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Executives

Joe Bennett - EVP & Chief Investor Relations Officer

Jeff Platt - President & CEO

Jeff Gorski - EVP & COO

Quinn Fanning - EVP & CFO

Bruce Lundstrom - EVP, General Counsel & Secretary

Analysts

Jeff Tillery - Tudor, Pickering, Holt

Todd Scholl - Clarkson Capital

Ian Macpherson - Simmons

Gregory Lewis - Credit Suisse

James West - Barclays

Jon Donnel - Howard Weil

Veny Aleksandrov - FIG Partners

Jeff Spittel - Global Hunter Securities

Richard Sanchez - IHS Petrodata

Mark Brown - Citigroup

Matt Conlan - Wells Fargo

Cole Sullivan - ISI Group

Tidewater, Inc. (TDW) F3Q 2013 Earnings Call February 1, 2013 11:00 AM ET

Operator

Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Fiscal 2013 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Joe Bennett, Executive Vice President and Chief Investor Relations Officer. Sir, you may begin the conference.

Joe Bennett

Thank you, Regina. Good morning everyone, and welcome to Tidewater's fiscal 2013 third quarter earnings result conference call for the period ended December 31st, 2012. Regina just introduced me. But with me today this morning on the call are our President and CEO, Jeff Platt; Jeff Gorski, our Executive Vice President and Chief Operating Officer; Quinn Fanning, our Executive Vice President 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 Platt for his initial comments, to be followed by Quinn's review of the financial details for the 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 info concerning the factors that could cause actual results to differ materially from those stated or implied by the forward-looking statements can 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 Platt.

Jeff Platt

Thank you, Joe, and good morning to everyone. Earlier this morning, we reported fully diluted earnings per share for our third fiscal quarter of $0.61 compared to year-ago quarter's $0.67 per share. This quarter's results included a $3.4 million after tax charge or $0.07 per share associated with the settlement and payoff of our former CEO Dean Taylor's retirement benefits. Vessel revenues in the quarter were $305 million, which was up modestly from the vessel revenues we reported for our prior quarter, after excluding a one-time impact of the catch-up revenue from a retroactive contract negotiation completed during the September 2012 quarter.

Our vessel revenues are consistent with our assessment of the state of today's recovery that we have expressed in previous conference calls and presentations. The underlying fundamentals of the offshore business are good and appear to be strengthening, something I'll detail later in the call. The bottom line is the outlook for our sector is promising.

Our results this quarter, in terms of vessel operating costs and general and administrative expenses were on the positive side with the guidance Quinn outlined on our last earnings call. As you will learn from his discussion of this quarter's financial results, there were several items of note in the quarter the improved the bottom line versus previous guidance for the December quarter. One item was our dry docking activity.

While we anticipated and indicated in our last call that the third fiscal quarter should include a number of expensive dry docks on some of our larger vessels with the resulting loss in revenue, related to the anticipated downtime, ultimately some of these dry dockings were delayed into the March quarter and possibly beyond. The timing of these dry dockings could have a material impact on our quarterly results.

While there are specific industry guidelines that speak to the timing of vessel inspections, these guidelines are appropriately flexible to accommodate the market realities of marine vessel usage. As we operate our fleet to meet our customers' needs, address emergency repair requirements, and schedule of shipyard availability that flexibility option may be utilized adjusting our originally anticipated inspection schedule.

As you also know, our investment per vessel today is much greater than it was only a few years ago. These vessels more sophisticated specifications and greater capabilities command higher day rates, which means each vessel has a greater financial impact on our overall fleet's results, when it is idle for dry docking or inspection, due to the lost revenue, the potential mobilization cost with shipyard, plus the actual cost of the inspection and any repairs.

Understand, we plan for and forecast the timing and cost of inspections as accurately as possible. But just as when you remodel your home, there are often pleasant and unpleasant surprises once the work begins. Let me assure you, we consider all of these variables when we provide our forecast, but in the end, many of the variables are outside of our direct control.

While generating increased revenues is very important, it is also important that we control all of our operating costs, not just repair and maintenance costs. As you'll hear from Quinn, we continue to manage these other operating costs well in the quarter. But due to inflation exposure and competitive market forces, we must remain diligent in this area as well.

On the safety front, we experienced an incident in December that fortunately did not result in any injuries or any significant pollution of which we're aware, but did result in the loss of a vessel. The Nanotide, a tug working in the Democratic Republic of Congo began to take on water. And while the crew worked to correct the problem, the vessel began listing and eventually settled in relatively shallow water to the sea bed on its side. It is unlikely that we will be able to return the vessel to service. The vessel was insured for a month that is in excess of its current book value and we expect to reimburse for the loss, but it will be in the future quarter. Quinn will cover the financial ramification of this incident that impacted the December quarterly results.

The Tidewater safety culture remains one of my key focuses. Safety is important not just because it is good for our customers and our business, but primarily because we owe it to everyone who comes to work each day to return home safely at night. Through the third fiscal quarter, Tidewater's safety record reflected a total reportable incident rate of 0.17 per 200,000 man hours worked. Importantly, we have experienced no lost time accidents to-date this fiscal year, which totals over nine months.

In early January, we filed a Form 8-K providing an update on our operations in Angola. We announced that we continue to have constructive discussions with Sonangol, our joint venture partner, about a new long-term JV agreement, and that current JV agreement has been extended to March 31st, 2013. We believe our relationship with Sonangol remains on solid footing, and we remain very hopeful that our discussions will lead to a new long-term Sonatide joint venture agreement that will satisfy both Sonangol's objectives and ensuring the interest of Tidewater shareholders are promoted as well. We will continue our policy of living our comments about this topic to the official releases and will 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 for the third fiscal quarter and to provide you some commentary about next quarter.

Quinn 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 markets opening. We expect to file our quarterly report on Form 10-Q through the EDGAR filing service sometime before the close of business today.

Turning to financial result as of and for the three month period ended December 31st, 2012. As usual, I will provide a recap of the quarter just completed, offer few perspectives on what's driving financial results, and then provide our near-to-intermediate term financial outlook. I'll conclude my remarks with review of capital commitments and available liquidity.

As Jeff noted in his introductory remarks, we reported diluted earnings per common share of $0.61 in the December quarter versus diluted earnings per common share of $0.83 for the September quarter. I understand that the consensus of analysts' estimates for the December quarter per Thompson First Call was $0.43.

Vessel revenue for the December quarter was at the top end of our vessel revenue guidance range that I provided in November. Operating expenses well below our expectations and guidance and vessel level operating margin was about 5 percentage points better than the midpoint of my prior guidance. For your period-to-period comparisons I'll highlight just a few items from the December quarter in addition to the $0.07 settlement charge that was included in the general administrative expenses, and that was referenced both in our guidance and on our November earnings conference call as well as Jeff's opening remarks.

Vessel revenue for the December quarter was about $305 million as compared to adjusted vessel revenue for the September quarter of about $302 million. The difference between reported vessel revenue and this adjusted number is the approximate $7 million in retroactive rate increases that we're agreed to and recognized during the September quarter, but related to the period from January 1st, 2012 through June 30th, 2012. Unless otherwise noted, you should assume that my period-to-period comparisons adjust to the effects of the retroactive portion of these rate increases.

As Jeff noted at the top of the call, dry docking activity largely explains results for the December quarter relative to our expectations. More explicitly bridge adjusted vessel revenue for the September quarter of $302 million and vessel revenue for the December quarter of $305 million. Note that one incremental vessel revenue from five new vessels that were delivered in the December quarter and four vessels that were delivered in the September quarter totaled about $8 million in the December quarter. And two, incremental loss revenue due to vessels in dry dock was about $6 million.

For reference, our expectation in November for incremental loss revenue in the December quarter due to vessels in dry dock was in excess of $10 million. Foreign exchange movements and the impact on vessel revenue of additional vessels going to stack were both immaterial in the quarter and other miscellaneous items were largely offsetting.

Looking at key asset classes for the deepwater class of vessels, which represented about 49% of consolidated third quarter vessel revenue, vessel revenue was up about $1.5 million quarter-over-quarter. Average active deepwater vessels were up five vessels quarter over quarter to 77 vessels and average day rates were up about $200 a day to $27,100.

Utilization of active deepwater vessels in the December quarter however was off about 5 percentage points and essentially neutralized what we would consider to be a positive trend in fleet count and average day rates.

The quarter-over-quarter utilization trend largely reflects again the timing of dry docks, but also new vessel deliveries and mobilizations during the quarter, rather than any deterioration and general market conditions. In fact, our census that the market for deep water vessels is both strong and stable, if not still improving.

For the towing supply and supply class equipment, which was about 42% of consolidated third quarter vessel revenue, vessel revenue was essentially flat relative to the September's quarter's vessel revenue. Average active towing supply and supply vessels were down 2 vessels to 120 vessels. Utilization of active towing supply and supply vessels at about 87% was basically flat quarter-over-quarter and average towing supply and supply day rates were up about $150 quarter-over-quarter.

Looking now at our geographic reporting segments, vessel revenue in the Americas and the MENA segments respectively up 3% and up 30%. In the Americas region day rates were pretty stable quarter to quarter and utilization of active vessels was up about 3 percentage points, in part reflecting some modest progress in converting awards to contracts and ultimately getting vessels on charter with Petrobras in Brazil.

The very positive quarter-over-quarter vessel revenue trend at MENA in part reflects awards for larger, higher spec equipment in the region, which obviously increases our regional average vessel count. There's also a knock on mix benefit of adding higher spec equipment for regions, which possibly impacted average day rates in the December quarter as did normal course contract rollovers to current market rates.

Vessel revenue in MENA also benefited from lump sum mobilization fees. Beyond the quarter-over-quarter trends and perhaps more importantly, we're seeing good opportunities to deploy more equipment end markets such as Saudi Arabia and India, where we hope to see additional Tidewater activity in the coming quarters. Libya would be another market in the MENA region where we think there is some intermediate term potential.

As the result of these items, utilization of active MENA region vessels was up 6 percentage points quarter-over-quarter and average day rates of MENA were up about $2,000 quarter-over-quarter.

Looking at the other two geographic segments, that's a revenue in the large Sub-Saharan Africa/Europe segment was down about 4% quarter-over-quarter. And vessel revenue in Asia/Pacific segment was down about 8%. Average vessel count in Sub-Saharan and Africa was actually up 5 vessels quarter-over-quarter, indicating a generally positive activity trend, and that's a revenue impact of vessels in dry dock, however, was most pronounced in this region in the December quarter, as is highlighted by relatively stable average day rates quarter-to-quarter but an approximate 7 percentage point drop in utilization of active vessels in the region.

In Asia/Pac utilization of active vessels at about 86% was up modestly quarter-over-quarter and average day rates were off about $1300 a day. In my view, there is really no underlying trend here that merits mention, but I'll highlight in a moment that the margins in the Asia/Pacific region remained relatively strong.

Vessel operating cost for the December quarter was about $181 million versus about $177 million in the September quarter, which as previously noted was well below my guidance in November.

Repair and maintenance expense at about $36 million, was up about $3.5 million quarter-over-quarter, or was at least a couple of million dollars short of where we were projecting R&M cost at the time of our last earnings conference call again, largely reflecting the timing of vessels in dry dock.

Crew costs were down quarter to quarter by an amount similar to the increase of repair and maintenance expense and were also below my expectations in November. To some extent this reflects reduced staffing during extended dry docks. It also reflects the timing of new vessel deliveries, relatively favorable conclusion of calendar year-end labor rate adjustments, and ongoing efforts to control operating costs.

As suggested by Jeff at the top of the call, OpEx in the December quarter was negatively impacted by the nanotide incident, off the cost of the DRC. In particular, insurance and claims costs were up about $3 million quarter-over-quarter, largely reflecting the accrual of additional experience based insurance premium.

I'll note again that the company believes that its insurance coverage subject to customer retentions, deductibles, and premium adjustments is adequate to provide for the loss of the vessel, as well as any claims that may arise as result of the sinking of the nanotide. Any recovery in excess of the vessels net book value of about $4.2 million as of December 31st will be recognized in the future period. Overall, vessel level cash operating margin for the December quarter was $124 million or about 41% of vessel revenue.

Looking at the geographic spread of our operations the Americas, Asia/Pacific, MENA and the Sub-Saharan Africa/Europe regions respectively contributed 27%, 14%, 14%, and 45% of vessel revenue. Vessel operating margin in the December quarter was about 40% for Americas, about 42% for Asia/Pac, about 53% for MENA, and about 37% for Sub-Saharan Africa/Europe. MENA is the positive outlier here and was largely driven by previously referenced vessel revenue story. Sub-Saharan Africa/Europe was the negative outlier in regards to vessel margin. Again, this is largely a dry dock story with vessel revenue and vessel OpEx elements.

G&A for the December quarter at about $46 million was up about $4.5 million quarter-over-quarter and was consistent with our expectations due to the previously referenced settlement charge. Gains and dispositions net was essentially zero for the quarter, reflecting the offsetting effects of couple of million dollars of gains on vessel dispositions and asset impairments that were taken in connection with an ordinary course review of our stacked fleet, which we do at least two times a year.

The effective tax rate for fiscal 2013 through nine months including discrete items through December 31st was 23.25% or down 125 basis points relative to guidance that I provided in November. Reversing the over-accrual through 9/30 reduced tax expensed in the December quarter, by a bit over $1 million.

In regards to overall fleet count, day rate and utilization trends, our active fleet averaged 263 vessels in the December quarter, which is up 4 vessels quarter-over-quarter. Average active new vessels were up 6 vessels quarter-over-quarter to 224 vessels. Average active older vessels were down 2 vessels quarter-over-quarter to 39 vessels in the December quarter.

As to relative financial contribution, 92% of vessel revenue and 98% of vessel level operating margin was generated by vessels added to the Tidewater fleet, since we began our fleet renewal and expansion program in fiscal 2000.

At December 31st, the stacked fleet totaled 53 vessels and was down 8 vessels quarter-over-quarter, reflecting just one vessel being stacked in the quarter and nine vessel disposition from the previously stacked fleet. Included within this disposition total was five vessels sold as operational equipment and four vessels that were scrapped in the quarter.

Turning to our outlook, we continue to expect that the newer vessels within the both deepwater and towing-supply and supply class of equipment will continue to experience high utilization positively or negatively impacted by the timing of dry docks. Average day rates particularly for the deepwater PSVs continues to trend positive as vessel roll the charters reflecting current market conditions.

Consistent with our comments in the November earnings conference call, day rate traction of the towing-supply and supply class equipment has been limited to-date. Utilization of our 120 active towing-supply and supply vessels, however, remains above 85%. So we have good levers to improving jack-up market.

As to perspective fleet count, we took delivery of five new vessels in the December quarter and based on commitments as of December 31, we expect to take delivery of an additional six vessels in the March quarter half of which are large deepwater PSVs and half of which are small crew boats.

Offsetting the expected incremental vessel revenue contribution of new vessel deliveries in the March quarter, will again be lost revenue associated with vessels that we expect to be in dry dock in the March quarter, a number which we had expected to be in dry dock in the December quarter and then generating revenue in the March quarter.

The net effect of these two primary near-term trends should be positive revenue progression from the December to the March quarter, but the sequential trend will likely be less dramatic than I articulated on our call in November, again largely due to dry dockings that slid to the right, which should result in elevated levels of off hire time at least through the March quarter.

As we're still developing our fiscal 2014 budget, it's too early to give guidance beyond the March quarter. I can assure, however, that we're giving the issue an appropriate amount of management attention.

In this context, internal estimates currently peg the March quarter's vessel revenue somewhere between $310 million and $320 million, again reflecting slow and steady improvement from a better than expected December quarter rather than a dramatic rebound from the particularly weak December quarter that we had discussed with you in early November.

Based also on what we know today, OpEx for the March quarter will probably fall within a range of $188 million and $192 million reflecting incremental OpEx related to new vessel deliveries and the expected dry docking activity in the quarter. Based on these guidance ranges in regards to vessel revenue and vessel OpEx, vessel operating margin for the March quarter should be somewhere between 37% and 40%.

With our SERP settlement charge now behind us go-forward general and administrative expenses should be in the area of $43 million or $44 million per quarter, a reasonable range for our March quarter's effective tax rate is between 25% and 26%.

To quickly summarize Tidewater's current financial profile, cash flow from operations for the first nine months of the fiscal year was about $183 million versus $158 million for the same period in fiscal 2012.

CapEx and proceeds from assets dispositions for the first nine months of fiscal 2013 were about $327 million and about $19 million respectively. In the December quarter, we also spent $20 million to buyback just under 500,000 shares of our stock at an average price just south of $44 per share. On a year-to-date basis, we spent about $85 million on 1.9 million shares at an average price of just under $46 per share.

New vessel commitments made in the December quarter totaled $169 million for four European built deepwater PSVs, two of which were delivered into the Tidewater fleet in the last couple of weeks. We expect to take delivery of the two remaining vessels in June and September of 2013.

In total, unfunded vessel commitments, at December 31st, approximated $536 million, including 25 vessel construction projects and 4 vessel purchase commitments. Total debt at December 31st was $930 million and cash on hand at 12/31 was about $54 million. As a result net debt at the quarter-end was $876 million and net debt to net book capital at 12/31 was about 26%.

As the funding needs CapEx in the March quarter is expected to be about $110 million based on December 31st commitments. Total liquidity at 12/31 including availability under committed bank facilities was approximately $465 million.

To wrap things up, our current sense is that the combined results for the December quarter and the March quarter will be relatively consistent with what we expected back in November even if the timing of revenue and expense was shifted a bit from our earlier expectations. Excluding vessels and dry dock, our active fleet is either at or close to full utilization and we've been able to move average day rates up about 22% over the last six quarters.

Additional revenue and earnings growth can and should come from existing vessels continue to recontract at day rates that reflect current OSV market conditions from the delivery of new vessels and from day rate traction of towing-supply and supply class equipment.

And with that I would turn the call back over to Jeff.

Jeff 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 good and the industry's recovery is continuing. As a result, we believe the outlook for Tidewater's business is promising. It is certainly no secret that the outlook for our business is tied directly to the health of the offshore exploration and development business and that starts with the health of oil and gas company's balance sheet, cash positions, and spending plans.

Based on the various well-respected industry surveys for 2013, oil company's spending plans suggest a mid to upper single digit percentage increase this year. In those surveys North America's spending is projected to be relatively flat with international spending increasing at a high single digit percentage rate.

The projected increase of international spending is particularly interest for us as roughly 90% of our revenues are earned outside of U.S. waters. With the healthy oil company spending increase last year and another projected for this year, we've seen worldwide offshore drilling rig utilization improve, which is a proxy for the health of the offshore vessel market. At the present time, the worldwide offshore drilling rig fleet is averaging an over 80% utilization rate with floating drilling rigs at a slightly higher utilization rate than the jack-ups. For both type rigs the respective premium rigs are already experiencing high 80% to low 90% utilization rates.

Keep in mind, the composition of the working offshore drilling fleet is roughly 60% jack-ups and 40% floaters. So while the floating drilling market is important for our vessel utilization and earnings, an increase in the number of working jack-up rigs will impact our future financial results as well.

Our deepwater fleet is experiencing high utilization and leading edge day rates in this segment have increased nicely over recent quarters, even though just slightly over one-half of our deepwater fleet has had the opportunity to roll-off of their legacy vessel contracts at lower rates to these new improved day rates.

On the other hand, our 120 active vessel towing-supply fleet of which 102 are new vessels having been built or acquired since 2000 is primarily dependent on the utilization rate of the jack-up fleet. This rig segment is now back to pre-2008 global financial crisis activity levels suggesting that further increases in active jack-ups may bring an improved pricing environment to this class of vessel.

While improving jack-up rig count bodes well for the demand, the shallow water towing-supply vessels, the supply side is also improving as the majority of the industry's aging vessels that are exiting our industry are towing-supply vessels and the current construction backlog of this vessel class is a relatively minimal number of less than 100.

With a total of approximately 85 jack-up rigs currently under construction, the key to a continued shorter term jack-up rig market improvement will likely be tied to the expected delivery of over 50 jack-ups during the next 12 months. Well these additional rigs be incremental for the fleet or replacement for older ones that we retire.

The answer to that question would be, for the future utilization of our towing-supply vessels and even more important the future day rate environment for this class of vessel. In recent weeks, several offshore drilling contractors announced new contracts for some of their new build jack-ups, which suggest that these particular units could be incremental to the active fleet.

Current industry data suggest that over 40% of the jack-ups expected to be delivered in 2013 are already contracted. That is promising news for the outlook for a towing-supply vessels.

There are currently over 180 new floater and jack-up rigs under construction, with more than half scheduled for delivery over the next two years. This is a huge financial commitment by the petroleum industry to the future offshore exploration and development.

We believe it signals a positive long-term outlook for the supply vessel business despite some near to intermediate term challenges. As the global drilling fleet expansion unfolds, we regularly communicate with key operators to make sure we have the types of support vessels our clients will need.

Quinn mentioned in his discussion that we committed last quarter to four additional vessels for our fleet based on our assessment of the mix of vessels we will need in our fleet to satisfy future customer requirements.

We are fully committed to operating a safe environmentally responsible support vessel fleet in the future that can handle the demands in all geographic markets and water depths 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 offshore opportunities the market presents.

Tidewater has a strong balance sheet with a relatively low financial leverage, providing us significant financial flexibility that will allow us to capitalize on attractively valued opportunities that might materialize in order to grow earnings.

That said it's also important to understand the Tidewater's management is actively considering other steps to further the growth of the company. This is not a recent development but rather a refinement of the long-term growth plan management established several years ago.

We will focus on opportunities to accelerate the company's growth while maintaining our solid financial strength. Our overriding objective is to create greater shareholder value by building a larger financially sound company that possess meaningful earnings power and participates in the rapidly growing segments of the offshore market.

We believe Tidewater is well-positioned for the upturn in our market that is currently underway. We are focused on long-term growth and recognize that our quarterly earnings plan will in all probability continue to fluctuate. But, we fully anticipate that over a reasonable period of time we will continue to grow revenue, profits, and shareholder value.

We're now ready to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Jeff Tillery with Tudor, Pickering, Holt.

Jeff Tillery - Tudor, Pickering, Holt

I wanted you to give right a little more color just around the MENA strength especially in the towing supply vessel and rate it seems like may be part of the rate was mobilization fees but could you just comment on that as well as just kind of sustainability of utilization at this higher rate?

Jeff Platt

Sure. I think we did mobilize some vessels into the region and the vessels that are in that MENA region these were relatively larger vessels than what has made up the previous fleet size there. It's primarily in India and then we've a Libya project we kicked off. So what you've seen is actually the increase of some bigger spec, higher spec equipment certainly with the higher day rates. That's what's moving the day rate usage.

With respect to utilization again there's a lot of that equipment that's in Saudi on term-contracts. We do have a little bit of churn. But overall we're pretty bullish on that market and I think that that will be fairly sustainable.

Jeff Tillery - Tudor, Pickering, Holt

Good. And a similar question also here in Africa, Jeff the September quarter we saw a real bump up in that towing supply vessel utilization and that sustained here in the December quarter. How do you see the next 6 to 12 month playing out in the utilization side?

Jeff Platt

Well, I think again for the newer fleet we worked very hard, almost full utilization when you take into account a bit of mobilization and certainly the R&M. When you look at the rig growth that's expected as projected with the new rig deliveries that I walked through in my earlier commentary, again, we believe that those -- that utilization level will continue to be in the mid upper 80s and so we really don't see any slackening in that.

Jeff Tillery - Tudor, Pickering, Holt

I know it's early to ask for comments around the fiscal '14 but is curious if you guys would provide just directional comments of how you see kind of dry docking CapEx for fiscal 2014 directionally you're thinking of flat, down, or up year-over-year?

Jeff Platt

One point of clarification is the vast majority of our dry docks are expensed relative to capital.

Jeff Tillery - Tudor, Pickering, Holt

Sure. And I was trying to think about that from a utilization standpoint. I should have separated the question?

Jeff Platt

We do in fact have I guess is have, is frequently the case upgrades taking place either port contracts or in conjunction with a normal dry docking that takes place, strikes me that we're upgrading some of the deep water PSVs in fact as we speak, just in terms of mixing mud mixing capabilities as an example.

But, so I guess the crux of your question is beyond the March quarter. Actual truth is we would expect things to moderate to some extent, getting more granular than that is probably prematurely because we're still in our FY'14 budgeting cycle. But as I mentioned on the call in November we have a sense of taking the pipe in terms of our dry docking schedule, we thought it would be more dramatic impact in December quarter. Things have slid a bit to the right and as a result we'll probably have reasonably high dry dock and therefore R&M cost in December and March quarter at which point we would expect it to moderate to what extent we'll probably have to stay tuned on that.

Jeff Tillery - Tudor, Pickering, Holt

Okay. And just your thoughts -- your initial thoughts around CapEx for fiscal '14?

Quinn Fanning

Our CapEx that is related to the existing fleet tends to be reasonably modest. Our CapEx is more driven by vessel purchase commitments, or new construction commitments and I think we're a little ahead of ourselves in that for FY'14, since we haven't presented a budget to our Board.

Operator

Your next question will come from the line of Todd Scholl with Clarkson Capital.

Todd Scholl - Clarkson Capital

Just a couple of questions. First can you talk about your thoughts on the U.S. Gulf of Mexico and talk about continuing to bring back vessels there and I know you've two new build U.S. flag vessels. Can you give me your thoughts on may be expanding that program and making it a little bit larger given the kind of strength we're seeing there?

Jeff Platt

Yeah, Todd we actually have three vessels under construction in the U.S. right now. All three are PSVs. All are pretty sophisticated deepwater boats two of which are very sophisticated and kind of if you will ultra deepwater boats that are under construction. So we're bullish as a lot of people are domestically certainly over the short-term or shorter term as we have the deliveries of those new builds, which will unfold here in the next. Two of those in this calendar year and then one early next year is what the current schedule is. So I think they're going to be hitting the market at a fairly opportune time.

We do, as we have in the past looked at our other vessels that are U.S. flag, not in the U.S. market and we actually have a boat that we will be mobilizing back. It's got a contract. So that will be going on and we're in discussions with certainly it was here primarily and again in the deepwater Gulf of Mexico certainly looks to be promising over the next 12 to 18 months. I guess talking to our clients you can put your finger on may be 12 to 15 deep water rigs. But I just want to put that in context of that is about 140 rigs on the worldwide basis is being delivered, so while the Gulf is certainly a positive, it's a positive, that is just a part of the overall worldwide increase of the drilling activity. So just I kind of put that in context for everybody.

Todd Scholl - Clarkson Capital

Would, if you had to stratify it though would you say that U.S. Gulf is your -- the most attractive market you see right now?

Jeff Platt

Absolutely not. I think, it's a good market with the deepwater segment whether in the U.S. Gulf be it Sub-Saharan Africa, that's -- the deepwater market really across the board is a very strong market and rates have moved up across the board worldwide. So, I absolutely would not put it as the most attractive market for us. It is just one of a lot of markets that we think have potential. But again, on the overall capacity, but just to put it in perspective, we're talking 12 to 15 incremental rigs domestically, which is a nice number but on the context is a 140 delivered over the next two years worldwide.

Todd Scholl - Clarkson Capital

Okay. And then, just one quick one for Quinn. It looks like the next two years you guys should be growing off some pretty decent cash flow. Given what one of your peers has done with their dividend, you guys had discussion about increasing your dividends?

Quinn Fanning

Yeah, that's obviously a decision of our boards. We regularly look at all the tools in the tool kit, whether it's incremental investment and market share, buybacks, or dividends. I'd agree with your point that if the market continues to develop as we anticipate, we can continue to invest rather assertively in the fleet and still generate free cash flow and above that. How that ultimately is deployed whether it's in a repatriation strategies with shareholders, which we've done in the past and in material ways or in share growth or investment in adjacent businesses I think is something that we'll evaluate both on an absolute basis and relative to each other.

Operator

Your next question will come from the line of Ian Macpherson with Simmons.

Ian Macpherson - Simmons

Good morning. You had said, you see opportunities to continue to address -- to invest assertively and market fundamentals appear fairly buoyant. How do you see the build versus buy parameter is shaping up, looking ahead with regard to shipyard pricing and consolidation, in which way you'll see the pendulum swinging in the calendar '13 in that regard?

Jeff Platt

Okay. Ian, certainly, our bias is to purchase equipment that doesn't add to the overall supply side. And I think this quarter, excuse me the December quarter was pretty nice and that we picked up some really nice equipment, high spec equipment, European build into that and obviously we thought that it was a good value proposition for Tidewater or we wouldn't have done it. You can go back to previous quarters where we've had very little activity in that respect and that's basically our discipline saying that it has to present value to us over the true cycle economics of the vessel.

How that plays out over the next couple of quarters, next couple of years is you're asking I'm not sure. Right now, we see and have seen those opportunities, which we moved on to the extent that they don't exist. We'll continue to address our needs with the fleet and do so through ongoing construction which we've going on at the same time. We'll pick and choose and the good news is for us, we have the financial ability to do that. Other people I think are kind of leave it up at this point but we've that optionality, when we see value, we're able to move on it and close quickly on what's nice equipment for our needs.

Ian Macpherson - Simmons

That sounds good. Thanks. Well question just regarding the outlook for day rate and cost dynamics. When we look obviously the December quarter and March quarter has been well covered burdened by higher dry dock et cetera but that sort of 42% to 43% gross margin that you had in the first half of this year. I think that the consensus would probably take the over on that level for fiscal '14, not necessarily by a huge amount but I think that we -- the market generally sees margins improving modestly and without getting into a highly specific question about guidance, does that correspond with your view of the market and margins?

Quinn Fanning

Well, once burned, twice shy in terms of getting too specific in term of timing of margin improvements. But I think we would take the over there as well.

Operator

Your next question will come from the line of Gregory Lewis with Credit Suisse.

Gregory Lewis - Credit Suisse

Hey, Jeff or Quinn. Quinn. I think you mentioned that you actually have or seen some of your more newer PSVs sort of needing to go in for minor upgrades. When you think about that, was that something where the customer sort of requested it and was willing to sort of pay for that cost or is that something where you're looking at a potential better price and just thinking hey we can sort of do this minor upgrade to the newer equipment and sort of demand a premium price? I mean, did I understand that right?

Jeff Platt

Greg, I'm going to let Jeff Gorski, our COO, take a stab at that.

Gregory Lewis - Credit Suisse

Perfect.

Jeff Gorski

Yeah, Greg, hi, this is Jeff Gorski. Some of the modifications we're doing is just basically being pushed by our customers' interest in terms of greater capacity. So, in that scenario absolutely if we are adding those modifications that brings to the higher spec it is in fact bringing us better day rates. So, in that scenario, we want to continue to deliver what our customers need in their operation. And specifically in deep water, as you know, the transit time between where the rig is and the shore base a lot of times becomes a hindrance in terms of efficiency. So, if you can bring greater capability just outside the 500 meter zone then in fact that gives our customers significantly upside and efficiency and improve their operation.

Gregory Lewis - Crédit Suisse

And so just thinking about that that we're not talking about stretching a vessel, we're talking about reconfiguration of the vessel, right?

Jeff Gorski

Absolutely, no, no. No, no, we're not talking that in terms of increasing debt capacity. We're looking at things such as improving deliverability on fluid strength as well, well-bore fluids be it the various needs for deepwater drilling programs in terms of bud weights. That's the only thing.

Gregory Lewis - Crédit Suisse

And then, Jeff, you touched on it. I mean, there's a lot of jack-ups that are scheduled to hit the make the market over the next, let's call it, one to two years. In terms of thinking about the towing supply fleet and sort of the price opportunity there, I mean, is your sense for the overall market for these towing vessels -- how tied is the market, and are we at the point where we could potentially see day rate pricing maybe accelerate a little bit fast than maybe the market is thinking?

Jeff Platt

Greg, we've been watching and obviously before you get the ability to move day rate you have to get utilization. That's just be it the tow supply or deepwater, same thing. We've seen the high utilization for the Tidewater fleet, and again about 101 ships or 102 ships are the new vessels for Tidewater. I think it's the rest of the market needs to catch up with that and realize sort of where they're at.

The good news is, as you pointed out, we've got incremental rigs coming in. To the extent that they would truly incremental drilling and not push out, that's the real question. So, the other good news about that, typically the contracts on the tow supply to jack-up support outside of the state run companies, those tend to be shorter terms contracts than your deepwater. So, once the market turns and the other vessel operator realize that we have that pricing ability I think it will -- we have the ability to turn the contracts a little bit quicker than our deepwater.

Are we there yet? We haven't seen it. Again, we're waiting for that but the utilization has to proceed the day rate and what our utilization in that class is that we're trying, I can tell you that much.

Gregory Lewis - Crédit Suisse

And then just one really follow up to the tag question, I noticed that it looked like you stacked one vessel. I guess, given the fact that it sounds like the market, I mean; we're seeing pricing go higher. Is this something where this boat at this point is just simply sort of beyond its useful life stacked? And I mean, I guess my questions are what basin was that? What basin is that boat in, and do you ever anticipate that boat coming back to surface?

Jeff Platt

We don't get to that granularity of it. I hope you understand but the point is -- and you hit it right the nail on head. It's basically a vessel that we look at it just doesn’t have on a go-forward basis the business case to keep it working. We have roughly 39 legacy boats, what do we say?

Quinn Fanning

Yeah.

Jeff Platt

We have roughly 39 legacy boats in our active fleet. And I would expect that over the next couple or two years those vessels will be kind of moved out just like this was -- with the one that came up for a time to either have some money reinvested into it or just didn't have good contract opportunities on a go-forward basis. I wouldn't read any more or less into it than just the natural course of the old fleet, what's left of it just rolling of the table for us.

Quinn Fanning

Just adding to Jeff's comments, to the best of our ability we try to time the expiry of papers on a vessel with its contract so -- I'm not sure what the situation was with this particular vessel but it's certainly the case where the vessel is coming off contract and you have a decision to make of do you invest in it to essentially buy yourself another two and half years of operation. And the economics of that more often than not less couple of years have not worked for the older equipment.

The other point I'd clarify is yes, we have 39 operational "old vessels". I think the actual numbers of OSVs however is high teens. So, it's really rounding here in terms of the fleet at this point. Tugs and other specialty vessels like that sometimes can seems going for ever but really we have less than 20 operational old OSVs the balance of which are specialty vessels which again we'll see probably pushed completely over the next couple of years.

Operator

Your next question will come from the line of James West with Barclays.

James West - Barclays

Jeff, on the towing supply side, obviously when you mentioned several times you guys have been well utilized. Digging a little bit deeper there, you have great market intelligence and are waiting for your competitors to play catch up, how close are they? I mean, are they almost there so that we can finally this day rate momentum that we've been looking for?

Jeff Platt

James, first I'll take it as a compliment you say we've got great market intelligence, but it's a pretty foggy world out there. It's so discrete when you try to go further.

Certainly you look at the number of the older vessels the roughly or 700 some ships that are 25 years or older. The greater majority of those are in the tow supply and supply class. So, those are already -- if they're not already pushed out they're pretty close to getting pushed out.

I would hope that at the higher end when you're talking about newer vessels, we got to be getting close. So to the extent that the jack-up deliveries again which are very much weighted for the next 12 months or 24 months there was a large number of vessels. We've got about 53 as I said earlier, slated for delivery into the market. We would certainly hope that we reach that tipping point, if you will, and start seeing that increase in the day rate. What it's going to happen? James, I wish I could tell you, I wish I do that, but I just don't have that kind of granular detail on the intelligence.

Joe Bennett

This is Joe. I'd just add on to that. When you look at what the movement of the jack-up rig market was really in the last two months since our last conference call had moved up by 20 to 30 rigs just in the last two to three months. Just so that we have a question going forward and the answer to your question will that pace continue to be. You probably has as good as challenges as anybody on that sort of thing. It's certainly the delivery schedule of some 50, 55 jack-ups would suggest another deep hole, is that closer to it than we are suggest that there is real demand for those rigs. Again, the old ones get pushed when they come in. Those are all the things that will help drive the timing of the tightness of our towing supply fleet as an industry.

James West - Barclays

Okay, that's fair enough. We do think that those are going to be added to the fleet. Just one follow up on the deepwater fleet. Jeff or Joe, you had mentioned that about half of the fleet had already rolled to new market rates, and I think the other half rolls over here in the next few quarters. What's the delta or just could you give us some sense of the delta between kind of where those vessels may rest today versus where the market rate is now?

Jeff Platt

I think if you look at the ones that had not rolled which you're questioning I would suggest that I don't have a calculation in front of me, but I would suggest that the average day rate of that kind of 50ish or so percent is probably in the upper teens lower 20s, and probably with the opportunities on average to get to upper 20s. Understand and we looked at this very, very closely before this call. Understand that our deepwater PSV fleet consists of vessels that are; I'll give examples, 230 feet in length and of course great dead weight tonnage up to 300 feet and commensurate day rate. So, not everything rolls at a given $30,000 or $35,000 day rate. But I would say just from a trend standpoint, you'd be going from upper teens, lower 20s, up to the higher 20s to 30 or so, something like that. So significant.

Operator

Your next question will come from the line of Jon Donnel with Howard Weil.

Jon Donnel - Howard Weil

Quinn, I think you briefly mentioned regarding Brazil that you had a couple of those vessels get to work. There were also some industry reports out a couple of weeks ago that said you ought to have a couple of vessels mobile from Brazil to West Africa or the Mediterranean. I was wondering if you could just give us an update kind of on where things stand there and maybe what the outlook is for the deepwater and Brazil overall?

Jeff Platt

Jon, this is Jeff. Let me take a crack at that. We did have one large anchor handler that go on contract with Petrobras in the December quarter. That was good news. So that vessels is on right now.

In the tender that included a pretty significant number of large PSVs a majority of those are outside of Brazil that are on contract, they stayed on contracts. There are several vessels that are inside of Brazil that are awarded the new contract that are currently on contracts with Petrobras and they will only expire over the next couple or two quarters. So, they would roll on to the new award. And we did have as reported some vessels that mobilize out of the Far East as relatively new builds that had contracts with Petrobras that are now in Africa.

So, overall, I think in looking at the award which we're still very optimistic in discussions with Petrobras that that will come to a conclusion here hopefully in the next several weeks so we can move on to that at what we think are very good day rates for Brazil. But overall a majority of the vessels today are on other contracts and are working nicely for us.

Jon Donnel - Howard Weil

That sounds encouraging compared to the down time which all have been experiencing here recently. And then I guess one brief follow up on the new vessel purchases you're making out of Europe. I mean, the North Sea has not been a point of reference with you guys here recently. With these new builds being there and presumably able to operate there, is that a market that you're looking to maybe expand operations in here going forward or what's the outlook for those vessels that are being built in Europe right now?

Jeff Platt

John, these are vessels that can work anywhere. Again, with respect to the fact you could work in the US because they're not US bound. They're deepwater, very nicely quality, presented a good value for us. Are they actually targeted for North Sea? The answer is no, but we look at all markets. We're sort of agnostic on this market we would like to work in, in this market we would not like to work in. It's where we can make the business case we'll go to. And I think again, having European first world class, if you will, construction certainly allows you to enter markets that when it becomes opportunistic for us we have that other option to us to go there. But these are great ships that could end up in Sub-Saharan Africa, could end up in Brazil potentially. These are deepwater ships that fit nicely into the total portfolio of what we are looking for.

Quinn Fanning

And you can do the math when we file the Q also. So, if you're reasonably close to what construction pricing would have looked like on these vessels you'll see that the economics of our purchase are quite compelling relative to the new build pricing.

Operator

Your next question will come from the line of Veny Aleksandrov with FIG Partners. Your line is open.

Veny Aleksandrov - FIG Partners

My first question is related to Sonangol, and if you're not comfortable responding that's fine, but not talking for further negotiations just talking about the number of vessels that you currently have there. I know that at one point you started operating consortium that you had but did not sign the chargers. So, compared to near ago how many vessels do you have there and how many were?

Jeff Platt

Overall, we're at net down 2 I believe year-on-year to answer your question. And just understand that we really need to avoid and you can't talk about negotiation for obvious reasons. But overall, and it's just on what we have reported is that we have ongoing --being awarded contracts, participating in tenders on an ongoing basis. And then really in hindsight the activity levels for us in Angola really have not been dramatically affected by the ongoing negotiations that both Sonangol

Veny Aleksandrov - FIG Partners

They're falling apart.

Jeff Platt

Yeah, but the market activity is -- there was not really a great opportunity to increase the presence. I think that's more a reflection on the Angolan market as a whole in the rear view mirror.

Veny Aleksandrov - FIG Partners

And then talking about crew cost, you mentioned it was down in the quarter and a couple of things, dry dock and new vessel but you also said our emphasis on bringing out crude oil can we expect some of these to continue and crew cost to be controlled more in the future?

Jeff Platt

Well, I think that's one of the benefits of our operating footprint is that we are exposed to many different markets some of which have greater labor pressure than others. But you should distinguish between the total spend on crew cost and the spend per vessel. We do in fact expect to trend up in part because our fleet count is growing. But certain jurisdictions, as we've highlighted in other calls, such as the US market, Brazil and Australia have had more greater -- more labor pressure than other markets but not completing tongue in cheek but labor pressure in Myanmar has not been significant.

So, as we look at the entirety of the portfolio not being leveraged to one or two markets that has a lot of labor pressure has ultimately benefited and we experience same pressures of many of our competitors do and that's particularly the case for certain skill sets such as DP operators where we and our friends on the rig contracting in many cases are competing for the same people.

Operator

Your next question will come from line of Jeff Spittel with Global Hunter Securities.

Jeff Spittel - Global Hunter Securities

If we could just speak to the cadence of vessel dispositions, I think you reference that we're still kind of about 40 or the older boats that are going to get pushed out of the fleet, any reason to believe that things are going to change meaningfully from the pace of the dispositions that we see in the last few quarters?

Jeff Platt

We sold nine vessels last quarter, as I mentioned. I think on the November call I highlighted the fact that we are trying to be a bit forward leaning in our disposition program and had downwardly revised our guidance in terms of likely gains, not to highlight what gains would in one quarter and other, but our expectation is good. The gains will come down not necessarily because the market is materially soft I think but because we are probably more critically looking at the fleet on a regular basis, and the bottom whatever depth isle we've more actively considered scrapping. We scrapped I think four vessels last quarter. And then sold five vessels as operational equipment.

But the pact that we've sustained over many years now 10 to 15 vessels a quarter is something that we think we can sustain. There's demand for OSVs that may not fit this market any longer, i.e., the oil and gas market whether its Nigerian Security, Caribbean Cargo Trade or whatever has consistently generated demand for this equipment which is good from our perspective because it removes the potential competition even at the low ends of the oil and gas market. But we'd like to think that we will sell out of the stack fleet and ultimately the older active vessels in that whether five vessels in one quarter and 50 in the next or what I can't forecast, but we continue to expect to prosecute this disposition program over the next couple of years to the point that it will not be on your radar screen any longer after few more quarters I guess.

Jeff Spittel - Global Hunter Securities

And then switching over to the Middle East, you alluded to a pretty constructive body language out of Saudi Arabia in particular. Is there a possibility we could see you redeploy some shallow water assets in to that market or you think you got a few that are under construction that might be headed in that direction? Just trying to get a little of a feel for that.

Jeff Platt

It's yes to all of the above. As the market unfolds and grows we absolutely expect to have a nice position there. So, in the market there are rumors of additional tenders coming out from Saudi how that unfolds we absolutely expect to participate in it as we do in all the markets that we're in.

Operator

Your next question will come from Richard Sanchez with IHS Petrodata.

Richard Sanchez - IHS Petrodata

I had a question regarding drill. I wanted to know if Tidewater had been affected by Petrobras contracting delay due to new board approval requirements there?

Jeff Platt

Yeah, I think Richard, this has been a subject that we certainly reported over the last, at least the last quarter and have alluded to just like the rest of the industries not unique to Tidewater, it's not unique to the OSV space I think some drillers had the same issue and I probably if you drilled into it, there were other service providers that were all in that same category, the answer is yes.

Richard Sanchez - IHS Petrodata

And then, the other one is regarding Mexico where I understand there is also some adjustments being made to their tendering process. I wanted to know if you're having any issues resisting -- renewing of the existing contracts in Mexico, such as the PSV Patt Taylor?

Jeff Platt

We don't answer questions specific on vessel, Richard I hope you can understand that. But again, you have the new Presidential Election last year and I think if you've been following Mexico over the years, the political change certainly has to ripple through the theme X, as well as the rest of the economy, so you have some of that. But no, to answer your question fairly simply no, Mexico is actually a market that again we feel pretty bullish about on a go-forward basis it's going to unfold nicely for us.

Operator

Your next question will come from the line of Mark Brown with Citigroup.

Mark Brown - Citigroup

Just wanted to ask about Sub-Saharan Africa/Europe and the margins there, was there any impact from labor inflation that we've been hearing about in the West Africa region?

Jeff Platt

Mark just there is -- I think Quinn talked a little bit about, as you get to the officer set the DB operators that there is that -- but I wouldn't say that it's unique or anything more than kind of the general inflation. Areas of Sub-Saharan Africa and [Europe] it's not an inexpensive place to operate for anybody. But again, I don't think there is any meaningful change that happened in the quarter that I can recall.

Mark Brown - Citigroup

Okay. And maybe you could just comment on following Macondo, whether you've seen a change in requirements for the number of vessel that operators are looking to have to support their drilling operation, has there been a meaningful change or do you expect to see that going forward?

Jeff Platt

Mark, I think certainly domestically it's a slowdown of permitting issue. So you've that and we're seeing the bounce back. I think if there has been a change, it's been in discussions with our clients with respect to who they want to do business with. I think everybody is getting on the safety bandwagon if you will and one of our competitor today they're touting their safety records. We've been pretty well developed along that for a period of time.

But overall, deepwater in general be in the Gulf of Mexico or outside, people are looking for DP to large capacity ships. They want to make sure that they companies they're operating or contract with have real safety programs, have standards such that you don't get into trouble as you get near that 500 meters on around the rigs. But to say that we've seen a market change and there is an additional one vessel per deep water rig, I don't believe that's the case.

Operator

Your next question will come from the line of Matt Conlan with Wells Fargo.

Matt Conlan - Wells Fargo

Could you give some commentary on how the Mexican market is shaping up? We see that they're looking to add a bunch of new jack-ups there, continue to expand their deepwater presence, how is that affecting the Americas market?

Jeff Platt

I don't know that Mexico is affecting, I know the fact it is a certainly a part of the Americas. The good news I think is that you've the rebound of the deepwater side certainly in the Gulf. So you expect that Mexico steps out and then steps up a little bit in deepwater that will bode well. But I think as general assessment; we look at Mexico as a bright spot going-forward.

Pemex certainly has had production decline over the years. I think they need to address that. We're in discussion with Pemex. It looks like they will be adding the rigs as you alluded to. And when you add rigs you need to have vessels to support that. So again, we're pretty up domestic and Mexico is going to be a good market historically for us. We've had a presence there and have a nice presence there. And we expect to do well in Mexico.

Matt Conlan - Wells Fargo

Do you see -- I mean, they obviously take rigs from the U.S. side of the Gulf of Mexico, do you think they will take any vessels from the U.S. side?

Jeff Platt

Well, I think it's a legitimate pull. But again, it's not -- it doesn't have to be if you will but that certainly is a close by market to the extent some vessels would move down. But just remember that the jack-up market domestically is not all domestically U.S., it's primarily a gas market. And there's not a whole lot of equipment necessarily that needs the Mexican jack-up market that's available to be delivered from the U.S. Gulf. The U.S. Gulf with respect to jack-ups, most of the rigs get moved by tugs not AHTS's Anchor Handling Towing Supply. A lot of what you would expect in Mexico historically and typically would be AHTS's. There is not a great abundance of that domestically. There are some supply boats that could do that domestically here. But again, Pemex is also upping their standard. They've got age requirements, DP requirements, CC requirements. So potentially some of the older equipment domestically that could move down there, might be excluded from those tenders as well.

Operator

Your next question will come from the line of Cole Sullivan with ISI Group.

Cole Sullivan - ISI Group

Most of my questions have been answered or asked at this point but I just wanted to know if there was any update you could provide. I know you talked about the JV briefly in your prepared comments but anything that you could provide on continuing contracting activity or similar to what you, the updates you guys have given previously?

Jeff Platt

Cole, I just I don't want to presume anything different in the future. I think what we've said and what's out in the public, we just got a stand at that and I hope you understand that.

Cole Sullivan - ISI Group

Sure, sure. And then one follow-up. It looks that Asia/Pacific deepwater rates, revenue, and utilization fell off in 4Q, is that kind of a mix issue related to dry docking or is there something going on in the market there?

Jeff Platt

It is actually our third quarter -- third fiscal quarter. I mentioned there's really not an underlying trend but I call your attention to in Asia/Pac. I mean, we have kind of the normal ebbs and flow of work scope, which impacts day rates in part because it eliminates incremental labor pass through, which is a low margin pass through where some clients particularly in Australia. I think that's part of what you're seeing. But there is other cats and dogs behind that as well. But nothing that I would highlight as a negative trend, at least in regards to margin. And in fact, Asia/Pac stacked up pretty nicely in terms of margins and March quarter even if average day rates came off for the reasons mentioned.

Operator

And at this time there are no further questions. I'll turn the conference back over to management for any further remarks.

Joe Bennett

Regina, thank you very much. We went a little over our normal timeframe with good questions. We appreciate everybody participating. And have a great weekend. Thank you.

Operator

Ladies and gentlemen this does conclude today's conference. Thank you all for joining. And you may now disconnect.

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