Tidewater Inc. (TDW) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Tamika and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2012 first quarter earnings conference call. [Operator Instructions] Mr. Bennett, you may begin your conference, sir.

Thank you, Tamika. Good morning, everyone and welcome to Tidewater's Fiscal 2012 First Quarter Earnings Results Conference Call for the period ended June 30, 2011. I'm Joe Bennett, Tidewater's Executive Vice President and Chief Investor Relations Officer. With me this morning on the call are our Chairman, President and CEO, Dean Taylor; Jeff Platt, Chief Operating Officer; Quinn Fanning, Executive Vice President and CFO; and Bruce Lundstrom, our Executive Vice President, General Counsel and Secretary. In a minute, I'll turn the call over to Dean for his initial comments, to be followed by Quinn's review of the financial details of the quarter. Dean will then provide some wrap-up comments before we open the call for questions. First, let me say that during today's conference call, Dean, Quinn, I and other Tidewater management may make certain comments that are forward-looking statements and not statements of historical fact. I know that you understand that there are certain risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we may make during today's conference call. Additional information concerning the factors that could cause actual results to differ materially from those stated or implied by the forward-looking statements may be found in the Risk Factors section of Tidewater's most recent Form 10-K. With that, I'll turn the call over to Dean.

Thanks, Joe. Good morning, everyone. Earlier today, we reported fully diluted earnings per share for our first fiscal quarter of $0.48. This compares to $0.77 in the year ago quarter and the $0.23 we reported for our March quarter, which after adjustment for several items would've been $0.51. For practical purposes, our results were flat with the prior quarter but the fundamentals are showing some improvement. In our last earnings conference call, we commented that we were increasingly confident that we were close to the bottom of the industry cycle. Our first quarter results further support that view. Based on what we are seeing in the marketplace, we believe that we have hit bottom for this cycle. That said, let me also caution you and ask you not to assume that the recovery will necessarily be v-shaped. We're still likely to experience some tough times ahead, but our sense is that what were headwinds are slowly moving around to our back. Before Quinn walks you through the results for the quarter, let me point out that we've had another solid quarter of safety performance. There were no lost time accidents in the quarter and our total recordable incident rate was 0.19, same rate we achieved for all of fiscal 2011. Tidewater's focus on safety continues. We owe it to our employees and their families but also to our customers, that we provide an accident-free work environment. We believe our industry-leading safety performance is a competitive strength. Let me now turn the call over to Quinn to review the financial details for the quarter. I'll then return to discuss our outlook for the market and our business strategy. Quinn?

Thank you, Dean. Good morning, everyone. First, I will call to your attention our earnings press release, which we put out this morning prior to market's opening. We also put out an 8-K last Friday confirming that we have extended through the end of the calendar year our Sonatide joint venture in Angola. Finally, note that we expect to file our quarterly report on Form 10-Q through the EDGAR filing service sometime before the close of business today. Turning to the financial results as of and for the 3-month period ended June 30, 2011, as usual, I will provide a recap of the quarter just completed, offer few perspectives on what's driving financial results and then provide our near to intermediate term outlook. I'll conclude my remarks with a review of capital commitments and available liquidity. As Dean noted in his introductory remarks, we reported diluted earnings per common share of $0.48 for the June quarter versus diluted earnings per common share of $0.23 for the March quarter, which again included a number of unusual items, including our settlement with the Federal Government of Nigeria and a cumulative or catch-up effect of fourth quarter revision to our effective tax rate. After-tax unleveraged return on invested capital remains in the mid-single digits, which is below our weighted average cost of capital but is slightly north of our marginal funding costs. For your period-to-period comparisons, I'll highlight just a few items from the June quarter. First, vessel revenue for the June quarter includes profit of about $2 million and revenue related to retroactive rate increases to January 1, 2011. This amount is being recognized in the June quarter, our first quarter of fiscal 2012, rather than the fourth quarter of fiscal 2011 because the relevant contract negotiations were not yet complete at the close of our prior fiscal year and the filing of our 10-K. While a variety of vessels are covered by these retroactive rate increases, note that the new rate reflects an approximate 7% year-over-year increase in underlying day rates. As adjusted, vessel revenue for the June quarter was essentially flat relative to the March quarter and as a result, vessel revenue in the June quarter came in a bit above the high end of the range that was incorporated into our May guidance. The bottom line impact of the timing of our revenue recognition was a shift from the March quarter to the June quarter of approximately $0.03 of earnings per share. Second, repair and maintenance expense was down a couple of million dollars quarter-over-quarter and was also below our expectation when we provided vessel operating expense guidance in May of approximately $155 million, largely reflecting the timing of vessels in drydock. Other categories of operating expenses generally at offsetting variances and actual OpEx of about $152 million was very consistent with the guidance that was provided in May, particularly if you adjust for the reference timing issues with drydocks. Consistent with prior guidance, mobilizations remained at elevated levels in the June quarter and fuel, lube and supplies expense was up about $2.5 million quarter-over-quarter. In most cases, recent mobilizations have been for contracted work and the payback is more easily quantified than was the case with some of the more speculative mobs that we undertook in prior quarters based on our assessment of the relative attractiveness of various markets. For reference, we initiated 18 mobs unrelated to new vessel deliveries in the June quarter. We had 9, 18, 12 and 8 mobs in the March, December, September and June quarters of fiscal 2011, respectively. As we get some of this fleet repositioning behind us, our expectation remains, that all things being equal, we will enjoy an uptick in utilization and average day rates in coming quarters. Third, gains on asset dispositions net, at about $1.7 million, was flat quarter-over-quarter, largely reflecting a few additional impairments on stacked vessels. Net gains in both quarters were below the quarterly average over the last 2 years of about $5 million. If one were to adjust for the June in March quarters, the retroactive rate increases and other unusual items noted for the March quarter, adjusted earnings per diluted common share for the June quarter was essentially flat quarter-over-quarter. Beyond the retroactive rate increases, quarterly results and the quarter-over-quarter trend largely reflect a 91-day quarter, incremental revenue contribution from 3 vessels delivered in the March quarter and a modest contribution from 3 additional vessels that were delivered in the June quarter. Offsetting these positive items was lost revenue due to the continued stacking of older vessels and, consistent with guidance, relatively weak results for the larger anchor handling towing supply vessels. To bridge the March and June quarters, it might be helpful to note the following items: the impact of the 1-day longer quarter was higher revenue of about $2.75 million; contribution of new vessel revenue for March and June new vessel deliveries was also a bit less than $3 million. This revenue benefit was offset by approximately $5 million of lost revenue from 10 vessels that were stacked in the June quarter. Smaller items included lost revenue due to vessels in drydock, which was down quarter-over-quarter by about $1.5 million and foreign exchange movements, which contributed about $2 million to the quarter's revenue. Parenthetically, I'll note that despite the positive revenue impact, the overall impact on FX movements on operating margin was slightly negative in the June quarter as reported OpEx was also higher as a result of FX movements. In regards to overall fleet count, day rate and utilization trends, our active fleet averaged 262 vessels in the June quarter, which is down 10 vessels quarter-over-quarter. Average active new vessels were up 4 vessels quarter-over-quarter to 194 vessels. Average active older vessels were down 14 vessels quarter-over-quarter to 68 vessels. As the relative financial contribution, 83% of vessel revenue and 91% of vessel level operating margin, which [indiscernible] by vessels added to the Tidewater fleet so as we began our fleet renewal and expansion program in 2000. At June 30, the stacked fleet totaled 98 vessels and was up 8 vessels quarter-over-quarter, reflecting the previously noted 10 vessels going to stack in the June quarter and 2 vessel dispositions from the previously stacked fleet. Total vessel dispositions in the June quarter were 8 vessels, but 6 of these were from the active fleet. For reference, note that the aggregate net book value of the stacked fleet was about $48 million at June 30, which implies an average carrying value of less than $500,000 per vessel. The average net book value of 66 active traditional vessels at June 30 was about $60 million. That implies an average carrying value of these vessels of about $900,000 per vessel. Total carrying value of the fleet at June 30 was $2.3 billion, so the stacked fleet and the active traditional vessels represent 2% and 2.5% of the total fleet's carrying value, respectively. Overall day rates, at $12,496 a day, were up about 2.5% quarter-over-quarter. Reported utilization for the fleet, which includes the drag associated with stacked vessels, was off 1.3% to 61.5%. Utilization for the active fleet, i.e. excluding stacked vessels, was about 84% for the June quarter. Utilization of active new vessels was 85% and utilization of active traditional vessels was 81%. For the non-deepwater towing supply and supply class, day rates were up about 2% quarter-over-quarter to $12,190 a day. Utilization was down about 4 percentage points quarter-over-quarter to 51%. It's worth noting that 85% of our stacked fleet, which again was at 98 vessels at the end of the June quarter, is part of the towing supply and supply class of vessels. This obviously has a material impact on reported utilization for this class. Deepwater day rates were also up about 2% quarter-over-quarter to $22,065 a day. Utilization was essentially flat quarter-over-quarter at 76%, again reflecting weak utilization of our 11 newer plus 10,000 brake horsepower anchor handling and towing supply vessels. Voyage utilization in the June quarter was just 69%. And while the level of utilization was generally flat relative to the March quarter, a number of these vessels have recently secured term work at reasonable day rates, so we expect these vessels to be better contributors to results in the second half of the fiscal year but it's unlikely that the impact on the September quarter will be material. For comparison, utilization of our 47 newer deepwater PSVs was about 84% in the June quarter. G&A expense was about $37.5 million for the June quarter and if you adjust the March quarter for our settlement with the Nigerian government, G&A expenses were up $2 million quarter-over-quarter. Professional fees were up about $500,000 quarter-over-quarter and the balance of the increase largely reflects increased personnel costs, which were up about 6% quarter-over-quarter due to annual wage adjustments, incentive compensation accruals and the quarterly revaluation of outstanding equity-linked incentive awards. Turning to our outlook, Dean has already commented on our collective sense that we may be in the early innings of a cyclical recovery. And while the shape and speed of a recovery will be determined by variables largely beyond our control, Tidewater has made a big bet on longer-term industry fundamentals in the form of relatively large capital commitments in recent years. Over the next couple of quarters, those capital commitments are expected to translate into a heavier vessel delivery schedule. Like the shape of an industry recovery, we expect new vessel deliveries to be an important driver of near- to intermediate-term financial results. Initially, the financial impact is expected to be negative to neutral as is normally the case due to the cost and time that is required to get a newly delivered vessel on to its first job. Beyond a quarter or 2, financial impact should be highly accretive. In particular, we expect to take delivery of 9 additional new vessels in the September quarter, including 3 deepwater PSVs and 6 shallow- to mid-water anchor handling and towing supply vessels. The PSVs, each have 5,200 deadweight tons of cargo capacity and the towing supply vessels are rated 5,100 to 9,000 brake horsepower. Four of these 9 vessels already have long-term contracts. We expect to take delivery of an additional 12 vessels in the December quarter and a further handful of vessels in the March quarter. So based on commitments at June 30, total vessel deliveries for the remainder of fiscal 2012 will be about 25 vessels. If additional vessel acquisitions come our way during the remainder of the fiscal year, this number would obviously go up. Let me give you a sense for the pattern expected revenue and operating margin, our 2Q revenue expectation for the 9 vessels that are scheduled for delivery in 2Q, plus the 3 vessels that were delivered in 1Q, is about $4.5 million or up about $3 million quarter-over-quarter. Projected operating margin in 2Q for these 12 vessels is in fact negative to the extent of a couple of million dollars, largely reflecting provisioning and mobilization costs for the 9 vessels assumed to be delivered in 2Q. As we move into the second half of the fiscal year and based on our assumption that the market is generally trending positive, these 12 vessels should collectively contribute about $10 million in incremental vessel revenue per quarter and generate vessel margin at or above the 40% levels that we have just reported on a consolidated basis for the June quarter. Based on the current trend in the market, vessel deliveries in the December quarter should exhibit a similar pattern of a drag for a quarter or so and then pretty solid performance thereafter. Offsetting the contribution from new vessel deliveries, at present, we expect to stack 5 to 10 vessels in the September quarter. Other expected drivers of 2Q results include mobilizations and continued relative underperformance from larger anchor handlers. Our sense today, however, is that these 2 items will be less of a drag in the September quarter than was the case in the June quarter. So based on current visibility on new vessel deliveries, vessels likely going to stack and the additional items noted here, we expect that quarter-over-quarter revenue progression will be positive but only moderately so in the September quarter. As of today, internal estimates peg September vessel revenue somewhere between $255 million and $260 million or up a couple of percentage points quarter-over-quarter, if you adjust the June quarter for the previously referenced retroactive rate increases. Again, the second half of the year should benefit from ongoing vessel deliveries, are getting some of these mobilizations that are unrelated to new vessel deliveries behind us and we hope, some traction on day rates as more of the OSV industry moves toward the mid-80s type utilization rates and we expect to be at with our active fleet as we move into the September quarter. We are already seeing some of our bigger boats secure contracts that will begin over the next quarter or so, at rates that are a few thousand dollars higher than the contracts that they have just completed or that they will soon be completing. As global vessel utilization improves with expected increases in the working rig count, we expect to have additional opportunities to move day rates higher as vessel contracts roll over. We expect operating expenses in the September quarter to be reasonably flat relative to the June quarter, reflecting somewhat offsetting impacts of an increase in the number of new vessels, higher repair and maintenance expense due to a more typical drydock schedule and lower fuel costs as mobilizations hopefully taper off a bit. For modeling purposes, plus or minus $157 million for the second fiscal quarter is a reasonable OpEx assumption based on what we know today. Vessel level margins should also be reasonably consistent with June results, about 40%, though we expect that vessel operating margin, like vessel revenue, has a better-than-even chance of trending up in the second half of the fiscal year. General and administrative expenses are expected to be reasonably consistent with June's results and should remain in the plus or minus $37 million per quarter area in fiscal 2012. Finally, we are currently assuming an effective tax rate of 23% for fiscal 2012. As many of you appreciate, the effective tax rate is a tough one to forecast with great accuracy given the highly mobile nature of our asset base and the large number of tax jurisdictions in which we operate. As always, the mix of U.S. and international earnings and international margin trends can cause the tax rate to be volatile on a quarter-to-quarter basis. It's fair to assume that if the revenue and margin trends for the business remain positive in the coming quarters, there is potential for improvement in our tax rate. 23% however, is the best estimate that we have today. Turning to the balance sheet, capital commitments and available liquidity. Cash flow from operations for the June quarter was about $27 million versus $53 million in the same period in fiscal 2011. CapEx and proceeds from asset dispositions net in the June quarter were about $70 million and about $7 million, respectively. New vessel commitments in June quarter totaled about $140 million and included 2 vessel construction projects and 5 vessel purchase commitments. In total, unfunded vessel commitments at June 30 approximated $570 million, including 28 vessel construction projects and 12 vessel purchase commitments. CapEx in the September quarter is expected to be about $150 million based on June 30 commitments. CapEx for the second half of fiscal 2012, again based on commitments at June 30, approximates $250 million. Total debt at June 30 was $700 million and cash at 6/30 was a bit less than $200 million. As a result, net debt at quarter end was about $500 million and net debt to net book capital at 6/30 was about 16%. Debt maturities in fiscal 2012 are limited to $40 million that was paid in July. Total liquidity at 6/30, including availability under committed bank facilities, was approximately $775 million. As some of you may have seen from the 8-K filed on July 25, we extended the availability period for the $125 million delayed draw term loan that was put in place in connection with the last redo of our bank facility. To the extent that we source additional actual investment opportunities as the year progresses, this bank term loan maybe an attractive medium term funding alternative for us, so we were pleased to extend the term loan's availability period and we appreciate the assistance provided by our bank in this regard. In closing, the June quarter's results are generally consistent with, if not a bit better than, our expectations that were articulated in May. Dean will address our fundamental outlook, but I'll again highlight that we have visibility on a number of items that give us a bit of confidence that the trends should be positive as we move into the second half of fiscal 2012. Day rate trends aside, we have a number of recently idled vessels that will first complete mobilizations and then begin term contracts in the September quarter. In addition, we have a string of new vessel deliveries that will result in substantially new tonnage joining the Tidewater fleet in fiscal 2012, and thereby increase our leverage to a market that we believe is trending higher. Our financial position remains strong, both in regards to leverage and liquidity and we believe that we are well-positioned to act on additional investment opportunities that maybe presented to us. And with that, I'll turn the call back over to Dean.

Thank you, Quinn. I think you'll agree that after hearing Quinn's rundown of our results that the quarter showed the beginnings of what we'd hope to look back upon as the bottom of the cycle. As to how quickly the demand for our services ramps up, our guess is that our next quarter will show slight revenue growth, with better times following in subsequent quarters. Momentum seems to be building. Our active fleet utilization rate remains high, and bidding activity is stronger. We've already begun pushing day rates higher and will continue to do so, to do that as aggressively as markets will allow. We're realistic and are prepared for the possibility that by so doing, we may not win some contract awards because of price. But we feel that is a situation that will improve as our competitors achieve higher day fleet utilization rates and as market rates steadily increase through time. We anticipate our revenues beginning to grow and that the pace of growth will accelerate as we move into the latter part of this fiscal year and next year, too. We do, however, need to control our operating cost to ensure that the revenue gains are translated to the bottom line. A very important consideration is that the key driver for our business, the number of working offshore drilling rigs, continues to increase. Drilling contractors also continue to place additional orders from new offshore drilling units and especially more deepwater ones. Even though Gulf of Mexico deepwater drilling permitting activity remains at a slow pace, the opportunities globally continue to expand. That is our future. And to us, it looks brighter every day. When you model Tidewater's future performance, please keep a couple of things in mind. As Quinn pointed out, we have only added a few new vessels to the fleet during each of the past 2 quarters, but we're scheduled to add approximately 20 vessels over the next 2 quarters. As he pointed out, the new vessels initially are a drag on financial results but our investment in them as our investment in the new vessels that we have been adding to the fleet since the year 2000, will provide the backbone of future prosperity for the company and its shareholders. We will continue to actively seek new vessels to buy or build. We believe our cash flow is on the upswing and we have increased our financial flexibility by opportunistically raising capital on attractive terms, both of which should provide us the necessary funds to act on attractive investment opportunities. We will, of course, continue to evaluate the purchase of new equipment relative to other alternatives, including returning capital to our shareholders. For now, we feel that our investment in new units does serve the long-term interests of our shareholders. Let me close with a brief comment. You may have noted in Joe's introduction that Steve Dick was not mentioned. As you may be aware from a recent 8-K filing, Steve elected to retire at the end of June. He remains a consultant to the company and will continue helping us in our efforts to acquire new vessels. As a longtime employee and colleague, we will miss Steve but wish him and Claire a happy retirement. Billy Brown, our Vice President for Engineering and Technical Services and an experienced offshore hand, will be filling the vessel acquisition and disposition role with Steve's assistance, which we believe speaks to the bench strength at Tidewater. We're now ready for your questions. Tamika?

[Operator Instructions] Your first question is from Paul Carr.

A couple of questions, a lot of them you addressed in your comments. For G&A, just curious about the rise in crude cost. You said most of the increase in G&A this quarter was rise in crude cost. Is that ongoing or temporary?

To correct one item, the increase in G&A was not related to crude cost. Crude costs were actually part of operating expenses. The corporate and field level overhead and, in fact, there were personnel cost increases embedded in the quarter-over-quarter increase. I'll remind you that our fiscal year end begins in April 1 and that is really when you would start to see annual wage increases. And in this particular quarter, that was magnified by accruals on equity incentive awards and revaluations that we do every quarter, which is driven by the stock prices moving up.

So we would expect G&A to be relatively consistent with this quarter?

For fiscal 2012, that will be correct.

Crude costs actually were flat quarter-on-quarter, actually.

I wrote down crude in my comments but you meant for personnel, yes. The other one is international utilizations being down slightly for newer vessels and substantially for older vessels, just curious about is that repositioning or difficulty getting spot work? Or if you could just add some color there.

Actually, international utilization I don't think was down quarter-to-quarter and activity levels in most of the regions have stayed consistent or actually had an uptick.

Just actually looking at the active utilization statistics, the reported numbers for international utilization, you're correct, was 61.7% in the June quarter versus 63.2% in the March quarter. That's really reflecting 2 things more than anything. Number one is increased stacking of older vessels. And you'll recall that our stack vessel population is included the denominator when we calculate reported utilization. And then secondly, we have had, particularly in the deepwater class of vessels, a bit of a drag associated with 2 things: One is mobilizations, as you pointed out, which have been heavy for the last couple of quarters; and then secondarily, the large anchor handlers have, quite frankly, been weak for the last couple of quarters. We seem to see a little bit of a light at the end of the tunnel in the next coming quarters. So that's really the big drivers. It'll be difficult for me to disaggregate it for you on the fly.

Okay, that explains it. Based on what you're seeing then you would hope to see some improvement in utilization for newer vessels internationally in the September quarter?

What we said, Paul, is that we think revenue will increase marginally in September, and then we think that the next 2 quarters, we should see a better increase in the following 2 quarters. So September quarter revenue will increase but marginally. And we think that revenues should increase at a better rate in the following 2 quarters after that.

Great. Just 2 short questions to finish up. It looks like you're -- you've got abundant liquidity with both the lines of credit and cash flow for your current acquisition schedule. For further acquisition strategy, are you looking at new builds, buying yard slots or newer models, used stuff? Or is there some combination?

Yes. All 3, Paul.

All 3, okay. And with global [indiscernible] of newer vessels, I know in the past, you've mentioned that you still feel that there is sufficient retirement of old assets in the market to cover the sort of relatively increasing pace of new deliveries. Do you still feel confident about that?

I do feel confident. I'm not banging the table confident because the industry has, in its history, has had a history of tending to overbuild. But I do think that the scenario is that, that tendency is going to be muted this time because there is so much old equipment that needs to be replaced as evidenced by what's happening within our own fleet. The customer simply is not accepting older equipment for new tenders. There are a few exceptions to that but not many. Most of our customers are requiring newer equipment to fulfill their needs. So with roughly 750 units in the worldwide fleet that are 25 years old or older, we expect that those units will disappear from the active vessel count in a relatively near time period. So I do think that the effects of the new building activity will be muted.

Your next question is from Victor Marchon.

First question for the new vessels and you guys talked about taking some idle vessels and putting them back to work. I wanted to see if you could talk about what regions of the world you're seeing particular strength in for both the reactivations as well as the new equipment?

Well, some of the -- I don't want to get too specific, Victor, because we -- as you know, some of our competitors listen in on the line. But some of the equipment will be in Southeast Asia and some will be in West Africa. And I don't want to get into equipment classes. What I can say is that for a while, we've been saying that the anchor handling segment was -- the large anchor handling segment was going to be the segment, if there was a segment that was going to be overbuilt, that it would be that segment. And I think we've been proven right on that estimate. But even some of the larger anchor handlers, we're seeing some improvement in rates, if that helps you.

Maybe clarify one thing, Victor, it'll distinguish between stacked and idle. At least to clear for my comments, what I said, or at least what I think I said, is that we have had a number of idled larger anchor handlers that are presently mob-ing to known work. That is different than our -- an expectation that we have to take stacked equipment and return it to the active fleet. Stacking of older vessels in our view will continue. The idle vessels, meaning the larger anchor handlers, we expect to see improved utilization based on visibility on contracts that we have today.

And also just wanted to ask about the Saudi contract. I believe that was just about starting up now. Just want to see how that was going and the opportunities going forward there. And also just wanted to ask about what you guys were seeing out of Mexico from a tender end perspective and how you see activity there in the second half of this calendar year and into 2012?

On the Saudi contract, we have not yet started with any of the vessels. That should occur here in the next -- actually, couple of days, we're expecting to start with the first vessel and then that will ramp up from there. With respect to your question on Mexico, what we see there is that BMX [ph] has put out several tenders, both for rigs and for vessels. And in Mexico, they put a cap, a budget cap. And in effect, what has happened is a lack of equipment both on the rig side and the vessel side. So what we expect is that they will have to reissue tenders and hopefully adjust the cap that makes more sense to what the market will be today. So we would expect to see increases in the Mexico market, both in vessels going in and certainly the rates that they achieve.

And if I could, just one more, just on Brazil, as to what you guys are seeing there from both an activity standpoint and a competitive standpoint?

Well actually, rates are going up in Brazil but I think it's just simply operators are discovering that costs are not what they thought they were going to be. And so they're building in the increased cost into their rates. I'm not sure margins are going up in Brazil just yet. Activity -- Petrobras has actually slowed down their bidding activity a little bit, but I think this is just a relative hiatus and what I expect to be a growth market. I think Brazil is a market that can't be ignored and we are trying to rationalize our own approach to it because we struggle with some of the cost issues there and committing new equipment to a market where your margins are somewhat marginal, so to speak. It's something that we struggle with, particularly when we have better opportunities in other regions of the world. But I think Brazil is a market that can't be ignored. We're not going to ignore it. We've lost some market share. We've admitted to that. But I think we did so in a way that was good for our shareholders and that we didn't take bad deals for long periods of time. It's one thing to take a bad deal for 6 months, it's quite another one to take one for 4 years. And I think some people have -- will find themselves in that position and I don't think we will. But Brazil, I'm actually optimistic, long term, about Brazil. The question is how do we get from here to there and what Petrobras is going to end up doing in terms of local content, and that's still a big question mark. The government of Brazil recently announced, a couple of days ago, that they're going to have to emphasize more local content yet. And I think that's going to be an issue with which contractors are going to have to wrestle for a while. So I don't know if that answers your question but that's my attempt to that.

Your next question is from Jean Luke Remained [ph] .

You mentioned your willingness to increase day rates as aggressively as possible as competitive pressure allows. Are there regions where you believe there are more opportunities to raise prices than overall [ph] ?

Luke, we prefer to avoid that question if we can, not because we don't want to be responsive to you, but there's no sense tipping our hands to our competitors in regions where we will be more aggressive in raising rates. So I hope you'll excuse me.

If I may rephrase my question, which regions do you see more competitive pressure now?

In which regions do we see more competition now?

Other regions -- where we've seen -- I mean competitive pressure in regions where the market is tighter or is that. . .

Well, we think -- actually, we've stated on a number of occasions, Jean Luke, that we feel like the opportunities for improvement are almost worldwide, with the exception of 2 places: the North Sea and North America. And we stand by that. Some regions where we think the utilization and day rates will improve in a faster -- in a quicker fashion, but in general, we think that as rig activity increases, and rig activity is increasing, as rates will improve worldwide. And whether it starts in Australia or whether it starts in Brazil or whether it starts in Mexico, that's going to -- that will be -- it's going to start someplace and it started in some places already. And again, we prefer not to tip that -- to indicate that to our competition if they don't know it already.

Your next question is from Richard Sanchez.

This is Richard Sanchez with IHS Petrodata. I had a question regarding what you've been hearing on the pace of permitting in the U.S. Gulf from operators and how that's affected your utilization in the Gulf?

You know, Richard, the Gulf is a small part of our business. For the longest time, we had to dispel the notion that we were a Gulf of Mexico company and Gulf of Mexico represents but about 6% of our business these days. Pace of permitting, I was with a large operator in the Gulf of Mexico yesterday for lunch and he actually was relatively optimistic about permitting. He felt like permitting would take longer to achieve. He felt like instead of what used to be a 6-month process, the operators themselves would now have to become accustomed to a 12-month process. But he felt like the permitting was going to improve. Now, that's one operator. Some other operators are complaining vociferously about the pace of permitting. I think it may be dependent upon your point of view. But our point of view is we hope that if permitting activity increases, we think it will, simply because I think that the administration is going to recognize that sooner or later, we need to become more self-reliant for our energy requirements and that in order to do that, we've got to have activity offshore. So I think it will improve, but the pace of the improvement is really not under our control. All we can do is make predictions. I think we will slowly improve if that answers your question.

There are no further questions at this time.

Well, we thank everyone for your participation in our call this morning and in your interest in our company, and we wish you the very best. Thank you very much.

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