjørn Svenning of Fearnleys, who are leading independent and global provider of brokerage research and advisory services to investors and maritime companies worldwide. We will then turn to Tore Guldbrandsøy from Rystad Energy, who are an independent energy research and business intelligence company that provides data analytics and consultancy services to the energy industry across the globe. Tore will look more closely at oil market fundamentals and specifically production volumes underlying the shuttle tanker demand in our markets in offshore Brazil and the North Sea. He will also include some comments on how the energy transition plays into all of this. Our VP of Chartering and Business Development, Mr. John Einar Dalsvåg, will then apply all of this background context to the mechanics of how our specific markets work, how we keep ourselves on top of the market and how we actively manage our risks and challenges to make sure we're well positioned to access the growth we see in the future. I will then come back and present a summary of our business, focusing more on the financial side, looking at the many key strengths of the business and how we expect to move forward. From there, I'll hand over to Bryan Degnan, who work for The IGB Group, who KNOP has appointed to assist with our Investor Relations and Outreach. Bryan has done a great job organizing much of today's event. By the way, equally want to tend to be in front of the camera if only for a few minutes, so hopefully, our stakeholders will appreciate that we're prioritizing our communications, our outreach and ultimately supporting our unit price from every angle. Finally, we'll open for a Q&A, as you have already heard. So then without further delay, please let me hand over to our esteemed Chairman, Mr. Trygve Seglem, who will start our presentation and talk about our beginnings, our strong track record and our strategies going forward. Trygve, over to you.

Thank you, Gary. Welcome, everybody. It's a great pleasure to see so many people online. And it's also been a great pleasure to continually report our shared success each quarter over the last 8 years since our IPO in 2013. When our business went public as [indiscernible] issuer. Today, we have an opportunity to provide you with a more in-depth update on KNOP to reaffirm our commitment towards our business and to hopefully help you all to understand why we look forward to continued success for KNOP well into the future. I started my career with Statoil in 1975 to develop offshore loading, transportation from the giant statute fields in the North Sea. I joined Knutsen in 1983, and in 1984, we won a tender to build 2 shuttle tankers with a 15-year time charter to operate at the Statoil field. We built one vessel in Norway and a sister vessel in China. The vessel built in China costed $37 million and was sold for $46 million when it reached 21 years. So that was a real success. And actually, it shows what could happen in shipping. We have been collecting our experience improving and expanding our business ever since pioneering the new technologies and operational strategies that have become industry benchmarks. And over 36 years later, we are today the #1 operator in shuttle tankers in the world. Then a brief introduction about the main sponsors of KNOP. Firstly, NYK. That was established in 1885 and is a major international shipping company, headquartered and listed in Tokyo, and today has over 35,000 employees. And as at March 2021, owned or operated around 684 vessels across all types, including containerships, tankers, LNG and car carriers, to name just a few. Following closely behind, the Knutsen Group based here in Norway was originally established in 1896 and established its good name internationally over many decades, coming into its current form more than 30 years ago. Today, we operate 50 vessels across LNG, chemical tankers and FSOs, as well as our shuttle tankers, and have 4 shuttle tankers and 15 LNG vessels under construction. [indiscernible] in the appendix of the presentation that shows what we do and where we are located globally, including a nice picture of our office here in Haugesund. But suffice to say that both Knutsen and NYK are large brothers, [indiscernible], longstanding participants in international shipping. Knutsen Group has worked closely with NYK over more than 10 years now, formerly beginning back in 2010 when we formed a 50-50 joint venture for our shuttle tanker business, Knutsen NYK Offshore Tankers, or KNOT as we call it. This then led us to our IPO in 2013, dropping down initially for our KNOT vessels into the listed vehicle. We're all primarily with KNOP. Before I move on, it is worth noting that very significant intangible benefits of having 2 such large sponsors sitting behind KNOP, all our business must always stand on its own feet. It does mean that KNOP has access to geographically diversified top-tier shipyards, finance and operational support that on its own would be not possible or much more expensive. Today, KNOT still owns around 28% of KNOP, with the remainder being held publicly. And KNOP owns 17 vessels with another [indiscernible] vessels held by KNOT include 14 under construction. And therefore, the KNOT -- KNOP Group controls 29 vessels, which represents around 35% of the global fleet, making the KNOT -- KNOP Group the largest owner operator of shuttle tanker tonnage in the world. Almost all of the operational activities of KNOP, a summary of which you can see at the bottom of this slide, are outsourced and performed by KNOT using our decades of experience. Further into KNOT and the KNOP leads together, we benefit from synergies from greater buying power and for access to many other efficiencies on a day-to-day basis as well as ensuring common high standards, safety and quality. In addition, we control the full value chain and the linkages between each part. And in our view, this gives us a better control and a better understanding of our business, and in our industry, we think this is a competitive advantage. What is important in shipping and business in general is flow of information and control as well as limiting [indiscernible] and agency costs. Our strategies might seem simple and easy to copy, but operating our vessels at the utilization and levels of safety that we do is anything but easy. I can assure you and I pay tribute to the hard work of our teams and through both onboard and onshore [indiscernible], particularly in this last year where we have remained resilient and successful despite all of the many challenges that have arisen. Since we began operating shuttle tankers 37 years ago, our approach has stayed the same as shown here. Without keeping each of these 4 pillars in front of our mindset at all times, our business cannot perform as it should. We believe our success has come from our consistent commitment to operational safety and performance. Our deployment of advanced, highly differentiated vessels over long-term contracts providing stability and predictability. And our demonstrated ability to win and maintain close working relationships with first-class charters, all our this is mutually supportive, and over the years, has built trust with our lenders, our customers, our other stakeholders and, hopefully, with our unitholders. We try to operate in a simple, transparent manner and do what we say we will do. This all brings financial stability. And recently, we paid our 24th consecutive quarterly distributions of $0.52, meaning we have paid a distribution in every quarter since our IPO in 2013. That is now 33 quarters. And despite the past 18 months, we have been able to maintain our disposition too. Since our IPO, we have now paid out $16.54 per unit to our core unitholders, which includes $472 million in absolute terms. We have access to and long relationships with a large group of shipping banks and institutions, and we have been able to finance and refinance our business at each and every term with every low margin and following a robust debt repayment profile. We have operated since our IPO at 99.5% utilization for scheduled operations and have had no safety, environmental or quality issues or loss in that time. And some of our initial long-term contract start to expire and our contract mix evolves, we expect to see more of a mixture of fixed charter contract lengths. As our VP of Chartering and Business Development, John Einar Dalsvåg, will discuss a bit later, notwithstanding this, however, we still have $642 million of forward contracted revenue as at June 30, 2021. And just a look on COVID-19, which obviously remains a significant issue facing all of us, not least of all our [indiscernible], we have every opportunity taking action to ensure the safety of our crew and the smooth continuation of our vessels operations. And we have put in place many workable processes to outcome the significant logistical and safety challenges which are presented by COVID-19. That being said, we will, of course, stay vigilant and adapt as needed should things change. So this is what we have achieved so far. What is next? In short, it is our intention to continue our business in the same way going forward. We don't want to fix what is not broken. Our 4 pillars have served us well, and they will continue to end up in our strategies. Although our unit price continues to reflect some of the external challenges facing our sector, be that the overall performances of MLPs, the specific issues that some of them have faced or the wider market impact related to COVID-19, I would emphasize that our business and our results have remained strong. And our ambitions remain to put [ suffice ] and at least maintain our current level of distribution to our unitholders to deliver stability in our business and our cash flow and to grow the MLP in the future. Whilst we don't claim to be able to predict the future, we are still, in essence, a long-term contract business with fixed price charters. And we firmly believe there is much room for further growth in the shuttle tanker market in the coming years and decades. We successfully dropped down an asset during the last 12 months without issuing equity. In this is our presently assessed at the KNOP level that represents an additional growth pipeline for KNOP when the time and conditions are right. We contact the first-class charters, which further facilitates access to very competitive finance and mitigates our risks. We continue to operate our vessels to the best of our ability and continue as we do today in making improvements, large and small, to drive efficiency and overall ESG ambitions. In summary, you will see in the following presentations that our position in the shuttle tanker market is strong. The market is still expected to grow, and we will continue to use our deep experience, expertise and relationships to maximize our fleet utilization and most importantly, ensure good return for our unitholders. Finally, let me say thank you for your interest in KNOP. And I will hand over to Sverre Bjørn Svenning from Fearnleys Securities, who will take us through some shuttle tanker fundamentals. Thank you.

Thank you. Good morning and good afternoon, and thanks for giving me this opportunity to give a brief presentation of the shuttle tanker market as such. Yes, I think I started a little bit early. That's all right. Good morning and good afternoon, everybody. The shuttle tanker market, as we know it today, has an almost 50-yearlong history, starting out in the North Sea, but also tanker loading is much older than that and was started already in the 1930s with offshore terminals of the U.S. Coasts. I have here 2 examples of 2 ships, the Matco Thames, which I believe was the first purpose-built shuttle tanker in 1975. And on the other hand, right-hand side, we have the Hilda Knutsen built in 2013, which is not the new one, but it is representative of the current generation of shuttle tankers. It's also interesting to see the 2 photos on the bottom of the slide where we see the Matco Thames loading at the Beryl Alpha in the U.K. sector in the late 70s or early 1980s. And we see that the flaring of gas from the producing installation is quite evident, whereas on the right-hand side, we see the loading at the Goliath field in the Barents Sea in 2016 or later, which is pretty clean and no clearing of gas at all. Next please. The 2 main areas of shuttle tankers is the North Sea. And the North Sea, we could define as both the British and Norwegian sectors, including the Danish sector, and all the way up to the Barents Sea, employing around 26 shuttle tankers today, has been operational, which -- shuttle tankers for almost 50 years. And then we have the Brazil sector, which has a slightly shorter history than in the North Sea of about 20 years, but has grown to a bigger market than the North Sea with some 35 to 38 shuttle tankers being deployed. In addition to that, we have a small market off Canada, East Coast Canada, where we see 3 to 4 shuttle tankers being deployed on a regular basis. Next, please. So a shuttle tanker is, in principle, not too different from a conventional tanker whether we're talking about the [indiscernible] size or in azimuth side. But there are some key features that are quite important. And that is, of course, the bow loading equipment, which you can see in the upper most right-hand corner for loading offshore. We have the dynamic positioning system, which is key to sales offshore loading with retractable azimuth thrusters in the bow and in the arc, which can be seen. In addition, controllable pitch propellers and flap rudders for easy maneuvering. We have also a helicopter landing pad. I mean, most tankers have a designated area for landing of helicopters in case of emergency, but this is more permanent fitting on the shuttle tanker. And typically in the North Sea, twin propeller or diesel electric propulsion. It is, I mean, not even more than theoretical chance to convert an existing tanker into a shuttle tanker. It has been done, but it's quite a few years ago since last time, and it's quite costly. Whereas a conventional [indiscernible] tanker has a price tag of USD 60 million to USD 65 million, the starting price for a North Sea designed shuttle tanker is about USD 115 million. And the main reason for this is the demanding operations offshore during loading. Next, please. This photo I stole, but I think it shows very world-wide dynamic positioning system is needed for safe and secure loading of oil offshore. The green zone showed just off the bow of the ship is where the ship can swivel back and forth when it's tied to the loading installation. Once it moves into the yellow zone, there's also as a traffic light moving into danger zone and moving into the red zone, its immediate host disconnection to maintain the safety of the ship and the production platform. And with the weather conditions we have in the North Sea as well as in Brazil, I mean, these are very sophisticated and costly systems that are necessary for the safe and secure operation or loading or offloading of oil into the tankers. Next, please. And we are speaking about a very specialized market segment, and we have tried to classify the -- some types of shipping segments, shuttle tankers, LNG carriers, conventional tankers and bulk carriers. The function of these are, of course, commodity transportation for the shuttle tankers, transporting crude from the FPSO or production unit to the terminal or the refinery. When companies order newbuildings, it's most usually with a contract. This -- hardly any speculative ordering. And I think it's quite some time since anybody ordered a shuttle tanker without a contract. The long-term contracts, typically 5 to 15 years. It's a small fleet globally, 77 ships altogether with about 10 million deadweight tons transportation capacity. LNG carriers is a little bit of both. The majority of LNG carriers are contracted with a contract. But there's -- every year, a handful of contracts being placed speculatively without any contracts. Again, as for shuttle tankers, long-term contracts, 5 to even 25 years. There are 573 ships in the world fleet, with a combined capacity of almost 94 million cubic meters. Then we have standardized asset classes like conventional tankers and bulk carriers. These are ordered mainly speculatively without any contracts, and they mainly trade in the stock market or spot contracts, [indiscernible] 5,000 conventional and 13,000 conventional bulkers with a carrying capacity of almost 600 million deadweight tons and almost 1 billion deadweight tons. As such, the shuttle tankers are unique and highly specialized asset classes that are integral to the offshore oil infrastructure. And in simple terms, it could be said that if the charter, if the oil producer having an FPSO or other offshore production unit, they cannot market their oil production unless they have a safe and secure contract with a reliable shipping partner. Next, please. And as we see, the fleet age distribution is not very homogenous. We see that we had a top in 2013 of deliveries. We had another top in 2020, and we will see quite a few ships being added next year. We see that in 2019, '10 and in 2019, no ships were delivered. So these ships are ordered as new fields are being developed and they need transportation capacity. And the ownership of the fleet, the operational control and ownership of the fleet is controlled basically by 2 groups or 3 groups: The KNOT and KNOP jointly with 31 vessels altogether; and then Altera, formerly known as Teekay Offshore, with 28 ships; and then it's more distributed between smaller entities. Next, please. And I'll just round off with a few comments on rules and regulations, some in the world of decarbonization and the greenhouse gases, shipping is now exception. And I won't go through every of these bullets. But I must say that if we go back to 2018, the big thing at that time was the IMO sulfur cap that was going to be introduced on 1st of January 2020. And I would say that it was surprising to see such a big share of the [ growthship ] on a community being in some sort of denial of the sulfur cap. And people thought it would be watered out, it would be delayed, it would be canceled and so on and so forth. But 1st of January 2020 came and went and the sulfur cap was a fact. Today, my impression is that ship owning companies, big and small, generally speaking, are very well aware of the decarbonization trend of transportation and, taking this very seriously and preparing for a new world and new different world. The latest we have on decarbonization is the EU commission that proposed early this summer to include the shipping sector into the emissions trading scheme in Europe. And this will come up most probably if things move according to schedule in 2023, 2024. We believe it will be slightly delayed. When it comes to the IMO regulations that will come, enter into force in a couple of years. The good thing is that the IMO is quite agnostic about measures taken. So it's very much up to the individual ship owner to choose the solutions leading to compliance with IMO regulations that fits their fleet and suits their operations. So there's nothing carved in stone. It's nothing that you had to do this or you had to do that. It's a set of measures that could be made to reach the targets going forward. And with that, I thank you for your attention and wish you a good day. Thank you.

Thank you very much. Thanks, everyone. I'd like to now turn it over to Tore Guldbrandsoy, Senior Vice President from Rystad Energy. He will provide us with an overview of the offshore energy market, which is the immediate source of demand for shuttle tankers. Tore, over to you.

Thank you. And thank you for the invitation, and good morning, good afternoon to everyone. Okay. So I will talk -- next, please. Yes. So I will talk about the oil market. I think the key thing now is that we see record high prices on oil and gas. It means there's a lot of income coming into the companies developing the fields and driving the whole sector. And then -- but then we have also the energy transition that we are following in the background, and of course, putting some questions about the long-term demand for oil and gas. But interesting enough, we still think that I think the key message during the presentation is that it's quite a good development, both for Brazil and the North Sea, even if you see less demand in the future related to the whole energy transition that is ongoing. Next, please. So just a few words about Rystad Energy. We are a global knowledge energy house. And we deliver data, we deliver reports, analytics, and we do special consulting services for different kind of companies across the whole energy space. Next. And what we think is unique for the way we work is that we do a bottom-up analysis and a top-down analysis. So it's -- for example, we have more than 85,000 oil and gas assets in our database. So it's -- everything is built up from the bottom-up. But then, if you add everything together, it has to make sense, either on a country level or on a company level or it's correlated. So that's, I think, a unique thing we have. And we have this for the E&P, but we also have this now for all renewable kind of assets like hydrogen or if it's CCS or solar and so on. Next. So just firstly, this -- we are following, of course, the oil demand. What this is showing? This is the difference in oil demand compared to a normal level of 100 million barrels today from just before the COVID outbreak. And you can see in April '20 that we were down by more than 20%, or about 20 million barrels per day down on the demand side. If you follow the lines going up to where we are now, October, November, we are about 4 million barrels per day or 4% below the normal levels. And if you move forward, we think that you can start to touch now towards the end of the year in single points. You can come up back to normal levels. But on a consistent -- more consistent level on the demand side, we'll probably need to move into the middle of next year. And as you can see, if you move to the right, it's the yellow part that is still below the 0 line, indicating that the aviation and demand, of course, in the aviation driven by the very reduced level in global aviation and flight traffic that is the key reason for this. Next. And then, when it comes to the oil price, we see now very high prices on oil, more than $80 for the Brent. However, the fundamental reason for this is that OPEC has been holding back the volumes for a long time. So we are taking -- we are expecting prices to come down next year as OPEC will increase the production. And also for the longer term, we have somewhat lower oil price than $60. It's more like in the $50 to $60 kind of range. But of course, just what we see now, there's a lot of kind of -- there's low storage levels and there's also limitations in the supply system, not only for oil, it's also for gas and also, of course, for all the kind of products, as you see. For example, we see the steel prices that have increased significantly. Next, please. But what we do see now is that this is showing the cash flow from -- for the E&Ps from 1980 up to this year -- estimate for this year. And you can see the oil price, that's the red line and the cash flow is the green bars. And if you look into the period between around 2010 or up to 2014 that we had really high oil prices. Cash flow was pretty good. But then, of course, we had the oil price crash. Cash flow went really low. But then, all the companies, of course, they reduced the cost. The cost of a lot of steel development has come down by like 50%. Also, the operating costs have come down, and that has been improving. You can see going into the next years into '17, '18, the cash flow has improved. But of course, this year, we have the oil price of '08 now, we have the oil price of $80. And as of today, we have the gas price that is similar to 3x on a barrel of oil equivalent basis, more than like up to $240 per barrel. So the companies [indiscernible] a lot of money [indiscernible] how much will be spent on E&P on the developing fields, how much would go to the dividends or how much will be [indiscernible] to get into the [indiscernible] plantation and [indiscernible] renewable assets. But a lot of money [indiscernible]. Next. So then a few comments on the energy transition. Next, please. So of course, we follow these energy transitions, and there's a lot of things ongoing. And as examples, of course, new Biden administration. We have the EU coming with a lot of different policies and requirements. Of course, we have all these different reports and like the Net Zero roadmap, how to get to a zero level. And we also see a lot of the European like majors [indiscernible] targets in 2050, and probably also the U.S. will follow. So a lot of focus on this. And of course, the next is a big climate meeting now coming up in Glasgow in the U.K. in beginning of November. It will be interesting to see what will come out of it. First, nothing is, of course, you need to agree on what to do. And secondly, you have to follow what you agree to do. But there's a lot of things and a big momentum ongoing, so we're following this. Next, please. So we have built a global energy kind of scenario database. And then you start out with looking on the CO2 emissions. What does it take to come to a 1.5-degree scenario? And we can look then on the different emissions. And based on this, we can look on how you have to adjust all the investments, and also what kind of assets will be able to win in the competition for these different scenarios. So if you go to the next, I can show you just a few examples of how it looks on the oil demand. So for example, the top line, that's a 2.1 degree scenario. And the next one is a 1.9 degree scenario, which is approximate about where our base case in our databases are today. We may adjust this down now over the next months, closer to more like 1.7 degrees or 1.8 degrees scenario. But it doesn't mean that's the right picture. But of course, more and more people now use scenarios to do robustness testing of the business going into the future. And -- but luckily, in a way, for this business and new developments to come in the North Sea and also in Brazil is quite robust against lower oil prices as we will see [indiscernible] . Next, please. So let's now focus in on the key driver, which is actually the oil volumes to flow going forward to be produced in these areas going forward. Just first, just to give you an overview. This is the total liquid production, so it's oil condensated also NPLs in this block. That's still like 100 million barrels for kind of a normal level. The green one is the onshore part and the blue colors, that's the different -- that's for the offshore. And you can also see the red of the shale or the shale/tight oil revolution that happened in late -- starting in 2010, '11. But it's about 77% of the total oil market, that's from the offshore. Next, please. And then, if we focus in on the oil production in Brazil. And you can see Norway and the U.K., you can actually see that from -- since 2013, all these areas actually have increased slightly, and it's been a really good production, stable production up till 2020. So that's total oil production. Next, please. What we then can do is to split it out and to look into what of these -- which of these volumes have been transported through the offshore pipelines , which is the brown part at the bottom. And you can see what has been transported through the -- for vessels or shuttle tankers. And you can see -- of course, then you can also, again, see that the offshore pipeline has been pretty stable, whereas the vessel has increased quite well in this period or from both of the graphics. Next, please. Okay. And then we can look in -- having a look towards 2035. And to the left, you can see Brazil, and to the right it's the North Sea. And the way we have colored this is this brown part, that's the production in -- of producing fields. Yellow is the fields under development, and the green is the non-sanctioned fields. That's the discovery still to be evaluated for being developed. And if we add all the assets we have in the database in -- for Brazil, this adds up to quite a big growth, up to 60%. Of course, it must be noted that this is unrisked, but it's still fields that we know if they're all named, and we have information for most of all these assets and certain different plans, and we run economics for them. And you can also see in the North Sea, in the U.K. and Norway, there's also actually growth going forward. And in Norway, there's been some issues also, incentivizing for to do a lot of developments in the coming years. So quite a good outlook. And then if we move to next. So now here, we're looking into taking all the fields that have not been sanctioned yet. And then we have just sorted it by the breakeven price for the -- to develop these fields. So that's all future cash flows, the CapEx or the investments, the operating costs and also the income from the oil or also [indiscernible] and running economics for them. And of course, the key observation, if you look at Brazil, most of the fields, they have a breakeven below $40 per barrel. So they only require an oil price in a way of $40 per barrel, just to meet the return requested in the economics. And also you can see, for Norway, it's about the same picture. So of course, if you want to use the kind of scenarios or if we take down the demands going into the future, of course, then you will start and take out all the most expensive field developments going forward. And so you -- it looks like this is quite robust. But again, you would need to do a very kind of special [indiscernible] exercise to get the kind of exact mix of this. But generally, the growth seems pretty good. Next, please. And also if we look into the today kind of the -- this is the operation -- the production split by the operators going forward. Of course, these are quite -- these are solid companies like -- and responsible operators like Equinor or Petrobras, BP, Galp Energia and companies that also is well-known and a good reputation. So that's also good to know. And if it gets into a little bit of tough times and things changes and as you go through the cycles. And then next, please. Again, if we look on the greenfield investments. So that's the CapEx for fees to be sanctioned towards this year and towards 2023, 2024, if you get some delay for the offshore. This is the offshore greenfield investments. You can see, Brazil is on the top, Norway #2 and U.K. actually #4. So it's -- again, it's a good place to be if you want to be in a place where there is new things coming and new things happening, new investors come. And then I think we're moving on to the last slide. And yes, so I just want to make a comment on the day. I just talked about a key fundamental driver, which is the oil volumes to flow, and that has to be transported. But of course, we also do a lot of work on this in different ways of context. And we have a systematic way for to look on this. If you want to do like a more, very, more detailed analysis, then you would need to look on the discoveries and look on the timings, do some risking on it. Then you can also look on the production outlook. And then, of course, you have the volumes. And then, of course, we also use AI's data to look on and can see all the patterns, all the portfolio moving and how efficient they are and how much time they spend. Then, of course, you also need to look into the site. And if you take the volumes and divide by these 2 factors, of course, then you get the demand for shuttle tankers going forward. So also, if you do such an exercise, I did not include any exploration in the slides I've shown so far. It's only been discoveries. So of course, it will probably mean that you would add some volumes in when you get further out in time, at least from 2030 and onwards. But again, if you do some risking you may reduce the volumes. But I think that was all I had to say, yes. Thank you.

Thank you very much, Tore. We're absolutely delighted that your data supports what we're also seeing and expecting for our shuttle tankers, particularly in Brazil and the North Sea. So now we have John Einar Dalsvåg, KNOP's VP of Chartering and Business Development, to look more closely at our own business.

Thank you, Sverre and Tore, for your presentations, and welcome to everybody. You have heard that our experience with shuttle tankers goes back to 1984 when we received our first shuttle tanker contracts of 2 newbuildings to Statoil, which is today called Equinor. And I joined the first one of them as Chief Officer when she was delivered in 1987. I joined the Knutsen Group as an ordinary seaman in 1978, worked my way up and spent my last 5 years as captain onboard our shuttle tankers. I came ashore in 1985 to work with Statoil as manager of their offshore tankers section and then later as Vice President of the chartering of shuttle tanker fleet. I then came back to Knutsen after 6 years, and for the last 13 years, I've worked as Vice President for chartering and business development at Knutsen. Of course, it's not just me. Our Chairman here today is an able architect who is still very actively involved in everything we do, from newbuildings to day-to-day OpEx spend. And our management is packed with engineers and people with experience operating our vessels as masters and officers. We like experience and we like longevity and stability, and we have found it brings the best results. So then we heard about shuttle tankers and size of the market and supply together with our experience and expertise to deliver the right results. Hopefully, this will provide you with a framework of understanding how things work in this business when you really get down to it. To best explain, I would like to spend a couple of minutes looking at our contracts for shuttle tankers and how our business sit in the market and in the supply chain and maybe reemphasize a couple of points that have already been mentioned. I'd like to start by just setting out some terminology used in our industry. Many of you will be familiar with this, but I think it's important to reiterate as without this understanding, our presentations today will be less -- will have less meaning. So you can read for yourself, of course, but a time charter is the hiring of a vessel for a specific period of time where the owner supplies the vessel and the crew and the charterers pay for all other costs like fuel, port charges and commissions. In return, we receive a daily hire. Under a time charter contract, the charterer takes full operational control of the vessels during the charter period. These contracts apply to 9 of our shuttle tankers operating in Brazil today and 4 of our vessels operating in the North Sea. A bareboat charter is similar to a time charter but we do not provide crew, administration or technical maintenance. The charterer still takes full control of the vessel and is responsible for all operating expenses, including fuel, crew, port expenses and insurance. Four of our vessels in Brazil are employed on bareboat charters today, though fortunately, for these vessels, Petrobras, our charterer, has elected to let the sponsor, KNOT, manage the vessel on their behalf, ensuring the high level of quality and maintenance we have across the rest of our fleet. Under a contract of affreightment or COA, the vessel owner such as KNOP undertakes to transport cargoes made available to the charterer within a specified period of time, typically on a specified route in return for a daily agreed rate on a round-trip basis. The frequency of cargoes may require more than 1 ship, and the owner may have the ability to subsidize similar ships. COAs are not uncommon for shuttle tankers operating in the North Sea and the Norwegian sector. Finally, a voyage charter is similar to COA in that it is for the hiring of the vessel and crew except it is for a single voyage between a load port and a discharge port. The charterers may pay to the vessel owner a lump sum, and the owner typically pays port costs, fuel costs and crew costs. These types of contracts are not often seen in the shuttle tanker market but are common in conventional tanker market. Here, it is important to start out by making sure everybody understands some key elements of our risk profile. Under our time charter and bareboat charter contracts, we don't take oil price or oil volume risk. These contracts are essential hire contracts for vessels. And as long as we provide a working vessel in accordance with the contract, then we are paid. We are also paid monthly in advance, which really helps to minimize our cash flow and working capital requirements. In this respect, we have a robust protection from short- and medium-term market volatility. We saw in the Rystad's presentation that pipelines are not a source of growing capacity for deepwater offshore oil transportation, and we think this trend will continue as there are many comparative disadvantages. As set out here on the left, notably, pipelines, of course, lack source or destination flexibility, which for our customers is becoming increasingly important. And their construction and use can have a very significant and material environmental impact on the delicate subsea habitats of a large area. We also saw a little earlier in Fearnleys presentation the difference between shuttle tankers and other standard tankers so I won't repeat too much here other than to mention that all our vessels are the latest DP2 technology, right, and that we perform a mission-critical function for our customers. They rightly demand first-class operational safety from us every single day even in the harshest of weather conditions. In addition, our vessels are subject to stricter standards, higher regulation and need specialized crew compared to conventional tankers. And we are able to consistently deliver this and more, which is reflected in our reported utilization figures that are over 99% for scheduled operations since our IPO in 2013. The shuttle tanker market is not one of -- that anyone can play around without serious commitment and track record. And this is one key reason why we think we don't see assets of pure financial players in this market. Our customers invest billions of dollars to get the oil to the surface from deepwater offshore wells. However, this by itself is not sufficient for our customers to monetize the oil. They need to transport it from the well or production area to their customers or terminals, and only then do they themselves typically get paid. Our vessels are then crucial to our customers' ability to generate cash flow, and this is why we emphasize our service as critical component to the supply chain. As the shuttle tanker market itself is small, niche market, we are very familiar with our customers' requirements. One factor that impacts the demand for shuttle tankers, as you can see on the top, is, of course, the production from the field itself but also the storage capacity in the field out at sea. For example, a high-production field with only a relatively small storage capacity is likely to need more shuttle tankers to load the oil produced more frequently. For our customers, on most fields, they will have entered into production sharing agreements based on their ownership percentage in that field. And from that arises a strict timetable for when each participant must lift the oil from the oil -- from the well or the platform. Should an entity not turn up with a vessel in time and miss their slot, then the financial implications can typically run into millions of dollars due to potential consequential contractual effects and the time value of money where the cargo of oil might then only be lifted a long way into the future. Finally, what works in our favor is that the service we deliver to transport the oil represents only a fraction of the value of the cargo even in a low oil price environment. And this is also why in more than 30 years of operation, we have never had any problems with customers honoring the contracts. Another advantage for us is that the shuttle tanker-operated fields produce some of the most competitive oil in the market, and we think this should only improve further. I know this is something that Gary has covered before in our earnings calls, but both Petrobras and Equinor target now to invest only in projects with a breakeven of $35 per barrel or less. And today, Petrobras marginal cost of lifting their oil in the deepwater-based oil fields is less than $5. As also demonstrated in Rystad's presentation earlier, this makes our market robust and resilient even in the face of future global oil production decline as we transition towards cleaner energy in the coming decades. Generally speaking, once the initial capital outlays have been made to develop a field, the producer is incentivized to keep producing for a long term. And as I mentioned earlier, on the time charter and bareboat contract that makes up for the KNOP portfolio, the cost of oil -- the cost of fuel for on-hire vessel is passed through to the charterers. In shipping terms, our contracts are long: for newbuilds, at least 5 or 7 years. And for rechartered vessels, we anticipate an average of between 1 and 3 years, which, together with the other market characteristics we have already outlined makes our income profile more stable and far less volatile than most other shipping segments. So you have heard about our vessels, the market we operate in and many of our important characteristics. Let's now turn to our fleet. This slide is one that many of you might be familiar with and shows a simplified view of our fleet contractual position at a given date. Here it is at June 30, 2021. We had $642 million of forward contracted revenue at that date and a relatively young fleet with an average age of 7.5 years compared to the rest of the global fleet average of about 9.3 years. So our fleet has at least 2/3 of its useful life on average still remaining. For 2021, we are comfortable with our position. But of course, what is apparent is that a number of our initial long charters are coming up for renewal in '22 and '23, just like some have already done previously. For our investors and other stakeholders, we fully appreciate that total certainty here would be preferable, but we think we can say a few words that will hopefully provide not only reinsurance but also some confidence. Firstly, the reason for holding this event today is to have an opportunity to reiterate why our business has done so well over the last 8 years and to make the case that all the facts and circumstances are still in place for that to continue. Although there are some so-called gap periods in our schedule today, this is our business and the one that KNOT has been performing over the last 30 years. As the #1 in the shuttle tanker market, KNOP and KNOT together are both committed to the market itself. Certainly, KNOT has faced these types of scenarios before over the years even if they are less familiar with those watching from the KNOP perspective. It is important context here that, for sure, the gap periods, perhaps those of up to around 1 year, we do not expect that these are all or nothing. And as I outlined earlier, long-term time charters are only a portion of how shuttle tankers are deployed in the market. For example, the Bodil Knutsen which from KNOP perspective is on a fixed-rate time charter with KNOT is in turn being utilized by KNOT in a contract of affreightment. We are very close to our customers. Our market is very small. We talk frequently. And actual customers' needs are more diverse and dynamic than maybe apparent from the outside. Most of the vessels coming off contracts for gap periods next year are of Suezmax size. That has the capacity of about 1 million barrels. These vessels are attractive in the spot market. And if our market improved as expected, an alternative should the gaps remain will be to trade them in the spot market. However, we will always prevail to target long, then mid- and short time charters and then spot contracts if we don't find those. Many of our clients are involved both in Brazil and the North Sea. KNOT has COAs in the North Sea, and indeed, any idle vessels from Brazil may also be used from time to time to cover some of these commitments if needed. It is important to understand that we are acting proactively here. We are, of course, not just waiting for things to fall into our hands. And whilst during the gap period, our vessel may not be fully employed every single day, as I mentioned earlier, we do not expect these periods to be all or nothing. What is also helping us today are increased [ such scene ] in the general tanker market which helps to boost demand for shuttle tankers as our customers have less reason to transfer their cargo from our shuttle tankers to conventional tankers once loaded in the field but rather keep our vessels to deliver the cargoes to terminal and ports further away. Simply by doing these longer journeys, most shuttle tanker demand is created. The recent significant increases in newbuild, being shipyard prices, have also helped as this makes our existing vessels more competitive. This dissuades customers from ordering new vessels. And general increases in underlying steel prices also helps our vessel's residual values. So then I hope I have been able to convey to you a better understanding of how our business operates and I have been able to provide you with the comfort that our experiences proactively are being used every single day to move us forward so we can continue to be successful. On that basis, I will hand back to Gary who will take a look more from the financial point of view.

Thank you very much, John Einar. KNOP has delivered scheduled vessel utilization of 99.5% since our IPO in 2013, and this is a testament to the quality and robustness, I think, of our sponsor, KNOT. And our revenue and many of the similar metrics have all been remarkably consistent quarter after quarter even after we have added more vessels over time. In this slide, we have built the partnership to a market cap of around $640 million today and an enterprise value of approximately $1.7 billion. For the last several years, we've prioritized our coverage alongside our distribution in order to lock in this robust and consistent financial performance, notwithstanding that we have also been able to show balance sheet discipline in paying down our debts in good order and recently eliminating the incentive distribution rights or IDRs that were held by our sponsor. You'll see on the right side of this slide debt has only risen when new vessels and their accompanying contracted long-term EBITDA have come into our business. On a regular basis, we follow a slightly accelerated debt repayment schedule, resulting in scheduled repayments of approximately $90 million per year. As further evidence, we like this slide as it shows how stable our business is compared to the price of Brent crude. That's not to say that higher oil prices like those currently prevailing don't tend to inspire more new offshore developments and help with our clients' cash flow and CapEx, which will all in time require shuttle tankers, but it should be clear from the chart that our performance is not dependent upon either stable or overly elevated oil prices. One other factor that contributes to our stability is the fact that none of our charterers -- our charters account for more than 10% of our EBITDA. So when a given vessel is dry docked or transitions between charters, there is not always a dramatic drop. I would add also that although our main offices are in the U.K., that many of our operations are managed from Norway and that our vessels operate in Europe and Brazil. We actually have limited foreign exchange exposure with our business being overwhelmingly transacted in U.S. dollars. As Trygve mentioned earlier in the presentation, there are 2 vessels sitting with our sponsor right now plus another 4 under construction. And we have repeatedly said that we will look to realize those growth opportunities as and when we can access growth capital at a cost that makes the transaction accretive. It's imperative that the yield of any instruments is at a level that facilitates a positive carry. Otherwise, we can't justify the transaction, and we will be better off foregoing the opportunity. While we were thrilled to have completed an accretive drop-down at the end of 2020 without issuing equity, we've demonstrated over the course of 2021 thus far that we are not compelled to accommodate drop-downs if doing so would not be in the best interest of our unitholders even when such drop-down candidates are on contracts and ready to be dropped, as is currently the case. At the present time and whilst we've not made a firm decision, we believe that we're unlikely to acquire a new vessel in 2021. When the price is right, our preference has always been and remains to do a tried-and-tested block equity issuance, but we also have options with more private preferred units through our ATM facility or an internally financed acquisition using cash and debt like we did last year. We're pleased to have a diversity of options available to us, but it really just come down to finding whatever course of action best serves unitholders. Some capital we have raised through the MLP market, indeed around $670 million since our IPO, but the majority is raised through bank finance. And we have a very bankable strategy. modern advanced vessels on long-term contracts, first-class charters, lower charter rate volatility in our particular market at least. Our safety record and reputation also stand out. And by consistently performing and honoring our commitments, we have never experienced any issues in attracting lenders with favorable tenors, leverage ratios, margins and flexibility. As some of you will know, we recently closed a new 5-year $345 million senior secured credit facility in respect to the refinance of 5 of our vessels that there is interest at LIBOR plus a margin of only 2.5%. Separately, we also extended the maturity of one of our $25 million unsecured revolving credit facilities. We now have no refinancing due until the third quarter of 2023. KNOP today in our view still has scope to increase its leverage, but we'll only do this if it's prudent, if there's a need for the funds, if the pricing is acceptable and if it fits with our policy of paying down debt, meaning, in essence, that any increase in leverage would only be temporary. KNOP today has 15 active lending banks. There are many more across the Knutsen and Knutsen NYK groups, as shown here. You'll see many top-tier institutions, and all are active in the maritime space such that they are experienced lenders. This is important as the debt finance that KNOT arranges for its newbuilds typically transfer down to KNOT when the vessel is acquired by KNOP. Moving to ESG. This is something that KNOP takes seriously. We firmly believe that efficiency and the environment, acting responsibly, taking care of our people and following good governance practices also brings better financial outcomes. So why wouldn't we be interested in this? KNOP with and through KNOT is party to a range of industry accords and organizations that upholds sustainability principles, good governance and anticorruption practices. New developments like the Poseidon Principles are also welcomed by us, where they further support the distinction between those that want to lead and contribute and those that are not yet prepared to do so. Just to the avoidance of doubt, we place ourselves in the first category. The global shipping fleet is facing rising costs associated with its operations, but with a relatively young fleet and a proactive approach to all the upcoming changes, we believe KNOP is well placed to manage the risks and changes that are coming. Even before ESG became so prominent, KNOP and KNOT were looking at, for example, managing operating speeds, optimizing fuel consumption and also looking at ways to improve fleet maintenance. As again, we recognize that this is also compatible with the business. We, of course, recognize that in the very long term, industry and government decarbonization targets and peak oil scenarios are likely to transform the oil and gas industry. However, with oil deeply integrated into our lives in all countries of the world across the energy and nonenergy economies, shuttle tanker-serviced offshore energy is expected to grow and take market share from other forms of production, even in scenarios of aggregate oil production declines. Of course, there are challenges for our business in the future as there are for all of us, but we're managing the short and midterm risks through proactive initiatives and capital assessments. And we believe that in the long term, our business remains robust and impact will grow rather than shrink. All of this has resulted in incredibly stable and attractive returns to our unitholders since 2013. In just over 8 years, we've returned over 78% of our initial IPO price of $21 as distributions to our unitholders. In that time, we sought to be both transparent and do what we say we will do and worked tireless for our unitholders to produce a stable income stream. As our Chairman has indicated, other than safe operations, the maintenance of this crowd distribution record is our main objective going forward. And whilst John Einar had set out the challenges that are in front of us, we believe as the market leader and with our depth of experience, we'll be able to move beyond these and ultimately take advantage of the growth opportunities that you saw outlined in Rystad's presentation earlier. So what does the future look like? We want to sit with our reputation for being open, and I can say candidly, that the coming quarters have a higher concentration of rechartering needs than we've seen previously at the partnership. And as such, there will be more potential for variability in our quarter-by-quarter cash flows. However, outside of safety, as I've said, our #1 priority of our distribution, very closely followed by vessel utilization and cash flow stability. We believe there are many factors in market data as have been outlined today that are in our favor to allow us to ride out any upcoming bumps in the road that might affect our coverage. And within the longer term, we'll see significant growth in demand for shuttle tankers. This growth outlook is backed by announcements and CapEx commitments already on public record made by all companies. As just 2 examples I can point to the flurry of FPSO orders coming to Brazil in the next few years and the stated strategies of Petrobras and Equinor investing in projects where the breakeven of no more than $35. This is then backed up by the analysis from third parties like Rystad Energy here today. And we fully intend to follow the same principles that have brought us success over many years. And although as the Chairman said, we would never suggest to knowing the future, we do have short-term liquidity and good coverage today that would also provide support through the near term should we require it. And in my opinion, importantly, the interest of the sponsor continue to be aligned with the interest of the unitholders, partly as the sponsors own still a very significant portion of our common units. We will continue to target high scheduled utilization, but in the current capital market environment, on balance, as stated earlier, we think it's unlikely that we will acquire a new vessel in 2021, but no final decision has yet been taken. What we also know is that the market is quite dynamic in turning and can turn in our favor more quickly than perhaps we envisaged today. There's confidence within our customers' organizations increase and they become aware of the potential to be caught short of tonnage in the future. So in summary, we're taking all the measures available to us to provide additional contract cover and certainty in the medium term. And we're optimistic in our ability to find employment for our open vessels. Recalling that today, the vast majority of the global fleet of shuttle tankers are still operating under long-term contracts and are not available. As we move beyond that midterm period, our expectations for the business become increasingly optimistic with a great deal of opportunity and growth still ahead of us. So I just want to finish by very quickly summarizing our investment case. This slide is being used in our earnings call previously, but for those that haven't seen it before, I think it's useful. We issue 1099, not K-1s to our investors. As you've heard today, our sponsor is hugely experienced in our industry, and we're the #1 in our market. We operate infrastructure that's critical for our customers that has limited replacement risk. Our vessels are modern and very flexible in their operation. There are high barriers to entry in the shuttle tanker market. We have strong contractual counterparties. Our contracts are fixed rate and do not vary with the short-term commodity prices or vessel utilization. We focus on the long term and target stability. No vessel accounts for more than 10% of our EBITDA, helping to derisk our revenue. We have access to a wide pool of lenders and attractive finance terms. And so while that's a really quick summary, I hope it gets across some of the benefits that we are able to enjoy in our business. And with that, I'm going to turn it over to Bryan Degnan, who's going to say just a few words on our increased IR activities. Bryan?

Hi, everyone. As Gary mentioned, my name Bryan Degnan, I'm Managing Director at the IGB Group, an investor relations and strategic communications advisory firm. Gary and the team at KNOP brought us on board a few quarters back to see how the various tools and perspectives fall into the IR umbrella can be brought to bear on some of the unique challenges facing KNOP. Well, what we do is often largely behind the scenes in IR. In light of the fact there's been a topic of interest for KNOP investors for some time now, Gary asked me to spend a couple of minutes summarizing for the audience how KNOP and the IGB Group have been working closely together and just what it is that we've been working on, which I'll briefly summarize here. So overall, We aim to bring a proactive holistic approach to IR at KNOP and specifically at key communications challenges facing the partnership in the capital markets. We've aimed to establish an unvarnished, up-to-date understanding of prevailing investor views, concerns and expectations for the partnership. My colleagues and I have interviewed a good number of you who have joined today's event, some of you on multiple occasions. We appreciate the candor with which you've shared your views. We continue to retest those understandings and assumptions in light of the passage of time and events both internal and external to KNOP. We then try to make sure that everything that the partnership conveys to the world is responsive to those concerns and expectations to address any requests or issues that are addressable and to ensure that management and the Board consistently have a firm understanding of where the investors stand. We also aim to remove barriers to entry by utilizing clear, direct materials and messaging. For a company with direct -- sorry, without any direct public theaters and with limited outside visibility on the business beyond what KNOP itself puts out into the world, it was pretty quickly apparent to us that the most fundamental IR challenge we face here was not defending or explaining some particular aspects of the business or its prospects, but rather than investors might see this as being too much of the time commitment to ever establish even the baseline understanding of the company and the investment proposition. So with that in mind, we've been revamping and expanding essentially all of KNOP's communications, including the investor presentations, press releases, quarterly earnings materials to be as clear, compelling and accessible as possible. A revamped website is in the works as well, and you'll see a social media presence emerging here in the near term as well, trying to take all angles here. I'm optimistic that those of you following the story quarter-to-quarter will have found that it's got easier in recent times to quickly grasp what's happening at KNOP, what the partnership is focused on and what that means for you as the investor or potential investor. And to the extent that hasn't been the case, I encourage you to reach out to me or my colleagues at IGB to let us know. Our contact is there at the bottom of the slide. We aim to introduce KNOP story to a wider audience of engaged institutional and retail investors as well as sell-side analysts. So with the updated messaging and materials in hand, we been conducting more direct outreach to investors in the form of non-deal roadshows, opportunistic one-off meetings, expanded conference participation and regular engagement with both covering and non-covering sell-side analysts, a number of whom have joined us here today. Clearly, there's great value in having a robust sell-side coverage group. And while KNOP is cognizant of being in the business that's unique and where there aren't a dozen other public companies doing the sort of same interchangeable thing, the partnership is determined to lower the barriers to entry for the sell side in the same way as we have for the buy side, and all efforts are being made engagement with the sell side with the goal of both maintaining our current coverage and also securing additional coverage over time. We're aiming to deepen the discourse as KNOP is more than just a yield. While obviously, KNOP's yield is an important component of what it offers to investors, we've been working hard to bring more attention to the actual business and how it works, the stature of and benefits derived from the sponsors, the strength of the balance sheet, the extent of stability inherent in the time charter and bareboats contracts, the drivers and fundamentals underlying growth prospects and on and on. That is, we want to provide investors with both the market context and the conceptual framework with which to really understand development of the partnership. Also more fully appreciate what KNOP is, does and aspires to. What investor doesn't fully grasp about a company, surely can't very well be expected to incorporate into a model or evaluation. So we see it as the role of IR to put that information out there in a way that you as investors can put to use. We remain engaged with the investor community, keeping KNOP top of mind and making sure that we know what's important to current and potential unitholders. We know that not every company or security is right for every investor, but what we can do is to make sure that everyone who should be considering an investment is given every opportunity to do so. And also that anyone who isn't considering an investment isn't making that choice due to a misunderstanding, a lack of transparency or simply never having heard the investment story in a way that makes sense to them. On that basis and with today's events and both the scale and makeup of the attendance as strong evidence, I'm comfortable in saying that good progress is being made here with more to come. And with that, I'll turn it back to Gary.

Thanks very much, Bryan, and to all our presenters for today's materials. I very much hope that everybody has both learned and refreshed their knowledge in our business in a positive way, and we very much appreciate everybody's time. I would just note that we have included a few more slides as appendices to this presentation that will add to what we've talked about today. Also, the slides from today's presentation will be available on our website with the Fearnleys and Rystad slides also available as separate files. Then I think we can move on to questions, and I see we've received quite a lot over the course. So Bryan, first of all, back over to you as host for this section.

Thanks very much. So we've gotten a number of questions in here over the online feed, trying to check with our operator, April. April looks like we've got a couple that have dialed in as well. If you could please just go ahead, giving instructions for anyone who has dialed in who needs to queue up, and then we can go ahead and take the first question from the phones.

Okay. [Operator Instructions] And our first question is from Liam Burke with B. Riley.

I had a question on fleet utilization rates. You'll have 4 vessels operating in the spot market during periods of 2022. Obviously, the longer-term charter has created a very high utilization rate. How much do you think the spot -- participating in the spot market will back off those utilization rates?

I think to the extent that utilization is about how much we're utilizing the vessel, at the moment, there's some gap periods in '22, '23. If we are able in the tanker rate market, the rates in the tanker market are to increase, that becomes an option for us to boost our utilization. So I think at this stage, as John Einar was saying previously, we target long term first. If that's not available, we'll look for midterm. If that's not available, we'll look for short-term time charters and only then really if need be, we'll go and look in the spot market. So I think there are various options available to us to try to make sure that our utilization stays at a high enough rate going into 2022. We have acknowledge the challenges as we sit here today. But yes, we've got some options available to us, and we're being proactive as much as we can to resolve those.

Okay. And you touched on mostly subject as we went along with the presentations. But presuming the equity markets are in your favor, how do you look at capital allocation? Is your #1 priority in a favorable equity market to add vessels? Or would you think about reducing yet on a faster pace? Or is there a thought understanding you have a very, very high unit payout yield to raise the payout?

Yes, that's a great question. I think from our perspective, let me address the debt question. We already paid down our debt at quite a speed. We're quite comfortable with that. And given the price of our debt, we probably wouldn't prioritize paying that any faster. I think from an acquisition point of view, we look at the whole market and our own cash flow position and the liquidity and the accretion of that vessel before we make a decision on that. And I think from a distribution point of view, yes, we look at the yield, we look at the markets. We're out there trying to attract equity ourselves just as lots of other companies are. And if our yield is at a certain level and comparable or we believe higher than other companies and we don't necessarily feel we deserve that, then perhaps the distribution is right in terms of where it is. So I think today, we almost look at the acquisition of a vessel and the distribution question as being almost 2 separate questions in a way. I'd probably park the debt question off to the side a little bit for the reasons I've just said. But yes, I think in terms of priority next year, we will look at our distribution, first and foremost. That's our #1 priority, as we've said a couple of times today. And I think after that, yes, we've looked to grow the MLP. I think that is what allows us to look to the future and the growth of both the MLP itself and also in the future, the distribution too.

And may I just ask one more on the dropdowns -- on the potential dropdown?

Sure.

All of the potential dropdowns are -- have long-term contracts associated with that vessel. How much insight do you have on the return potential of those vessels ahead of time, understanding who the contracts are with and what the terms are?

Yes. As KNOP, we've got some information on those vessels. Clearly, KNOT has to share with us in order for us to be able to evaluate the potential acquisition in the first instance. So when we get into a position where we feel that we're able to finance that acquisition, whether it's internal funding, whether it's equity, whether it's ATM, at that stage, we go through a process, and we receive all of the information from KNOT at that point, and we appoint the independent external financial advisers to help us with that. Initially, as we sit here today, we know there are sort of fair bones of what those deals are. I think it would be -- it wouldn't be fair of me to say that we know nothing about it. And I think the returns clearly depend on the price we pay for the vessel, so it becomes a financial exercise at the time. The first thing for us is to get the ability to finance that acquisition in place first, and then we look to acquire it. And obviously, if it's not accretive, if it's not adding to the partnership once we've done that work and once we've gone through that process, then it's not something that the Board here could support. So we have a right to purchase vessels from KNOT, but not an obligation.

April, we can take the next dial-in questioner, please.

Your next question is from Patrick McElroy with ClearBridge Investments.

Yes. The in-depth presentation on the shuttle tanker market has been very helpful. So much appreciate it. You mentioned throughout the presentation as well as the previous caller about the several vessels that are coming off long-term charters over the next couple of years. I was just wondering if you've had preliminary discussions with -- on potential new charters on these vessels and what the rates or terms might look like. And if they are going to potentially be contracted under mid, short or spot contracts, how might that impact your cash flow? And would it potentially have any impact on your distribution?

Yes. Good to speak to you, Patrick. Thank you for your kind words on the presentation. I think in terms of the rechartering, perhaps John Einar come in, in a moment as well, but I think the key for us is that there are probably only -- it's a small market. There are not that many customers for us, and we stick to them very regularly there needs change, depending on their production profiles and their own internal situation as well. And I think from our perspective, we always target the longest possible data. But equally that does also depend on the rates. And perhaps John Einar will be able to say a few words on that interaction between charter length and rates and where we are today. But I think the situation is very difficult for us to give certainty on today. We've tried to explain how this market works. But let me bring John Einar in here, and he can perhaps just tell us a little bit about some of the things that go into affecting a charter rate for a vessel that's coming off charter and how we go about talking about that with our customer.

Yes. Thank you, Gary. As you could see from our presentation, we have some gaps there in part of our fleet and then we have been able to secure future commitment for those vessels. And the way we do it is that basically, we see what's out there in the market and we talk to our clients constantly. The rates you are able to get is very much depending on the newbuilding prices because it depends on how long for what you're fixing. I mean if you're fixing more than 2.5, 3 years ahead, and then, of course, they can build new ships. And this is the situation in the shuttle tanker market, that it's more reflecting the newbuilding prices than other competitors. Because as you saw, it's a very -- it's a slim market. So there are a few ships out there. But of course, it all depends on timing. And it's very hard to say what the rate can be next year. It's easier to say what the rate can be in 2, 3 years' time because then you have the newbuilding prices from the yards and then you can see how much money you need to do a newbuilding. So we are constantly looking for new volumes, and we have our existing fleet, and we try to make it attractive for our clients to utilize existing vessels rather than to go and build new ones. So I mean this is a constant battle and to try to find out what the needs are and also try to use the vessels that we already have in service. So -- but we could be lucky. I mean next year, there could be a few people asking for short-term chartering. And we have seen that before, and we have done very good business, [ mostly MLP ] with having idle vessels because they -- it could be that somebody needs ships on a short notice. So it's very hard to predict these things.

Yes. And I think I just -- yes, I'd probably just add to that a little bit as well that the rate is a discussion at a point in time, and I've sort of said this on some earnings calls before that to the extent that a charter needs a vessel, depending on how long they need it for, a vessel may or may not be available. And given the consequences of our customers not lifting their cargoes, it's vital that they have tonnage when they need it. So to some degree, that's our big question, to understand the requirements of our customers. That then informs us quite clearly where we think they are sitting in terms of their need and hoping to get tankers.

Okay. Yes. Just curious also, it seems like inflation is showing up in all aspects of business. Are you experiencing higher vessel operating expenses at this point?

I think that's definitely something that we're seeing a little bit of. I think our purchasing department is on the ball in terms of sourcing, et cetera. We've seen higher costs as a result of COVID around transporting our crew around the world and the logistics around spare parts and maintenance. I think at the moment, we're not seeing increases that cause us too much concern. Of course, it's not good. But yes, I think we're expecting that things will sort of settle back down in due course as the global economy opens up again and costs become a little bit cheaper. So I think to answer your question, in place as we're seeing it, but actually, overall, probably no more than others.

Okay. And then lastly, I was just curious, you announced the $100 million ATM last quarter. Were there any units sold on that ATM so far?

I'm not sure my lawyers would be too happy with me answering that verbally on this question. If you don't mind, I'm going to defer that to our Q3 earnings, which is not that far away now.

So we've got some more dialed in. I'm going to -- just for the sake of those who have put in questions online, I'm going to take a couple of those real quick and then we'll go back to the phone. So unsurprisingly, a lot of the questions coming in are around the same kinds of topics that you might expect. That is, how quickly do you expect to grow in the next -- in the near term, medium term? And how do you access capital to grow, particularly if equity yields in the space stay high? So you mentioned this a bit in the presentation, if you could talk through it just through the thinking around it a bit.

Yes, of course. I think where we're at is similar to where we've been for quite some time as an MLP. We're here to pay our distribution, and we're here to grow if we can. And I think that second leg has obviously proven difficult for not just us but also for other MLPs as well. I think in terms of the position of KNOP, I think it's been very well supported by the sponsor. I think we've not been under undue pressure to think about or action any drop-downs when really, it's not been the right time. I think, obviously, that has allowed us to be a little bit boring, if you like, for the last few years. We managed to do the one drop-down last year, which is great. But before that, we obviously didn't do a drop-down for quite a while. And I think we're in a position with long-term assets, where we're not forced to do anything. Things move in cycles that we are of the mind that the market will come back. We've got a good business. We keep trying to be out there in the market telling people about it and explaining why we've got a strong balance sheet, why we think we can continue doing what we've been doing for the last x number of years. So I think we'd like to grow. We've got options on the table if the capital markets do come back. And then I suppose the other point to make is that we do have the option of looking at more private preferred or even public preferred, but probably a private-preferred transaction similar to what we've already got today. I think for us, that's not our first preference, but that may be something that starts coming higher up our list of possibilities if the public equity markets sort of stay where they are today. I think we want to grow the MLP and we want it to be both successful, but also providing that extra security and stability that those extra vessels would provide to us.

Another question here. Just asking for a bit of insight into -- I guess, John Einar touched on this a bit, but timing. So rechartering cycles. What -- can you give a sense generally of what that looks like? When you would expect conversations to proceed to what point? Just sort of maybe in a generalized context with the idea that there are some coming up for rechartering next year?

Yes. I'll let, again, John Einar talk about timing as well, but that's such a tough question. Forgive me for repeating a little bit what we've said already. But we're in discussions with our customers all the time. There aren't that many of them. There aren't that many people supplying shuttle tanker tonnage in the market either, which is why we're a little bit reticent to some degree to give out individual numbers and individual discussions with individual customers. I think we could find that we get vessels fixed tomorrow, we could find that it ends up being a month after they've already come off charter. We just -- we don't know. Whilst I say we don't know, I don't want that to come across negatively in terms of possible way that you could read into that. We're being as proactive as we can be. Our customers need vessels. Of that, there's no doubt. And we have vessels. So at some point, we are going to fix them, and we are going to find business for them. And I think from our perspective, I'll maybe hand over to John Einar, see if he's got anything to add to that.

Thank you, Gary. No, I think you're right. We constantly are looking for new work for our ships. And of course, some of them are coming off contracts, but very often, our clients have options. And they don't let their options go before they have to. So sometimes that could be 6 months ahead of contract expiry and it could be 3 months ahead of contract expiry. So this timing thing is an ongoing fact actually. You're constantly looking for new jobs, and we have a flexibility in our fleet. I mean KNOP have some contracts that is like 5 years. But already, we have had ships redelivered. So we have ships on shorter contracts, and that has given us a lot of opportunities. I mean if you have ships able to do bridgings, that has secured longer contracts for us because sometimes the clients need a vessel in 1 year time, and it takes 2.5 years to build one. So this is like an ongoing thing that we look at all the time, and there is no fixed answer to this. It's a daily work that we perform.

Got it. All right. So we've got -- April, we've got another dial-in question. If you could take that, please.

Your next question is from Richard Diamond with Castlewood Capital.

Just to note a day when energy and shipping stocks are selling off, KNOP is holding in beautifully. And I just mentioned it because there's a lot of work that went into this presentation. And I want to thank you for -- I think it gives people confidence in the business, so thanks, everyone, for this day. Gary and others, could you talk about the moats that are inherent in the shuttle tanker business? What would stop someone just from deciding from one day to the next that they wanted to enter the business?

Yes. I think I'll hand that straight over to John Einar. I think he's probably the best person to answer even though I could.

Yes. It's not the easiest thing to do overnight. But as we all know, there is no such thing that people can't do the job that you're doing. So you must be able to face competition. But over the years, we have seen that it takes a lot of both capital and also about to stay in this business, it's very -- it takes a lot of experience, it takes hard work. And of course, to build ships on speculation, maybe ships costing 40% more than ordinary ships and not knowing whether you have business for them, that is -- that's a very risky business. And I don't think we have seen it so far, but we have seen newcomers that has decided to go into this market, and they have done so. Not many, but some has done it. And of course, that may happen always. So we have no guarantee that we don't see competitors going forward either. But this kind of business is a lot about regularity. It's the most important thing in offshore loading is regularity, regularity and regularity. It's like a floating pipeline. If you don't show up, they have to close their production and they are in big trouble. So if you cannot deliver every day, then you're struggling. So this is about relation and this is about regularity and it's about staying in this business for many years. So I don't see people building this on speculation.

Yes. I'd add to that as well that when you look at the cost implications, yes, you can convert a vessel. But I think we saw in one of the earlier presentations that -- and it has been done, conversions. But economically, it really doesn't make a lot of sense. You'd have to have a contract in place. But to have a contract in place, you really need to track record. So it's a huge commitment to come into this market. And the market itself is quite small. So in terms of somebody coming in and trying to grab huge amounts of market share, it would be incredibly difficult, I think, for them to do that.

And I have a second question along the same theme. If someone did want to enter the market or someone wanted new shuttle tankers, what are the delivery windows like? And how much more expensive would it be on a percentage basis than an existing shuttle, I think existing shuttle tanker? Just close enough for government work is perfect.

I think if I understand your question, Richard, a shuttle tanker price today has probably increased by around 15%, we believe, compared to even just perhaps a year ago. And that's as a result of the yard capacity really coming right down over the last months through huge amounts of ordering, both in containers and LNG. So our newbuild...

And my understanding -- go ahead, please.

No. Please, go ahead.

I was going to say, I just understand that newbuild availability, you'd be lucky to see something in the second half of '23 in more likely 2024 at this moment, but you're closer to it than I am.

Yes. Well, maybe Trygve would have a view on that. If you wanted a shuttle tanker today from the yard, what's the earliest you could get one, do you think?

I think actually, if we go into the market today, yes, we will have -- I mean, it's not so many shipyards, which can deliver such vessels. We're talking about 4, 5 shipyards, 3 in Korea and maybe 2 in China. And I don't think all of them can deliver within '24. So -- but okay, maybe some could deliver. And okay, we are also seeing -- actually, we are also working with LNG vessel and we have seen a hike in prices there. So we also expect that newbuilding from -- for the offshore loading investments that have a hike in price and be much more expensive. I also think that actually, to do any conversion today is not -- would not be a good thing. It would be too expensive. So we're taking the cost of the extra equipment and actually the -- also the specification has been a bit more difficult technically to start on conversion. So I will rule out conversion, and I would say that, okay, first, second quarter '24, you may have a delivery of our vessel for a couple of the 4 shipyards which could build, I think.

Richard, does that answer your question?

Yes, it does.

Great. So we've got a number of other questions here queued up from online submissions. I'll just run through them. So could you talk through a bit time line? If you think of your existing fleet -- sorry, I'm just trying to condense a couple here to a single question. Across the existing fleet, how do you think about the time line, the life span of a vessel? What happens over the course of shuttle tankers lifetime that maybe changes the prospects for that ship? How do you think about residual value more generally? So a lot in there, but broadly around the idea of how does it change over the course of the life? Walk us through the life of the shuttle tanker.

I think -- to try to give a general answer to that question, I think a huge amount comes down to the maintenance and the maintenance program and the quality that you give over to the shuttle tanker and the care of that vessel over its life. I think they operate in very harsh environments. They're very complex pieces of kits. There's lots of kits on board as well. So I think the maintenance side of it really is the thing that brings out the best in these vessels over the whole of its life. And I think that also then plays into the residual value. Obviously, steel price has a huge impact if you're going to recycle the vessel. But actually, if a shuttle tanker gets to 21, 22, 23 years old and there's an opportunity, then maybe it will be sold and continue to trade. And to the extent that the vessel is being well maintained over its lifetime to the high standards that our sponsor and KNOT do for us, then I think that is all for our benefit. John Einar, have you got anything specific to add on?

You cannot generalize. I mean we've sold ships that has been 27 years old and working as a shuttle tanker until the last -- its last day. And we have sold vessels being 25 years old, at least 2 of them, and we have sold vessels being 22, 23 years. So I mean, this all depends on the market there and then. Because if you need a ship and there are no newbuildings available, of course, you can continue trading these vessels. Quality-wise, there is nothing preventing them from trading. It's more a question of the oil company policy and so on and so forth. But also the oil companies, I mean, they will generally take the ships if you have the right quality. So -- but of course, if there are newer vessels available in the market, they go for the newest one first, but it all depends on the market there and then.

Yes. And I think we try to maximize our impact in the market by ensuring the quality of what we do in our maintenance. And our customers vet our vessels on a regular basis, and there are huge numbers of regulations and standards that we have to meet all the time for our vessels to be accepted by our customers in terms of carrying their cargo and also setting up at the fields. So without that level of quality throughout the vessel's life, we wouldn't achieve the utilization figures that we've got.

Okay. So this one, I don't know if I'll leave it to you, whether you want to answer yourself, Gary, or turn it to Trygve. But the sponsors ordered some LNG-fueled tankers, you see that as the way forward for this sector. Will everything in your fleet eventually be LNG fueled? And is there any possibility of converting the existing fleet to LNG fuel over time?

Yes. I think it's one tool for shipping to use. And certainly, those vessels are very modern and very acceptable in this ESG world where we are today, and we're very proud that we've got 2 of those at the sponsor level. And hopefully one day, we'll get them into the MLP. I think we tend to build ships that our customers ask for. So to a degree, I wouldn't describe our situation as passive. But obviously, we're not going to build a ship that a customer doesn't want. So if our customers under their own ESG banner or their own policies want clean, efficient LNG-fueled ships, then we're very happy to go down that route and build them for them as we have done for the 2 vessels that sit with the sponsor today. As for conversion, John Einar or Trygve, is it feasible to convert a shuttle tanker to run on LNG?

Well, everything is possible in this world. But of course, we are doing a conversion of the Bodil Knutsen, where we are installing a VOC plant. And this VOC plant will ensure that we collect the VOC vapor from the loading offshore. And this can be used as energy for discharging and so on. I believe more in that than to go for pure LNG. And as you heard was saying today, the LNG price is now 3x the price of crude oil. It's more than $200 per barrel equivalent. And it's going to be very interesting to see going forward what will happen with the LNG propulsion on ships. And of course, the difference between LNG and diesel oil is it's not of a magnitude. So it's more important to do something about the VOC at least on the shuttle tanker fleet, I think. But of course, like Gary is saying, we will build whatever the clients want us to build, and we try to be on the forefront when it comes to technology. So I'm not going to rule out anything when it comes to the fuel.

Got it. And I'm cognizant of time here, but let's try and do a bit of a speed round to get through some of these questions that are still here. I don't want to turn any away. And just to clarify, for those who have queued up, if you have a question in that we're not able to address, feel free to reach out afterwards, we can continue the discussion. But the next one here. Right. So the individual ship rates, you don't give day rates on a per ship basis for competitive reasons. But how should people think about what a "normal" day rate would be for a shuttle tanker? Where the market is currently compared to that? And where do you think it moves from here?

Yes. I mean I'll kick off the answer here and hand it over to John Einar, I think. But I think that's a little bit of a case of comparing it to if you walked into a motor showroom and decided that you wanted to buy a car, and those cars all over the place all at different prices. And it really depends what you want, what day of the week it is. There's a whole bunch of reasons that will affect the price that you end up paying. So anyway, I'll hand over to John Einar, who can give you a more scientific answer. But unfortunately, it's probably going to be the same level of generality as I've just given.

Yes. It's very hard to say what the rate should be for shuttle tanker. Because obviously, it depends on how many shuttle tankers are there out there today free to do the job. And I mean if you have the only shuttle tanker available in the world, then, of course, it will be a lot higher rate than if there were 20 idle ships waiting. So the -- like I said earlier, the rates of the shuttle tankers generally follow the newbuilding prices. That's the general thing and at least if you have the time to wait for the construction to happen. Because generally, the clients that need shuttle tankers, they are there long term. It's not like you need a shuttle tanker today and you're through with it tomorrow. So it's generally longer time -- longer-term business. So I mean, they can normally wait for a newbuilding to be delivered. And then, of course -- and that's what we see. That is why some of the ships are being redelivered, that even if they have options because they see that they can take benefit of a lower newbuilding markets. So they go in and charter new ships. And then the -- also for the oil companies, of course, it's extremely important to have competition. They don't want to see the likes of Altera and KNOP and KNOT, being the only ones able to supply this. So also, of course, you will always see clients out there to get new vessels built. But it very much depends on the situation there and then. And you cannot even guarantee that they will pay more for a shuttle tanker than a conventional ship if the market is right. We have seen conventional tanker market, Suezmax market being much higher than we are getting on the shuttle tankers. So these things, it's shipping. You never know tomorrow what the rates may be. So it's very difficult to predict.

I think the one thing that I would just emphasize, we've gone through a period where newbuild prices were very low and the yards were struggling. That's not the case today. And the timing for us works quite well. We've got our vessels coming off charter, coming into this next year when newbuild prices are higher. So that really helps us in our conversations with our customers.

Okay. So we've got a few different questions coming at this from different angles. But how do you think about capital allocation priorities? As you get cash in the door, are you looking to delever? Are you looking for growth? Are you looking to do buybacks? How do you think about using the cash you've got coming in the door?

Yes. I think, first of all, as an MLP, we -- I've said it several times, we prioritize the distribution. That's what this entity is about, so that's what we prioritize first and foremost. And I think the second thing we would try to prioritize, we think, is growth to the extent that it's accretive to the unitholders. I think I also mentioned earlier, we probably wouldn't prioritize deleveraging. We feel that the leverage that we've got is very comfortable today and, in fact, probably could be higher and still be comfortable given our access to the debt markets that we've got. So I think we put it in that order. I think we prioritize our distribution as an income stock. We prioritize growth probably next to the extent the capital markets are available to us or internal funds, if not. But equally, that then depends on making sure that we're making the prudent decision if we're using internal cash for an acquisition. So yes, I think those are the two main things. We've been asked about buybacks previously, and it's just not been the right time for us to do that. We've wanted to prioritize coverage and stability that, that coverage brings to the business. I think our investors really appreciate, I hope, the consistency, stability and coverage that we have been able to provide over the last year when some others have not fared so well.

So we've had -- this has also come in, in a couple of different ways. But looking out to the midterm, and you did mention this a bit during the presentation, but out over the midterm, call it, 2 years, what are the primary challenges you see? And to the extent this is something that we could address relatively briefly, how do you think about oversupply? And what that means in a market like this one?

Yes. I think our midterm we're on was on one of our slides in terms of where we talked about our what next. Clearly, our priority is rechartering of our vessels that are currently open in '22 and '23. And we've asked John Einar here specifically today to come along and talk a little bit about that and to try to reassure that we're doing everything we can proactively to deal with that challenge. I think thereafter, the financing side of the business is going to be quiet because we've just closed the refinance. We've got nothing else to do until probably maybe next year when we start a discussion about refinancing in 2023. So I think that's the biggest challenge for us is looking at that utilization and getting those recharters buttoned down. And I think as John Einar said in his presentation, we're not expecting those sort of intermediate gap periods to be all or nothing. So where people are perhaps looking at a gap period and thinking, well, that's just zero revenue. That's not our expectation. It may not be employed or a vessel may not be employed every single day in that gap period, but our expectation is that we will find some business for those vessels during those periods. Sorry, Bryan, did I cover everything there?

I think so. Yes. I will just end off with another -- just a couple here and we'll call it a day. But this is an interesting one. So as depressed as certain parts of the offshore sector have been in recent years, and given your positivity on future prospects with KNOP, and I imagine this will be KNOT as well, the question. Consider investing in offshore assets outside of shovel tank, FPSOs, drillships, OSVs, et cetera. How do you think about diversification? And then, I guess, the potential of dropping that into KNOP.

Yes. I think at the moment, that's not something that is on our radar really. It's not really the business of our sponsor, that side of the offshore business. KNOT is a shipping company, LNG, et cetera, as we saw earlier. I think we've been asked the question previously about whether or not we would put LNG vessels into the MLP. And I think our position has stayed pretty constant in that we found benefit in this MLP being a transparent, easy-to-understand single asset class entity. And we still think that's probably the right answer for us. So I think at this stage, whilst it's an interesting concept and we would never say never, it's not something that we're looking at right now.

Okay. I think that actually -- that wraps us up for the Q&A section. Again, for anybody who had a question that either wasn't answered or hasn't occurred to you just yet to ask, feel free to reach out. We're here to engage with you. So let us know, we're happy to continue the discussion. But for purposes of today, I think I'm going to hand it over to Trygve and then potentially, Gary thereafter, for some closing remarks. Trygve, you can go ahead.

Thank you, Gary. And I just want to say thank you to all of our investors, past, present and hopefully future investing in the KNOP and believing in our story. We believe we have provided great results since we started the IPO, and we'll be doing our best to continue this going forward. I'm quite sure we will and that we will succeed.

Thank you, Trygve. And look, thank you to everyone who's presented and joined and giving us their time today. Our third quarter results will be out in November as per our usual timetable. And all that's left is for me to wish everybody a very good day, and thanks again and goodbye.

This concludes today's conference call. You may now disconnect.