GulfMark Offshore, Inc. Q1 2010 Earnings Call Transcript

| About: GulfMark Offshore, (GLF)

GulfMark Offshore, Inc. (NYSE:GLF)

Q1 2010 Earnings Call

April 28, 2010 9:00 am ET


David Butters - Chairman

Bruce Streeter - President and CEO

Quintin Kneen - CFO


James West - Barclays Capital

Judd Bailey - Jefferies

Bo Mckenzie - Global Hunter

Marius Gaard - Carnegie Investment Bank Ab

J.C. Harrington - BHP Billiton


Good morning. At this time, I would like to welcome everyone to the GulfMark Offshore Incorporated first quarter Earnings Call.

On the call today are David Butters, Chairman; Bruce Streeter, President and Chief Executive Officer; and Quintin Kneen, Chief Financial Officer.

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).

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 and the project outcomes can or will be achieved.

Thank you. I would now like to turn the call over to Mr. Butters. Please proceed.

David Butters

Good morning everyone and welcome to GulfMark Offshore’s first quarter 2010 earnings conference call.

When we last met, we hinted that perhaps we were bumping along the bottom of the business cycle and hope things might get better from there. Today I think I can say with a great deal of confidence that we indeed are on the upward moving slope and that I must tell you feels a lot better.

And I think what is interesting about this cycle recovery and perhaps different from previous recoveries is that unlike the past where improvement began in the Gulf of Mexico and spread to other areas. This recovery at least for GulfMark has begun in the North Sea and this is partly explained I believe because of the oily nature of that part of the world.

There maybe other reasons and perhaps Bruce can explain those as well. But he will take over and discuss the markets as we see them today and the outlook, but first Quintin Kneen will cover the first quarter financials and give us details on that. Our formal remarks will then be covered as usual by a question and answer period. So, Quintin, why don't you take over from here?

Quintin Kneen

Thank you, David. As usual Bruce and I will speak for around 15 to 20 minutes and then we will open it up for questions. We will try to provide more clarity and color to the quarterly results and to the near-term outlook.

Although revenue and operating income were generally flat in comparison to the fourth quarter of 2009, the first quarter's results provided some interesting data points about the activity levels in each of our regions.

As we indicated on the last call, utilization in the Gulf of Mexico has been increasing steadily since August 2009. Utilization continues to demonstrate month-over-month improvement and for the month of March, utilization in the Gulf of Mexico was 91%.

Revenue in the Americas was up 12%. As indicated on our press release, the average day rate for the quarter in the Americas region decreased 7% from the prior quarter. That decrease was driven by utilization rates, putting the smaller lower day rate vessels back to work have the effect of lowering the average date rate.

Absent the effect of utilization rates, the average day rate in the region was actually up 3% in the Americas. So, approximately one quarter of the 12% quarterly increase in revenue came from improved day rates in the region.

The North Sea displayed a similar story. Revenue was up 6% before the negative impact of a strengthening US dollar. The 6% increase is the sum of a 4% increase from delivering two new large PSVs to the North Sea market, and a 2% increase in day rates.

This increase was offset by the strengthening of the US dollar over the North Sea currencies which brought down revenue and the average day rate by 4%. As a result headline North Sea revenue was up only 2% from the prior quarter and average day rate was actually down 2%.

Southeast Asia provides a softer story. Revenue was down 22% from the fourth quarter of 2009 due primarily to increased utilization and also due to real decrease in day rates.

We suggested on the Q4 call that utilization in contract rates would be lower in the first quarter and indeed that was the case. Revenue came in 22% lower driven by a 10 percentage point decrease in utilization and about a 4% reduction rates.

We expect rates to trend lower than last year's average, but we expect the utilization to increase from the current first quarter numbers.

All in, revenue for the first quarter of 2010 was $84.7 million consistent with what we reported for the fourth quarter of 2009.

Consolidated direct operating expenses were down during the period primarily because there were unusual items that drove the fourth quarter and 2009 expenses up. But direct operating expenses were also down due to the change in the exchange rates of the North Sea currencies.

The two new vessels delivered into the North Sea over the past two quarters increased direct operating expenses by approximately $1 million during the first quarter. The full quarter run rate for these vessels is approximately $700,000 per vessel.

Another item impacting direct operating expenses during the quarter is labor expense in the Americas. You may recall that at the beginning of the third quarter of 2009, we changed the work schedule for the offshore employees in the Gulf of Mexico, which had the effect of reducing the hours worked by each employee. This allowed us to reduce labor costs without losing our dedicated and well-trained America staff.

As the vessels have gone back to work, we have changed the labor schedule back to accommodate the increased work load. Consequently, the labor savings we achieved in the third quarter and the first part of the fourth quarter are reversing as the vessels are going back to work.

Additional labor costs in the Americas accounted for approximately $1 million of a higher direct operating expense during the quarter.

From the last call, we identified approximately $5.3 million of expenses in the fourth quarter of 2009 that were higher than usual, which indicated that a normalized fourth quarter run rate for direct operating expenses would be approximately $42 million.

A mix of factors influenced the actual results for Q1 2010. The capacity additions and the additional labor that I just talked about contributed approximately $2 million of additional expenses. Those were offset by currency effects, resulting in total direct operating expenses at the $43 million level for the first quarter of 2010.

We originally budgeted performing eight drydocks for the first quarter of 2010 at the cost of $6 million; we ended up performing nine during the quarter at a cost of $7 million. However, full year 2010 we are still anticipating spending approximately $22 million of 30 drydocks. So, no change in the full year outlook there.

For Q2, we are currently expecting to spend $5 million on six drydocks; two in the North Sea for $2 million, three in the Americas for $2.5 million and one drydock for approximately $1 million in Southeast Asia.

General and administrative expenses were up sequentially, which was expected. Some of the extraordinary costs we incurred in Q3 that we expected to continue into Q4 delayed to Q1. So as anticipated G&A costs in Q1 were little higher. The average run rate for G&A costs should be just under $11 million per quarter and the average for Q4 and Q1 was $10.9 million in line with that expectation, but still slightly elevated.

The extra costs in Q1 were primarily legal costs associated with the reorganization that we completed and announced in January.

Consolidated depreciations flat with Q4 but was actually expected to be up, due to the new vessel deliveries in the North Sea. Currency changes impacted the North Sea numbers, so instead of being up by approximately $250,000 they were flat. The run rate will move up slightly, approximately $250,000 during Q2 due to delivery of the North Purpose and for the whole quarter. The quarterly run rate will move up again by about $400,000 in the last half of 2010 after the delivery of the two remaining vessels in the newbuild program.

So, as a result, operating income for the first quarter was $8.9 million, reflecting an operating income margin of 11% and an EBITDA margin of 27%, both consistent with Q4 of 2009.

Operating income in the North Sea for Q1 was 16%, significant improvement from Q4 when operating income margin was just over breakeven. Pension costs in Q4 was the driver of the lower margin in previous quarter and the most significant reason for the relative improvement, but the reduction in supply expense in Q1 of 2010 also contributed 4 percentage points to the improved margin.

Southeast Asia continues to perform very well. Although margins were lower in the first quarter, operating income was $9 million for the quarter, reflecting an operating income margin for the region of 57%.

Operating income in the Americas was positive for the quarter. Increased revenue of 12% offset by increased labor costs drove the net increase in operating income for that region.

As we previously mentioned, we received some good news out of Norway earlier this year. The Norwegian government declared the 2007 tonnage tax provision unconstitutional. As of December 31, 2009, we had approximately $12 million remaining on our books due to this liability.

When we took the benefit to the income statement for that amount as well as an additional benefit for $3 million to reflect cash we received during the first quarter as a [refund] on the payments that were made in previous years.

Now there is likely to be a replacement of the overturned tax law enacted sometime in the second quarter that will result in a liability to the company. It's too early to know for certain, but based on proposed legislation that liability is estimated to be approximately $6 million.

Capital expenditure for the quarter was approximately $55.2 million; that amount includes the final payments on the North Purpose that was delivered in February, as well as progress payments and capitalized interest on the vessels still under construction.

Our updated estimate of remaining capital expenditure for the newbuild program is $10 million and that will complete the prior requirements under this current program.

We have two vessels that remain to be delivered, the two 10,000 BHP anchor handlers being built by Remontowa in Poland. One of the anchor handlers is to be delivered in late Q2, perhaps early Q3, and the last anchor handler is to be delivered in Q3.

Cash flow from operations for the quarter was $21.9 million, which is relatively low quarterly operating cash flow number for us. The number reflects the fact that $12 million of the $15 million Norwegian tax benefit as non-cash and the fact that we saw a lower liquidation of working capital in the quarter consistent with the fact that consolidated revenue seems to have stopped declining.

Cash on hand at quarter end was $48.2 million. All totaled, net debt, total debt less cash was $303.2 million at March 31. That is an increase of $35.6 million, since December 31. That increase is unusual for us, but simply the result of making large vessel payments that we just mentioned in the quarter.

We saw a slight increase in Q4 as well with the delivery of the Highland Prince and we see it again this quarter with the delivery of the North Purpose.

I expect net debt to be flat to up slightly by the end of the second quarter. And I expect to see net debt rates in the range of $220 million to $240 million by December 31, 2010.

So to recap, at year end, the senior notes represented $159.7 million of our outstanding indebtedness. There were no amounts outstanding under our $175 million revolving credit facility and the outstanding amount on the term loan facility is now $191.7 million and these debt amounts have not changed since quarter end.

Total outstanding indebtedness is therefore $351.4 million and net of cash, the balance at quarter end was $303.2 million.

Contract cover for the remainder of 2010 stands currently at 57%. Consolidated contract to revenue for remainder of 2010 is $189 million; that's revenue dollars. The $189 million of revenue dollars for the remainder of 2010 breaks out as follows: $75 million for the North Sea, $49 million for Southeast Asia and $65 million for the Americas.

Forward contract cover for 2011 stands currently at 30%.

With that I will transfer the call over to Bruce to give more detail on current market conditions and more perspective on 2010.

Bruce Streeter

Thanks, Quintin. On the last call, I suggested that I would pull out my somewhat cloudy crystal ball and get a little more into strategic views and a little less into the technical aspects of how our business moves and how we see as specific vessel changes within areas. And I think perhaps that since I got a number of comments about that, perhaps I would go ahead and continue that to some extent today.

I think I should have identify some consistency in what we see today and try to look through the near term and identify some of the strong positives that we see in the future.

There are certain aspects that are consistent with what we said on our last call. Oil price, for instance, continues that stability in the $70 range that we talked about. In fact, oil as you know, more recently have been trading in the 80s. Increasing jackup activity continues and is just not occurring in selected markets, but in a number of locations around the world.

Despite high storage levels, gas price is over at or currently are above the $4 range here in the US. Debt markets are open and active, national oil companies continue to be active, consistency, financial capacity, widening areas of interest are all good for our future.

I did speak last time that there are global events that can and will impact our business, and last week strategic event in the Gulf clearly is one of those. Our prayers and thoughts go out to the missing and the injured and their families.

We also had the volcanic cloud, which had an impact on European transportation and caused the short-term increase in vessel usage for passenger transportation in the North Sea.

Clearly, the unpredictable can and will happen. Since I can’t predict those events, I will concentrate on the industry trends, the factors that I can see. Last quarter I indicated that their appeared to be a consensus in recovery that the majority considered it a 2011 event but certainly everyone was focused on expectation of recovery. And those that pointed toward earlier improvement and suggested it would come in the second half of 2010 seem today to be closer to the mark.

We have seen general market improvement and particularly strong improvement in PSV term activity in the North Sea and higher vessel utilization in the Gulf of Mexico. There is the possibility that one or the other or both can be short-term and say later in the year.

However, we are pleased with how March developed and while we have concerns about specific months and the contract status of several specific vessels, we are definitely encouraged about 2010 as it is developing.

As we look around the world and as we compare quarter-to-quarter, we see that much of the [appointing] and the working that we did is improving the future potential. We looked last time, I think I mentioned that we thought improved contracts would largely come in the second half of the year in 2010, but we are seeing some positive movements and some recent contracts have shown the improvement that we would like to see.

Our contract coverage for our fleet is about where we were last quarter, but it includes an improved mix of contracts than what we had and we are working towards several other vessel charters that will improve percentages for 2010 and going forward.

And then as we look around the world, in the Americas, last time I thought that our activity levels in Brazil and Mexico would be fairly consistent, at least certainly in the first half of the year that we have seen some growing strength in Trinidad and we are starting to see improved utilization in the Gulf of Mexico.

In fact, we have added the additional contract in Brazil for PSV and in upcoming months, we expect to add additional equipment in Brazil, and we will retire the oldest vessel in our fleet that has worked in that location for many years.

In Mexico, we did have an additional term contract for a crewboat and an additional vessel from the North Sea arrived in Trinidad to support the construction project. Trinidad's support requirements for the rest of the year are uncertain and we are likely to see some vessel movements away from Trinidad this summer.

In the US Gulf, we have one vessel in drydock, but all of the rest of the vessels have been working.

We could see some reduction in demand during the hurricane season, and we certainly will see vessels shifting contracts and locations. Long-term trend is clearly positive, and much better forward potential than what could we see when we were here last fall.

In the North Sea, the activity has included as I mentioned one vessel moving off to Trinidad and another to the Falklands, where it will support a drilling program.

We have worked much of the quarter to reduce or prevent spot markets exposure and have been successful at that, then of course, you know, whatever law you want to talk about, we have seen a recent very large improvement in the spot market.

The significant moves that have occurred in the spot market have only been in the last two weeks. So we will still need to see what kind of legs that already has. However, spot PSV commitments of both 20,000 pounds for PSVs late last week is a significant improvement over the beginning of the year.

The volcano no summer construction and the start of the several of the mid water programs we said last time will influence the market in the second quarter, have all clearly had an impact. What we see today that is particularly interesting, are growing number of tenders with variable periods, i.e., the tenders suggest that you can put in for 6 months, 12 months, 18 months of service, etc.

This to me indicates that oil companies are starting to consider that prices are rising and looking at their strategy they are still trying to determine if they stay short term or if it is not a blip, and it is time to start to increase contract periods.

We are comfortable with recent charters in this market and while the spot market is attractive today, we are not planning on trying to increase our spot exposure. It may come a little bit as we do have three contracts that expire within May and the one vessel, the one owned vessel that we have in the spot market starts our term contract this weekend.

In Asia, we have several contracts that ended during the first quarter. They had kept vessels busy for two years or more and given concerns about weakness in the area, we were quite pleased to see that, by and large, we have replaced or are replacing the contracts the ended. Rates are not at the same levels but the duration and end result of recent charter agreements are consistent with long term high expectations for the region.

And as an example of the strength that we have had in the marketplace and the high reliability in customer satisfaction with boats, we know that even though the three vessels in one region did come off charter during the first quarter that over a period that in some cases exceeded two years, we had one maintenance, at one day of maintenance related downtime between the three vessels over the course of 2008 and 2009. I think that’s a truly remarkable result. High utilization and strong results in 2009 make it very hard for 2010 to match last year but it should be a good year in Asia.

Market commentary in Europe from both brokers and analysts are rather bullish. In fact, recent comments for recoded vessel pricing is starting to move up and this could reflect recent positive turn day rates in spot trends. Reports here continue to focus on improving market usage of jack-ups and even more so then last quarter, the area of concern appears to rates rather than utilization of deepwater drilling units.

In the Gulf of Mexico, there are still number of deepwater units slated to arrive later part of this year and at least one that will go to Pemex after the mid point of the year. Thus, while overall demand for deepwater units may not be keeping up with supply, the impact of further deliveries in specific regions should be positive.

Similarly, we see drilling continuing in the Falklands occurring off of East Africa, planned for Greenland and more and more programs and projects approved around the world. The spread of areas of operation and the strengthening of tempo are the key for us and for our industry.

Quintin spoke of the recovery in utilization and that hopefully has maintained and coupled to improved day rates as we move forward. We try to prepare for improving tempo as best we can. He went through the cost changes in the upward movement incur expense that reflects increased vessel count and increased vessel utilization.

We are always trying to be cost effective and that limits time how much we can reduce costs. But first quarter did not have the one time items seen in the fourth quarter and had lower cost on higher utilization.

The drydock plan he outlined is subject to revision. In order to take advantage of contracts and best starting points for contracts we are likely to revise drydock planning as we did in the first quarter.

Overall, I am still not ready to do cartwheels but even though the first quarter only had signs of improvement and second quarter is unlikely to prove recovery, we all should see the potential. Remarks from others last week focused on strength in international activity and strength in oil-related activity.

Forward comments are much more positive than three months ago and indicate a strong future. With our fleet mix, we intend to achieve that. Summary of oil company plans reflected increased spendings. We may have additional quarters below our expectations, but the recovery will occur and the future has strong promise.

With that Caitlin, I'll turn it over questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of James West of Barclays Capital.

James West - Barclays Capital

Bruce, thanks for all your commentary and that was very helpful. First, I had a question on the Gulf of Mexico. With your fleet at, I believe you said 91% utilization during March, what type of pricing power is now developing in that market?

Bruce Streeter

There are still vessels that have not returned to service. There are still a number of contracts that are one week at a time or one well at a time. Everybody is focused on what happens in hurricane season. So I don't think you've really much pricing power.

Yes, we have had a lot of vessels that have come off of one contract and moved to the next and improved their rates, but I wouldn't say that it seems significant pricing improvement. So far it's largely been utilization. Some up tick, obviously in pricing and that's reflected in the fact that even though you have fewer days in the first quarter than you did in the fourth quarter you moved into positive territory after everything in the Gulf.

James West - Barclays Capital

What would you estimate the excess of supply in the market is, currently? Or what the utilization may be for the industry is, at this point? In the Gulf of Mexico?

Bruce Streeter

You have to decide, do you consider some of the older equipments that's less likely to work, when do you cover it, etcetera. So I don't know specific numbers and I would have less feel by class of vessels but I think that I don't think you have a significant number of higher spec units, and available in the marketplace but as the mix of types of vessels increases, I think you have more that could come back to the market

James West - Barclays Capital

Do you think it's fair to say that the higher spec asset utilization is as somewhere near where you guys utilize?

Bruce Streeter

I would think so. People don't really share with that information that openly, but I would expect it in. People are looking to the fact that depending on what you have listened to, I think that certainly there is at least deep water rigs that deliver in a second half of the year. So I think there is some future direction towards rate structure related to those deliveries.

James West - Barclays Capital

Okay. And then, if I look at Brazil, can you remind us how many assets you have in Brazil today and then with your recent, I believe you were a low bidder or winner on a recent tender in Brazil, how many assets you will be sending to Brazil over the course of this year?

Bruce Streeter

Always, maybe I am superstitious but until the contract is done, I generally try not to talk about it but we do have six vessels working in Brazil today. The oldest unit, the '74 built vessel, where we have committed with Petrobras that we intend to remove that from service but we will add several vessels or we expect to add several vessels before the year completes.

James West - Barclays Capital

Okay. And would these vessels come from your operations in the Gulf of Mexico or would you be pulling from the North Sea?

Bruce Streeter

More than likely they will come from the Gulf of Mexico.

James West - Barclays Capital

Okay, that’s very helpful. That’s all I had. Thanks, Bruce.


Your next question comes from the line of Judd Bailey of Jefferies. Please proceed.

Judd Bailey - Jefferies

Thanks, good morning. Wanted to dig a little deeper on, Bruce, you mentioned that you have seen some vessels in the Gulf roll off contract in relative to a higher rate. Can you give us a sense of what kind of increase those vessels have seen? Broadly, roughly?

Bruce Streeter

I mean, it depends on how long the vessels have been working and the ones that have been shorter term turnovers, the rates haven’t been significant. But overall, I think we’ve focused more on the utilization than change in rates, but we do see boats move up a 1,000 here et cetera.

I think it's more the utilization has improved and it's hard to see from the numbers that Quintin gave because the vessels that have been hardest to put in to the market and then crude boats and of course the crude boat rates are much lower. So, when you add to mix the vessels in the result is that even though you had improving day rates basically across the board you see a lower average number because of the mix of the vessels that we have at work.

Judd Bailey - Jefferies

Yes, now understand the averaging issue, but is it fair to say that I mean the thousand an average or is most of it below that. Looking at just the PSVs you have excluding the crude vessels, the crude boats?

Bruce Streeter

If the vessel is coming off of a years job it might actually not we are getting the same rate as it was a year ago. If it’s coming off one that was two months ago it might have gotten 1500 to 2000 I mean it’s…

Judd Bailey - Jefferies

So, one that maybe got fixed to two to three months ago you are seeing that type of increase just on the rollover if its only been our contracts for a few months that fair?

Bruce Streeter

Yes, I think so. I didn’t really go through those numbers, but I think the average kind of suggest that.

Judd Bailey - Jefferies

Next question was on Southeast Asia, Quintin did you say that you expected and I may have misunderstood. Did you say that you expected Southeast Asia, the average rate to decline a little more over the next couple of quarters, the average?

Quintin Kneen

Just year-over-year, I expect the average to be down, but I think you may see improvement throughout the rest of the year. We've got some solid contract cover for the remainder of 2010. We were pushing about 87.5%. So, we have some good visibility there, but I'd like to see it play out.

Bruce Streeter

I don't actually expect a whole lot of rate change for the rest of this year. We've got a couple of vessels, where you don't know exactly, when a contract starts and you've got a couple of vessels that we will drydock and you have two that are on programs that seem to be extended one well at a time and both of those could come to an end, but assuming where we are today, the rate picture for Southeast Asia appears to us to look like it's going to carry largely through the rest of the year.

Judd Bailey - Jefferies

Would it be fair to say you think maybe rates in Southeast Asia are probably hit bottom then?

Bruce Streeter

I don't know the rates hit bottom.

Judd Bailey - Jefferies

But you are saying your average rate because your contract cover probably pass?

Bruce Streeter

Yes. It may reflect they change next quarter as you let the results of the transfer from contract to contract flow through, but I would think after next quarter you should see consistency a reasonable consistency.

Judd Bailey - Jefferies

Okay and if I can get one more. Your three large anchor handlers; are those all working in Trinidad right now or is one in the Falkland and the other two in the Trinidad.

Bruce Streeter

No. One was in West Africa and two were in Trinidad and they clearly are the vessels that we are looking at as the year goes on what happens when the current contracts expire.

Judd Bailey - Jefferies

That would be a midyear type event for those?

Bruce Streeter

Yes, could be. I’m not 100% sure on drilling timing, but it did very well. Let say we are looking at from the perspective of it should or could be a midyear.

Judd Bailey - Jefferies

Okay, great. I will turn it back. Thank you.


Your next question comes from the line of Bo Mckenzie of Global Hunter. Please proceed.

Bo Mckenzie - Global Hunter

Can you guys hear me this time?

Bruce Streeter

We can.

Bo Mckenzie - Global Hunter

I tried last time, but she was pretty quickly switched. Hey, any update on the contract expectations in the last two vessels to be delivered?

Bruce Streeter

We only actually started to market them. We have one of them shortlisted for a contract less than a year contract, but I don’t know it will in the end we able to do that even if awarded because they’ve move to start data towards questionable, whether the vessel could take it. More than likely the two vessels would go to Southeast Asia and one of them would probably start by leading other vessels for drydock.

Bo Mckenzie - Global Hunter

Okay and going back to the question on the gulf, I know that we talked before about looking at the market as utilization, when opted average day rates probably came down somewhat because smaller and the fleet was going back to work in lower day rates and what’s the stuff that was after working, with the kind of pickup we see in the Gulf, would it be fair to say that, that’s behind us now or are we still looking at lower average rates from the smaller vessels going backyard, going forward?

Bruce Streeter

The vessels have progressively come back to work. So, you are going to still see some effect because largely the crew boats were the later vessels to start to work and so that works through the mix. Looking forward, as I keep mentioning, we are somewhat concerned about what hurricane season does and that could change the day-to-day mix and that obviously will have some effect as well.

Bo Mckenzie - Global Hunter

One last question, would this new tax issue in Norway, you talked about being a liabilities, is there any income statement impact that will be recognized or is this just another liability be added to the balance sheet or what, as your current understanding of it. Would be the likely financial impact?

Quintin Kneen

It will have P&L impact and it will be in the range of about $6 million. So, if it comes, if it gets enacted in Q2, as we think that it may, we will take the $6 million hit in Q2.


Your next question comes from the line of Marius Gaard. Please proceed.

Marius Gaard - Carnegie Investment Bank Ab

I have a question related to North Sea and you are reducing the spot exposure during Q4 and Q1, but have you been giving the stockers options so that it difficult to take advantage of the strengthening markets?

Bruce Streeter

We have always worked to a contract mix and in the third quarter last year and certainly going in to the fourth quarter, we were more concerned about building forward contract coverage and we gave on rate and particularly when we could pickup contracts that had shorter periods and then as we have crossed the turn of the year, we have been more cautious of potential, particularly potential for the large PSVs. So, we did put somehow on the one well, two well, three well with the anticipation that we would be walking in to former periods. So far that happened and now we are probably bidding more specifically to some longer term contracts and hopefully that that work so, but we always work to a mix so there is going to be and you saw some of the reflection in first quarter. It is that you had some vessels that came up of long-term contracts at the end of the year start at the New Year at lower rates than what they were working at and at the same time you had some vessels that picked up shorter term contracts at higher rates than where they were working before.

Marius Gaard - Carnegie Investment Bank Ab

You said you were having three vessels available in May.

Bruce Streeter


Marius Gaard - Carnegie Investment Bank Ab

Are they in terms of being bid in on same contract?

Bruce Streeter

There is a lot of contract activity. Three is a tender that closes today. There is one that closes tomorrow. One I think Monday of next week and at least two of those vessels will be bid on some of those tenders.

Marius Gaard - Carnegie Investment Bank Ab

That's great, but then I guess you have some exposure to install markets.

Quintin Kneen

Consciously, we have to kind of look, so you try to create spot market activity. If you do, do we create at an exactly the time that falls off. That's your guess, but as long as term rates fit in what our longer term expectations are, I'll give the up sp the spot market if we can get that. If we can, then we'll have some aspect to the spot market and should prove positive.

Marius Gaard - Carnegie Investment Bank Ab

All right. Then I have a question about your balance sheet. It's very strong and very limited CapEx risk beyond Q3, and markets are recovering but you're going to able to generate overall free cash flow going forward, so can you give me some thoughts on how you're trying to use our balance sheet acquisitions or dividends or maybe even a dividend policy?

Quintin Kneen

Since you've kind of directed the questions towards dividends, I would have to say you know as a public company, we have to look at all aspects of the business and all the potential options for the best result for stockholders.

Historically, with the cycle effect of this industry, we've always been hesitant to look at dividends, but clearly as our balance sheet has strengthened and our cash flow and our ability to forecast cash flow moving forward has strengthened. It's obvious that we'll be more focused on looking at a dividend policy.

Marius Gaard - Carnegie Investment Bank Ab

Final question, I think you are indicating that Southeast Asia will be a bit difficult to match 2010 versus 2009. Can you say something about the Americas? How that would play out relative to Russia, because I guess thus far thought very good in came off quite well (inaudible).

Quintin Kneen

One of the advantageous of our structure is that different areas obviously have a different face to the marketplace in that one area has weakness and other area has strength. The Gulf of Mexico is not certainly that something that can be identified as a strong market, but as you know there's more cycles to the Gulf of Mexico or more shorter period cycles in the Gulf of Mexico than other regions in it, so if you see strengthening in the Gulf of Mexico, it clearly could be a positive for us and offset any negative that we would have anywhere else.


Your next question comes from the line of [J.C Harrington of BHP Billiton].

J.C. Harrington - BHP Billiton

Thanks for your commentary. I just have a quick question about the global order book. Have you guys seen much of an alternation to that?

Bruce Streeter

I don't think so. I mean, you have seen some new construction orders this year, but very limited and generally against certain expectations. At the same time, you have seen a number of deliveries and rating analysts, for instance, the gentleman who is just on from Norway have indicated, particularly older vessels that a lot of them have perhaps moved in to lay-up and the potential likelihood of those vessels returning to the market is somewhat up in the air.

I think that overall, people are looking at a declining impact of forward deliveries, not to say that there is not an impact, but that is clearly month-after-month, as vessels come into the market and our contract that another vessels move out it is certainly less of an impact.

J.C. Harrington - BHP Billiton

Well, specifically, have you seen cancellations for vessels and non-execution of options for spots particular in the Asian shipyards for like doing next year for the more high specification boats?

Bruce Streeter

Yeah, I think that you probably don't hear about all of them. There is the notoriety runs where a company cancels a ship and the shipyard takes them to court or to arbitration or it becomes obvious that a ten-ship program that’s suppose to have deliveries through 2008-2009 that still haven’t had any deliveries is unlikely to occur, but I still think that a lot of the vessels are in various lists will get built, but there are clearly cancellations and there are probably more cancellations than what you get to hear in the public.

J.C. Harrington - BHP Billiton

Then also on the current vessel NAVs, is it coming to the point where it might make sense to buy used equipment on the market or have you seen asset prices fall to the level, where it's not quite yet advantageous to do so?

Bruce Streeter

No. I think you've seen Tidewater, for instance, has made some acquisitions based on good pricing, and we have inspected vessels, we will continue to look at that aspect of the market.

Obviously, our historical perspective has always been to be very serious about the asset value before you move forward and sometimes good pricing is fine against the paper contract or the paper specification but then when you actually look at the vessel it's not what you expected, so. To be honest, we have not found as much in the marketplace as far as court bargains as we would thought they would be.


There are no further questions at this time.

David butters

Well, then if there are no further questions. We can wrap up today's call. And I just again thank everyone for joining us and look forward to our next call. Thank you. You can wrap it up, Caitlyn.


Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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