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GulfMark Offshore Inc. (NYSE:GLF)

Q4 2012 Earnings Call

February 26, 2013 9:00 am ET

Executives

David Butters – Chairman

Bruce Streeter – President, Chief Executive Officer

Quintin Kneen – Chief Financial Officer

David Rosenwasser – Chief Operating Officer

Analysts

Todd Scholl – Clarkson Capital Markets

Jeff Spittel – Global Hunter Securities

Greg Lewis – Credit Suisse

Jeff Tillery – Tudor, Pickering

Bill Dezellem – Titan Capital Management

Joe Gibney – Capital One

Matt Beeby – Williams Financial

Cole Sullivan – ISI Group

Mark Brown – Citigroup

Operator

Good morning ladies and gentlemen and welcome to the Fourth Quarter 2012 Earnings conference call. My name is Emily and I will be your conference specialist for this presentation. On the call today are David Butters, Chairman; Bruce Streeter, President and Chief Executive Officer; Quintin Keen, Chief Financial Officer, and David Rosenwasser, Chief Operating Officer. After the speakers’ remarks, there will be a question and answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded.

This conference call will include comments which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors. These risks are more fully disclosed in the Company’s filings with the SEC. The forward-looking comments on this conference call should not therefore be regarded as representations that the projected outcomes can or will be achieved. Thank you.

I would now like to turn the call over to Mr. David Butters. Please go ahead.

David Butters

Thank you, Emily, and good morning everyone and welcome to GulfMark’s fourth quarter and year-end conference call. Today we’ll follow our normal format with management covering the financial and operational highlights; but before we go into that, I would like to comment on an announcement that we made about two weeks ago regarding the retirement of our Chief Executive Officer, Bruce Streeter, and that will be effective as of June—this June annual meeting.

It was almost 23 years ago when Bruce took charge of a small seven vessel fleet company consisting of a few platform supply vessels acquired by GulfMark from Offshore Logistics at a total purchase price of around $19 million. During the ensuing years, Bruce built a company through astute purchases of existing tonnage and the design and construction of modern vessels. The company’s footprint during that period grew from a few vessels in the North Sea to a global enterprise consisting today of almost 100 vessels owned and operated throughout the world.

Within the industry, I think Bruce is known as one of the most knowledgeable operators in the business and as a man with a high degree of respect and intelligence. I know what he has achieved, having seen the intrinsic value of our company grow almost 50 times since he took charge of the company back 23 years ago. Shareholders have indeed benefited during this stewardship of Bruce.

We will miss Bruce but he will and we will move on; and I think it’s a real tribute to Bruce that the Board of Directors chose an individual within the company to continue his legacy, and at this point I’d like to congratulate Quintin Kneen on his upcoming appointment and wish him the best of luck.

So with that, I would like to call on Quintin to summarize the fourth quarter results, and then Bruce will cover the operational highlights of the last quarter. Quintin?

Quintin Kneen

Thank you, David. As we normally do, we will have about 30 minutes of prepared remarks from me, Bruce Streeter and David Rosenwasser, and then we will open it up for questions. As always, we will try to provide additional clarity on the fourth quarter results and then throughout the call we will provide our expectations for 2013.

As we indicated in our press release, results for the fourth quarter were characterized by the typical Q4-Q1 seasonality in combination with some unanticipated special items. Revenue for the quarter of 95 million came in on the low end of our quarterly guidance range. On a sequential quarterly basis, consolidated quarterly revenue was down 7% from the third quarter, and on a year-over-year basis consolidated quarterly revenue was down 5% over the fourth quarter of 2011. On a full-year basis, consolidated annual revenue was 389 million, up 2% from 2011 and just outside the low end of the revised annual guidance range.

Quarterly revenue in the North Sea region for the fourth quarter was 39.5 million, down approximately 5% or 2.3 million from the third quarter. The decrease was not unexpected and it reflects the typical seasonality we see in Q4-Q1. Revenue for the fourth quarter in southeast Asia was 13.6 million, down 4 million or 23% from the third quarter. As we mentioned on the third quarter call, we made some strategic management changes in southeast Asia to better capitalize on the market opportunities we see in this region. As a result, revenue for the fourth quarter of 2012 was, and in the first quarter of 2013 is going to be lower than what would be expected based on the current market conditions.

The Americas region generated revenue of 41.9 million during the fourth quarter, essentially flat from the prior quarter. Both utilization and average date rate were up on a sequential quarterly basis, reflecting the transfer of a vessel to southeast Asia which was unemployed during the third quarter. Aside from the vessel sales and vessel moves, revenue, utilization, and average day rate were essentially flat throughout each of the sub-regions of the Americas.

On a consolidated basis, direct operating expense was 51.8 million, which was above our revised quarterly guidance of approximately 49 million. The increase was due to an unanticipated increase in accrued pension liabilities, additional fuel costs related to the vessel moves, and some accrued penalties in Brazil related to difficulty in getting regulatory clearance on the vessel we mobilized down to Brazil in Q4.

Drydock expense for the fourth quarter was 9.9 million, in line with our revised guidance. General and administrative expenses for the fourth quarter amounted to 16.1 million, 4.1 million over the quarterly guidance of 12 million. The overage was due principally to two items: a 2.3 million write-down of a receivable from a North Sea customer that suddenly went into liquidation in the fourth quarter, and an additional severance expense and other costs of 1.5 million related to the restructuring of our southeast Asia operations. The new management team in southeast Asia is now in place and we do not anticipate any material severance costs related to this restructuring going forward.

Consolidated depreciation of 15.1 million was essentially flat and in line with our guidance for 2012. As a result, consolidated operating income for the fourth quarter was 1.8 million, reflecting an operating income margin of 2%. Interest expense for the fourth quarter was 5.2 million, an increase of 900,000 which reflects the interest on the additional bonds issued during the quarter. There was also a bit more activity below the operating income line this quarter. We had approximately 550,000 of unamortized debt costs that we wrote off when we repaid the facility agreement, and we had 1.3 million of foreign currency and other movements during the quarter. All of these amounts were non-cash charges.

The tax provision for the fourth quarter was a benefit of 273,000, which resulted in an overall tax rate for 2012 of 12%. Capital expenditures for the quarter amounted to 81.5 million. For full-year 2012, capital expenditures totaled 192.3 million. Of that amount, 124.7 million was for progress payments on the new build program, 51.1 million was for the purchase of two vessels, and 16.5 million was related to upgrading equipment in our vessels and the ongoing mid-body extension program.

Cash on hand at year-end was 185.2 million. All told, net debt – total debt less cash – was 268.8 million at December 31. That’s an increase of 75 million since September 30 and reflects cash generated by operations during the quarter of 38 million, offset by capital expenditures of 82 million and dividends and debt issue costs of 31 million.

So to recap, at year-end the senior notes represented all of our 501 million of outstanding indebtedness. There are no borrowings outstanding under our revolving credit facility, and no amounts outstanding on the term loan facility which was retired during the quarter.

As it pertains to 2013, the following is our initial guidance for the upcoming year. Revenue for 2013 is currently anticipated to be between 395 and 445 million. We will tighten up this range as we move through the year. We currently anticipate revenue for the first quarter to be between 90 and 95 million with each subsequent quarter in 2013 increasing between 6 and 11 million per quarter. The typical pattern for GulfMark is to see higher revenue in the second and third quarters of the calendar year. This year due to the timing of the delivery of new vessels, the revenue pattern will be different. The seasonality will still be there; it is just anticipated to be overshadowed by the increase in the number of vessels the company expects to have operating in last half of the year.

Direct operating expense for the year is anticipated to be 208 million. On a quarterly basis, direct operating expense is anticipated to increase during the year from 51 million in the first quarter to 55 million in the fourth quarter. We anticipate drydock expense to be 25 million for the year, 15 million in the first half and 10 million in the second half. General and administrative expense is anticipated to be 13.5 million per quarter during 2013. Depreciation is anticipated to go up 3 million year-over-year to 63 million. The first two quarters will be approximately 15 million and the last two quarters will increase slightly with a beginning of 2014 run rate of 17.5 million per quarter.

Cash paid for interest during 2013 is anticipated to be 32 million, which equates to 8 million per quarter. For 2013, interest expense will be 20 million because a large portion of the cash paid for interest will be capitalized to the vessels under construction. On a quarterly basis, interest expense is anticipated to be 6 million in the first quarter, declining slightly in subsequent quarters of 2013. The tax rate for 2013 is anticipated to be 13%. For 2013, we anticipate spending 228 million on the new build program, and we anticipate spending approximately 30 million on other capital projects, including the U.S. mid-body extension program.

We announced in December the establishment of a share repurchase program. Through February 25, we have repurchased $11.5 million worth of our common stock. We have purchased 324,000 shares at an average price of $35.46. We also announced in December that we would be more focused on our divestiture program. In 2012, we divested five of our eight fast supply vessels and crew boats. We continue to have three larger fast supply vessels in the fleet. In general, this program will be focused on redeploying the capital we have in vessels that we consider non-core based on a variety of factors, including age, scale of operations, or geographic fit. In 2012, we divested 41 million worth of vessels and our objective would be to increase that level in 2013.

There are currently 11 vessels that we will be constructing over the next two years, and the total construction cost of these vessels is estimated to be 456 million. As of December 31, we had spent approximately 180 million on these vessels. We anticipate spending 228 million in 2013, 38 million in 2014, and 10 million in 2015 to complete this construction program. The vessels will begin to deliver in the second quarter of 2013. There has been no change to the expected total cost of the program while one vessel, the first 300-class U.S. vessel is now anticipated to deliver in the third quarter of 2013, one quarter earlier than originally scheduled. A schedule setting out the basic specifications of each of the new builds with their anticipated total cost and the quarter in which they are anticipated to be delivered will be featured in the 10-K filed later today. The funding of the vessels will be largely through cash currently on hand and cash generated by operations over the next two years, but we will also begin to utilize our revolving credit facilities.

Contract cover for 2013 stands currently at 48%, up from the 36% we reported on the last earnings call. Consolidated contracted revenue for 2013 was 227 million – that’s revenue dollars in backlog. The 227 million of revenue dollars for 2013 breaks down as follows: 101 million for the North Sea, 21 million for southeast Asia, and 105 million for the Americas. Forward contract cover for 2013 stands currently at 27%, and the total U.S. value of all backlog is currently 481 million.

And with that, I will transfer the call to Bruce to give more detail on current market conditions and more perspective on 2013.

Bruce Streeter

Thank you, Quintin, and David thank you very much for the very kind remarks. I’ll offer some comments on our overall expectations for the future and then ask David Rosenwasser to give a more detailed perspective. 2012 is over and we look forward to 2013. Fourth quarter of 2012 included a number of factors that influenced results but not our business going forward. We, with the agreement of the shipyard doing a project, decided to accelerate the stretch program, putting an additional vessel into the yard in the quarter ahead of our plan. This moves some of the cost in the fourth quarter of 2012 that we expected to spend in 2013. The result was that we have completed two of the vessels early and those boats are now on term contracts.

We had one of our smaller charterers in the North Sea who had a vessel on contract for more than two years become insolvent and we had to reserve the outstanding revenue invoices and lost considerable further vessel days before we could remove the deck spread and put the vessel back into the market. The vessel is now back into the marketplace.

We delivered a vessel to Brazil but encountered the types of problems others have noted getting the vessel on contract. We have only recently succeeded in getting the vessel on charter and have and will account for penalties, as Quintin mentioned, related to the contract. We may at some point get some reduction, but for now we have accounted for the maximum amount.

We also completed the mobilization of a vessel out of Brazil, sending it to southeast Asia where it has been undergoing upgrades which will be completed possibly later this week. Recently in Indonesia, there was a stoppage of extensions that had allowed a number of foreign flagships to work in Indonesia. We lost only one vessel contract because of the change, but we had anticipated increasing our presence in that country by a couple of vessels and the timing of that is now uncertain. Finally as Quintin mentioned, we had pension cost adjustments that caused our North Sea expenses to come in high. Although there is nothing we can assume looking to the future, about every three years we have ended up with some level of pension adjustment.

Looking to the future, we see indications that we are moving toward an up cycle that we are well positioned to benefit from. This year, we have a smaller drydock program than last year and that not only reduces expenditures but increases days available for charter. We have now completed the lengthening project on five of the six vessels available for the initial program and should complete the sixth in the first half of the year. We are also now in a position to expand the program to incorporate the second class of vessels. There are 10 vessels in that class and we have agreed to a contract for the first group of vessels and will start the program this year. In fact, we are likely to put the first vessel in the yard about mid-year, well ahead of our original plan.

We also will complete a number of upgrades, bringing one North Sea vessel up to the highest requirements looked for in the Norwegian market, and we’ll complete dynamic positioning DP2 upgrades on several other vessels. We have signed an LOI with an as-yet unnamed charterer, which similar to rig contracts would result in the two vessels coming out of service for a period of time, but then we would get repaid for both the mobilization and for the cost of the upgrades that we put into the vessels.

Recently one of our vessels concluded a project in East Africa, our first entry into that region. Two of the scheduled deliveries are Arctic-class ships, allowing us to work in colder locations. Our changes in Asia are likely to see ships from that region working in a wider range of locations. Overall our fleet, which is flexible and varied, will be younger and more capable in 2013.

Before I turn the call over to David, I thought I would make some comment about revenue guidance. Last year mid-year, we entered into the concept of providing revenue guidance, despite the fact that our markets move quickly and that we make a number of planning changes that affect revenue guidance. This year 2013 is an interesting year. All indications suggest a strengthening marketplace and that that strength accelerates as the year progresses, and particularly in the second half of the year. Thus, our guidance is somewhat wider than what we have tried to provide previously; however, as the year develops, we will be in a better position to bring the range down or adjust the range based on how the market actually performs and as it conforms to our expectations.

With that, I will turn it over to David and then give a short wrap-up.

David Rosenwasser

Thank you, Bruce. As most of you know, we as a company concentrate on term contracts where possible, and that continues to be our focus around the world. As we discussed on our prior call, we increased our North Sea spot exposure in 2012, which turned out to be a much weaker market than we expected. As the year progressed, however, our focus shifted to the term market with some success. The fourth quarter was a typical winter market in the North Sea with reduced spot market activity. That has continued into the first quarter, although we did see a brief period of accelerated demand and improved rates. In the winter of ’11-’12, for example, we laid up one vessel in the area. We did not have to do that this winter because although the winter spot rates were weak, utilization remained strong enough to keep us active in the area.

We have continued to concentrate our term business and are into a renewal process, as Bruce mentioned, with two of our first quarter rollovers already agreed and a further vessel completing a program and switching to a new term charter. In addition, two vessels currently in the spot market are under term discussions that likely will take them out of the market, with a third vessel possibly committed in the not-too-distant future.

The vessel that came off as a result of the charterer bankruptcy that Bruce mentioned has some interesting opportunities before it, and our plans are to see that that vessel leave that spot market as well. The end result should be higher term coverage remaining with some minimal spot exposure in the area should the spot market improve as we move into the summer period.

The seven vessel new build program in the North Sea continues to progress well with a number of hulls taking shape in various yards across Europe. Currently all of these vessels continue to be on time and on budget.

In southeast Asia, we experienced the seasonal softness we expected with several vessels coming off term contracts and entering into a weak spot market. We’ve taken advantage of this time to initiate a restructuring in the area which we expect will better position ourselves in the region going forward. As Bruce mentioned, the market is changing and we’ve seen at least one area become more restricted to foreign flag vessels while other areas appear to be opening new and/or expanding their operations. Our key focus is to best position ourselves for this changing environment not only with enhanced equipment but also through a strong onshore support base.

During the quarter, we brought another vessel into the area from Brazil, taking the opportunity to upgrade her capabilities during her regulatory drydock. We’ve also expanded our onshore support group to address the expanding and more diverse work opportunities we see developing in southeast Asia. This should allow us to enter additional markets within the area while also expanding our overall capabilities as well.

In the Americas, we continue to see growing vessel demand. The fourth quarter was comparable to Q3, even though several vessels were out of service for much of the quarter due to mobilizations and enhancements. Since the beginning of the year, we’ve seen the majority of our contracts in the U.S. Gulf rolled over at higher rates, absorbing the operating cost increases we expect for 2013.

The growing demand also allowed us to accelerate the start of one of our planned 230-class vessel enhancements into the fourth quarter from the first quarter of this year in order to meet a customer requirement. This meant that we had two 230-class vessels which were out of service during Q4 recently deliver within weeks of each other, both going immediately onto term contracts for customers here in the U.S. Gulf. The sixth and final vessel in the 230-class enhancement vessel program recently entered the yard after finishing her term contract. She is expected to deliver in the second quarter of this year.

Finally coming off the success of our 230-class vessel enhancement program, we have recently entered into an agreement with a shipyard to being our 260 vessel class enhancement program. Phase I of this program includes four vessels, although up to 10 of our vessels will ultimately qualify. The first of the 260-class is expected to deliver in Q3 of this year, around the same time as our first 280 new build vessel. The end result in the Americas will mean that we will upgrade the fleet by completing three 230-class vessels, three 260-class vessels, and one 280 new build vessel by the end of 2013.

With that, I’d like to turn it back over to Bruce.

Bruce Streeter

Thanks, David. As most of you know, GulfMark has always worked to and intends to maintain a strong balance sheet. We now have a financial structure in place that we feel can support the development of future earnings growth and at the same time allow us to provide current return to stockholders. Our current new build program on the various vessel upgrade projects shows our commitment to providing for future earnings. Our intention to match sales of non-core assets to company stock purchases when the stock trades in certain bands, and the dividend policy that we intend to maintain into the future are all part of our long-term planning.

Similarly, we have focused a great deal of effort into building our employee base into a strong team and developing the talent we need to move the company forward. Recently we announced the changes that are a reflection of the strong team that is in place to build the future. As a shareholder, I am looking forward to the next few years and the benefit of the hard work to put GulfMark in the position it is today.

With that, we’ll turn it over for questions.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. [Operator instructions]

Our first question will come from Todd Scholl, Clarkson Capital Markets. Please go ahead.

Todd Scholl – Clarkson Capital Markets

Good morning. Bruce, congratulations on your retirement, and Quintin on being promoted. So my first question is really as it relates to the North Sea. It seems to us that we’ve seen some strength in the North Sea as it relates to the timing of some rig moves, where the market can get very tight at times. So have you guys been able to take advantage of any of that? And then my other question is on the contracts that you have rolled over so far this year in the first quarter, were those at higher rates or at the same rates? What did we see when you rolled them over?

Bruce Streeter

The moves so far this year have all been positive as far as the contracts have gone. All of them have gone at higher rates than the expiring rate. The recent level of activity in the North Sea, it has slackened off this week as the weather has improved; but when you have a period of bad weather and you had a number of rig moves come out at the same time, the market tightened up and tightened up fairly quickly. This is somewhat counter-intuitive to what analysts had expected and said about this year, but obviously the market is close enough to balance to where it doesn’t take a whole lot to change it over.

We did benefit to some extent from the changes. We had a couple of vessels that were on 30-day type jobs where they didn’t get any reflection, but the ones that were actually in the spot market did pick up the benefit during the couple of weeks that we had of strengthening. I think that answers the question.

Todd Scholl – Clarkson Capital Markets

Yes, definitely. And could you maybe—I wasn’t able to get when you guys were going through the numbers, what do you exactly expect if everything that you want right now rolls from spot to term, what would be the percentage that would be in the term market versus the spot in the North Sea?

Bruce Streeter

That will change quarter to quarter, but whereas we generally had five vessels, and in periods five to six last year, I think we would be talking more in terms of an average of three. It might be higher in some quarters and lower in others.

Todd Scholl – Clarkson Capital Markets

Okay, great. Thank you.

Operator

Our next question comes from Jeff Spittel of Global Hunter Securities. Please go ahead.

Jeff Spittel – Global Hunter Securities

Thank you. Good morning, gentlemen. Maybe if we could start off with southeast Asia, and could you provide a little bit more detail about the management restructuring, and then would the prognosis be in terms of the utilization recovery that maybe we could get back to more of a normalized run rate by the time we get to the second quarter of 2013?

Bruce Streeter

Yeah, I’ll start it off. Quintin’s been doing quite a lot of work, and so I’ll pass it to him to finish up anything I miss. But essentially southeast Asia is a changing marketplace. We’ve focused on the concept of cabotage or restricted trading. We’ve also looked at the expanding opportunities. Some of the markets that have been sort of backwaters in the past are now expanding, and so the shape and the changes in the presence required in southeast Asia has, for instance, allowed us to concentrate a little bit more on PSVs and on markets that are a little bit farther from the typical pattern where we’ve worked, primarily Thailand, Malaysia, Indonesia, and a little bit in Vietnam. And now through the course of last year, we saw some expansion of that.

We had some improvement in third quarter of last year which led to the concept of, okay, the strength is going to continue through. This is the time to make the changes and start to make the moves to expand and to change southeast Asia, because it’s clearly an area that provides excellent margins and has a lot of scope for the future.

Unfortunately the situation in Indonesia changed somewhat from what we saw and were expecting, and a number of vessels that had been working construction in the Sakhalin area came back earlier than was anticipated, and frankly the market slowed down very significantly towards the latter part of this November and through December, and has only started to slowly pick up this year. But the concepts and the inherent potential that we saw is there, and we see it as the year develops.

I don’t know what I’ve missed, but—

Quintin Kneen

No, I think that’s a great summary. I would also add that the management team turnover is complete and the new management team was installed in early January. It will take them a month or so to get everything ramped back up, and I would expect that by Q2 and Q3 of this year we see results that are hopefully better than what we saw in southeast Asia last year.

Bruce Streeter

And for expanding the marketing presence, the HSC side, the quality provisions, the ability to support major operators as they expand their activities and levels in the region.

Jeff Spittel – Global Hunter Securities

Okay. And then a big picture question – we’re starting to see the new build rig deliveries show up. So far, are you starting to see some evidence that you’re getting either more absorption per new build rig in terms of the vessels, or larger vessels in terms of the capacity that each new rig is absorbing in your different end markets?

Bruce Streeter

I think I’ll let David handle that. I don’t think you see that per se in the North Sea. What you see is delivery enhancements as far as vessel requirements in the North Sea based on where the rigs are actually located, but I think you see a more fundamental effect in the Gulf of Mexico.

David Rosenwasser

That’s right. As we see these rigs move into the Gulf and we look at what the requirements are going forward, we’re seeing certain characteristics that are developing and that we’re having to make sure we’re addressing in our fleet, and that would include how we look at new builds going forward, what type of equipment we’re going to have on those vessels, and so forth. So as we continue to develop as we go forward, we will continue to look at those enhancements, and while we have the opportunity to make any necessary changes we can while the vessels are still in the shipyard, we will do so.

Jeff Spittel – Global Hunter Securities

Great, thanks. Bruce, congratulations and best wishes in retirement.

Bruce Streeter

Thank you.

Operator

Our next question comes from Greg Lewis of Credit Suisse. Please go ahead.

Greg Lewis – Credit Suisse

Yes, thank you and good morning. Quintin, could you touch a little bit more on the management turnover in Indonesia—I mean, I guess the office is in Singapore. In other words, were the replacements or the new management team, were those internal people that were promoted internally or was it sort of a replacement of the management team from the outside?

Quintin Kneen

It was a replacement of the management team from the outside. We brought in some talent that we think is really world-class and has a lot of experience in the area, not just in the typical areas that we have operated historically but outside the scope of that. So most of the management team came from the outside and as a result, they’ll take another month or so to get up to speed. We did have one person that transferred in from the North Sea operations as well, but for the most part they came from the outside.

Greg Lewis – Credit Suisse

Okay, great. And then you mentioned the one boat that was down in Indonesia related to that. It sounds like this is something that is sort of righting itself and could be better in the second quarter—by the second quarter. Is there any other area in southeast Asia where just given—I mean, is this something that GulfMark is constantly on the lookout for where we could see other types of events where there’s a problem with foreign companies inside these markets? And the only reason I ask is because some of your competitors have had similar issues like this overseas. Do you think this is a trend that is potentially going to start developing in southeast Asia, or do you think this is more of, like, a one-off type event?

Bruce Streeter

Well, Indonesia is somewhat complex. It’s instituted a cabotage provision similar to the Jones Act in the United States. There is not a sufficient number of Indonesian flag vessels to meet the requirement, and there are certain factors involved in creating Indonesian presence either through owned companies or joint ventures that have been somewhat murky or difficult for people to identify. And as a result, there have been a series of extensions of the ability to keep the foreign flag vessels in place. There was nothing to indicate that that was not going to continue throughout 2013, but it didn’t; and as far as how many vessels actually came off, we don’t know because there’s not that much information. There’s a lot of smaller southeast Asia players, and so we’ve heard a number of concepts.

We expect that the cabotage-related type concepts become more significant in places such as Malaysia, eventually potentially in Thailand, Vietnam, et cetera, so you’ve got to change the scope to be able to prepare for those and at the same time you look at expanding opportunities that are coming in places as varied as Papua New Guinea and Myanmar. So it’s an ever-changing market. It’s somewhat difficult sometimes to anticipate where those changes are, and at the same time it’s also a place of shorter term contracts and more consisting of marketing changes. If we were to go back to where we were in October with virtually full utilization, we looked at several projects coming up that allowed us to say, okay, maybe this is a good time to do it. But in the end, a long-tow project that we thought we had in place ended up getting on a heavy lift vessel. A couple of programs that we actually thought we would be supporting in December of last year still haven’t started. It is a more changeable marketplace and we’ve just seen some of the reflection of that.

Greg Lewis – Credit Suisse

Okay guys. Well thanks for the time, and hey Bruce, congratulations.

Bruce Streeter

Thank you.

Operator

Our next question comes from Jeff Tillery of Tudor, Pickering. Please go ahead.

Jeff Tillery – Tudor, Pickering

Hi, good morning. For the vessel upgrade program in the Gulf of Mexico, could you just give us a little color on an individual vessel basis, what does that mean from either cost or rough order of magnitude of downtime on those vessels?

David Rosenwasser

On the 230 program, we’ve talked about it in the past that the downtime is approximately 90 days, and as the last of six vessels, we mentioned has just come into the yard, we expect 90 days out of service. That shouldn’t change much for the 260 vessel enhancement. It will be around the same time plus or minus a week or so.

Bruce Streeter

I would anticipate a week or so more.

David Rosenwasser

On the cost side, we haven’t yet identified what the cost is on the 260 program, although it will be somewhat higher than what we’ve seen on the 230. It’s a larger vessel, both in width, depth and length, so there will be a requisite increase in cost to accommodate that.

Bruce Streeter

But we are evaluating certain upgrades that we can add within the program, not to every vessel but to incorporate. But similar to the 230-class vessels, these are diesel-electric vessels. We are basically changing the steel structure and wiring. We’re not having to change shaft lines, major machinery equipment or anything like that, so it’s a very similar process to the previous project, it’s just a slightly larger vessel.

Jeff Tillery – Tudor, Pickering

Okay. And then you mention in the release the Gulf of Mexico basically being at full utilization for parts of this quarter already. As you think about this year playing out, obviously you’ll have some utilization headwind with the vessels out of service, but can we think about the Gulf of Mexico as achieving 90%-ish utilization for the year, given the tightness?

David Rosenwasser

I think that’s certainly possible, yes.

Jeff Tillery – Tudor, Pickering

Okay. Last question I had just on southeast Asia – as you reposition the fleet and as we get into kind of the middle part of the year, should we think about the overall day rate for the region as being in the $15,000 a day range? Is that possible as we get the fleet kind of where you’d like it?

Quintin Kneen

$15,000 on average day rate would be up slightly from where we’re at historically, and that’s possible but it’s probably going to be more flattish than up slightly.

Jeff Tillery – Tudor, Pickering

Okay, great. Thank you guys.

Operator

Our next question comes from Bill Dezellem of Titan Capital Management. Please go ahead.

Bill Dezellem – Titan Capital Management

Yes, thank you. We have a couple of questions. First of all, what are your thoughts relative to backfilling the CFO role going forward?

Quintin Kneen

Well, we certainly will backfill the CFO role going forward, but we haven’t made any determinations as to how we’re going to go about that.

Bill Dezellem – Titan Capital Management

And then secondarily, at this point in the cycle, would you discuss your philosophies/strategy for forward contracts and maybe even approach it by region, if there is a difference in your mindset just in terms of where we’re at in the cycle.

David Rosenwasser

Sure. As we talked about earlier, we are still concentrating on contact coverage. That is something that’s fundamental to our strategy and has been historically. I don’t see any change as we go forward.

It varies by region. The North Sea is largely a contracted market, whereas places like the U.S. market are largely spot. When we talk about term contracts, term contract lengths can be anywhere from three months to multi-year. The longest contracts we have in place are up to 10 years. As we go forward, we will look at each of the individual areas and try obviously to put ourselves in a position where we have strong forward contract coverage and thus cash flow, and especially as we talked about the North Sea, we’d like to look at that as a highly contracted market and minimize our spot exposure. So we’ll continue to do that as we go forward.

Southeast Asia is really a mix. We will obviously look at and concentrate on contract coverage going forward to the extent we can, but we will have to remain flexible somewhat depending on what other areas we’re trying to move into in that area.

Bill Dezellem – Titan Capital Management

Part of where I was going with the question is given the strength that you are anticipating going forward, would you be less inclined to enter into longer term contracts today than maybe you would be a year and a half from now?

Quintin Kneen

I believe that’s correct. When we look at a strengthening market like we see in 2013, ’14 and ’15, the benefit of term isn’t as strong to us as it is if we think the market is turning over. So as we think about 2013, 2014, 2015, in order for us to lock up term contracts, we would have to have high price expectations, high day rate expectations in order to (inaudible).

Bill Dezellem – Titan Capital Management

Thank you both.

Operator

Our next question comes from Joe Gibney of Capital One. Please go ahead.

Joe Gibney – Capital One

Thanks, morning. David, just a couple questions for you. I was curious in the North Sea spot exposure. I know you referenced a couple in the spot likely going to term, a third a possibility. You’re trying to minimize some of the exposure in aggregate. What’s sort of a reasonable expectation for number of vessels in the spot, at least in near-term visibility in the North Sea? Is one to two PSVs and one to two, or two to three anchor handlers a reasonable assumption?

David Rosenwasser

I think what you first said is right – one to two PSVs, and maybe one to two anchor handlers. Bruce mentioned kind of an average of three or four, depending on where we are in the quarter.

Joe Gibney – Capital One

Okay, helpful. And on Gulf of Mexico, just curious – I don’t know if I missed this earlier, but did you reference how rates trended within your Gulf of Mexico fleet sequentially on the quarter? And I also just want to get your perspective a little bit on term. You referenced a couple of the 230 boats coming out, going on term – just how term is shaking out in Gulf of Mexico, your perspective on that from a fleet strategy as you enter the year now with seemingly a little bit of lift, obviously, in utilization and the floater count improving. Just curious to get your perspective.

David Rosenwasser

Sure. The majority of our vessels in the U.S. Gulf have rolled over since the beginning of the year at much stronger rates. As we go forward, term for us in the U.S. Gulf is, like I said, anywhere between three months beyond. We are seeing opportunities out there on multi-year charters – one, two and three-year charters. As we look forward and we roll these larger vessels back into the fleet and deliver our new build vessels, we will look at what we think the opportunities are in ’13, ’14 and ’15, as Quintin mentioned, to determine whether or not we roll those into the spot market or we pursue term opportunities which are there.

Joe Gibney – Capital One

Okay, fair enough. Quintin, if you could just repeat this –I’m sorry I missed it. Your movement to the interest expense assumption, I just wanted to make sure I had that dialed in correctly given some of the capitalization in the back half of the year with the new builds. If you could repeat that, I’d appreciate it.

Quintin Kneen

Absolutely. Interest expense for the year, we anticipate to $20 million. It will start out at 6 million in Q1 and gradually move down throughout the year.

Joe Gibney – Capital One

Okay, I appreciate it.

Operator

Our next question comes from Matt Beeby of Williams Financial. Please go ahead.

Matt Beeby – Williams Financial

Thanks. Good morning, guys. You guys reference the Gulf of Mexico rates improving and being able to pass through some costs. Can you talk about will that also allow for some margin expansion, and then what are you seeing in leading edge for the higher class vessels in the Gulf of Mexico?

David Rosenwasser

I don’t think we generally talk about leading edge rates. I know some of our other competitors do, but I would say that you’re talking about greater than 10% across the board and in some cases much higher than that percentage increases.

Bruce Streeter

Yeah, I don’t think we really want to get into rates, per se; but we’ve talked quite a lot in investor conferences about the payback periods and the rate improvement on the 230 extensions, and actually it’s moved up significantly from what we’ve demonstrated and discussed in the past, and the results have been quite beneficial and continue to move up positively. The rates across the board are moving up, and as we go forward we’ve made a number of commitments for three-month periods and some for six-month periods, but we’re still trying to keep as much of the forward leverage in 2013 available as we can.

Matt Beeby – Williams Financial

Okay. And then Bruce, I think you talked about the vessel that moved back to Brazil from the U.S. Gulf and recently restarting. Can you give any further clarity there, and then I assume we’re done with mobilizations for the most part between regions. Is that accurate?

Bruce Streeter

Well, I don’t know that I can give any clarity about Brazil. We’ve always had a very good process of mobilizing vessels to and from Brazil. Over the course of the last couple of years, we’ve essentially pulled back from Brazil. It’s going through a period in which there are a number of difficulties, and even though we thought we were fully prepared on all of the regulatory fronts and fully prepared for the whole process, it amazed me, at least, as to how much different it was since the last time we mobilized a vessel into the area. It was a very difficult process, even though our people worked very hard. We put in a lot of effort and I suspect that in comparison to others, the vessel went on in a reasonably opportune time but it still took a long time, and you’ve got to factor that in when looking at Brazil.

We have one vessel that comes off charter in Brazil this year. Interestingly enough, we have been offered an extension opportunity and we’re evaluating that, so we may end up with another mobilization this year, or we may not.

Matt Beeby – Williams Financial

All right, thanks guys.

Operator

Our next question comes from Cole Sullivan from ISI Group. Please go ahead.

Cole Sullivan – ISI Group

Hi. Most of my questions have been answered, but just on the North Sea new builds, can you give us any color on some of the recent discussions on those, so you’ve got several of those coming into the fleet this year?

Bruce Streeter

Yeah. One of the benefits of a transition and a new team is that they probably have a better focus than I do. Historically I’ve always been very hesitant to enter into early discussions on new builds because you’re making commitments and you’re never quite sure about when delivery comes. But the market is very active. There have been a number of preliminary discussions. We have entered into a tender or two at this time, not with the intent necessarily of winning but developing more knowledge in the marketplace, and the team will be out actually on another customer requested marketing spin next week, visiting and discussing it.

And it’s the same thing, that David’s talked to a number of people, and the guys in the Gulf of Mexico have progressed pretty well along in the plans and discussions related to the potential for the vessels that are being built in the Gulf.

Cole Sullivan – ISI Group

Okay, thanks for that. And then on the six potential other stretches for the Gulf of Mexico on the 260s, what would you need to see to move forward on those after these first four?

Quintin Kneen

I think we need to make sure that we are working with our customers on timing to bring those vessels in. We couldn’t bring those six vessels into ’13 without severely impacting our revenue in the region, so I think we’re going to look at a progressive program like we did with the 230 enhancement to ensure that we have our customers’ needs covered but at the same time taking advantage of the timing opportunities, regulatory drydocks and others, to bring those vessels into enhancement when it’s possible.

Cole Sullivan – ISI Group

Okay, that’s all I had. I appreciate it.

Operator

Our next question is a follow-up from Todd Scholl of Clarkson Capital Markets. Please go ahead.

Todd Scholl – Clarkson Capital Markets

Hey guys. Just real quick – can you give me a little bit more color on the pension liability and if that’s something that we can expect to see again? Was that just something that resulted due to market fluctuations in the value of the assets in the pension?

Quintin Kneen

Todd, it was really the projected benefit obligation related to the change in corporate bond rates. Corporate bond rates are used as the general benchmark for projecting income on the fund. It’s an actuarial-based computation. With those rates coming in substantially, the projected growth in the value of the pension assets was lower and therefore there was a pension adjustment of 1 million.

Todd Scholl – Clarkson Capital Markets

Okay, great. Just wanted to check. Thanks.

Operator

Our next question is from Mark Brown of Citigroup. Please go ahead.

Mark Brown – Citigroup

Good morning. Just was wondering if you could provide a little more color on the mariner operating costs that you’ve talked about trying to pass those onto operators, and specifically maybe on a per-vessel basis how much inflation do you expect? It’s sometimes hard to parse out how much of the cost increases are driven by the new builds entering the fleet versus just per-vessel inflation.

Quintin Kneen

Sure. I’ll touch on the per-vessel rate, then I’ll hand it over to David to give you a little bit more color on what’s being passed through and how fast we can do that. But on a per-vessel cost per day basis, we’re probably up 6 to 8% depending on the region, driven mostly by labor costs. There are some maintenance cost increases in some of the regions, but for the most part it’s labor cost driven.

David Rosenwasser

I think it’s very important to note that the charterers appreciate and understand that rates are moving up for mariners. It’s also important that we provide those customers with qualified, experienced mariners, and they understand that; so it’s very easy to discuss with a customer kind of where we need to be on a rate adjustment to cover some of those increasing costs, and we have been very fortunate to have customers who have been working with us not on a boat-by-boat basis but on a general basis as we go forward on making those adjustments. So we are very comfortable that the adjustments that we have made, we mentioned earlier on the rollovers, have more than covered where we need to be for the upward adjustments we’ve seen this year.

Mark Brown – Citigroup

All right, thank you. Also wanted to ask about the divestitures that you talked about being more focused on, and perhaps even increasing the dollar value in 2013. Are there specific asset classes that you’re looking at or geographical markets, or how are you going about the process of determining which of your vessels would be candidates for divestiture?

Bruce Streeter

We look at it on a strategic basis. We look at what elements constitute the characteristics that make a vessel part of core fleet and not part of our core fleet. Typically when we sell a vessel, even if it’s sold within the industry, it’s not longer competitive with our ships because we’ve moved on to a different place and time. Quintin mentioned that the returns on the fast supply vessels in the Gulf of Mexico were such that we moved a number of those last year, and obviously since we have three left, all of them are on term charters and steady with customers. So it is possible that we will keep those, but it’s also possible that we would continue that.

But aside from that, it would be largely on a vessel-by-vessel basis, no particular area or region of concentration.

Mark Brown – Citigroup

All right, thank you very much.

Operator

Again if you’d like to ask a question, please press star and then one.

At this time, I have no further questions in the queue, so this will conclude today’s question and answer session. I would like to turn the conference back over to Mr. Butters for any closing remarks.

David Butters

Thank you, Emily, and I just want to thank everyone for joining us. We look forward to visiting with you again in another three months. Thank you.

Operator

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

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