Tidewater Inc.
Q4 2013 Earnings Call Transcript

Published: 21 May 2013

[Operator:]

Welcome to the Fiscal 2013 Fourth Quarter Earnings Conference Call. My name is John, and I'll be your 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. Mr. Bennett, you may begin.

[Joseph M. Bennett:]

Thank you, John. Good morning, everyone, and welcome to Tidewater's fiscal 2013 full year and fourth quarter earnings results conference call for the period ended March 31, 2013. I'm Joe Bennett, Tidewater's Executive Vice President and Chief Investor Relations Officer. With me this morning on the call are our President and CEO, Jeff Plat; Quinn Fanning, our Executive VP and CFO; and Bruce Lundstrom, our Executive Vice President, General Counsel and Secretary. We will follow our usual conference call format. After the formalities, I'll turn the call over to Jeff for his initial comments, to be followed by Quinn's review of the financial details for the year and quarter. Jeff will then provide some wrap up comments before we open the call for questions. During today's conference call, Jeff, 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 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.

[Jeffrey M. Platt:]

Thank you, Joe, and good morning to everyone. Earlier this morning, we reported fully diluted earnings per share for fiscal 2013 of $3.03, compared to our fiscal 2012's $1.70 per share results. We remind you, however, that our fiscal 2012 results had been affected by a $30.9 million pretax goodwill charge. Excluding that goodwill charge, our after-tax adjusted earnings would have been $2.13 per share for fiscal 2012. This year's annual earnings results did include a $3.4 million after-tax charge or $0.07 per share associated with the settlement of our former CEO, Dean Taylor's retirement benefits, which we previously recorded in our third fiscal quarter. For our fourth fiscal quarter, we reported fully diluted earnings per share of $0.95, compared to the $0.66 we earned in fiscal 2012's fourth quarter. Our results for this quarter were substantially better than a consensus estimate of $0.61, and Quinn will provide you with additional information as to the reason for this solid performance. Vessel revenues in the quarter were $325 million, which is an increase of approximately 7% from the vessel revenues we reported our prior quarter but importantly, this quarter's revenues represent an increase of approximately 13% over the vessel revenues of last year's fourth quarter. Our vessel revenues reflect the improving health of our industry that we have noted in previous conference calls and presentations and the fruits of our continued investment on our vessel fleet over the past several years. We said we thought you would see a rising stairstep pattern to our future revenues, and we believe our latest quarter's revenues signal another step up. Our assessment is that the underlying fundamentals of the offshore business are good and appear to be strengthening. Not only do our financial results reflect this improvement, but our recent investing activity should demonstrate our growing confidence in the strengthening of the industry cycle. Last week, we announced an agreement to purchase Troms Offshore Supply of Norway for approximately $395 million. The transaction, which is scheduled to close in the second calendar quarter, will bring us 5 large modern and technically advanced PSVs with a sixth under construction and an option for a seventh. The acquisition expands our global footprint into the Norwegian sector of the North Sea, a market we have not previously served, but an important market in the long-term future of the offshore oil and gas business. Troms's vessels and, more importantly, their experienced management team and employees will provide us with the increased capability to work in harsh environments and in cold climates such as the Arctic, where oiling companies are targeting exploration. We are excited about the proven capabilities and the expertise that Troms's team will bring to Tidewater. The Troms vessels, coupled with the 3 STX vessels acquired last quarter, 2 of which having already been delivered, and our 2 U.S. flag vessels that are Polar Class 7 designated, due for delivery before the end of this year, provide Tidewater with a complement vessels and management expertise that will have the capability of competing vigorously for opportunities in the expanding global cold water offshore market. On last quarter's call, we discussed the impact of drydocks on Tidewater's financial results. This quarter, as Quinn will explain to you, we essentially hit our drydocking numbers, both in terms of the number of drydocks completed and the dollar amount spent. It's important that you keep in mind that Tidewater now has a fleet of over 230 new vessels, representing more than 85% of our total active vessel fleet. Although these new, larger and more technically advanced vessels have enabled us to earn higher day rates, they cost more to build or acquire and they are more expensive to maintain. When one of these vessels goes into a shipyard for a regulatory drydocking or other extended work, we experience a significant short-term revenue loss associated with the vessel's down time, coupled with the cost of the drydock, which we expense at the time our vessel enters the yard. This issue of earnings volatility caused by drydockings is not unique to Tidewater but rather it's an industry-wide challenge. With a large new vessel fleet, we will continue to have a number of drydockings every quarter. We continue to work with our customers and available qualified shipyards to complete the necessary work as efficiently as possible. Nevertheless, we may continue to experience volatility in a number of drydockings undertaking each quarter. Quinn will comment more on this topic in just a minute. The Tidewater safety culture remains one of our key points of emphasis. I am very pleased to announce that for the entire fiscal year ended March 31, 2013, our company comprised of approximately 8,000 employees experienced no lost time accidents. This performance speaks to the diligence of our employees in their daily work. This is only the second time in Tidewater's history that we have achieved this significant milestone. While the outstanding safety performance last year earned our employees additional well-deserved remuneration, our best reward is making sure everyone goes home safely each night. We can never allow our focus on safety to waver as it only takes a split second for an accident to occur. I thank all of our employees worldwide for their diligence in operating our fleet safely during fiscal 2013. Turning to Angola, our JV agreement with our joint venture partner, Sonangol, expired by its own terms on March 31, 2013. We continue to have constructive discussions with Sonangol about a new long-term JV agreement, but nothing has yet been formalized. I believe our relationship with Sonangol remains solid and that our discussions will lead to a new Sonatide joint venture agreement that will satisfy Sonangol's objectives, while ensuring that the interest of Tidewater shareholders are protected. In the meantime, I can report that our vessels operating in Angola remain hard at work, and we continue to respond to requests for additional vessels to support activity in Angola. We will continue our policy of limiting our comments about this topic to official releases and we'll look to provide additional information when there is something additional to report. Now let me turn the call over to Quinn to discuss our financial results in the fiscal year and fourth quarter, and to provide you some commentary about next quarter. Quinn?

[Quinn P. Fanning:]

Thank you, Jeff. Good morning, everyone. First, I'll call your attention to the earnings press release that we put out this morning prior to the market's opening. We expect to file our annual report on Form 10-K through the Edgar Filing Service sometime before the close of business today. I intend to focus my comments on the quarter just completed and our near to intermediate-term outlook. As usual, I will also provide a recap of capital commitments and available liquidity. I'll then conclude my remarks with a few perspectives on the Troms's offshore transaction, which is not explicitly incorporated into the guidance that I will provide for the June quarter. As Jeff noted in his introductory remarks, we reported diluted earnings per common share of $0.95 in the March quarter, versus diluted earnings per common share of $0.61 for the December quarter, which again was net of $0.07 in the SERP settlement charge. Focusing on the big picture. Vessel revenue for the March quarter, at $325 million, was above the vessel revenue guidance range that I provided in February. Operating expenses, at $186 million, was below vessel operating expense guidance range that I provided and vessel operating margin, at approximately 43%, was about 3 percentage points better than the high-end of the range that I provided on our last call. As vessel deliveries and vessels and drydock are frequently key drivers of quarterly financial results, I'll note a couple of items for you in order to provide some additional context. First, incremental vessel revenue from 6 new vessels that were delivered in the March quarter and 5 vessels that were delivered in the December quarter totaled about $8 million in the March quarter. Demand for our new equipment remains very good across most geo markets, and the team has been reasonably effective at getting new vessels on charter at good rates. Second, as we discussed on recent earnings conference calls, it can be challenging for us to accurately forecast which vessels will be on or off charter for scheduled and unscheduled repairs and to require regulatory drydocks. It is also difficult to know precisely if such vessels will enter and leave the shipyard. So relative to our expectations at the time of our last earnings conference call, note that vessel revenue and vessel operating margin in the March quarter included a net benefit of a couple of million dollars related to drydocks, i.e. lost revenue due to vessels and drydock was a couple million dollars lower than we expected at the time of our last earnings conference call. Just as the cost of the individual drydock can be higher or lower than anticipated, recognize that lost revenue estimates can be impacted by the acceleration and deferral of drydocks and by drydocks that take greater or fewer number of days than was originally anticipated. To be clear, the drydocks that were deferred in the March quarter will eventually be done and they will likely to be done in the June quarter. When I get to it, our guidance will incorporate the best available information we have in regards to the impacts scheduled maintenance and repairs will have on the quarter. With these 2 points in mind, I have a couple of operating statistics for the March quarter. Active vessels, at 265 vessels, were up 2 vessels quarter-over-quarter. Utilization of the active fleet in the March quarter was a respectable 83% and was up modestly quarter-over-quarter. As discussed, utilization in the March quarter reflects a relatively high drydocking schedule, even after the deferral of a couple of drydocks. The March quarter's vessel utilization also reflects a modest drag associated with newly delivered vessels getting to their first job. I highlight this primarily to note that if vessel demand trends remain positive in fiscal '14, as we expect, we hope to realize a couple of points of additional utilization of the marketed fleet in the coming quarters. Average day rates for the active fleet, at $16,400 a day, were up about 7% quarter-over-quarter. Looking at the key asset classes. The deepwater class of vessels, which account for about 52% of consolidated fourth quarter vessel revenue and for which average active vessel count was up 3 vessels quarter-over-quarter to 80 vessels, utilization of active vessels was up about 6.5 percentage points quarter-over-quarter. For the towing-supply and supply class equipment, which was about 40% of consolidated fourth quarter vessel revenue and for which average active fleet count was flat quarter-over-quarter at 120 vessels, utilization of active vessels was off about 3 percentage points quarter-over-quarter. I would be a bit cautious in reading too much into the differences in quarter-over-quarter utilization trends for deepwater vessels, for which utilization was up quarter-over-quarter, and the towing-supply and supply vessels, for which utilization was down quarter-over-quarter. At least in my view, the quarterly trend reflects scheduled maintenance time and new vessel deliveries in the March quarter was more so than the possibility that the 2 asset classes are trending in opposite directions. In fact, except for scheduled and unscheduled maintenance, our sense is that demand is stable to improving and our expectation is that utilizations should remain high across all asset classes for fiscal '14 and perhaps beyond fiscal 2014. Average day rates for the active deepwater vessels were up about $600 or about 2% quarter-over-quarter. This trend is consistent with our expectation that average deepwater day rates will continue to trend up as vessels currently in the fleet roll on to new charters that are set at current market rates as we continue to take delivery of larger, higher spec vessels that will generally command higher day rates than the average day rates for our current fleet. Again, demand for deepwater vessels is good across geographies and we expect the recently observed trend in average deepwater day rates to continue through fiscal '14. Average day rates for the active towing-supply and supply fleet were up about $800 or about 6% quarter-over-quarter. The quarter-over-quarter trend in towing-supply and supply day rates, on the other hand, reflects a combination of rate increases in select geographic markets and only for certain sub classes of vessels. Towing-supply and supply day rates also reflect lump sum demobilization fees, which account for about 30% of the $800 quarter-over-quarter increase in average day rates. Our expectation remains that towing-supply and supply day rates will move up as the number of working jackup rigs moves up. However, I would characterize our efforts to increase towing-supply and supply day rates as more a work in progress than a mission accomplished. As a result, I will be a bit cautious in extrapolating the quarter-over-quarter average day rate trend that was observed in towing-supply and supply class in the March quarter, until we have a few more data points supporting the case for real rate traction. I can assure you, however, that we are working hard to push rates when there is an opportunity to do so. Turning to vessel operating costs. Vessel OpEx for the March quarter was about $186 million, versus about $181 million in the December quarter, which, as previously noted, was below my guidance in February. Repair and maintenance expense at about $36.5 million was up slightly quarter-over-quarter but was generally consistent with where we were projecting R&M costs at the time of our last earnings conference call, reflecting, generally, offsetting effects of deferred drydocks and the combination of accelerated drydocks, emergency repairs and cost increases on drydocks that were already process. Crew costs were up quarter-over-quarter by about $3 million, yet we're still below our expectations at the time of our last earnings conference call in February. Our expectation, of course, is that crew cost will trend upward with fleet growth. For reference, Tidewater's crew cost, as a percentage of vessel revenue, was 29% in fiscal '13, although that percentage varies quite significantly across our 4 regions. Finally, as expected, insurance and loss costs, at about $4.2 million, were down about $3 million quarter-over-quarter, largely reflecting higher cost in the December quarter related to the Nanotide incident. Going forward, quarterly insurance and lost cost should be reasonably close to the quarterly average in fiscal 2013 of about $5 million a quarter. Overall vessel-level cash operating margin for the March quarter was $139 million or about 43% of vessel revenue. Looking at our geographic reporting segments. For the large Sub-Saharan Africa and Europe segment, which accounted for about 48% of consolidated fourth quarter vessel revenue. Vessel revenue was up a better-than-expected 14% quarter-over-quarter, reflecting a combination of additional vessels in the region, higher average day rates and better-than-expected utilization, due in part to the previously referenced deferral of drydocks. For the Americas segment, which accounted for about 25% of consolidated fourth quarter vessel revenue, vessel revenue was off modestly quarter-over-quarter but was generally consistent with our expectations. For the smaller Asia-Pacific and MENA segments, each of which accounted for about 13% of fourth quarter consolidated vessel revenue, the quarter-over-quarter vessel revenue trend was positive. For Asia Pacific, vessel revenue was up about 6% quarter-over-quarter with particularly good growth in Australia. In our MENA region, vessel revenue was up very modestly quarter-over-quarter, but the region experienced very good year-over-year growth, largely as a result of successfully scaling up our business in Saudi Arabia over the last couple of years. Vessel margins for the March quarter for all but the Americas segment were about 40%. And with the exception of the better-than-expected performance in Sub-Saharan Africa in the March quarter, all 4 regions generally performed in a manner consistent with expectations. Below the vessel operating margins, shipping expense for the March quarter, at about $47 million, was up quarter-over-quarter, reflecting both higher professional services costs and higher compensation costs. A portion of the increased compensation expenses attributable to the higher share price at March 31 and a portion of the increased cost is attributable to incentive compensation tied to better financial and safety results than was assumed in our expense accruals through December 31. Also worth noting in the March quarter was a $3.6 million foreign exchange gain related to the February devaluation of the Venezuelan bolivar. If this is counterintuitive to those on the call, recall that at the time of the nationalization of our business in Venezuela in fiscal 2010, we wrote off long-lived assets and we took 100% provision for potentially uncollectible accounts receivable of PDVSA and its affiliates. As a result, our Venezuelan operations are presently carried under our consolidated financial statements as a net liability. The devaluation of the bolivar has the effect of reducing financial statement value for bolivar-denominated liabilities. Finally, our effective tax rate for fiscal 2013 was a bit less than 23%, which was a couple of percentage points lower than the guidance that was provided in February. The lower tax rate can be largely attributed to the previously referenced foreign exchange gain, which there is no associated tax expense and better-than-expected pretax results and lower tax rate jurisdictions including Africa and Australia. The effective tax rate for the March quarter also reflects a reversal of an over accrual of tax expense through the first 9 months of the fiscal year. Turning to our outlook. We continue to expect that the newer vessels within both the deepwater and the towing-supply and supply classes of equipment will continue to experience high utilization, positively or negatively impacted by the timing of drydocks. We expect that average deepwater day rates will continue to trend positive as vessels roll to charters reflecting current market conditions, whereas near-term day rate traction in the towing-supply and supply class equipment will likely require further improvements from the jackup market, which, from our perspective, already appears to be occurring. As to prospective fleet count, we took delivery of 6 new vessels in the March quarter. Based on commitments as of March 31, we expect to take delivery of 3 additional vessels in the June quarter, including one large deepwater PSV and 2 crewboats. There is also a good chance that the Troms offshore transaction can close before June 30, but I am excluding additional vessels related to the Troms transaction from these numbers. To the extent that the Troms transaction closes in the June quarter, we will, of course, highlight all financial statement effects of the transaction on our next earnings conference call. In this context, internal estimates currently peg the June quarter's vessel revenue somewhere between the $320 million and $330 million, reflecting slow and steady improvement from a solid March quarter despite the fact that we may be contending with drydock-related headwinds for a couple of quarters. Based also on what we know today, OpEx for the June quarter will probably fall within the range of $195 million and $200 million, reflecting incremental OpEx related to new vessel deliveries and higher estimated costs for planned repairs and maintenance and regulatory drydockings. It may be helpful to note that quarterly repair and maintenance expense in fiscal '13 averaged about $33 million. Individual quarters were as high as $36.5 million and as low as $27.2 million. With the growth and increased complexity of the fleet, on average, we would expect quarterly repair and maintenance expense to be 10% to 15% higher in fiscal 2014 than it was in fiscal 2013. As was the case in fiscal '13, we could also find that individual quarters could be 15% or 20% higher or lower than the quarterly average for the fiscal year. I'll also note that our current expectations are that the repair and maintenance costs in the first half of the fiscal year will be higher than the second half of the fiscal year. While I'll try to incorporate the most current information that is available to me in my quarterly OpEx guidance, I'll note that a $5 million quarter-to-quarter swing in R&M costs is well within what I would expect to be ordinary course volatility. In any event, based on the vessel revenue and OpEx guidance range just provided, vessel operating margin for the June quarter should be somewhere between 38% and 41%, although I personally feel that the June vessel margins will be in the upper half of this margin percentage range. In addition, vessel margins are expected to move up as fiscal 2014 progresses given our positive fundamental outlook, expected fleet additions and an expectation that drydocking activity will be lower in the second half of the year than in the first half of the year. Again, the timing of drydocks can and will result in quarter-to-quarter volatility. In terms of our expectations for relative performance by region, note that the Sub-Saharan Africa and Europe region has a particularly heavy drydock schedule in the first half of fiscal '14 and this will weigh a bit on the region's vessel operating margins. Within the Americas region, our Brazil area will also likely lag the other areas within the region for a quarter or 2, as the area prepares vessels for a handful of multi-year contracts that were recently approved by Petrobras. Despite the near-term costs and downtime, the rates achieved for this equipment are very good rates, in our view. Other areas within the America segment, including U.S. Gulf of Mexico, are expected to continue to perform well to pick up the slack in the region in the near term. As a result, we expect overall result in the Americas region to be good throughout fiscal '14. Going forward, general and administrative expenses should be in the area of $44 million or $45 million per quarter. A safe assumption for fiscal '14 effective tax rate is 23% or 24%. As always, the geographic mix of pretax earnings and margin trends can cause the tax rate to be volatile on a quarter-to-quarter basis. To quickly summarize Tidewater's current financial profile, cash flow from operations for fiscal '13 was $214 million. CapEx and proceeds from asset dispositions for the fiscal year were approximately $441 million and approximately $27 million, respectively. We also spent $85 million in fiscal '13 to acquire about $1.9 million Tidewater shares at an average price of just under $46 per share. As you probably saw, last week the Tidewater board approved a new $200 million share buyback authorization, which is effective from July 1, 2013, through June 30, 2014. This latest authorization is essentially reset in continuation of the current authorization, which is set to expire on June 30, 2013. New vessel commitments made in the March quarter totaled $193 million from 9 vessels, including 6 deepwater PSVs and 3 towing-supply and supply vessels. One of which was a vessel purchase that we closed in February. In total, unfunded vessel commitments at March 31 approximated $600 million, including 30 vessel construction projects and 2 vessel purchase commitments. Total debt at March 31 was about $1 billion and cash at 3/31 was about $41 million. As a result, net debt at year end was approximately $959 million and net debt-to-net book capital at 3/31 was about 27%. Total liquidity at 3/31, including availability under the committed bank facilities was approximately $400 million. At the funding needs, CapEx in the June quarter is expected to be about $100 million based on commitments as of March 31. Over and above CapEx related to commitments as of 3/31, an additional $200 million in cash will likely be required in the June quarter in order to close the acquisition of Troms, including our making the final payment on the fifth Troms vessel, which we expect to be delivered essentially concurrent with closing. Note that we will also assume approximately $150 million of Troms's debt upon closing. To wrap things up, I'll note that we think about the Troms offshore acquisition as being closely linked to our December agreement to acquire 3 Norwegian-built deepwater PSVs from STX Pan Ocean. Two of the STX Pan Ocean vessels were delivered in recent months, as Jeff noted, and the third vessel is expected to be delivered in our second fiscal quarter. Without an allocation of purchase price and non-vessel assets, our implied cost for the 7 Troms vessels, which include one option vessel and the 3 STX Pan Ocean vessels, is about $58 million per vessel. New build pricing for comparable equipment is likely in the $60 million to $65 million area, with a best case delivery likely in late 2014 or early 2015. Our overall estimated cost per deadweight ton is approximately $12,000. Depending upon your day rate assumptions, the combined value of the 2 transactions, would likely fall within a range of 6.5x to 7.5x fully delivered EBITDA. As Jeff noted, we think that the Troms offshore transaction will add much more to the Tidewater global franchise and it ships an incremental EBITDA, but I personally am very comparable that the economics are compelling on a standalone basis. At closing, which is expected to be in our first fiscal quarter, we will likely use currently available credit facilities to fund the cash portion of the purchase price. While we are still evaluating current financing alternatives, we expect that the Troms transaction and other planned CapEx will be funded with operating cash flow and a mix of bank and other debt arrangements. Importantly, we believe that our financing plan will allow us to continue to maintain strong investment-grade type credit metrics. As such, we have no plans for secondary offering of common stock in connection with the Troms offshore transaction or to otherwise raise traditional equity capital. While we still have work to do on purchase accounting, integration planning and the like, based on our operating estimates and financing plan, our expectation is that these 2 complementary transactions will be modestly accretive to earnings and cash flow. And with that, I'll turn the call back over to Jeff.

[Jeffrey M. Platt:]

Thanks, Quinn. As I said at the outset of the call, we believe our quarterly results demonstrate that the underlying fundamentals of our industry are solid and the industries' recovery continues. As a result, we believe the outlook for Tidewater's business is promising. The health of those businesses servicing offshore exploration and development companies starts with the health of oil and gas company cash flows and spending. With commodity prices remaining strong, oil company cash flows remain healthy and the company's appear to be willing to spend more money on exploration and development. We see nothing to suggest any retrenchment in spending. In fact, the March Gulf of Mexico lease sale results support that view. In recent months, we have seen the international offshore rig count continue to increase. International spending is of particular interest for us, as roughly 90% of our revenues are earned outside U.S. waters. Our results demonstrate that the improvement in international activity is occurring across the board, not just in select markets. Our fleet utilization rates are strong, and we experienced healthy average day rate increases for each class of vessel in our fleet. At the present time, the worldwide offshore drilling rig fleet is averaging about an 85% utilization rate with floating drilling rigs at about 91% and jackup utilization at 86%. The composition of the offshore drilling rig fleet is roughly 58% jackups and 42% floaters. So while the floating drilling rig market is important for our vessel utilization and earnings, an increase in the number of working jackup rigs can have a meaningful impact on our future financial results. Our deepwater vessel class is experiencing nearly full practical utilization and day rates in this segment have increased nicely over recent quarters, with a good portion of the class still to roll on to new contracts at historically low high day rates. On the other hand, our 100-plus towing-supply/supply fleet is primarily dependent on a number of working jackups. As mentioned, this rig segment is operating globally at about 86% utilization, suggesting that further increases in active jackups may bring pricing power to our vessels. A key to the jackup rig market's continued improvement will likely be tied to the approximately 50 newbuild jackups scheduled for delivery during the next 12 months. If these additional rigs are largely incremental to the working rig count, our towing supply vessels should experience increased demand and presumably support higher day rates. With the recent surge in activity in the global jackup market, recent commitments by a number of drilling companies suggest that a good number of these newbuild jackups should be incremental to the global working jackup count. Currently, there over 200 new floaters and jackup rigs on order, with more than half schedule for delivery over the next 2 years. This is a huge financial commitment by the petroleum industry to offshore exploration and development. In addition, we are beginning to see a shift from pure exploration drilling to increased development drilling. We believe these trends signal a positive long-term outlook for the OSV business. As the global drilling rig fleet expansion unfolds, we regularly dialogue with key operators to make sure we have the types of support vessels our clients will need. Our Troms Offshore acquisition is a reflection of this dialogue and our desire to make sure we are well-positioned to meet our customers global needs both today and tomorrow. We are fully committed to operating a support vessel fleet in the future that can handle the demand in all geographic markets and water depth in which our clients wish to work. At the same time, we remain dedicated to building a stronger and more profitable company that can take advantage of whatever other offshore opportunities the market presents. Tidewater has a strong balance sheet, which wherein liquidity providing us significant financial flexibility that will allow us to capitalize on any attractively valued opportunity that might materialize in order to grow our earnings faster. In that vein, Tidewater's management continues to evaluate other opportunities to grow the company, which is not a recent development, but rather a refinement of our long-term growth plan established several years ago. We will focus and on opportunities to accelerate the company's growth without compromising our strong financial foundation. Our overriding objective is to create greater shareholder value by building a larger financially sound company that possesses meaningful earnings power and that participates in the rapidly growing segments of the offshore market. We are focused on long-term growth opportunities and recognize that our quarterly earnings pattern will continue to fluctuate, but we fully anticipate that over a reasonable period of time, we will grow our revenue profits and most importantly, shareholder value. John, with that, we're ready to take questions.

[Operator:]

[Operator Instructions] Our first question comes from Jeff Tillery from Tudor, Pickering, and Holt.

[Jeff Tillery:]

You talked about the R&M inflation expected for the full year in the 10% to 15% range. Can we think about the overall operating costs for the vessel fleet and inflating kind of in that same range year-over-year?

[Quinn P. Fanning:]

Our hope is that labor inflation would not be at that level. We've generally been trending at levels less than that and I'm not seeing any numbers that would suggest that we're going to be eating anywhere close to 15% labor inflation on a unit basis, and obviously, closely track the vessels that we're accruing.

[Jeff Tillery:]

Can we take into account the amount of labor you need to hire? Should we think about that overall cost number as being kind of up in that 15% range year-over-year?

[Quinn P. Fanning:]

I think the -- obviously, in weaker markets, labor has tended to move with the exception of a couple of key jurisdictions either down or trend flat. The jurisdictions I would highlight that was not the case over the last couple of years that were otherwise a weak market were Brazil and Australian and more recently, the U.S. Gulf of Mexico. We've also had, like many in the offshore space, pressure tied to specific technical skills where we're competing for individuals with some of the rig owners and that's specifically the DP operators. But I think where I would instead focus you on labor costs is where we have tracked relative to vessel revenue. It's not a perfect measure. As general matter, we have been kind of in the low-30s as a percentage of vessel revenue in the cyclical trough for rebuilding period and we tend to at least keep of our operating footprint presently below the 30% level in a decent market. But again, as I mentioned, the region by region costs as percentage vessel revenue can be quite volatile. And Americas, as an example, are probably 7 to 8 percentage points higher than some of the African regions.

[Jeff Tillery:]

I mean, there's good rate progression kind of across-the-board this quarter. So it sounds like the only thing that you might consider unusual in the March quarter was the couple hundred dollars a day in the towing supply group that was from demobilization and amortization. Is that a fair characterization of the March quarter?

[Quinn P. Fanning:]

No, I guess to make one point, it was not an amortization of demobilization fee. It was actual cash paid to us by a customer in conjunction [ph] with contractual agreements. It did have the effect though of -- maybe distorting's a bad word, but day rates did include the demobilization fees for our towing supply and supply class of the $800 quarter-over-quarter progression, I think it was $200-some. Yes, but to be clear, certain geographies were experiencing some more rate progression. I would say the 7,000 to 10,000 pre-course [ph] power classes are trending better than the smaller vessels within that class. And certain markets, likewise, are doing better than others, but we are optimistic about the class. As Jeff and I both mentioned, it's just not moving as fast as we'd like it to and certainly the trends in the jackup market would hopefully change that a bit in the coming quarters.

[Jeff Tillery:]

Okay. But kind of the underlying trend of improvement we saw in the quarter really nothing unusual to negate that, that we saw in the March quarter? Just a little bit of help from some of the lump sum payments.

[Quinn P. Fanning:]

Correct.

[Jeffrey M. Platt:]

We agree with that.

[Operator:]

And our next question comes from Ian Macpherson from Simmons.

[Ian Macpherson:]

It seems like Tidewater has resisted Norwegian market for some time, and I'm curious what's changed with Troms's more of an opportunistic situation, or have you seen the strategic imperative of the cold water harsh environment in your geographic market becoming too important to avoid at this point? And just thoughts on further consolidation opportunities in the market going forward.

[Jeffrey M. Platt:]

Ian, it wasn't purposeful that Tidewater did not participate in the Norwegian market. It's always been one that we have kept an eye on in the North Sea market as a whole. Sometimes that was a good thing, sometimes it wasn't such a good thing. When that market gets good, it can get good. I think it's a natural progression for us where we are with the fleet rig capitalization. We certainly take note of what our clients are doing. They lead the way and certainly, the Arctic harsh water environment seems to be -- has some tremendous opportunities. And when we looked at that, we looked it for the right opportunities, not just an iron purchase. We wanted to have the competency of a management team that has the experience to operate in that, to add to Tidewater and it came out to be what we think is a very good fit for Tidewater. And I think one that certainly positions us well today and also looking ahead as the Arctic unfolds, which it may turn out to be the very large new opportunities that our clients are certainly excited about and we're going to be positioned to grow with that. So that's a little bit of the insight with respect to the Troms acquisition. And I guess the second part of your question, could you repeat it again, Ian?

[Ian Macpherson:]

Well, how you've -- what you think about the opportunities after further M&A?

[Jeffrey M. Platt:]

And Ian, that's nothing new. Our bent has always been to acquire vessels or potential companies to have some consolidation. When you look at what we've actually done, buying companies certainly is a pretty short list, you have to go back a ways until we've done that. But a lot of the assets that we have acquired since we started the recapitalization, we've done a pretty good job of buying assets that are already committed to the industry that is our bent. And again, our financial position allows us to make a move when the opportunities present itself. We always like to see consolidation. It is still a fragmented market. We're certainly looking all the time at potential opportunities for Tidewater.

[Ian Macpherson:]

Okay. And then just lastly on Troms. Just the 6.5 to 7.5 EBITDA range that you've described, is there any -- are there any other aspects of the backlog on that fleet that could -- that are distorted from the current market rates when we think about the run rate for year 2 or year 3 of that acquisition? Are there any contracts that are below market or et cetera?

[Jeffrey M. Platt:]

They do have some term coverage, which I guess relative to the current market rates. One could argue should price up in due course. But to be clear, the -- obviously EBITDA is a function of what your day rate in OpEx assumptions would be and I would certainly acknowledge that smart people can disagree on the precise rate that group of assets can realize in the market. But just to clarify one point, the range of EBITDA multiples I used would capture effectively a 10-vessel fleet, which includes the 3 STX Pan Ocean vessels, which effectively were front-runners to this transaction and are essentially identical sisters to some of the vessels with Troms and results. So the one vessel that is under construct that will delivered in early '14 and the one option vessels so that's where you get to 10 vessels with average price of I think I said $58 million on average and 6.5x to 7x -- excuse me, 6.5 to 7.5x fully delivered EBITDA.

[Ian Macpherson:]

Got it. Okay. And then just lastly, does Troms bring you the shore-based support that you need to run this fleet or do you foresee additional investment on that side to sort of round out?

[Jeffrey M. Platt:]

Ian, very confident management team. They run a tight shift up there. I think it's going to fit nicely into Tidewater, and I think that we have the ability to grow without much shore-based expansion.

[Quinn P. Fanning:]

The shore-based is not in Stavanger. We do have an office or Troms, I should say, has an office in Oslo, which has a corporate and marketing personnel in it. But the real operating basis in Troms so, which is northern Norway, and we think that's a very positive point of differentiation for the platform as it's a developing jumping off point to the Bering Sea and to the other cold water markets that we're interested in.

[Operator:]

Our next question comes from Joe Gibney from Capital One.

[Joseph D. Gibney:]

Quinn, I just got a question for you. Big picture G&A question, I understand the $44 million, $45 million sequential guidance. Thoughts on G&A going forward can be a significant factor in the model if you guys are expanding your fleet, expanding some of your geographic footprint? What are some thoughts around presumably as we're moving into a better operating environment as well? What are thoughts on G&A growth and how we should be thinking about that on our model?

[Quinn P. Fanning:]

Well, I think that the reality of a relatively high operating cost business model is that we'd like to think that we have at least near-term overhead absorption benefits with growth. The Troms transaction is perhaps a contra example of that we're actually adding vessels, theoretically gross margin and some incremental G&A. But we think it also comes with franchises as we've talked about. But now, we built out an area in Saudi Arabia as an example of the last couple of years. East Africa is a growing market that may ultimately result in some incremental shore-based support, but no, I wouldn't think that growth of our fleet would come along with comparable growth in G&A. We would like to think that the fleet that we are running at least in the business we're presently in will be supported by the existing cost platform with natural year-over-year growth as we spoke to inflation factors and things like that. And obviously, we have incentive compensation metrics that are safety and financially based that have -- which [indiscernible] more earnings and more return on capital. And G&A would grow with it.

[Joseph D. Gibney:]

Okay, fair enough. And just an additional question on the Troms debt assumption. I'm sorry I missed it, I believe you referenced, just want to clarify. Did you indicate $150 million in Troms debt that you're assuming in the transaction?

[Quinn P. Fanning:]

Yes, there's about $150 million in debt in place on a gross basis. I think the net debt at March 31 for Troms was about $139 million. If you could refer to our press release that we put out, it was a reference to assumed obligations and that was a combination of net interest-bearing debt and that's $139 million, or $140 million number I just referenced, and remaining payments on the construction in process.

[Joseph D. Gibney:]

Got it. Helpful. And Jeff, just last one for you. Just wanted to get sort of a big picture view on Middle East. I know there's a tender out there with ARAMCO currently. Just general outlook for the Middle East outlook. Appreciate it.

[Jeffrey M. Platt:]

Yes, I think overall the jackup rig comp continues to increase. I think ARAMCO's talking about stepping it [indiscernible] actually stepped out in little bit deeper water than what the average would have been. So overall, we're pretty optimistic that, that will continue to show nice growth.

[Operator:]

Our next question comes from Jon Donnel from Howard Weil.

[Jonathan Donnel:]

I wonder if you could give us an update on your deepwater fleet and the number of boats that's still are set to roll off of the legacy contracts, I think it had been about 50% as of the last update. I just wonder if we could get update on that number.

[Jeffrey M. Platt:]

Yes, Jon. I think that's still about right. There's about 50% that would be [indiscernible] onto the new contracts. I still think that's about right.

[Jonathan Donnel:]

Okay. So there's still just -- or I guess, organic growth just basically leading-edge day rates for those to be moving up without seeing another step change in the overall rate landscape then?

[Jeffrey M. Platt:]

Yes, that's right but we still are pressing the leading-edge day rates [indiscernible] and we haven't given up on that at all. But, nonetheless, the 50%, about 50% will have that pretty, pretty significant increase because they're coming off the legacy contracts to the new contracts.

[Joseph M. Bennett:]

Jon, you see the increase in this quarter to March quarter's deepwater day rates and that's just part of that process kind of unfolding as we suggested last quarter that it would be doing over the next 12 to 15 months.

[Jonathan Donnel:]

Okay. Great. I appreciate that confirmation. Then Jeff, you alluded a little bit at the end of the call about sort of the opportunities you look for outside of maybe the traditional just drilling and production support. I wonder if you can kind of give us an update on maybe the percentage of your operations right now that maybe are ones that are maybe a little outside the regular demand drivers. You think about perhaps the seismic or kind of P&A work and maybe your thoughts on specific ways you might be expanding that or if you think that that's the going to -- that percentage might be changing over time.

[Jeffrey M. Platt:]

Jon, I really don't really have any percentages to give you on the conventional business Tidewater's in today. And what we are involved in some of the seismic work, mostly that is not in the actual seismic acquisition but some of the support vessels to that. We did some work around, some light subsea work. We have installed jumpers and wellheads. We're doing some of that today. So we've got our finger in some of that but to actually come out and give you some numbers and where that might go, I think that's a little bit premature.

[Operator:]

Our next question comes from Greg Lewis from Credit Suisse.

[Gregory Lewis:]

Jeff, you touched a little bit on the Brazil tender that you guys won. Could you provide a little bit more color in terms of maybe the number of boats that were involved? I mean -- I think right now you have around 15, 16 boats down in Brazil currently operating. Any of these new tenders that you won in Brazil -- is any of that incremental boat demand or is that more just contract resets of existing tonnage that's already down there?

[Jeffrey M. Platt:]

Greg, I think we've talked a little about it before. It's a combination of boats in that tender and it was said around a 10-boat package for Tidewater. There were vessels that were in-country on Petrobras contracts. Those will rollover and reset nicely, nice day rate increases on those. And then there's an incremental of about 6 ships that will be coming into Brazil that would be incremental for us down there. And again, we're very happy with this contract. Day rates finally have moved back into an area that makes sense for us financially, so we're pretty pleased with that contract award.

[Gregory Lewis:]

And then on that, do we have any sense where those 6 boats are going to be, being pulled from? Are those newbuilds? Are those in another basin in the Atlantic?

[Jeffrey M. Platt:]

Greg, I really don't like to get down into the granular details and everybody would like that. Suffice it to say, these boats coming into Brazil just to give you some general ideas on it, these are not the brand-new, biggest deepwater PSV. They are deepwater ships, but they tend to be some of our little bit older new deepwater boats. They predominantly are DP 1 so again, we're moving them into a very nice market. And it's going to, again, tighten up the market for some of our new equipment coming in other areas. But overall, it's a good contract for Tidewater, we're very happy with it.

[Gregory Lewis:]

Okay, perfect. And then just real quick wanted to follow-up on Troms real quickly. I guess the 2 SPX boats that were acquired and are on the water currently, are those currently operating in Norway or are they somewhere else?

[Jeffrey M. Platt:]

They're somewhere else in and just to make sure we acquired a 3 SPX boats; 2 of which have been delivered; 1 will be yet delivered, I think June is the delivery date we're expecting on that.

[Gregory Lewis:]

Okay. And so with Troms, there's a chance to maybe that final newbuild maybe sticks around Norway?

[Jeffrey M. Platt:]

There's a chance for it to stick certainly in the North Sea, could be in Norway and potentially it could move out of Norway, too. I mean, again, we're not married to any one geographic market. It certainly makes sense that fleet or those vessels definitely have the characteristics that it makes sense to work with those pretty closely with the Troms acquisition.

[Gregory Lewis:]

Okay. Perfect, and then, Quinn, real quick. I don't know if this has already been done or not or we just have to wait maybe for the next 10-Q. Is there any sort of estimate for what the goodwill is going to be for the Troms acquisition?

[Quinn P. Fanning:]

No. As I mentioned, we still have a [indiscernible] drill to run and obviously, some integration planning as well. So hopefully, we'll be able to report that to you at our first -- on future conference call and I'd like to think it's going to be our next one.

[Operator:]

Our next question comes from Matthias Detjen from Morgan Stanley.

[Matthias Detjen:]

So I just have 2 more questions seeing that most of the things are covered. One of the -- on the Troms, and the STX in the North Sea region, I was wondering if you plan on making any further acquisitions in that area or growing that market further after this acquisition?

[Jeffrey M. Platt:]

We're always looking at potential acquisitions, both vessels and companies on a worldwide basis. And just leave it at that, I mean we're always looking for the right opportunity for us.

[Matthias Detjen:]

Okay. Well, and then there's just one last more technical question is if you could give us some guidance on how you think the operating expenses are going to be for the newly acquired vessels through Troms and the STX vessels, if there's any difference there from the rest?

[Quinn P. Fanning:]

I think ultimately, it will be a function of what jurisdiction we're operating in. But as you might expect, the North Sea, and the Norwegian sector, in particular and the cold water markets in particular, tend to realize higher day rates and also experienced some more higher operating expenses. But there's some data available all by asset class for the Norwegian sector in the North Sea. I could give you numbers but there will be somewhat precedent setting and I'd rather just rely on the geographic data that ODS and others provide.

[Operator:]

Our next question comes from Matt Conlan from Wells Fargo.

[Matthew D. Conlan:]

I wanted to ask about of the Norwegian PSV market a little bit. On the rig side, that's a very exclusive market and contracts are generally longer-term than another markets. Is that similar characteristic to the PSV market in Norway?

[Jeffrey M. Platt:]

You do have a function up there that's certainly longer-term. The Norwegian market is really a pretty unique subset of the North Sea. We certainly believe it's the one that we would absolutely want to be in. Obviously, that's why we did the deal. So again, it's typically higher-end, higher requirements for execution and it's a market we're very favorable to.

[Matthew D. Conlan:]

Okay. But these higher-end vessels can leave and come back pretty freely?

[Jeffrey M. Platt:]

Could you say that again, please?

[Matthew D. Conlan:]

So do these vessels leave the Norwegian side and come back pretty freely?

[Jeffrey M. Platt:]

Matt, there tends to be a large number that are on more term contracts and in that respect, they don't. Statoil has, I think, 50% of the market there. It's a very high-end client. They have very high expectations and requirements for the service provided to them and no, it's not a lot of churn, if you will, in a majority of that business. So no, it's not necessarily a spot market type mentality where vessels freely move in and out. There is some spot activity there but it tends to be much less than some of the other sectors in the North Sea.

[Matthew D. Conlan:]

Okay. Great. And if you don't mind, just to touch on the towing supply/supply market again. It sounds like $550 to $600 a day was the real increase in day rates. It really seem to be pretty broad-based, improved in every region. It seems to me there should be some more momentum of day rate follow-through there than you've been describing on the call. It sounded you're being a little bit more cautious on it than I would've thought.

[Jeffrey M. Platt:]

I would have thought that rates would be moving faster too. No, your observations are all generally correct. The adjusted quarter-over-quarter progression rates, if you back up demobilization fee, and I don't want to imply that, that's not real money. I mean, it was just lumpy in the way we received it. But if you were to compare over 8 quarters or something like that, what has happened with average day rates in the deepwater class and average deepwater -- and excuse me, an average towing supply and supply rates, it's really a tale of 2 fleets. As Jeff indicated, with the new jackup deliveries, particularly if they are incremental working rigs with supply-demand dynamic within the towing supply and supply class should improve. And as I believe, Jeff mentioned on the last call, when they do improve, they should translate into improved financial results faster because the contract terms tend to be shorter. So you can go back to our fiscal 2008 or 2009 and see when those rates run, they run pretty good. But at least from our perspective, it has not been experienced across geographies, as we've experienced in the deepwater class and across subcategories of equipment, and at least, our experience to date has been that the larger of the at least towing supply vessels have moved better than the smaller ones. And by large and smaller, I'm generally talking about or 7,000 to 10,000 brake horsepower as compared to the 5,000 to 7,000.

[Jeffrey M. Platt:]

Matt, just so you know, we never are satisfied.

[Operator:]

Our next question comes from David Smith from Johnson Rice.

[David C. Smith:]

Speaking of never being satisfied, hope you're satisfied with the LTI record this quarter. If I heard that right, that was a second time in your history?

[Jeffrey M. Platt:]

David, it was actually the year. We finished the full fiscal year which is obviously 4 quarters without a lost time accident.

[David C. Smith:]

Well you got the tight grip on the rattlesnake then, that was outstanding. I wanted to ask about the regions where towing supply isn't seeing pricing improvement. Do those regions have excess local capacity that can't usually move to the regions where you are getting price traction?

[Jeffrey M. Platt:]

The segment is pretty fragmented. Ourselves and our biggest competitor, Bourbon, we also as in past in there. And also, both of us have seen, I think, pretty good utilization, in fact, very high utilization in it. It's still a very fragmented and a lot of the companies, smaller companies, they may not have the wherewithal to actually move large geographic areas, so I think a little bit of that's in play. Certainly, the Far East where a lot of that equipment has been built and a good bit of it is owned by smaller operators, wanting to move very far afield from that is not something they have the expertise, capabilities or much of an appetite to do. So I think some of that's in play.

[Operator:]

Our next question comes from Mark Brown from Citigroup.

[Mark W. Brown:]

Just wanted to ask if you -- what your views of the Gulf of Mexico market are. And did you -- you might mind if I have missed this -- but have you ordered additional vessels for that market recently?

[Jeffrey M. Platt:]

Mark, overall we look at the Gulf like everyone else does. It's certainly improving and it continues to improve. We're happy to be part of it and we did, it was a publicized in some of the trade journals. We added 2 more large PSVs on the order, probably within the last month. I think we signed the paperwork on that so we've added 2 more to the queue for Tidewater.

[Mark W. Brown:]

All right, great. And in the press release for Troms, I think it mentioned some language at the end of there might be an earn-out provision or something to that effect. I was just wondering if you could talk about that a little bit?

[Quinn P. Fanning:]

Yes, sure. As is frequently the case, an attempt to bridge differing valuation views of buyer and the seller, we agreed with principal seller, which is a Norwegian private equity fund by the name of, HiTecVision, very well-known, well-regarded firm. We basically took a point of view as to how we thought that the market would develop over the next couple of years in terms of rates in OpEx. And we were comfortable putting our hand over heart on as -- I don't know if it's at 95% confidence [indiscernible] or whatever you want to call, but something that we were highly confident in our ability to execute. We think the transaction economics that were laid out in the press release, that $395 million reference is well-supported by iron. And those cash flows that we anticipated from the acquired sols. The way we think about and what we agreed to with the sellers is that to the extent that without performance beyond what essentially we model to support our purchase price, there is a sharing mechanism that is based on essentially an adjusted EBITDA metric over that 4-year period that's referenced in the press release. So we will be more than happy to make the additional payments to sellers because it will be a portion of our performance as we modeled it. Is that responsive? Is that what you're looking for.

[Operator:]

We have no further questions at this time.

[Jeffrey M. Platt:]

John, we appreciate your assistance with this call. We appreciate everyone's interest in Tidewater, and you all have a great day. Thank you very much.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, you may now disconnect.