Tidewater Inc. (TDW) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Fiscal Year 2015 Third Quarter Earnings Conference Call. My name is Christine, and I will be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Joe Bennett, you may begin.

Thank you, Christine. Good morning, everyone and welcome to Tidewater's third quarter fiscal 2015 earnings results conference call for the period ended December 31, 2014. I'm Joe Bennett, Tidewater's Executive Vice President and Chief Investor Relations Officer, and I want to thank you for your interest in Tidewater. With me this morning on our call are our President and CEO, Jeff Platt; our Executive Vice President and Chief Operating Officer Jeff Gorski and our Executive Vice President and CFO, Quinn Fanning. We'll follow our usual conference call format. Following these formalities, I'll turn the call over to Jeff for his initial comments, to be followed by Quinn's financial review. Jeff will then provide some final wrap-up comments, and we'll then open the call for your questions. During today's conference call, we may make certain comments that are forward-looking, and not statements of historical fact. I know that you understand that there are 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 Jeff.

Thank you, Joe, and good morning to everyone. Yesterday, after the market closed, we reported a fully diluted loss per share for the third quarter of our 2015 fiscal year of $3.31, inclusive of $284 million goodwill impairment charge. Excluding this impairment charge, our adjusted net earnings per share for the quarter were $1.12. That compared to adjusted net earnings per share of $1.12 in the corresponding quarter last year and $1.22 in the preceding quarter. The financial results for the December quarter reflected solid operating results. But with the energy we are changing dramatically in the last 90 days our past performance is probably of less interest than usual for participants of this call. With that in mind, I will limit my comments to some broad themes about our current positions and our views about the future of our market and how we intend to conduct our business. I will leave it to Quinn to provide you the details for the quarter's financial performance and our outlook for the near term. In general when we compare our performance in the December quarter against that of the September quarter our revenues declined about 3% due to modest reduction of our fleet average day rates and utilization. These results reflect the increasingly more challenging operating conditions during the December quarter as decline of global oil prices accelerated sharply and our clients responded by curtailing their operations. Since the beginning of this year, oil prices have continued to fall and everyday seems to bring new stories of oil companies across the globe cutting their 2015 capital spending plans, postponing new drilling and field development projects and shrinking their existing operations as a struggle to resize their operations for an operating environment of reduced revenues. Peggy Noonan, a Columnist for the Wall Street journal recently wrote about the challenges facing America's foreign policy. In her column, she wrote and I quote “We are living through a moment of monumental world change. Old orders are collapsing while any new stability has yet to emerge. When you’re in uncharted waters your boat must be strong.” I think those observations also accurately describe the energy what we are currently facing, but importantly the Tidewater boat is strong. We continue to maintain a strong balance sheet and healthy liquidity position. Today our net debt of $1.4 billion represents about 36% of our net booked capitalization. Importantly, our fleet reinvestment program is winding down as we have largely completed the transformation of our fleet from one dominated by old smaller vessels to the industry's most modern and diversely that is capable of operating in all water depths, deep water, mid water and shallow water. The winding down of our fleet reinvestment program is not a reaction to the current market conditions, but simply the planned conclusion of our 10 plus year strategy to replace, enhance and grow our fleet capabilities. With the largest global operating footprint in the industry, we are well positioned to meet our clients’ needs anywhere in the world they operate. That footprint provides us the flexibility to shift vessels from weaker to stronger geographic markets positioning us to achieve the best available vessel utilization in day rates. We have 28 vessels remaining under construction in our fleet reinvestment program that are due to be delivered over the next three calendar years with the corresponding capital commitment of about $500 million spread over the same time frame required to complete the construction. This remaining $500 million tails by comparison to the over $5 billion we have invested in new vessels over the past decade on an average of $500 million per year. What does that mean for us financially? It means substantially smaller portion of our future cash flows are committed to funding these new build vessels thus providing additional liquidity and financial resources to weather the current market downturn, sees on potential opportunities that may arise and to return to shareholders through dividends or opportunistic share repurchases. On the later point, in the December quarter we elected to use half of the 200 million authorizations provided us by our Board of Directors last May to repurchase shares. During the quarter we spent approximately $100 million to buyback just over 2.8 million shares shrinking our outstanding share count by roughly 6%. One of Tidewater's core values which will become even more important in the competition for securing work in the future is our focus on safe operations. Last quarter extended our rapport of no loss [Timex] for this fiscal year. Our total recordable incident rate, TRIR for this fiscal year to-date is 0.13 per 200,000 man hours. I want to thank all of our employees worldwide for the dedication in performing their tasks everyday in the safest possible manner. Our compliance initiatives are also an important competitive advantage as our customers along with their partners and local governments are very focused on how those service providers conduct their businesses. Compliance is becoming an increasingly important consideration for those energy and energy service companies seeking to participate in future exploration development and production projects. While Quinn will provide you a much more detailed update on the topic in a moment. Let me briefly comment on our ongoing efforts to reduce the working capital that is accumulated in our Sonatide joint venture in Angola. As expected we continue to make slow steady progress in reducing our net working capital in the region. For this current fiscal year through December, our U.S. dollar collections of about $270 million outside of Angola has about equal to revenue generated from our operations in Angola. We have been successful on reducing our net working capital position by 23% or approximately $80 million since the beginning of the fiscal year primarily through the management of the amounts due to our Sonatide joint venture. As we have discussed in prior calls, managing the knock on effects of the foreign exchange laws in Angola, which include payment delays, and additional costs and risk is a challenge for the entire service industry operating in Angola and not something that is unique to Tidewater. Continuing with our efforts to reduce our working capital in this region, and rightsizing Tidewater's business in Angola, all in the context of the risk return profile as we perceive it remains a high priority. Let me now turn the call over to Quinn to review the details of the quarter and how we see the near term outlook. Quinn?

Thank you, Jeff. Good morning, everyone. As Jeff mentioned, we issued our earnings press release after the market close last evening. We also filed our quarterly report on Form 10-Q through the EDGAR filing service yesterday. Turning to financial results, as Jeff noted, we reported loss per diluted common share of $3.31 for the December quarter, which included a non-cash goodwill impairment charge of $284 million or $4.43 per share after tax. Adjusted EPS of $1.12 per diluted share was down about 8% sequentially and flat relative to adjusted EPS for the December quarter of fiscal 2014 which also included a non-cash goodwill impairment charge of approximately $0.87 per diluted share. As you may have noted in review of our press release for the third fiscal quarter, as of December 31, 2014, with the most recent goodwill impairment charge, we no longer carry any goodwill on our balance sheet. For your reference, book value per share at December 31, 2014 is approximately $53 per share after taking into account the goodwill write-off. Vessel revenue at approximately $378 million was down about 3% quarter-over-quarter and up about 5% year-over-year and came in at the high end of the guidance that I provided at the last quarterly earnings call in November. Relative to the September quarter, vessel revenue for the December quarter reflects nearly offsetting effects of additional vessel revenue contribution from recently delivered vessels in loss revenue due to vessel that were recently stacked or sold. High lump sum mobilization and demobilization fees earned in the December quarter, strengthening of the U.S. dollar particularly in regards to Brazilian Real and the Australian dollar and relatively significant loss revenue due to vessels transiting to new jobs or otherwise between contracts during parts of the December quarter. The final two items, vessels in transit and vessels that were idle between charters was more pronounced in the Asia Pacific region and particularly in Australia where we saw a drop in active vessel utilization of approximately 20 percentage points. Vessel operating expense at approximately $210 million was down about 1% quarter-over-quarter and up about 6% year-over-year. Vessel OpEx for the December quarter was above end of the guidance range provided in November with negative in fuel and positive variances relative to expectations in both insurance and crude costs, a portion of which reflects a reduction in Australian crews as our support of select projects in Australia came to an end in December quarter. The strengthening of the U.S. dollar also had the effect of reducing our dollar denominated operating costs. Vessel level cash operating margin at approximately 44% was comfortably within the range of 42% to 45% that I provided in November. With FX movements possibly impacting vessel level cash operating margin in the December quarter by about 1.5 of 1%. Revenue in pretax start up losses in our subsea operations for December quarter at approximately $2 million each were generally consistent with our expectations for the quarter. Total general and administrative expense for the December quarter of approximately $47 million was flat quarter-over-quarter and down a couple of million dollars run rate earlier in the year. Largely as a result of lower professional services costs, the reversal of incentive compensation accruals and the downward revaluation of equity based incentive compensation at quarter end in order to reflect our lower share price at December 31. Below the operating income line, note that we reported a foreign exchange gain of approximately $4 million related to the continued general strengthening of the U.S. dollar relative to commodity currencies and the resulting quarter end revaluation of certain non-USD-denominated balance sheet accounts, including our Norwegian kroner-denominated debt. Note also that foreign exchange losses of approximately $7 million were recognized by our Angolan joint venture during the December quarter. Our 49% of those foreign exchange losses are recognized equity and net earnings of unconsolidated company’s line of our income statement. Offsetting the positive earnings impact of FX movements and a lower stock price, in addition to the previously referenced goodwill impairment charge, we recognized an approximate $6 million asset impairment charge related to five stack vessels. For reference we have 16 stack vessels at December 31 with an average net book value of approximately $1.2 million per vessel. Also note that our effective tax rate of 31% through the first three quarters of fiscal 2015 reflects our typical low 20s operating tax rate as adjusted by discrete items. The large difference between our operating tax rate and effective tax rate for the December quarter is the goodwill impairment charge only portion of which is the deductible for tax purposes. In regards to fleet profile performance, Tidewater's active fleet averaged 261 vessels from the December quarter, which is down 1 vessel quarter-over-quarter. Utilization of the active fleet at approximately 83% was essentially flat quarter-over-quarter, and average day rates at approximately $19,000 were down about $400 or about 2% quarter-over-quarter. As I mentioned a moment ago, lump sum mob, de-mob and similar fees were higher in the December quarter than they were in the September quarter. For reference average day rates, excluding lump sum fees, at approximately $18,500 or down about $650 or about 3.5% quarter-over-quarter. Looking at the key asset classes, as mentioned, the active fleet in the September quarter was 261 vessels and included on average 92 deepwater vessels and 111 towing-supply vessels. Reported average day rates for deepwater vessels at approximately $30,200 were down about $800 quarter-over-quarter or about 2.5%. After excluding the effects of lump sum fees average deepwater day rates in the December quarter were $29,200, were down about 4.5% quarter-over-quarter. Reported average day rates for towing-supply vessels at approximately $15,400, were down about $500 quarter-over-quarter or about 3.5%. After excluding the effects of lump sum fees average day rates for the towing-supply class of equipment were approximately $15,300 or down about 4% quarter-over-quarter. Note that the above mentioned FX movements account for some of the reduced rates. Looking at our four geographic reporting segments. For the Sub-Saharan Africa and Europe segment, which accounted for approximately 40% of consolidated third quarter vessel revenue, vessel revenue was off about 6% quarter-over-quarter, primarily reflecting a lower average active vessel count and the offsetting effects of modestly better utilization of active vessels in lower average day rates which fell approximately 5% quarter-over-quarter. For reference that’s the revenue in Sub-Saharan Africa and Europe was off about 7% year-over-year largely reflecting the transfer of vessels from Sub-Saharan Africa and Europe to other regions during last 12 months. Within the Sub-Saharan Africa and Europe segment vessel revenue generated along the African coast was off approximately 2.5% quarter-over-quarter and vessels revenue generated by North Sea fleet was off about 30% quarter-over-quarter. Overall utilization of active vessels in the Sub-Saharan Africa and Europe segment was 83% in the December quarter, which is up modestly from utilization levels in the September quarter. Average day rates for Sub-Saharan Africa and Europe at approximately $16,700 were up about 5% quarter-over-quarter with the exception of a relatively small Nigerian operation is bringing a slower utilization due to vessels in drydocks and off hire time between jobs. Utilization along the African coast remains relatively strong and stable in December quarter. Utilization on average day rates for the North Sea fleet however were up significantly due to a combination of the seasonal slowdown, excess supply and reduced demand driven by lower oil prices and the Russian sanctions. And near term rebound in the North Sea will similarly require a combination of factors including some sort of seasonal pick up in the spring and summer months and reduced vessel supply. For the Americas segment, which accounted for approximately 36% of consolidated third quarter vessel revenue, vessel revenue was basically flat quarter-over-quarter, following plus 10% increases in each of the prior two quarters. Utilization of active vessels in the Americas segment at approximately 86% was down about 3 percentage points quarter-over-quarter was still relatively strong and stable in the December quarter. Average day rates within the Americas segment for December quarter at approximately $24,000 were up about 6% quarter-over-quarter in part reflecting a good quarter for lump sum mobilization and demobilization fees. Adjusted for lump sum fees average day rates in Americas in the December quarter were approximately $23,000 which is up about 3% relative to September quarter. Vessel revenue in the Americas segment was up about 23% year-over-year. In the MENA segment, which accounted for approximately 15% of third quarter consolidated vessel revenue, vessel revenue was up about 14% quarter-over-quarter reversing the sequential decrease in MENA vessel revenue experienced in the September quarter. Utilization of active vessels in MENA at approximately 83% was up approximately 8 percentage points quarter-over-quarter, and average day rates in MENA at approximately $15,900 were basically flat quarter-over-quarter. Vessel revenue in the MENA segment for the December quarter is up approximately 9% year-over-year. In the Asia Pacific region, which accounted for approximately 9% of third quarter consolidated vessel revenue, vessel revenue was down approximately 24% quarter-over-quarter after a 14% sequential increase in the September quarter. Utilization of active vessels in Asia Pac at approximately 74% was down about 15 percentage points quarter-over-quarter which again largely reflected lower activity levels in Australia which is a trend that we expect to continue for at least for the next couple of quarters. Average day rates in Asia Pac at approximately $21,200 were down about 8% quarter-over-quarter again largely reflecting reduction in our activity levels offshore Australia but also including the impact of the weakening of Australian dollar relative to the U.S. dollar. For reference quarterly vessel revenue generated in the [indiscernible] Asia Pacific region was comparable to vessel revenue generated in that region of December quarter of fiscal 2014. And vessel revenue generated in the region of first nine months was up about 4% year-over-year relatively comparable period in fiscal 2014. Looking at relative profitability, vessel level cash operating margin in the December quarter was in the 44% to 46% in the Americas, MENA and Sub-Saharan Africa and Europe regions. Vessel level cash operating margin in Asia Pac for the December quarter was approximately 33% of vessel revenue largely reflecting the historically lower margins generated by the Australian operations due to the high cost of Australian labor and more recently foreign exchange volatility. Turning to our outlook, like many in the oil field service and capital equipment space, we are expecting revenue to fall in the coming quarters as our end user customer differ or possibly cancel projects and seek pricing concessions in regards to the projects that they plan to advance in order to align their cost and capital spending with reality of lower oil prices. As was the case in previous downturns our task in the currently deteriorating market will be to maximize vessel utilization and when necessary trade things for things rather than things for promises in our discussions with key customers and to bring our headcount and cost structure in-line with current and expected activity levels. Well, project delays will inevitably lead to utilization challenges in the near to an immediate term are relatively young fleet in global operating footprint should allow Tidewater to maintain utilization App for about utilization of competitors’ vessels. Average day rates for Tidewater vessels, however, will likely follow the market down over the next couple of quarters. Our current expectation regards to near term average active vessel count is in the range of 250 to 260 active vessels which is a bit lower than I indicated in our last earnings conference call and this is due to combination of new vessel delivery delays and our expectation that we will stack a handful of additional vessels due to the weaker operating environment. On a days available basis, contract coverage currently remains on the plus or minus 50% area for the next 12 months though that may fall a bit over the next couple of quarters as our customers re-assess exploration and development projects which will inevitably result in a slowdown and tendering and contracted activity. As Jeff mentioned on our last earnings conference call, I will remind you that approximately 60% of the revenue is related to rig support and remaining 40% is related to production, construction, and other activities not directly tied to the working rig count. In this context in recognizing the forecasting has become more challenging in turbulent market. Internal estimates currently paid the March quarter vessel revenue somewhere between $340 million and $350 million. Likewise, based on what we know today, vessel related OpEx for the March quarter should fall within a range of $205 million and $210 million which includes an increase in statutory drydockings for a couple of our large deep water vessels. Based on the vessel revenue and vessel OpEx guidance ranges just provided, vessel level cash operating margin in the March quarter would fall similar in the 39% to 41% area. I would caution however that we are still in the early stages, but potentially significant market reversal some margins and other estimates are subject to further revision. Particularly of our internal cost reduction efforts lag the expected reduction in vessel revenue. General and administrative expense should be in the area of $48 million to $50 million in the March quarter inclusive of $1 million to $ 1.5 million of G&A related services. Combined vessel lease and interest expense should be in the plus or minus $20 million area in the March quarter or basically flat relative to the December quarter. As to an effective tax rate assumption, as I mentioned earlier, we are assuming a 24% to 25% tax rate for the final quarter of fiscal 2015 excluding any discrete items. Turning to financing and investment issues, cash flow from operations for the nine months ended December 31 was approximately $276 million comprised of $91 million for the December quarter, $154 million for the September quarter and $31 million for the June quarter. At December 31, our net due from affiliated related Angolan operations was approximately $264 million, were down about $80 million since the beginning of the fiscal year. Cash collected by Tidewater from the Sonatide joint venture through the first nine months of fiscal 2015 was approximately $271 million which is comparable to the revenue that we have recognized from our Angolan operations. The good news is that the gross due from our Sonatide affiliate has not increased during the last nine months. On the other hand we have not yet been successful in significantly reducing the due from affiliate balance either. As Jeff noted in his opening remarks, the $80 million fiscal year-to-date reduction in net working capital related to Sonatide reflects the managed increase and are due to affiliate balance as we have done a better job in aligning the timing of commissions and other payments to Sonatide with Tidewater’s collection of U.S. dollars to Sonatide has been able to remit to use. As noted in prior filings, the challenges for the company and other service providers to successfully operate in Angola remains significant primarily due to Angola’s new ForEx law, recent related decrease and resulting uncertainty in regards to onshore and offshore payment arrangements. Nonetheless, remain that excess working capital devoted to our Angolan operations has stabilized and our expectation remains that the Angola driven imbalance on working capital position we will continue to shrink over the next couple of quarters. As the non-operating uses of cash, CapEx in the December quarter was approximately $103 million a portion of which was funded by asset dispositions including three sale lease transactions that were completed in December quarter and January at approximately $78 million of proceeds. As to go for funding requirements, based on commitments as of December 31, CapEx related to vessels and ROVs under construction for the remainder of 2015 is estimated at approximately $153 million. Beyond fiscal 2015, cash outlays related to commitments as of December 31, 2014, totaled approximately $350 million, $61 million of which is expected to be expended in fiscal 2016. Total debt at December 31 was approximately $1.5 billion, cash at December 31 was approximately $77 million and net debt to net book capital at 12/31 was approximately 36%. on this basis, leverage remains relatively low but is up about 3 percentage points quarter-over-quarter reflecting the combined impact of operating results for December quarter including the goodwill impairment charge and the repurchase during the December quarter for approximately $100 million of our own share pursuant to our current buyback authorization. As previously reported we have no significant debt maturities until fiscal 2019. Total liquidity at 12/31 was approximately $677 million including the full availability under our $600 million bank facility which is also available to the company until fiscal 2019. And with that I will turn the call back over to Jeff.

Thanks Quinn. Let me separate my comments about the outlook for our industry and Tidewater into two parts. First, what we know and second how we plan to operate. In the what we know category, there is very little we can be certain about. Our clients are under intense financial pressure due to the collapse in the global oil prices and they are responding as they have in every other similar period, cutting capital spending, reducing overhead cost by cutting staff and pressuring the service company, the service company providers for lower rates in the foreign projects. How long this environment is likely to last is a question that everyone is struggling to answer. Given the recent onset of the sharp reduction in commodity prices, we do not expect that any near term improvement in oil prices will cause operators to alter much of what they are planning in 2015. We are preparing for extended downturn until the environment changes in a sustainable way. If oil prices do recover by late this year, then we could look for a better 2016. But the reality is that this year will represent a very difficult environment for oil and gas operators and their service providers and we subscribe to the view that a meaningful recovery may not occur until a later part of 2016 or into 2017. So, what do we do? Our operations will be conducted with the focus on those factors we can control for example making sure that we maintain - making sure we continue to deliver a high level of service quality that means we will not alter our focus on safely and compliance. As I mentioned earlier in the call we consider these two qualities to be core values of Tidewater and we believe our performance in those areas provides us competitive advantage. We will also stay close to our customers not only to make sure that we are providing outstanding service, but also so we can partner with them in steps that can help them to reduce their operating costs. By staying closer to our customers we also hope to be on the leading edge of intelligence about changes in the future operating plan which might include shifts in geographic focus where our global footprint will provide us the opportunity to continue supporting them. We will continue to monitor industry developments and indicators in order to plan our future market and contracting strategy. You may remember just over a year ago, when the market environment of Gulf of Mexico was strong, we lengthened our vessel contracts in the gulf because we anticipated growth in the competitive fleet beyond what was likely to be needed by the plant increase the offshore growing fleet and overall drawing activity. Those lengthened contracts have turned out to be fortuities given the current environment. That is an example of how we adjust our strategy to respond industry trends and developments in the past. We will continue to monitor industry contracting conditions and will adjust our contracting approach to position Tidewater to better navigate the current downturn and to participate in the eventual industry recovery. As I mentioned earlier in my comments, we are winding down our fleet reinvestment program and we will follow a very disciplined approach to any new capital commitments. Like every other service company, we too are examining our headcount and operating cost seeking to reduce both to the extent possible without compromising our commitment to providing quality service inclusive of safety and compliance. We are taking these steps in an attempt to offset the impact from the expected downward pressure on our vessel margins that will come from industry driven lower day rates and utilization. Lastly, with industry turmoil usually come opportunities. What those opportunities maybe is impossible to assess currently. But we need to be prepared to be opportunistic when they do emerge. With our strong balance sheet, solid liquidity position, global footprint and experienced management team, we are well prepared to capitalize on the right opportunities. However, our response to any opportunity will be dictated by our commitment to creating shareholder value which remains the key objective of management. Christine we are now ready to take questions.

Thank you. [Operator Instructions] Our first question comes from Jeff Spittel from Clarkson Capital. Please go ahead.

Thank you. Good morning fellows. Maybe if we can discuss some of the large offshore customers who talked in the public domain about requesting pricing concession for the whole of their supply chain, how widespread those approach has been at this point and does there seem to be a willingness to trade I guess, Quinn characterized it things for things whether it's term for rate concession or something along those lines?

Jeff, a lot of these discussions are developing sort of as we speak today we probably heard from a handful of our major clients fully expect that to be across the board and it's not the first time we have been through this. And again, I refer back to what Quinn said and he has mentioned, we are very much calendar these discussions with the idea that we get it, we need our clients to be successful, but at the end of the day we need to trade things for things, not things for promises. And I can tell you some of the discussions that I have had recently is last week, there is an understanding by our clients on the other side too. So that's developing, but I am fully expecting it to be pretty much across the board as we move forward. The longer this downturn lasts.

Sure. that’s understandable. And then maybe with regard to the MENA region there seem to be a lot of moving parts there deep water vessel utilization trending in the right direction, Ramco seems to be pretty content to stay pretty active, but maybe at different price levels, the utilization has been a little bit volatile for the towing supply fleet. So maybe if you could just provide us a little bit more color and how these different mix factors are going to play out over the next few quarters in your estimation?

Jeff, I look at MENA, we have got a mix of longer term contracts and then we have some shorter term contracts be it with construction companies or even with the Ramco there is some like 90 day type contracts three months that we are on. How that plays out I think it's still going to be volatile. It's not going to stabilize to some normal I think unfortunately volatility is going to be more than norm than coming to a sort of a status quo.

Okay. I appreciate the color Jeff. Thanks.

Thank you, Jeff.

Thank you. Our next question comes from Gregory Lewis from Crédit Suisse. Please go ahead.

Yes. Thank you and good morning. So Jeff, I was - as we see how West Africa the deep water fleet has tracked it looks like over the last call in two years it kind of peaked out at 44 boats and now as this quarter ended, we were at 36 boats. Can you just talk a little bit about that's clearly been a strong big basin for Tidewater, lot of revenue coming out of that market? Can you talk a little bit about what's happening there and potentially why we are seeing that drawdown on the flip side of that I guess utilization is going higher. So just you can provide some color into the positioning of the water fleet?

Yes Gregory, I will just kind of refresh comments that we made in the past. We don't really have a bias to or against any one operating area. We are always looking at the best utilization or the best deployment of our fleet on a worldwide basis. I can tell you there are weekly basis Jeff Gorski and his team they are looking at upcoming opportunities and looking at what available maybe coming off of contract and we are looking at moving those assets to that better market. So, I think what you are seeing is just the result of that natural business process we have and that's what's going on. We have some nice opportunities outside of that region to move some of that equipment and we are going to do that. We will do that in the future and likewise if the best opportunity remains in or arises in that region you might see vessels coming back in. so again I think it's just more than normal business of how we manage our fleet than anything else.

Okay, great. And then, you touched on clearly at least from where I said it’s easier for me to track the 60% of the market based on drilling activity. In conversations with your customers on the other 40% of your business, the other, the construction etcetera, any sort of color you can provide on how that market is trending I think would be pretty helpful?

And again, I can tell you that internally as far as for us to get a real handle on all that is much easier to get a handle on the drilling side. But in general, projects that are well underway production projects those will continue I think to carry on, whether you are going to see or expecting is potentially new construction projects that could be differed as our clients are differing a capital spend we are going to see that kind of stretch out and get pushed out into the future. But again that 40% I’m very glad that we have the 40% it’s not directly tied to rig activities and that’s kind of where we’re at. But as far as giving you sort of real meaningful insight and how that will play out other than what I have just said I don’t know that we really can.

And just real quick, I’m just following up on that do you get the sense that that maybe, I guess over previous cycles and your experience does that cycle, does that segment of the business tend to be a little bit more defensive than the drilling aspect of it?

Sure. It does.

Okay, alright guys, thanks for your time.

Thank you, Greg.

Thanks Greg.

Thank you. Our next question comes from Jon Donnel from Howard Weil, please go ahead.

Good morning guys.

Hey Jon.

I had a couple of questions on your sources and uses of cash here as we think about the next couple of quarters. I’m going to appreciate that the CapEx program is starting to wind down but it looks like over the next two quarters you still have a pretty significant commitment in terms of both vessel deliveries and the CapEx related to that. I was just wondering what kind of flexibility you have or ability perhaps to delay some of those deliveries especially in light of the current market situation and is that something that you are looking at right now?

We’re certainly looking at all of the options Jon, but a lot of that equipment is being delivered over the next couple of quarters, but they are pretty far along with respect to where they are in the construction process. So, I really kind of careful because we are looking at everything but again the flexibility we have has to be tampered by also the fact Jon that’s good equipment and equipment we do want to bring into the fleet too. So with all that being said I kind of think what Quinn has spelled out with respect to the CapEx going forward that 500 million that’s pretty much moving along in that direction.

I think to add Jon, is that the delivery delays and revenue impacts associated with those delivery delays is not a Tidewater’s initiative. Some of the yards have struggled either with labor or for other issues and to the extent that vessels are not coming into the fleet according to the schedules that we have historically published. It's really on the yard side more circled is at the request of Tidewater that we have seen in the press other ship owners have sought delivery delays because of their financial position or because of just network for the new equipment but that's how we are talking about the lease at this point.

Okay. And then, in terms of funding is the first choice going to be to use the revolver here I mean it looks like the model would suggest that the cash amount to get pretty tied or would you maybe lean more towards sort of the sale lease pack, the way we have been seeing little bit more for the last couple of quarters to help fund that or and I guess in relation for that too, does that perhaps preclude any more share repurchases in the short term as you kind of wind up this bigger portion of the capital spent?

We probably expect being cautious in regards to balance sheet and liquidity management and that will impact as Jeff indicated any new commitments and we will certainly inform our thoughts in regards to additional share repurchases. In terms of the financing alternatives that we would pursue we will certainly as we always have look at lot of different things say at least programs which has been a top go for these calls in the past is really not something I would consider to be a primary funding vehicle, sale leases work well for us. Typically when there is three or four things that are met, the opportunity that we have to close a new sale lease transaction, number one is, we are getting good value for the vessel, and number two is, the effective financing cost is attractive and number three is that it addresses tax need typically which motivated a lot of our transactions last year. I don't expect sale leases to be a primary financing tool for us certainly not to the extent that it has been for smaller competitors, but it’s something we’ll look at as circumstances present themselves. I would say as a general matter we are trying to preserve availability on the revolver because who knows what the next couple of quarters or years are going to bring us, we do have long term financing alternatives where some of the vessels that are in the construction queue some of which are export, financing related and we will get those as we would any other launch of financial alternative obviously what portion of construction payments is funded by cash from operation, that is going to be a function of what the future brings us. But I am very, very comfortable with the debt portfolio we have its generally long term. It's low cost and our liquidity position is quite healthy really to address eventuality that may develop.

Okay thanks a lot for taking my question guys.

Thank you. Our next question comes from George O'Leary from Tudor, Pickering, Holt. Please go ahead.

Good morning guys.

Hi George.

Looks like the cost guidance you guys provided is down quarter on quarter heading to March quarter can you just talk about some of the leverage that you guys have to pull on the operating cost funds move forward is there further reductions in crew cost, is your cost coming down. What are the leverages you guys see under reducing cost as we move to this down cycle?

I guess short answer is yes and yes. Most of our fuel that is used on our vessels are customers account. We pay for fuel either when the vessels are hired or when it's mobbing on our ticket. What drives cost on a quarter-to-quarter basis is timing of statutory drydocks and major repairs. We have a relatively healthy amount of statutory drydock schedule for fourth quarter of this fiscal year, but other things that will impact us is the downsizing of our Australian footprint as we migrate vessels out of Australia to lower cost environment that will impact certainly revenue and crude cost. But, we are working everything from a cost management perspective and obviously the number of active vessels will have a significant impact on them as well.

George, we are service company and the reality is headcounts probably the thing that you can look at the most you have to size yourself for the activity and where you see the market going.

That’s helpful color. And then, on the new skew fund and maybe just kind of stepping back and thinking about it from your picture standpoint just look at the data looks like there is 400 boats under construction, just given your history in the business have we seen many cancellations heading into down cycles or coming out of down cycles not that you guys would cancel any of your contracts, but just historically has that occurred. We often hear folk say the other 400 vessels it look like they are under construction if you look at the data, but some of those probably aren’t real, just kind of curious what your take is on that and what you’ve see historically?

George, historically I don't know that we have ever had numbers. You can go back to and say this is the number that we were - that might not be delivered. I did mention on our last earnings call and I think it's even more relevant today, a lot of the construction that's in the Chinese yard and the far east yards, we have had some discussions with some other people that kind of monitor that some of the brokers and seeing some of that equipment first hand because we have vessels in those yards or nearby yards. I think there is a number and I’m hesitant to put say that it’s to quantify, but I think there are a number of that 447 specifically where the owner or the people who contracted for those ships is not going to take delivery so it’s going to be interesting to see how that plays out and a lot of those ships I think that would be abandoned like that I think ultimately they will not come into the market. But I’m pretty hesitant to throw a number out there but there are number of ships in Chinese yards that quite frankly there is not going to be an owner to make that last payment to pick them and how that plays out, it will certainly be a deduct from that 400, we have our numbers today by 447 OSDs under construction that’s our latest number. But there will be some of those that certainly will not take a delivery and won’t come into the market.

Just to correct one thing that you had mentioned as this, we fact have cancelled projects in the past as a result of yard performance.

Okay, helpful. Thank you very much.

Thank you. Our next question comes from Matthias Detjen from Morgan Stanley. Please go ahead.

Hello gentlemen. I have one follow up question on the sale lease packs and I was wondering was that new build vessels or was that existing vessels in your fleet and going forward what do you serve like what they have email you and you guys always second hand vessels for substantial actions?

The most recent transactions that was my recollection as well 6 to 8 year old [Sipco] but over the last two years we have done both, we did a sale lease transaction that made us in our disclosure and one of our large U.S. built depot PSEs that was coincided with delivery that’s the only transaction I can remember that we actually did a sale lease transaction concurrent with the vessels original delivery. But by and large the vessels we have done have in the 5 to 10 year old vintage and again the reasons so we’ve done and has been the value we received for the value of vessels upfront, the transactions provides us at the backend lease and ultimately the embedded financing cost and tax treatment.

Okay. Thank you. And then, I have one question about your contract backlog, couple of quarters back you said you had around an average length of two years, could you maybe give us update on that where that currently stands and maybe how much of contracted out to 2015 and 16?

No, I think in terms of foreign contract coverage as we disclosed in the last couple of calls, as we continue at about a 50% level, Quinn also had those comments in his discussion earlier. So at least looking at the next year from the perspective of our current fleet we have got about 50% coverage which seems consistent over the last couple of quarters. What I would say to your comment is we have openly said in the past when questioned what is the average term over the quarter vessel contract, that average term is around two years. The average term of a shallow water vessel is more than a year, year and a quarter range. So those - that maybe the information that you are referring to as opposed to specific contract coverage. The other point I would make is that when two closely combined average contract term with contract coverage just that so we provide it's really two different concepts. When I talk about 50% contract cover we are talking about over the next 12 months on days available basis what percentage of the days are contracted so that's - when we refer to plus or minus 50% contract coverage over the next 12 months that's what we are referring to. In terms of contract coverage as Joe indicated a lot can get lost in the averages but again it's when you combine the shallow and deep water fleets, it's typically somewhere in the 18 to 24 months average but that will include six month contracts and five year contracts on the regional basis that is quite different as well. Historically, we have had about 15% to 20% of the fleet roll on a quarterly basis and obviously that is the portion of the fleet that is either lagging the market as it moves up or lagging the market as it moves down and not knowing that for percentage of the fleet that subject to re-pricing in a typical quarter.

Okay, great that’s very helpful. Thank you.

Thank you. Our next question comes from Daniel Burke from Johnson Rice. Please go ahead.

Good morning guys.

Hi Daniel.

Quinn, I think going back to your apologize going back to your very near end quarter you alluded to, look like top line revenue being off about 8% to 10% just wanted to better understand I would imagine ForEx is probably unhelpful. You lose a couple of operating days sequentially in the March quarter and maybe of higher drydock not sure sequentially whether the drydock opportunity costs is larger or greater? But just trying to get a sense for what the underlying implied trend in day rate utilization looks like quarter-over-quarter, is it more like a 5% dip in the underlying operation sequentially just to try to understand that with an eye towards the next fiscal year and your comment that revenue should fall in coming quarters as well?

I think it's going to be difficult to disaggregate in percentage terms what’s going to be driving the top line or bottom line or anything in between. You are correct though that there is drydocking impact in the next quarter two days in the quarter obviously doesn’t help either. It's going to be tough to kind of translate into numbers but I think what we expect to experience particularly as customer reprioritizing projects is you are going to have significant delays in decision making in the next couple of quarters as people rebate for spending plans and that's probably going to first effect utilization and then ultimately pricing will follow the market as contrast roll. But at least our expectations in the next couple of quarter is that you are going to have delays in decision making that create contract gaps. That's going to play into it and all the other items you mentioned will play into it as well. I would love to give you more precise guidance for the couple of quarters but we are struggling with this just as you are.

That's helpful and then maybe as a follow-up then. More specifically to Angola while talking discussion on the cash flow outlook there but what about the fundamental out looking Angola The market did very consistent for you at least from a that top line perspective do you expect that Angola would outperform or underperform the overall trend in results over the next year?

Again, I think the activity level in Angola over the next 12 months is still pretty solid and just looking at it just strictly from the potential for work it is there and that's a lot of that is due to the fact that the clients have commitments to drill. And there is some pretty solid work that’s ongoing and some of those big projects will run through the next 12 months. So, I think overall the opportunities are there what's kind of an offset to that is the additional risk that potentially you have with again the foreign exchange laws in getting dollar out. So you really have a couple of pulling in different directions. But overall, I would say that Angola is still probably one of the stronger markets in the world for opportunities although the risk profile I think, can I would like to say is probably - it's not getting easier to operate there with respect to the financial issues that we’ve gone through.

Great. Thank you guys for the comments.

Thank you. Our next question comes from Michael Knoll from Key Group. Please go ahead.

This is Brian Finkelstein for Michael. Just had a quick question. We went through the queue and we saw that the Angola decrease has been separate June 2015 and I guess we are just trying to get color on Sonatide have to own 100% of that assets or how would that impact the current structure?

Those are very good questions the ones that we are trying to work through ourselves right now. Like a lot of countries when the decree come out it's not black and white it's not definite and we are trying to work through that issue as we speak.

Okay. Got you and then just had one other -

Whatever guidance governments provides in terms of the market requirements one expectation we do have is there would be a transitional period that will allow existing operators to comply, I mean ultimately any restructuring that we’re doing in regards to Angola operations will be informed by number one, a decree and number two the implementation regulation associated with the decree.

Okay. Do you think there would be a grace period then? And I understand over time this has just been an item where you guys have had just to work through. So I am just trying to get color on June is not that far away so -?

Yes, the thing is when you look at all of the service providers, our competitors were all in the same situation if you will and again I find the Angolans to be very pragmatic. At the end of the day they realize they need the services, and they realize that those type of changes if they would go to that 100% which I am not suggesting that that is the answer but they will come back with - they will realize we will take company's little bit time to go ahead and restructure and be compliant and rest assured we are going to be complaint with the laws in Angola. There are two ways about that. So again, I think that the way Quinn has answered and I think that yes, there will be transition period and I think that during that period we will become compliant.

No. I guess this was the first update, so I am pretty unclear on that would come out. I was just trying to get color. We just had one quick follow up question, just on some of your debt, do you guys have any debt to EBITDA covenants or I am just trying to get color on any covenants on the facilities?

No, actually the two primary financial covenants in both our bank facility and our private placements are a debt to total capitalization covenant of 55% and then there is covenants that is essentially in EBITDA to interest covenants and there is disclosure in our debt section of the Qs and Ks, but those are the two financial covenants. There is no debt to trailing annualized or other EBITDA covenant.

Okay. I appreciate it. Thanks.

Thank you.

Thank you. Our next question comes from J.B. Lowe from Cowen and Company, please go ahead.

Hi, good morning guys. I just had a quick question on your new builds that are coming to be delivered over the next couple of quarters what percentage or how many of those are contracted or have contracts that are going to be delivered into and those that don’t have contracts is a potentially you swap those vessels into all the vessels that are working on contracts perhaps.

Yes, JB this is Jeff Gorski, currently of the new builds there are couple of vessels that we’re building [indiscernible] equipment they do have some contract coverage and then also some of the other vessels that we are currently building in southeast Asia but that’s not necessarily common that we actually have contracts built, as Jeff mentioned before the winding down of our projects are target specifically the market opportunity and also to fill up the capability there by new fleet. So there is a combination of both but if you do have contracts you signed to them.

Okay and my other question was on the North Sea, so whether recovery there is going to require some supply being taken out of the market, have you seen that start to happen yet in terms of vessels moving out of the region and if so where those vessels headed. So whatever region they’re going?

I think what we have seen so far what we recently we have seen some operators in the North Sea, go ahead and warm stacks and boats and take them out of the market so again we have seen a little bit of that. We move some vessels out for projects out of the North Sea, some other people have moved some equipment into Brazil at times and further down at the African coast, but again as the whole market gets weaker there is less places to go for that equipment. But we have seen in recent times some operators go ahead and warm stacks and equipment in the North Sea.

I think it also seems to negotiate delivery delays, new construction that was targeting the North Sea in order to addressing some of the same supply issues.

Alright, got you, thanks.

Thank you. Our next question comes from Mark Brown from Global Hunter Securities, please go ahead.

Hi guys. Thanks for squeezing me in here. I just if you could give any color on the Gulf of Mexico, I know your day rates were up in the Americas sequentially I think some of that was mob and de-mob fees, but can you identify what or isolate what geographies you saw day rates improve over the quarter?

Mark, we don’t like to get down to this market, we have see an increase in this market, we have seen another decrease in kind of that granular detail. Your comment about the Gulf of Mexico, fortunately for us I think we did a pretty good job, extending our contracts a year ago, but we do have a little bit of equipment that’s trading and will be trading, looking for homes, coming up in a relatively short time. But, the market here in the gulf is certainly for the smaller equipment is getting increasingly difficult and it doesn’t look like the market as a whole domestically here in the gulf is going to have a large uptick in the near future.

Alright, sounds good and just my final question, if you have any comment on Brazil and the situation with Petrobras, are there any implications for your existing contracts or new tenders?

I think sort of the knock on, as Quinn mentioned some of the issues of just a decline in the oil price, we get back to Brazil you certainly have the issues within Petrobras, I think that tends to make decision making a longer process to get to it. So, as contracts would come to an end as you look for either extensions or new tenders that process would probably lengthen, I wouldn’t think it would shorten. Overall, for ourselves, I really don’t believe that we have a direct knock on from that. I would just make a comment that anytime there is these type of changes ultimately when corruption is pushed out of the market that’s good for operators such Tidewater and we try to play by the rules, we do play by the rules. So getting that type of things out of any market I think is ultimately good, but I don’t see any immediate knock on for Tidewater.

Alright that’s helpful, thank you.

Thanks Mark.

Thank you. We’ve no further questions at this time.

Christine, thank you for hosting us today, we appreciate everyone’s interest in Tidewater and enjoy the rest of your day, thank you very much.

Thank you. And thank you ladies and gentlemen, this concludes today’s conference, thank you for participating, you may now disconnect.