Good day and welcome to the KNOT Offshore Partners Second Quarter 2020 Earnings Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Gary Chapman, CEO. Please go ahead.

Thank you. Welcome, everybody. As always, the earnings release and slide presentation are both available through our website. KNOT Offshore Partners owns and operates shuttle tankers where our ships transport oil from offshore production units to shoreside and are an essential part of the supply chain for our customers, all of whom are large names in the oil and energy market. Our call today will include the non-U.S. GAAP measures of distributable cash flow and adjusted earnings before interest, tax, depreciation, amortization, EBITDA. The earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. And please remember that any forward-looking statements made during today’s call are subject to risks and uncertainties. These are discussed in our annual and quarterly SEC filings. Actual events and results can differ materially from those forward-looking statements, and the Partnership does not undertake a duty to update any forward-looking statements, and I refer you to slide 2 and our 2019 20-F for further details. Onto slide 3, Q2 2020 Financial Highlights and Recent Events. We continue to operate our fleet without any material disruption as a result of COVID-19, and you will find more information in our earnings release related to this topic. I think it’s worth saying that we’re reporting this quarter one of the best sets of results of the Partnership. We generated total revenue of $70.3 million, operating income of $33.4 million, and net income of $21.7 million, and more comparably quarter-by-quarter, adjusted EBITDA of $55.8 million. We ended with distributable cash flow generated of $30.7 million, giving a coverage ratio at the end of the quarter of 1.70 times. And we again maintained our cash distribution of $0.52 per common unit, returning an annual yield of remarkably around 16%, based on a $13 unit price. During the quarter, the fleet operated with 99.7% utilization for scheduled operations. There were no drydocks this quarter and none are planned for the remainder of 2020. Shell, in the end, chose not to exercise their option on the Windsor Knutsen. And while the vessel is still with Shell today, we expect that it will be redelivered to the Partnership sometime between mid-September and mid-December 2020, according to the redelivery provisions in the charter. The Partnership is currently looking at all options to recharter the vessel, and we’re talking to a number of potential parties, including the sponsor. On slide 4, the Income Statement. For the second quarter of 2020, we recorded total revenues of $70.3 million compared to $67.2 million for the first quarter of 2020. The increase is almost entirely related to the effect of Raquel Knutsen’s scheduled drydock in the first quarter. Vessel operating expenses for the second quarter of 2020 were $13.1 million, a decrease of $2.5 million over the first quarter of 2020. This decrease was mainly the result of lower operating expenses across the fleet in the second quarter and favorable movements in the Norwegian krone to U.S. dollar exchange rate. Depreciation was essentially flat at $22.5 million for the second quarter compared to $22.4 million in the first quarter. Similarly, admin and general expenses were $1.3 million, compared to $1.4 million in the first quarter. Overall, this caused operating income to rise to $33.4 million in the second quarter, compared to $28.4 million in the first quarter of 2020. Interest expense for quarter two was $8.5 million, a decrease of $2 million from $10.5 million in quarter one. The decrease again being driven by lower LIBOR on average across all credit facilities that are not hedged. Realized and unrealized losses on derivative instruments were $3.1 million in the second quarter, compared to a loss of $23.7 million in the first quarter. The unrealized non-cash element of the mark-to-market loss was $2.8 million for the second quarter of 2020, compared to a loss of $23.9 million for the first quarter of 2020. Of the unrealized loss for the second quarter of 2020, $3.5 million is related to a mark-to-market loss on interest rate swaps due to a decrease in U.S. dollar rates, and a gain of $0.7 million is related to foreign exchange contracts. Slide 5, Adjusted EBITDA. You’ll see an incredibly consistent adjusted EBITDA on this slide. In the second quarter, the Partnership generated adjusted EBITDA of $55.8 million, compared to $50.8 million in the first quarter. The difference again arises mainly as a result of Raquel Knutsen’s scheduled drydock in the first quarter. Adjusted EBITDA is a proxy for cash flow, referring to earnings before interest, tax, depreciation, amortization and other financial items. And please do refer to the notes at the bottom of this slide. Slide 6, Distributable Cash Flow or DCF is another non-U.S. GAAP financial measure and another very consistent measure for the Partnership. DCF was $30.7 million in the second quarter in comparison to $24 million in the first quarter. And the distribution cover at the end of quarter two, as stated, was 1.70. The increase over the first quarter relates to Raquel Knutsen's scheduled drydocking in that first quarter, but also to our capital management of the business helped also by some favorable shifts in interest costs and exchange rates. In the quarter, we again maintained our distribution level at $0.52 per unit, equivalent to an annual distribution of $2.08. Please do refer to the notes at the bottom of the slide. Slide 7, on the Balance Sheet. At the end of the second quarter, the Partnership had $70.1 million in available liquidity, which consisted of cash and cash equivalents of $41.4 million and we still retain $28.7 million of capacity under our revolving credit facilities. The revolving credit facilities mature in August 2021 and September 2023. Otherwise, KNOP has no other refinancing falling due until the end of 2021. The Partnership’s total interest-bearing debt outstanding as of June 30, 2020 was $960 million, down from $984 million at the end of the first quarter of 2020. The average margin paid on the Partnership’s outstanding debt this quarter again stayed as last quarter at approximately 2.1% over LIBOR. At the end of the second quarter, the Partnership had entered into various interest rate swap agreements for a total notional amount of $627 million, down from $634 million at the end of last quarter to hedge against the interest rate risks of its variable rate borrowings. Based on this in this quarter, we received interest based on three or six-month LIBOR and paid a weighted average interest rate of 1.74% under the interest rate swap agreements, which have an average maturity of approximately 3.6 years. We don’t apply hedge accounting, so our financial results are impacted by changes in the market value of these financial instruments. However, cash flow is stabilized by them, mitigating interest rate risk on distributable cash flow. Slide 8, an update on our long-term contracts. For the Windsor Knutsen, as stated at the outset, Shell in the end chose not to exercise their option of the Windsor Knutsen. And we expect that the vessel will be redelivered sometime between mid-September and mid-December 2020 in accordance with the flexible redelivery provisions in the charter. These redelivery provisions are typical and just allow the charterer to complete the charter at an appropriate operational time rather than say, mid-voyage. The Partnership is currently looking at all options to recharter the vessel, and we’re talking to a number of potential parties, including the sponsor, not just for operations in Brazil, but also for potential deployment elsewhere. Bodil Knutsen is our largest shuttle tanker operating in North Sea and is still on charter to Equinor until May 2021. Equinor then have three further one-year annual extension options. Torill Knutsen and Hilda Knutsen both operate on the Goliat Field in the Barents Sea. After initial five-year terms on both vessels, the Hilda time charter extended for 4 more years to 2022, and then has further options to extend the charter by 3 more one-year periods until 2025. The charterer of Torill has taken two of its one-year extension options to extend the time charter until November 2022 and then has further options to extend the charter by two more one-year periods until 2024. Dan Sabia, Dan Cisne, Fortaleza and Recife Knutsen remain on long-term bareboat charters through to 2023 with Petrobras Transpetro. Carmen Knutsen and Raquel Knutsen are on charter to Repsol Sinopec until 2023 and 2025, respectively, and with options to extend until 2026 and 2030, also respectively. The Ingrid Knutsen is on time charter until 2024 with Vår Energi, with charterer’s options to extend by up to five more one-year periods. Tordis, Vigdis and Lena Knutsen are on five-year charters to Brazil Shipping, a subsidiary of Shell. These will expire in 2022, and the charterer has options to extend for up to a further 10 years on each vessel. The Brasil and Anna Knutsen are on charter to Galp Energia until 2022 with charterer’s options to extend up to 2028. At June 30, 2020, the KNOP fleet had an average remaining fixed contract duration of 2.4 years and an additional 3.9 years on average in charterer’s options, as you can see, all with strong credit counterparties. When the Partnership listed in 2013, charter renewals were a distant issue, but whilst they are now starting to materialize, it’s important to repeat that these renewal decision points are a natural part of our business. And it’s natural that our average remaining fixed contract duration period will come down. This is unfortunately highlighted more right now by the fact that the equity markets are currently not economically available to us to drop down the growing list of new business that our sponsor has contracted as we have done successfully in the past. What works in our favor, however, is our customers’ essential need for these assets as part of their supply chain, our market leading position, especially in Brazil, our sponsor’s 30-plus-year history in this industry, the age of our fleet, the technological stability that we see in the industry right now and into the foreseeable future, plus our willingness and ability to be flexible for our customers’ needs. Contracts in the shuttle tanker market are also still typically measured in years rather than days, weeks or months as compared to many other areas of shipping. We never give guarantees as to the future and in particular, the time charter rate for a charterers’ option or a new charter can be open for a level of negotiation. But we want to repeat our point that we believe the Partnership’s risk profile is not the same as a typical shipping company. All of these factors continue to make the Partnership remain positive about the future of our business and we’ve built up a strong distribution coverage ratio for these times of greater uncertainty. On slide 9, the sponsor, KNOT, now has seven vessels that could be dropped into the KNOP, beginning from around Q4 2020. These have an average fixed contract period of 5.6 years with an average of a further 8.1 years extension options. The acquisition by KNOP of any dropdown vessels in the future is subject to the approval of the Board of Directors of each of KNOP and the sponsor, KNOT, and there can be no assurance that any potential dropdowns will actually occur. In reality, it is not possible for the Partnership to consider purchasing all of these vessels in today’s market. And indeed, it’s too early for some in any case. However, we are exploring options as to how we might be able to purchase one or even two vessels from the sponsor, without issuing new common equity and without putting undue strain on the Partnership’s liquidity. More specifically, we’re currently looking at how we can achieve one dropdown in the fourth quarter of 2020, perhaps December. But, it remains uncertain at this time whether this will be possible. What is clear is that if the market does begin to change for the better, then the Partnership is well-positioned to grow. On slide 10. The next following slides are all taken from external sources which we feel give investors a slightly more independent view than simply presenting information solely prepared by management. This first slide provides some background information on the situation in Brazil, and we think demonstrates the resilience of the Brazilian market in 2020. And whilst we’ve seen a dampening of output and growth, growth and economic development are still expected. All of this will have a knock-on effect for shuttle tankers and our commercial outlook. And whilst we’re not contractually expressed to oil price, volume or storage risks in our charters, these are some of the kinds of reasons why the Partnership remains upbeat about the future. On slide 11, the purpose of this slide is to show the estimated oil production development in Brazil for shuttle tankers and how, despite some potential delays, the trajectory remains positive. While we believe the number of barrels today shown here for 2021 and beyond are quite conservative, we do agree that the gradient of the red line was quite representative before April 2020, whereas the blue line today is perhaps what we expect across the coming five years. What we also believe is that, should the economic situation improve, then not only is Brazil well-placed to capitalize, but we do not think it would take much of an improvement for the shuttle tanker market to tighten again. Slide 12 shows similar data for the North Sea. And while the levels of growth are lower, we still expect this market to continue to grow over the next three to five years, and the demand for shuttle tankers to remain robust. On slide 13, this slide is perhaps best at showing why we feel there are strong mid to long-term prospects for shuttle tankers in the Brazilian market. Petrobras is still the dominant player in Brazil and has been selling a whole host of shallow and onshore assets in 2020 while reaffirming their commitment to the deep and ultra-deep wells, which have relatively low costs. We’ve seen increasing FPSO activity, and we’re seeing more involvement of Chinese players in the Brazilian oil market, which opens up a new area of activity. Indeed, our sponsor now has its first shuttle tanker contract with PetroChina. We’re not saying there aren’t challenges in the short-term with equity markets, a softer economic climate and sentiment towards energy and shipping, but we see the mid to long-term growth. As a business, and a leading and experienced entity in this industry, we’re doing all we can to ensure we navigate a stable path through the coming few quarters. Slide 14. In summary, we’ve reported a very strong quarter with a continued stable operating performance at 99.7% utilization for scheduled operations. Distributable cash flow of $30.7 million with coverage of 1.7, giving the Partnership a degree of flexibility to manage potential short to mid-term headwinds. We maintained our quarterly distribution of $0.52 for the 20th consecutive quarter. Our operations have remained largely unaffected by coronavirus, and we’ve been taking steps, like many companies to keep our staff and crew safe while working. We’re not exposed to short-term market turbulence, such as short-term fluctuations in oil prices, volume of oil transported or global oil storage capacity. We’re seriously considering financing options to take one new vessel from the sponsor without issuing new equity to strengthen cash flows and our contracted revenue stream, if we can. While we acknowledge the uncertainties seen in the wider energy market and the higher degree of difficulty in accessing new equity, both of which may continue for some time, we believe the shuttle tanker market is resilient, and growth prospects remain strong over the mid to long-term, particularly in Brazil. That concludes my short presentation for today, and I’ll open for any questions. Thank you.

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

Hi. Good morning. Gary, just wondering if you could help frame the recontracting on Windsor for us. And maybe more specifically, it sounds like there’s a low likelihood where it goes unutilized in the short-term, just given the sponsor support. But maybe just if you could comment on the utilization outlook for the vessel and then also just around rate expectations or what would be an acceptable outcome for the Partnership?

Sure. Hello, Marc. You’re right. We are not considering the Windsor situation as pivotal to the Partnership’s fortunes right now. Shipping and shipping requirements, as you all know, are constantly changing for all of our customers. And we said on prior earnings calls, while this re-chartering ambiguity is perhaps new for KNOP, it’s not new for our sponsor who has been doing this quite successfully for over 30 years. So, we’re leaving it to our chartering department right now, and we’re waiting to hear what’s next for the vessel? The vessel is a good vessel. It’s approximately 12, 13 years old, and it’s performed very well. It’s high class. It’s a very big shipping tanker. We don’t consider it difficult to charge for it. But you’re right, it depends on the rates. I think we’ve seen competition coming into the market with newbuild vessels and newbuild rates. But as we said before, for a newbuild vessel, charterers are asked to commit for a minimum of five years, and often that’s quite a commitment for most charterers. So, typically for a shorter term charter, we’re able to ask for more than the bottom base rate newbuild price. And I think that’s pretty much where we are with the Windsor at the moment. Its current rate isn’t particularly high. We may end up taking a few thousand a day off it in order to recharter it. But, as I said at the start of this answer, we’re not really considering that to be a pivotal moment for the Partnership.

Got it. Understood. And then, assuming if it were to move to a different geographical region, would there be any, like, I guess capital costs incurred associated with maybe retrofitting the vessel to serve a specific customer? How should we think about that?

Generally speaking, I don’t think it will need anything. Obviously that does depend. The vessel, you may recall, went on charter down to Africa a short time ago when we did the swap with Shell and the sponsor. So, we know that it’s perfectly capable of going down there. It’s ice class, so it can operate in the North Sea, no problem. And generally speaking, if a vessel needs specific equipment, then that’s the charterers’ cost.

Got it. Okay. That’s helpful.

I think the one next point just to say is that the cost that we might incur could be a bunkering cost if we need to shift the vessel from Brazil to another region.

Understood. Now, regarding the dropdown, you indicated that the Partnership is considering one as early as the fourth quarter of this year. It seems there are specific conditions that need to be satisfied on the Partnership’s side to proceed with that. However, you also mentioned later that there may be alternative financing options available without entering the public equity markets. I am curious about the conditions you are looking for and what we should anticipate in regard to moving forward with the dropdown.

We’ve got two or three things on our table at the moment, which I won’t go into in detail. But it’s largely internally funded. It may have an impact on leverage, but not too much. We’re paying down our debt. We’re overpaying on our debt. We’re paying approximately $80 million a year on our debt repayment. So, coincidentally, that’s roughly equal to our distribution. I think what we’re looking for is to make sure that we don’t put undue stress on the rest of the whole partnership and our business just in order to take a dropdown. We operate to payout and to pay our distribution and to run the business conservatively and stably. While the numbers need to work and the deal needs to stand on its own feet, if the deal itself risks damaging the Partnership, then we won’t do it just yet. But at the moment, the ideas that we’ve got don’t do that. If we can pull them off, we may be able to do it. But, as I said, we’re certainly not there yet. We’re really just at the early to mid-stages of looking at these ideas and putting them in place. But we do have some realistic ideas for internal funding. I say that we’ll operate it on a prudent basis. What it doesn’t do is really solve our longer-term problem. But let’s take one step at a time.

Great. That’s helpful. Thanks for the time.

Yes. No problem. I’d just add as well. Obviously any transaction will go through our conflicts committee. And that organization, that body is designed also to reflect upon the deal as a whole and to make sure we’re making a good decision with the information we have. So, I think that’s important to remember.

Our next question comes from J. Mintzmyer with Value Investor’s Edge.

Good afternoon, Gary. Thanks for taking my questions. And congrats on a fantastic quarter.

Thanks, J.

First of all, I think we touched on this earlier during the Q&A. With the Shell contract ending in October for Windsor Knutsen, it will affect Q4, right? Q3 appears to be mostly covered. Can you provide any sensitivity estimates on EBITDA or coverage? I know you spoke generally about the recontracting goals previously. Do you anticipate a significant decline in daily earnings, or might it be around a 10% to 20% decrease?

We debated whether to issue a press release regarding the situation with Windsor. However, the Board and the company decided that it wasn't significant enough to warrant that action. Additionally, we are currently in the midst of discussions. If you're asking about the impact on Q4, our best estimate at this time is that the vessel will be rechartered. Therefore, we’re not disclosing any negative aspects of Windsor at the moment. This isn't to say that it won't happen; we have those numbers internally. However, I want to reiterate that we don't consider the Windsor situation to be critical for the Partnership at this point. Our coverage is quite strong, and Windsor is just one ship out of a fleet of 16. So, there could be an impact if we do not recharter it or if there is a gap in contracts. Nevertheless, we believe we have a significant cushion before we would need to take any more serious actions.

I understand your perspective. I wanted to get more details, but I recognize that you’re currently engaged in negotiations, and we’ll remain optimistic. Regarding that, first, you have three more Shell-equipped shuttle tankers: the Tordis, the Vigdis, and the Lena. Are those in a similar situation, or do their contract structures appear to be significantly longer? Can we draw any conclusions from the Windsor situation, or is it entirely different in that area? Secondly, your next charter extension is for the Bodil Knutsen with Equinor, which I believe expires in May 2021. I assume there’s an option they can exercise, so I’m curious about the timeline for them to decide on that next option.

Sure. I’ll share what I know about Shell, which may not be extensive. Shell keeps their commercial strategies private. We perceive that Shell has a chartering strategy. Currently, they have eight shuttle tankers, reducing to seven once the Windsor is taken out. They have four more ordered with AET, bringing the total to eleven in the next few years. The supply-demand situation indicates they require eleven or twelve. However, to directly address your question, we don’t think that Windsor is connected to the Tordis, Vigdis, and Lena; it's a different scenario for Shell regarding the vessels' usage. I can say we're in constant communication with Shell, currently engaging with them. Our goal is to secure contracts for those vessels as soon as possible. If we can finalize them earlier, we will pursue that with Shell. Regarding the Bodil, it is with Equinor. We’re discussing the implementation of a VOC recovery plant system, which if approved, will likely require a longer-term contract as Equinor will invest considerable capital into the vessel. It is currently operating in Brazil, and we anticipate it may be moved to the North Sea at some point. We are maintaining close communication with Equinor and hope to receive updates by the end of the year. We expect the firm period according to the charter contract to conclude in May 2021, so we are optimistic about having clarity on that vessel before the year's end.

Excellent. We hope for good news regarding the Bodil, and we hope the Shell ships are not linked in that way. Shifting to a strategic discussion, I have two questions for you before handing it over. The first is about financing. You mentioned you're currently paying down debt. With LIBOR rates having dropped significantly, many of your peers are extending their derivative swaps at rates around 0.3 to 0.4 for terms of three to five years. That's a favorable interest rate environment. So, my first question is whether it's possible to increase leverage based on these lower interest rates, considering your total financing costs, including interest rates and debt repayment. Can we increase leverage to fund dropdowns? Secondly, how has the Board responded regarding further dropdowns? You mentioned there are seven available, and possibly one or two more. This expands on the first analyst question, but I'm curious to know what credit market indicators we should look for to facilitate those dropdowns.

I believe the short answer is that we are comfortable extending our leverage to fund dropdowns to a certain extent. There is a strong market preference for leverage to be around three times rather than four times. However, we feel that this is a generalized approach that may not apply to every company. Considering our cash flows and the amount of debt we are reducing, it seems reasonable for us to extend our leverage. Some of the internally financed options I mentioned earlier may lead to a slight increase in leverage, but our modeling indicates that it will decrease again quite quickly. If we communicate effectively and clarify our actions, we hope the market will recognize that it's for a greater purpose, allowing us to acquire an additional vessel under a long-term contract. The Board is very positive about further dropdowns. In past earnings calls, I've mentioned that the Board wishes the market were as favorable as it used to be, which worked well for everyone. The Partnership successfully dropped down 12 vessels after the initial decline and aims to continue doing so. There is certainly a willingness from the Board to proceed with acquiring the vessels. However, we must acknowledge the challenges posed by the current unit price and sentiment surrounding financing in this business, not to mention the general disfavor of MLPs among many investors. Currently, we find ourselves in a difficult position. Nevertheless, the Board believes we can afford to wait. We want to take action if it makes sense, but it's important to be patient. We've seen unit prices of $13 in the past, as in 2015. Back then, we managed to raise $200 million and increased to $20. Thus, there is no reason to think that today's environment will persist indefinitely. If we can navigate through the upcoming quarters, we will be well-positioned.

Yes. Thanks, Gary. I appreciate you taking the questions. It’s definitely a challenge with the low unit price and high common yield. We’ll hope for the best going forward. Thanks, Gary.

Yes. Thank you, J. Thanks.

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

Following up on the Windsor, I don't want to dwell on it too much. However, I prefer to consider the worst-case scenario. First, it won't come off charter until October, so there's no impact in the third quarter. Assuming the very worst case where you can't recharter it at all in the fourth quarter, could you provide a rough estimate of the potential impact on revenues and EBITDA?

We’re not exactly sure when Shell will return the vessel to us, and it could be as late as mid-December. It really depends on their operational needs. Currently, we’re not publicly predicting a scenario without a charter. We have several potential opportunities, including a charter to the sponsor. So, despite the uncertainty, we believe we should remain optimistic that the vessel will be chartered. Until we have more information, that’s our position. I want to reiterate that this is just one vessel out of 16, and we have good coverage at the moment. Therefore, we’re not panicking and don’t see it as critical.

I'm glad to hear that. Let me rephrase my question. I don't want you to share anything you're not comfortable with, but have you shared the charter rate for the Windsor? What is Shell currently paying you for it?

I’m not sure whether we have. No.

Okay.

I think you can work on averages, et cetera obviously, but I’m not sure we’ve given away any precise numbers, because I think that’s quite commercially sensitive obviously.

Okay. All right. You talked about if you had to reposition that there’ll be some bunkering costs. About how much would that be?

Well, obviously, it depends how far away it is. But, it might be in the region of $0.5 million. That type of ballpark. It’s not a few hundred. It’s probably more in the region of $0.5 million.

Okay. Different subject, and I apologize if you’ve covered this in the past. But, for the past few quarters, you’ve had some pretty substantial charges relating to unrealized and realized depreciation I guess. I am sorry, I don’t have the new release in front of me, relating to some of the interest rate swaps. First of all, how much of that is a cash outlay? And second, are we going to see similar charges like this for the remainder of the year, or we likely to assuming interest rates stay where they are?

Are you talking about the mark-to-market derivative amount?

Yes.

Yes. Since we do not engage in hedge accounting, we need to account for changes in the theoretical termination value of our interest rate swaps each quarter. These charges represent what the theoretical valuation would be if we chose to terminate our interest rate swaps on the balance sheet date. Importantly, none of these charges are cash items; there is a distinction because some of these figures include realized amounts, particularly related to foreign exchange. However, most of the losses are based on theoretical evaluations for the termination of the interest rate swaps. Unless we decide to terminate them tomorrow, those significant amounts are essentially just paper losses. Over the life of the interest rate swaps, they will ultimately trend towards zero on the balance sheet. To answer your question, there is no cash outflow associated with this.

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

Good morning. Thank you for a strong quarter. Could you provide more insight into why Shell chose not to extend the option?

Sure. I’ll share what I think we know. Obviously, we can’t know exactly what Shell is considering. However, it seems that next year, Shell might have about a dozen fewer cargoes than they expected. Since the Windsor was next in line for their decision, it was the obvious choice to cut. Although it has performed very well, we believe Shell may have faced some production cuts or delays, leading them to return the vessel. They are likely the second largest player in the Brazilian market, following Petrobras, which is significantly ahead. Their large fleet means that they will occasionally have ups and downs. We don’t believe, and we have no indication, that the situation is anything more than that.

Okay. It’s not like a drying up platform?

No, not at all. I mean, if you look at the E&P outlook for Shell in Brazil, they are committed to that market, and they’re in a number of fields and licenses.

Okay. My second question is, what benefit do you feel it would be to the shareholders to take on the additional dropdown in December aside from finding out the bank, since you won’t do it with the equity, with the equity price at around $12.40 right now? It seems like it would have to be funded through some form of debt, and thus it appears to be beneficial only to bankers. Would it change the dividend flow? What do you think would happen by taking on the additional dropdown?

Yes. I think the main driver for it is the extra security of cash flow. It’s a new seven-year charter for this first vessel that would come into the Partnership. I think that’s the primary driver to do it. We’re looking at it from the point of view that even if leverage is temporarily pumped up a little bit in order to do this, if we believe the Partnership’s cash flows, even taking into account some levels of sensitivity can carry it, we think we can explain that and we think we can show that and that it’s a good move for everybody. It’s helpful for us to show as a business that we are moving to a position where we are just about able to do this. It’s kind of a bit of a holy grail for an MLP like us to be able to do that because we can then grow our business regardless of the markets. I think that would be good for everybody if we got to that position. So, although we are completely aware of the leverage and the liquidity and the potential for problems in doing this, we do feel the extra cash flow security and the fixed contracting income that that will bring to us is worth it, provided we can do it in a secure manner.

Okay. So, you’ve been paying down debt at an accelerated rate, you said. And...

Yes.

Are you also been building cash to put you in a position where it could be done internally, as far as the dropdown is concerned? So, you’re balancing paying debt faster with saving cash for a potential dropdown.

I don’t think we can do the dropdown using only internal cash. As an MLP, we’re paying out a very healthy distribution and we’re paying down our debt quicker. What that leaves us with is a fairly stable cash balance; it hasn’t grown. We’ve had approximately $40 million in the bank for quite some time. So, we probably do need to take on some form of debt to do a dropdown. But, as I said...

Okay. But it would likely be a smaller amount. Please continue.

No, no, no. Please, you go.

A little bit earlier in conversation, you referred to yourselves as dealing with the longer-term problem. Could you give me a little color on what you meant by the longer-term problem?

Sorry, Robert. When exactly did I say that, what context?

I guess you were talking about dealing with the rechartering of this Knutsen and in those conversations, in that conversation that you made the statement that we would have to deal with the longer-term problem. I caught those words, and I wrote it down. So I was wondering what the context in your mind was of what is the longer term problems for the business?

I can't precisely remember using those words. It's certainly possible, but it does depend on the context. The long-term issue I see, if you want to call it a problem, is likely twofold. It involves the unit price and the ability to access equity markets for growth, along with the long-term growth of the business that results from that. This is ultimately the challenge for this MLP because, without that growth in the long term, we have 16 vessels that are young now, but in 5 or 10 years, they will be less young. Eventually, far into the future, they won't be young at all. So, we cannot fully understand the situation without some growth at some point; it doesn't have to happen immediately or next year, but we do need to see some growth eventually.

Okay. My last question is this. I guess I’m trying to understand, I mentioned this on the last conference call. Obviously, the Board has not considered yet or executed yet any share buyback when we’re yielding 16%. As a business, when you can buy a good secure business like ours that’s yielding 16%, I scratch my head why not, especially with the 1.7% coverage. It’s tremendous performance and it just doesn’t compute with me why there’s no determination on the Board not to buy some stock back in the market at this ridiculously low price. Can you give me their reasoning why they refuse to do it?

Well, I think, as I’ve said before, Robert, I think I can see and the Board can see both sides of the argument. I think, the side of the argument is yes, of course, it’s a high yield, why wouldn’t you? I think, the flip side of that is that that’s not our general business. To make a dent, we’d have to spend quite a bit of money. At the moment in the market we’re in, and let’s be clear, the market is softer for everybody today in the world, we’re not sure and the Board is not convinced that it’s the best use of funds right now. That’s really the bottom line. Certainly economically and on a piece of paper it makes sense, but the real world often takes over, and cash in the bank is important to us.

No doubt, Gary. But what I’m looking at from a standpoint of what is the image that is projected by the Board when they do not see their stock as such a gross margin. You don’t have to buy millions of shares; you don’t need necessarily have to make "a big dent". But what you do have to do is cast an image that there’s great safety that the Board has in it and that this stock is ridiculously low priced. Every time you take one share off, you put $2.08, so to speak in the bank.

Yes, yes.

The issue relates to both the perception and the practical effects of withdrawing some funds from the treasury. With over $40 million available, using just $1 million or $2 million for a share buyback would send a strong message to the market about future intentions. That's just my perspective; I hope they reconsider their current stance.

I thank you for that. I hear you.

Our next question comes from Igor Levi with BTIG.

Hey, guys. What do you think of the prospect of selling some of your older assets to help fund the dropdown? And especially in the case of, let’s say the Windsor, they get closer to the recontracting, and it still doesn’t have a contract, is that something you’ve considered and how do you think about that?

Hey, Igor. Hello. We have spoken about that at the Board and it is an option. I think, in all likelihood, the sponsor had a desire to have first refusal on any of those vessels, first of all. So selling them to the sponsor is also an option for a vessel swap even, an older vessel for a newer vessel coming in. Those sorts of ideas have been discussed at Board level. They’ve not been ruled out. But, at the moment, we don’t see there is a big need to do a transaction like that; that may change. I think the answer to your question is, yes, it is on the table. But, right now, I don’t think we’re anticipating doing it.

Okay. And I guess as a follow-up, what kind of a trading value do you think you can get with the sponsor if you bring in three old vessels; can you get a new one or what’s roughly the ratio there?

Igor, that’s an impossible question. All I could say to that is, it depends on the vessels, the time and evaluations, and the situation of the vessels in terms of charter values. Presumably the new vessel coming in would have a charter. The only reason we would perhaps do it is if the old vessel going out doesn’t have a charter. So, there are all kinds of moving parts in there to suggest the valuations could fluctuate quite a lot. So, I’m going to have to pass on that question. Sorry.

No problem. All my other questions have been answered. Great quarter. And thank you.

Thank you.

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

Yes. Gary, I want to commend you and the Board on the consistency of your policies and operations. Like the other callers, I think the risk-reward is much higher to the rewards than it is to the risks. I think the story would be helped if you found out that with investors or potential new investors, so that they could understand and differentiate the story. Could you talk about any plans that you have in Q4 to virtually meet with investors or conferences you may attend virtually?

Thank you, Richard. It's great to speak with you. Your question is very timely. We actually discussed this at the Board meeting yesterday. Given our evolving unit-holder base, we realize it's increasingly important to attract new equity unit-holders while also supporting those who have recently joined, particularly in light of some institutional sellers exiting. You're right that it's a bit early to dive into specifics, but it was an important topic during our Board discussion. We have some ideas and plans that we'll be advancing in the current quarter, Q3, and carrying into Q4. On a slightly different note, we are also working on an ESG publication, which we currently do not have as a business. We possess all the necessary internal data, but haven't published it yet. So, that's something we're focusing on as well. This is an important issue, and you can expect to see more updates in the coming weeks rather than months.

Our next question comes from Ted Lu with Tertiary Oil & Gas. Please go ahead.

The last commentator from Castlewood, I think was spot on. It seems to me that you only have one problem, and that’s lack of information going out to the investment community. If we can get some more solid research analysts following your stock, I think everything else would fall into place. I personally think you’re the best investment that I’m aware of. I’ve only been doing this for 50 years. Thank you so much.

Thank you, Ted. We would appreciate having more research analysts. The typical reasons given are that we’re in shipping, that we're an MLP, or that we're too small. You’re correct. We need to focus on this, which is partly why we discussed investor relations at the Board meeting yesterday. We aim to raise our profile and increase our visibility. It’s a challenging task, but we are committed to doing our best.

Aren’t you taxed as a C corporation?

Yes, we are.

I think that needs to be underlined a few hundred times. Thank you.

Thank you.

Our next question comes from Pavel Oliva with RockHill Global. Please go ahead.

Hi. Good morning. Thank you for taking my question and for a great quarter. My question is regarding the disconnect between your cost of debt and cost of equity in relation to the share price. I would like to know what is causing the hesitation to add new dropdowns? Additionally, I think marketing a stable partnership with a 16% yield shouldn't be that difficult. There’s shareholder turnover, and many investors are looking for 2% yields. Therefore, I don't see why the Board has permitted this situation to arise. It doesn’t seem complicated to fix; the team simply needs to highlight to investors the tax advantages, particularly that some of it is a return of capital. It really reflects on the Board that your cost of equity is 16%, while your cost of debt is 1.5%. Also, if people ask what the downside is of not rechartering the Shell ship, why not clarify that it would reduce your coverage by a certain amount? This would provide some clarity so that we understand the worst-case scenario.

Pavel, Thanks for your questions. I think on the arbitrage between the debt and the equity, we have NYK, the Japanese shipping company, as part of our sponsor group. As a result, we have access to Japanese banking lending on the debt side. We’ve ended up in a very fortunate position to have incredibly low costs of debt. That sort of pushes us one way. Obviously, the equity has gone the other way, but largely driven by the market. If you look around at other companies, they’re in exactly the same position as us. Some of those companies are just as good, maybe not MLPs, but just as good. You’ve got larger companies, $5 billion companies in the high-single digits on the energy side. It’s a difficult place to be at the moment. We can do more and I think we recognize that. We do need to come out and do more. I think where, historically we had institutional holders and a stable financial market, it probably was easy, whereas today we’re in a different world. So, I think the equity has gone one way, swept along by the market in general terms, and the debt’s gone the other way, because we’re able to access probably some of the lowest debt costs in the world for the type of company we are. I think we recognize we can do more, and that’s our plan.

Well, one suggestion is you look at large institutional investors, insurance companies, or pension funds that are struggling to meet their 6%, 7% or 8% revenue targets. It’s bringing in few of those would be very interesting addition besides stable shareholding. It’s something that may be very interesting. And can you maybe also comment on what I asked, can you sort of put toward the downside if you do not recharter it? I mean, it’s not that you won’t recharter it, but at least as investors, we know what the downside is?

I think, over the years, the Partnership has not given out huge amounts of forward guidance on sensitivities. It’s probably not needed to. I think there’s a recognition that things are different today and potentially they will stay different in that respect anyway. I take your point that perhaps we could do more in terms of looking forward with sensitivities. I think that’s part of the IR story that we’d be looking at. Because I do agree with you that the more information we can give, the clearer it is for the unit-holders and potential unit-holders.

Well, you were a shipping company or MLP before, so it’s not a new situation. Obviously, there has been a huge turnover, a lot of your shareholders were levered and had to sell. Even having some of your sponsors buying some stock, if you can’t buy stock, would be very, very helpful, just saying like, they recognize the value. If the market doesn’t want to buy it, at least the sponsors can.

Yes, noted. Yes.

I think you need to be a bit more aggressive and increase the urgency because the stock is trading as if the company is bankrupt.

Yes. I wouldn’t agree with that. I don’t think it’s quite that bad when you look around at the rest of the market. But, as I said before, we recognize that there’s more we can do.

Okay. All right. I just want to hear a little more urgency in your voice. That’s all, I guess.

Yes. I understand your point. Thank you, Pavel.

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

Yes. Thank you everybody, and thank you for your questions today. It’s been a good discussion. So, thank you very much.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.