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GulfMark Offshore, Inc. (NYSE:GLF)

Q1 2014 Earnings Conference Call

April 22, 2014 9:00 AM ET

Executives

Quintin V. Kneen – Director, President and Chief Executive Officer

James M. Mitchell – Executive Vice President and Chief Financial Officer

David B. Rosenwasser – Senior Executive Vice President and Chief Operating Officer

Analysts

Jeff D. Spittel – Clarkson Capital Markets

James C. West – Barclays Capital, Inc.

Todd P. Scholl – Wunderlich Securities

George O’Leary – Tudor Pickering & Holt

Gregory R. Lewis – Credit Suisse Securities LLC

Joe D. Gibney – Capital One Securities, Inc.

Trey A. Stolz – IBERIA Capital Partners LLC

J.B. Lowe – Cowen & Co. LLC

Bill J. Dezellem – Tieton Capital Management LLC

Mark W. Brown – Global Hunter Securities LLC

Matt D. Conlan – Wells Fargo Securities LLC

Operator

Welcome everyone to the GulfMark Offshore First Quarter 2014 Earnings Conference Call. My name is Amy and I will be your conference specialist for this presentation. On the call today are Quintin V. Kneen, President and Chief Executive Officer; Jay Mitchell, Chief Financial Officer and David Rosenwasser, Chief Operating Officer. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) 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, and that the projected outcomes can or will be achieved. Thank you.

I would now like to turn the call over to Mr. Quintin Kneen. Please go ahead.

Quintin V. Kneen

Thank you, Amy and greetings everyone. Welcome to the first quarter 2014 GulfMark earnings conference call. No change to the standard format, I will make some prepared remarks on current market conditions and on what we anticipate for the remainder of 2014. Then I will hand it over to Jay to go over the quarterly numbers and our updated guidance, and then David will give us an update on operations around the world. I think we will be relatively brief and then we’ll open it up for questions.

We are pleased today to be able to report solid results for our first quarter. First quarter is normally our softest quarter of the year. Our revenue guidance for the first quarter was $118 million to $123 million and we hit about the middle of the range. We anticipated worldwide utilization of 89%, and we came in at 88% flat, 1% of utilization in our business was about 60 boat days or about $1.3 million of revenue, and we have generally been setting our quarterly revenue guidance at plus or minus 2% of utilization.

The driver of the difference between the guided national results was the U.S. Gulf of Mexico where we were anticipating utilization of just over 86% and we came in just under 84%. that difference of roughly 2.5% was large single factor although on a positive note. the average day rate for the subregion was a bit higher than it was built into the guidance.

For the full-year 2014, we are holding our original guidance, although we now anticipate slightly lower utilization in the U.S. Gulf of Mexico. We are seeing a slight uptick in the North Sea. We were originally anticipating utilization of just under 88% for the full year in the U.S. Gulf of Mexico and we have backed that down to just over 85%. In the North Sea, we are forecasting to make up the shortfall and improvements in the second and third quarters.

Overall, the first quarter was a solid quarter, but interestingly consistent with a typical Q4, Q1 calendar year seasonality. consolidated revenue was down sequentially, which is typical for us. However, it is normally the seasonality in the North Sea that brings the consolidated revenue number down sequentially from Q4 to Q1.

This year, it was decreased in the Americas where utilization was down about 9 percentage points from the fourth quarter. About 6.5 percentage points was expected and considered in our guidance with the remainder being 2.5 percentage points shortfall I just referred to.

The North Sea was up from Q4 to Q1, driven by positive momentum in all three revenue packers. during the quarter, we achieved a higher average day rate at higher utilization, albeit just slightly higher, and we had more vessels operating in the area. All of this is the result of delivering new larger boats into the strong North Sea market.

For 2014, we see continuing improvement in each of our primary markets. Compared to the full year 2013, we see the worldwide average day rate for us increasing just over 8%, and gaining another 2 percentage points increase in worldwide utilization. with the additional vessels, we have added to the fleet in 2014, we are estimating that year-over-year increase in revenue of up to $100 million in 2014.

The U.S. Gulf of Mexico is facing near-term headwinds related to what we see as some transitory oversupply in that market. But we continue to anticipate the second half of 2014 to be strong and we are still anticipating a year-over-year increase in average day rate for the U.S. Gulf of Mexico of nearly 15%.

The first quarter of 2014 was a relatively high drydock quarter for the U.S. Gulf of Mexico, which brought down revenue from what we experienced in Q4. In the U.S., 4% of the vessel availability was invested in drydocks and the vessel stretch project, which resulted in $3.3 million of lower revenue for the quarter in the U.S. and as anticipated and previously discussed, we had a softer market on top of that. but again, this blip in a relative performance of these two regions, the North Sea and the U.S. Gulf of Mexico is just one of the benefits of geographic diversification.

Weather in the North Sea was extremely rough during the winter and this leads to higher vessel utilization as boats are loaded and waiting for the weather to break for completing their delivery circuit. In addition, planned rig moves and offshore activity are at new record levels. all of which provide the backdrop for a strong second and third quarter in the North Sea.

Southeast Asia continues to deliver high returns on investment. Utilization was about 2 percentage points lower due to the difference in drydock days in Q4 versus Q1 with some additional lower utilization due to market conditions. But overall, our team there continues to deliver solid results in what is an evolving market.

Just as we have seen the shift in size and capability of boats in the U.S. evolve over the past 10 years, similar changes are beginning to occur in Southeast Asia. I don’t think the speed of the change will be the same as what we have seen in U.S., generally because the activity there is still largely shallow water activity. but the push for subsea is beginning in Southeast Asia.

So I think it will be interesting to see how that market develops from the next five years. And the vessels that we choose to invest in for Southeast Asia will have to be able to handle this transition. All-in, the second quarter is forecasted to be a record revenue quarter for the company. And in fact, each sequential quarter in 2014 is looking to be even better.

typical for the North Sea, we should see the calendar year pickup in activity in the second quarter. The Americas region should see a pickup in average day rate in conjunction with the increased vessel count, reflecting the newbuild addition expected this week in U.S. Gulf of Mexico.

Southeast Asia should pick up a bit of day rate. the utilizations are about where it should be given the state of the market in that region of new world. Drydock expense for Q1 was a bit more than we guided and because we fully expense it when incurred, it tends to create some P&L volatility. We still anticipate drydock expenses to be between $27 million and $28 million for the year.

We have been very pleased with the performance of the two Arctic Class vessels operating out of Norway. Their performance in non non-arctic areas have been very strong and as announced in the press release, we have ordered one more vessel this time for delivery in late 2015.

Likewise, we are excited about the capabilities of our new U.S. vessels as well. new design features that allow for enhanced power management as well as state-of-the-art technologies, should prove to be valuable to our customers and provide a longer-term increased uptime.

Our approach to building investments going forward is likely to be a way from the large episodic and closer to a steady through the cycle building program, probably of about a couple of vessels per year and as opportunities present themselves, we will acquire vessels on the secondary market just as we did in Q1.

So all-in, we have a strong first quarter with solid operating income with meaningful increases anticipated throughout the rest of the year. The newbuild program is ongoing and as we mentioned previously, we have delivered seven of the 11 in the program, with the eight vessels in the first U.S. newbuild, anticipated to deliver later this week.

As we mentioned in our previous calls, the U.S. newbuilds continue to run late. we have no concern over the total cost or ultimate delivery, given what we see some transitory softness in the U.S., it’s probably not all that bad. So as has been the case, over the past year, we have a lot of good things to communicate to you on the call today. We hit closer to the midpoint of our revenue guidance and we pride ourselves on giving you reliable revenue guidance that is neither too conservative nor too optimistic.

When we update our guidance which, of course, we do once every quarter, we said it with the intention that we are most likely going to hit the middle of the range. The business was a bit softer in the Americas in Q1, but we anticipate making up the difference in the second and third quarter through improvements in the North Sea.

And with that, I will turn the call over to Jay to go over the numbers in more detail and our updated guidance for 2014.

James M. Mitchell

Thank you, Quintin. As everyone saw in the press release and the Form 10-Q that was filed last night, our earnings were $0.63 per diluted share. As Quintin mentioned, this was a solid quarter for us with slightly lower utilization and much higher amount of drydock time than last year’s fourth quarter. We saw signs of strength in all the regions. Quintin already mentioned that we achieved consolidated utilization of 88% for the first quarter and this is our highest first quarter utilization rate since 2009.

Also first quarter day rates for the fleet exceeded 20,000 per day for the first time since Q1 of 2008. As we mentioned in the press release, we did achieve our highest first quarter revenue ever of $119.6 million, which is a 23% increase year-over-year. In the Americas, we had slightly lower day rates that combined with a 9% decrease in utilization, or 9 percentage point decrease in utilization that Quintin mentioned.

This caused in the revenue in that region to decrease by 12% to $48.7 million. The utilization decline is not as dramatic as it sounds when you consider for the entire Americas region, we lost five more percentage points to drydock day and the – the drydock days and the stretch program in Q1 than we did in Q4. Recall that we did expect revenues to decline in Q1 in the U.S. Gulf of Mexico to our stretch program and some transitory weakness.

Overall the results played out close to how we expected. We still see some weakness as temporary in the U.S. Gulf of Mexico and expect things to get stronger in the second half. This week, we expect to take delivery of our first U.S. Gulf of Mexico newbuild vessel, she’s a 280 Class PSV. This vessel is going to work on a term contract with the super major upon delivery and we’re excited to add her to our fleet.

In Southeast Asia, revenues decreased slightly during the quarter to $18.3 million. Utilization declined to 86% from 91%, again, drydock was a factor in the decline. we had 29 days of drydock during Q1, compared with no drydock in Q4 for this region. The day rate did increase 1% quarter-over-quarter, which is encouraging ensures us that there are – there continue to be signs of modest incremental improvement in this region. We expect day rates to be up slightly in Q2 and remain steady in Q3 and Q4 while utilization also increased in Q2 as well.

North Sea revenues increased by 6% to $52.6 million. this is contrary to the typical seasonal patterns. Utilization increased slightly compared to the fourth quarter and the average day rate increased 3%, which is encouraging for us. As Quintin mentioned, we benefited from poor weather in the region during Q1, which increased the number of days our vessels were spot exposure were variable to work.

Within the North Sea, Norway continues to be very strong. We actually achieved utilization of 99% for the quarter in Norway and this has our attention. Strong performance in Norway in general and our Arctic vessels in particular, have us excited about the Norwegian market. We see a thinning of the order vessel book in the North Sea and this has given us confidence to begin construction on a third Arctic Class vessel. We continue to expect strong activity for the remainder of the year in the North Sea, and expect day rates to continue to increase in the second and third quarters.

In line with the guidance given on our previous call, consolidated direct operating expenses were $56.3 million, which is an increase of only $600,000 or 1% from Q4. The increase was mainly due to the impact of the new vessel additions in the North Sea. Drydock expense was $7.2 million in this quarter, which is about $1.8 million less than our guidance. The drydock was lower than anticipated primarily as a result of three vessels with drydock that was delayed into the second quarter. G&A for the quarter was $14.5 million, also in line with our previous guidance.

On the tax side, our effective tax rate for the quarter was 5%. In the quarter, we benefited from higher profitability in our lower tax regions, which kept the overall tax rate low. Going forward, we anticipate the improved tax rate will continue for the rest of the year and we expect the effective rate will be between 5% and 10% for 2014, excluding any discrete items. As always, this rate is highly dependent upon the location of profits and in particular, in the Gulf of Mexico. If the Gulf of Mexico picks up faster than anticipated, we could see this rate increase.

On the cash front, we generated $17.6 million of cash from operations during the quarter. CapEx for the quarter was $96.1 million. Cash on hand at the end of the quarter was $25.7 million. We did draw approximately $51 million on our revolving credit facilities during the quarter to provide liquidity for the newbuild program. Total debt at the end of the quarter is $551.8 million. And as we go forward, we still expect to have sufficient cash from our operations and revolvers to fund CapEx and dividend programs.

Total CapEx for the remainder of the year will be approximately $83 million, of which approximately $47 million relates to our newbuild CapEx. We have an additional $61 million of planned CapEx for 2015 and nothing right now for 2016. The dividends paid for the quarter were $6.8 million. As we previously discussed, we expect this dividend will continue indefinitely. We currently have five newbuilds under construction.

As I mentioned a moment ago, we expect to take delivery of our first U.S. built PSV in the newbuild program later this week. We also took delivery of two North Sea newbuild vessels in the first quarter, completing our North Sea portion of the newbuild program. Also we mentioned on the previous call that we purchased a 2012 built large PSV expected to operate in the North Sea. Looking forward, we have four remaining deliveries in the U.S. Gulf of Mexico in our newbuild program and anticipate deliveries will be in Q2 2014, Q3 2014, Q4 2014 and Q2 2015. We expect the newly announced Arctic Class vessel will deliver in Q4 2015.

Looking forward, as Quintin mentioned, we still anticipate revenue for the year, for 2014 to be between $525 million and $555 million. As Quintin mentioned, this is still in line with the guidance we gave last quarter, but we see earnings skewed more towards the third and fourth quarters. We may tighten up this range as we move through the year. We currently anticipate the revenue for the second quarter will be between $131 million and $136 million with the third quarter increasing another 5% to 7% from the second quarter.

Direct operating expenses for 2014, we expect to be between $230 million and $240 million in line with the previous guidance we’ve given. On a quarterly basis, we expect direct operating expenses will increase during the year from $58 million to $59 million in the second quarter to $60 million in the fourth quarter. We still anticipate drydock expenses will be between $27 million and $28 million for the full year, $5.5 million of which will be in the second quarter, with Q3 and Q4 splitting the remaining amount.

General and administrative expenses are still expected to be approximately $14.5 million per quarter during 2014. Depreciation expense is expected to be between $76 million and $77 million, the second quarter depreciation will be approximately $19 million. The third and fourth quarters will increase slightly, and we anticipate beginning the 2015 year with a run rate of about $20 million per quarter for depreciation.

Cash paid for interest in 2014 is expected to be above $36 million, which equates to $9 million per quarter. For 2014, the interest expense will actually be slightly lower than the cash number at about $30.7 million, because a portion of the cash interest will be capitalized into vessels under construction. On a quarterly basis, we expect interest to be $7.8 million in the second and third quarters and increasing to $8.4 million in the fourth quarter of 2014.

With that, I’m going to turn the call over to David who will comment on operations.

David B. Rosenwasser

Thank you, Jay. Well, we’re certainly off to a good start for 2014. As most of you know, the first quarter is typically soft and we did see the expected utilization slip in both the Americas and Southeast Asia. However, our North Sea utilization held firm and coupled with newbuild roll-ons, added nicely to the quarter.

First quarter in the North Sea brought with it, the normal seasonality as the region faced one of its worst winters in many years, in terms of high sustained wind speeds. This however translated to extensions on spot contracts and periods of extreme tightness, where operators try to take advantage of weather windows. Consequently, January and February were better than forecasted in terms of utilization and day rates for PSVs.

Over the last few weeks, we’ve seen a number of new term PSV requirements coming to the market and we expect an improvement in owners’ favor in the relatively near-term as a large number of vessels have already been contracted and will soon depart the spot market. Many of these PSVs are leaving the cover of the seasonal pipe haul requirements and other international opportunities.

We anticipate vessel available in the North Sea spot market to be reduced significantly during the May-June period, as seasonal work starts, improving the day rate levels going forward. This combined with the normal rig move programs, in addition to the new jack-up and semi’s being deployed in the region bode well for a very busy summer. Although there’s some uncertainty concerning Russia’s activity towards Ukraine/Crimea and how this may influence activity in the Barents that certainly has a potential to fuel further North Sea gas development out of the UK.

During the quarter, we took delivery of our second Arctic Class PSV for our Norwegian operation and a medium-size PSV for our UK operation. We also took advantage of an opportunity to purchase a previously managed PSV for our North Sea fleet. As Quintin mentioned, with both Arctic Class vessels having delivered straight to work and the potential for cold weather harsh environment work increasing, we have decided to execute a third Arctic Class PSV newbuild contract for the same yard in Norway. Delivery of this yet unnamed Arctic Class PSV is expected to be in the latter part of Q4 2015.

The first quarter in Southeast Asia remains solid given the monsoon season. Although the market has not yet seen a pick up from the seasonal downturn. we have continued to maintain good utilization and day rate through contract extensions. Age restrictions are becoming a larger factor for consideration even in countries such has Indonesia and India that have typically had higher tolerances for older assets. This continues to play in our favor, however, as our average fleet in the area is less than 10 years.

The medium anchor handling and PSV markets remain one of the better performing groups of these where we’ve seen good utilization and incremental day rate improvements as operators with extended drilling campaigns farm out or hand over support vessels together with the rigs. The larger PSV market, however, remains in flux with the steady flow of tonnage delivering out of China that has disrupted rates for the spot market. Several of these vessels are expected to move relatively soon to other regions, primarily Africa.

Looking ahead, we expect to maintain a healthy utilization rate with many of our vessels having close to full utilization until the third quarter of 2014, with charters being extended in areas like Vietnam and Myanmar. Recently, at PSV, in yet another area has secured a one-year extension through May of 2015.

Finally, with numerous offshore blocks recently being awarded for development in Myanmar and multi-vessel requirement tenders being launched by majors in national oil companies for deepwater drilling programs in other areas, there continues to be good opportunities on the horizon.

As expected, the softness in the U.S. Gulf of Mexico has continued through the first quarter. Today, we have three vessels working in the spot market, which is somewhat different from most of the fourth quarter where we saw a little to no vessel availability. We expect the softness to continue through the second quarter, but remain optimistic about the second half of the year.

We have however, been fortunate in several respects. We completed our third successful enhancement of our 260 class PSV, which delivered directly under contract at an improved rate during the quarter and our nearing completion of vessel number four, one of two vessels that return from Trinidad in Q1, which is also contracted and expected to deliver during the first half of May. The second PSV that returned from Trinidad went directly under contract during the quarter, where she continues to work today.

Looking forward, as vessel number four moves to work in May, vessel number five, of eight if you recall, will enter those shipyards to begin her conversion. The 280 class PSV newbuild Polaris has slipped a bit, but we are happy to announce she is currently undergoing sea trials and could deliver onto her contract as early as the end of this week. Newbuilds number two, three and four are still tracking to delivery schedule given on our last call with expected deliveries in 3Q – sorry excuse me, Q3 2014, Q4 2014 and Q2 2015 respectively.

We are continuing to see operational improvements in Brazil, which was slightly overshadowed in Q1 by a maintenance issue on the vessel, which required us to take her out of service for most of January. Fortunately, however, we were able to take advantage of the situation, working with the client to accelerate her regulatory drydocking, which was originally scheduled to take place in Q3 of this year.

In fact, Mexico, Brazil and Trinidad, all continue to be areas of focus for us and we expect to continue to pursue opportunities in each of those areas as the year develops. Although the short-term effects of the slowdown in Brazil or the fallout from Oceanography in Mexico are still unclear, we still believe the ramp up of an activity in these areas could come as early as 2015.

And with that, I’ll turn it back to you, Quintin.

Quintin V. Kneen

Thank you, David. So I hope you get from our commentary today, a sense for our continued optimism and our confidence in the business, both for this year and for the long-term. We understand from listening to investors that there is real concern about the level of offshore drilling activity and its follow-on impact on our business.

We listen to these concerns, we take heed of them and we consider them in our guidance. Those you can tell from our estimates for 2014. We still anticipate the 2014 will be a record revenue year for GulfMark. Thank you. We can open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Spittel at Clarkson Capital Markets.

Jeff D. Spittel – Clarkson Capital Markets

Thanks. good morning, guys.

Quintin V. Kneen

Good morning, Jeffrey.

Jeff D. Spittel – Clarkson Capital Markets

If you could start off with the Gulf of Mexico. I don’t think this is necessarily surprising for anybody. Has anything really changed in terms of your outlook over the last couple quarters with regard to either some potential rig departures or the body language of the customers in terms of term contracting appetites or anything else that we might be missing, it sounds like it’s just more of the same.

David B. Rosenwasser

Jeff, this is David. I think you’re right. we’re seeing a little bit of push on some of the equipment arrival. but overall, we still really believe that the strong fundamentals and we’re excited about the potential as it pushes through the later part of this year into 2015.

Jeff D. Spittel – Clarkson Capital Markets

Okay. And then, you mentioned Brazil and maybe some improvements in your business internally there and then Mexico as well, certainly at least some potential, as we kind of think about 2014 or maybe even into 2015, if you had your druthers, is that incremental both to either one of those markets, is there one that you anticipate being a little bit more attractive than the others, is it just still a little bit too early to tell?

Quintin V. Kneen

I think Brazil is probably ahead of Mexico as far as activity potential goes in the near-term. Overall as we move forward into 2015, I’m excited about what potential Mexico has and we’ll see how it develops.

David B. Rosenwasser

I believe that there’s a real future in Brazil, and we’re going to continue to invest in Brazil. The returns through the cycle have not been as high as they have been in Mexico. but I don’t think Mexico is ready next year for those investments, but both good areas to be focused on in the next five years.

Jeff D. Spittel – Clarkson Capital Markets

Sure. Nicely done this quarter. Thanks guys.

Quintin V. Kneen

Thanks, Jeff.

David B. Rosenwasser

Thanks, Jeff.

Operator

The next question comes from James West of Barclays.

James C. West – Barclays Capital, Inc.

Hey. Good morning, gentlemen. Quintin, on the Arctic Class vessels, obviously, two have been delivered and are working well. do you order an initial vessel this quarter? we see this as a pretty significant play going forward, maybe a couple of years out, but what order more than one, why not that order five, 10 or so vessels to be in part of the big, clear niche business in the Arctic.

Quintin V. Kneen

It is a good question. We’ve seen that play in the shipping industry before, which we’re trying to lock out a particular market by ordering in mass and support. I’ve actually never seen it play out longer-term. What I would expect to see happen in the Arctic is, because of the environmental sensitives in that area. Once there is a push for significant development activity, there’s probably going to be a long ramp-up time. And there’s going to be time for people to get into that industry. So I do believe that being the first mover is going to have some advantage. But tripling down and getting much larger in the Arctic today, I don’t think it merits it today.

James C. West – Barclays Capital, Inc.

Okay, okay, fair enough. And then if you think about your newbuild program going forward. I think you mentioned being less episodic and more structured, a couple of vessels per year. Where should we think about those vessels going, would it be evenly split between your North Sea assets and Americas and South Asia or is there one area that you favor more than another?

Quintin V. Kneen

We’re going to build the assets that we can’t buy for the most part. So you can’t buy these types of Arctic Class vessels. and so we’re definitely going to be building those types of advanced vessels in the North Sea region. I would see building being the real option in the North Sea market and in the Americas. I would see building being the real option in the North Sea market and in the Americas. I would see buying being probably the best alternative in the near term in South East Asia and probably Brazil, as well.

James C. West – Barclays Capital, Inc.

Okay got it. Thanks Quintin.

Quintin V. Kneen

Thanks.

Operator

Our next question comes from Todd Scholl at Wunderlich Securities.

Todd P. Scholl – Wunderlich Securities

Good morning guys.

James Mitchell

Hey, good morning, Todd.

Todd P. Scholl – Wunderlich Securities

Congrats on a solid quarter. My question is more kind of macro themed, I mean, you mention earlier those were weakness in the offshore drilling market and you know we’ve definitely seen day rate pressure there. But it doesn’t look like that we’ve seen as it much in the OSB space and that’s kind of despite utilization for the worldwide fleet being quite a bit lower from those classes than it was at this time last year. Why do you think that there is less pressure on day rates for the OSB space? I mean, is it because the OSB space didn’t see quite the same moving day rate relative to the rig, or is it because there’s new – the vessels that are coming on board now are so much larger that they move into higher day rate. Can you may be give us a little bit of color on that.

David B. Rosenwasser

I think it’s still actually, I mean, I do believe that the drillers are able to push price faster than we are in the OSB industry. They are little bit more consolidated and I think their prices are ramped up faster this cycle than ours have. All of our costs have been increasing and I know the operators are feeling the same punch, that punch of the increasing cost. It’s coming primarily from increased labor costs which aren’t going away. But the vessels are getting more sophisticated.

If you look at the vessels that are getting delivered into the Arctic and if you look at these vessels that we’re delivering into the U.S, these are very sophisticated, much more expensive vessels. So in order to get the returns we are all holding rates. I mean, we’re talking about a record revenue year here at GulfMark and we are excited about it. But it’s not a record profit year, because costs have continued to increase. I do expect to see record profit years and years to come. But the reality is also been increasing and we’ve got to push that through we’re holding day rate, because we have to.

Todd Scholl – Wunderlich Securities

Great. That was helpful. And just as a– here as a quick question I have related to your guidance. Looking back, it seems like when you guys provide drydocking guidance, a lot of time actually your drydock seem to come in late, because somethings get pushed. Is there every scenario we’re going to envision where that – where your drydock guidance actually comes in above, but your drydock expense comes in above your guidance?

Quintin V. Kneen

Absolutely, I mean it has in the past honestly, I guess, we will be doing this for about two years on the guidance side, but it definitely dose happen.

James M. Mitchell

Yes. And it definitely can happen, sometimes when you get into a boat, you don’t know exactly what you’re going to find when you get into the boat, you get there, and there maybe more work or less work to actually perform, sometimes the drydock can get accelerated, this happened in Brazil about two quarters ago.

Todd Scholl – Wunderlich Securities

(Indiscernible) was happening?

James M. Mitchell

Yes. So it definitely is possible and we try to hit exactly. When we get into the guidance we’re trying to tell you where we think the number is actually going to be.

Todd Scholl – Wunderlich Securities

Okay. I can see from your push, so I thought that more likely there was downside to that number than there was upside. But – all right, thank you. That was helpful.

Operator

Our next question comes from George O’Leary at Tudor Pickering Holt.

George O’Leary – Tudor Pickering & Holt

Good morning, guys.

Quintin V. Kneen

Good morning.

George O’Leary – Tudor Pickering & Holt

You just have a number of vessels rolling off contract in Brazil in Q4 this year, kind of any updates on what you think you might do with those vessels, try to keep them working in Brazil, move them to another proximal market just updated thoughts around those vessels?

Quintin V. Kneen

We’re going to be careful there, because we’re currently looking opportunities to either extend those contracts or move to different areas. So we’ve got good opportunities in both Brazil and other areas for those four assets you’re talking about. So pretty happy with where we are today, but want to be careful what we say just yet.

George O’Leary – Tudor Pickering & Holt

Understand. And then the Gulf of Mexico, I believe, I heard you guys saying that day rates could be up 15% year-on-year, understanding that a portion of that comes from these newbuilds that you will be delivering throughout the year. And then the potential for day rates to actually just kind of increase overall in the back half of the year, could you kind of breakout maybe how much you can underlying day rates are moving higher versus the contribution from the new vessels with regard to that 15% increase in day rate?

Quintin V. Kneen

I think we’re being conservative here, but I’ll say that the majority of that’s going to come from the newbuild vessel roll-ons, we’ll have to see how the second half develops, we’re optimistic about it. But I want to be real careful about saying, we’re going to see a fundamental push in rates on the remainder of the fleet.

James M. Mitchell

Certainly, the biggest portion of it is driven by the roll-on of the newer larger vessels, but David is right…

George O’Leary – Tudor Pickering & Holt

Thanks very much.

James M. Mitchell

Thank you.

Operator

Our next question comes from Greg Lewis at Credit Suisse.

Gregory R. Lewis – Credit Suisse Securities LLC

Thank you, and good morning.

Quintin V. Kneen

Hey, good morning, Greg.

Gregory R. Lewis – Credit Suisse Securities LLC

Hey, David, you mentioned the enhancement vessels, the five to six to seven and the eight still to come. What we think about the U.S. Gulf of Mexico and really what’s going on in that market? It’s not just newbuilds that have been, coming to market. There’s also been new as well as at least one other competitor are doing whether their stretches or enhances of the market. Do you have any sense for, are there any other operators maybe on the private side that are partaking or entering into these enhancement and stretch vessels. And when we think about it, when this is, at least when we look at what's been done and what is still yet to come, do we have any sense for how vessels have been enhanced or high graded? And really when enhanced vessel comes out of the yard, is this pretty much the equivalent of a newbuild vessel, I mean, it sounds like the rates that you are getting for your vessels that have been enhanced are really attractive and in line with that type of level.

Quintin V. Kneen

I can certainly say that others are looking at doing modifications to their vessels. I mean, we know now that some other public companies have talked about converting some newbuilds to multipurpose where they had hell of that truck cranes or whatever. I can only speak to our costs associated with enhancing our boats, because they’re new generation DP2 assets, we’re not having to do major modification. So there is no engine modifications, there is no infrastructure modification other than building essentially a center of module and fitting it back on to the vessel. So from our standpoint the cost and the time associated with doing that has been very advantageous.

The last enhancement we did took a total of 97 days, included in that 97 days was our normal regulatory drydock. So I think we have a strong advantage with respect to somewhat others might be doing on basically reengineering some of their assets, and that’s allowed us to be very successful. As far as the outlook on the boat, the capacity itself changes fundamentally. For us we have a lot – greater than 50% increase in our under debt capacities alone. So we’ve seen the requirements in the U.S. Gulf moved to a really a medium to a large PSV class and this has allowed us to participate in tenders that we could never participate in before the smaller size, and we have a new generation asset, I mean all these boats are essentially built kind of in the 2008 and later period, so the age of the boat is still relatively young.

Quintin V. Kneen

And I would say Greg, that our fleet of PSVs in the U.S. Gulf of Mexico the 20 that we have are all candidates for the stretch. And I don’t know any fleet out there other than ours where 100% of their fleet is capable to be stretched. I think everybody else sees this is more incremental, so I don’t believe that there is a tremendous amount of activity in the stretch as a percentage of the overall fleet in the U.S. Gulf of Mexico.

Gregory R. Lewis – Credit Suisse Securities LLC

Okay, great. And then just another follow-up, you have the other newbuild that’s coming being delivered on later this year, it sounds like it’s going to be a little bit delayed pushback. I know with the current newbuild you are taking delivery off, I guess in the next couple of weeks or next week that it was a fixed forward on a contract multiyear duration. Is that something that we should expect similar to, all right I guess another way to ask it is, is there actually appetite from customers that you’re seeing for newbuilds to potentially fix those actually before they hit the water on multiyear contracts?

Quintin V. Kneen

Let me just mention one thing, you missed that I may have misunderstood, but we actually have three new-builds delivering this year. We’ve got one now, one in Q3, and one in Q4, that’s the plan. But we’re seeing interest in those boats. We are careful about when we enter into contracts for newbuilds. I mean, as you’ve seen in our North Sea fleet over the years, where we’re really not actively pursuing contracts on a newbuild until maybe two months, maybe three months ahead of time, where we get really serious about negotiations. We’ll start talking about it well ahead of that.

But at this point, I think we’re being careful about really getting the tender paper on some of this as we see rate shift a little bit. I think they’re trying to take advantage of the current softness in the market and we want to make sure that we have our options available for latter half of the year. Now, I hope that that doesn’t come back and invite us, but I really believe, it’s the right strategy at this point.

Gregory R. Lewis – Credit Suisse Securities LLC

Okay, perfect. Thanks for the time, guys.

Quintin V. Kneen

Thanks.

Operator

Our next question comes from (indiscernible) at Morgan Stanley.

Unidentified Analyst

Good morning, gentlemen. I have another question about the North Sea actually and seems to be particular market and there is going to be lot of drilling activity growth and drilling activity there, and the order book seems pretty low. I was wondering to what extent can vessels from other regions get into that – into that market, and what are the picture the curiosity say that maybe great barriers for the vessels, which you could maybe give us a bit more color there.

Quintin V. Kneen

Well, there is a problem, it’s not a closed market like we have in the U.S. Gulf of Mexico and others. And so occasionally you will have vessels coming up from Africa and other areas and competing in the summer work season in the North Sea. And, in fact, we saw that in 2012 for we had a bunch of Anchor Handlers coming up into the region to take advantage of schedule rig moves, those rig moves did materialize, and they started cannibalizing PSV supply around, and you see that long, long happened from time to time.

Fortunately, the activity around the world has increased over last couple of years. And although we have seen some vessels move up into Norway over the winter, not as many as we’ve seen in the past. So it is a factor that we have to reevaluate the size of the vessels due in the North Sea is much larger than it is in other areas of the world due to the wave conditions and particularly in the winter time, but also in the northern part of the North Sea. So as a result there are some physical restrictions that keep any vessel from coming into that market.

The Norwegian market in particular is de facto close to Norwegian operators, although there is no formal [capitals] (ph) restrictions.

Unidentified Analyst

Okay. And then why is that in the Norwegian market because of the – just the size of the vessels, or is there also because there is some sort of standards of the set they are?

Quintin V. Kneen

Well, I think that’s they are a bit provincial and I believe that they’re looking for higher standards and they’re looking for no region crew, no region language was is hard to – hard to get outside the Norway.

Unidentified Analyst

Okay. That makes a lot sense. Well that’s it for me gentlemen. Thank you very much, that was very helpful.

Quintin V. Kneen

Thanks.

Operator

Our next question comes from Joe Gibney at Capital One.

Joe D. Gibney – Capital One Securities, Inc.

Thanks. Good morning guys. Just a couple of quick questions for me, I just wondering if you could just clarify the sequential rate utilization changes in the Gulf of Mexico in the quarter and Jay you mentioned coming in just under 8%, 12% utilization and average rate a bit higher than guidance. I’m just curious what was the change from 4Q, what was your fourth quarter Gulf of Mexico utilization and what was the sequential average day rate change for your Gulf fleet?

James M. Mitchell

The first quarter utilization was actually 94%. And the second and I'll tell you what happened with the day rate is, actually you know what the day rates were flat from Q4, actually they’re up slightly just a very small amount.

Joe D. Gibney – Capital One Securities, Inc.

Okay helpful. Quintin as wondered, if you could just update as a little bit one thing to be cognitive that of the model that we often talk about I guess as vessel dispositions maybe the number and sort of maybe regional distribution of vessels that maybe are going to not be part of your fleet plans as you exit this year just part of your active fleet management profile, but just curious if you can give us an update there?

Quintin V. Kneen

Sure, we’ve talked about eight vessels, I would consider older and non-core that we’re looking to dispose of in the next year and a half. Certainly market conditions drive a lot of the timing of those transactions. Some of the vessels are bit older. Are much harder to move. I would say that it’s hard to predict. We had two or three under contract in the beginning of the year. All the sales fell through. I would be hope whether we could get at least one or two down in the second quarter, but it’s really difficult to predict the vessel sale activity.

Joe D. Gibney – Capital One Securities, Inc.

Okay. And then just from a geographic standpoint on most of these older vessels?

Quintin V. Kneen

Older vessels in the North Sea and the older vessels in Southeast Asia are the likely candidates to get new trust.

Joe D. Gibney – Capital One Securities, Inc.

Okay, it’s helpful. And then the last one for me David, I just wondering if you could update I apologize, if you mentioned this in your prepared remarks, but kind of where we are on expectations for North Sea spot exposures we get into the May, June seasonal work kicking in a little bit more?

David B. Rosenwasser

Well, that’s actually good question, I didn’t mentioned. We have a decent amount of spot exposure, we’re probably exposed five or six vessels in the North Sea. And that’s really where we want to be, pretty comfortable with that right now.

Joe D. Gibney – Capital One Securities, Inc.

Okay, helpful, I appreciate it. I’ll turn it back.

David B. Rosenwasser

Thanks.

Operator

Our next question comes from Trey Stolz at IBERIA Capital Partners.

Trey A. Stolz – IBERIA Capital Partners LLC

Good morning guys, couple of quick questions here. A lot of it’s already been asked. The drydocks, did I catch up right with the $5.5 million in 2Q, is that the number you gave?

Quintin V. Kneen

Yes, that’s correct.

Trey A. Stolz – IBERIA Capital Partners LLC

Okay and with a lot of questions on the call here and kind of volatility we’ve discussed in the past thoughts on providing EBITDA free drydock and even that you’re going to also I think be beneficial on an apples-to-apples basis with your peer?

Quintin V. Kneen

Here, this is an interesting concept. The volatility that expense in the drydock brings does reduce to comparability over quarters. We’ll continue to consider that, I appreciate that far.

Trey A. Stolz – IBERIA Capital Partners LLC

All right. Again, you mentioned the third Arctic Class vessel with some questions on building to that market acquisition as well. Anything else you’re looking at and you kind of you are in the later ending I guess if you need that program here and approaching a cash generation pace or else being equal. Anything else on may be dividend buyback or I think you kind of dismissed the NTSP option. What other options might there be for – for use of cash going forward?

Quintin V. Kneen

Well, currently we still see opportunities to reinvesting the business being the first – the highest return for us and for the shareholders and we will continue to pursue that. Either through secondary market purchases or additional new build constructions. However it does not materialize, we have no pension to keep cash on the books by any stretch. We will continue to be efficient with the use of cash and invested to and what we think is the highest return for the shareholders whether that is investing in both or investing in the share himself by repurchasing and more increase in dividend.

Trey A. Stolz – IBERIA Capital Partners LLC

Okay. And tax rate I'm sorry but if – if I missed this earlier, but tax rate guidance. Did you give it figure for that for 2Q in the year?

James M. Mitchell

We expect that number will be between 5% and 10% for the remainder of the year.

Trey A. Stolz – IBERIA Capital Partners LLC

Okay. That's kind of a large range. Any idea what my determined that or how we can handicap that?

James M. Mitchell

If I were to pick a point I go right to the middle at 7.5%, the number can move around depending on where the earnings come from for us, we have some high tax jurisdictions for the U.S. repay enclose to 40% tax little below that and then we have other jurisdictions, such as the North Sea, where we have kind of tax exemptions, which keep our total tax down, total rate close to zero.

Trey A. Stolz – IBERIA Capital Partners LLC

All right. I think that’s it for me. I'll catch up with you all after. Thank you.

Quintin V. Kneen

Thanks.

Operator

Your next question comes from J.B. Lowe at Cowen & Company.

J.B. Lowe – Cowen & Co. LLC

Hi. Good morning, guys. I just had a quick question on the Gulf of Mexico. I was curious as to what kind of assumptions you guys are making in your outlook there in terms of rig departures and also in terms of potential vessel moves in and out of the region maybe vessel departing or vessel is coming back in from other regions, just kind of wondering what the – what kind of assumptions are going into your numbers there?

Quintin V. Kneen

First upon on the rig departures, we can’t claim to have more visibility than anyone else on those call right here. We are forecasting currently somewhere we’re currently forecasting three rigs that will be departing three floaters during year. In addition to the rigs that are being delivered, which we think will incrementally increase the total number of floaters. So, we still expect the number in the drilling activity in the Gulf of Mexico did actually increase. On the boat side, I think we have a little bit less visibility as to what departures we will see from our competitors.

It’s a little bit different than the North Sea. You don't have so much forward visibility in the U.S. Gulf as you do in certain other areas, but at any point there is activity in Mexico, there is activity in Brazil, there is activity in Trinidad, there is activity in West Africa. All of this bodes well for the market in general because it means that vessels can typically move, but everybody seems to be relatively busy that the U.S. Gulf of Mexico is experience a little bit of softness, but as we mentioned earlier it's really driven by some other delay in the equipment starting up as oppose to the actual demand in the Gulf.

J.B. Lowe – Cowen & Co. LLC

Sure, okay. That’s helpful. And just my other question was on Southeast Asia. Do you guys need to see further improvement in the region before looking to expand new operations there or are you guys looking to grow their now and you just going to waiting for the right deal to come along?

Quintin V. Kneen

I think it's more the latter it. I am very confident of the cyclical pattern that we see in Southeast Asia. And buying countercyclical is a key to making long-term profits in this business and above the average returns. If we could find the right vessels at the right price in Southeast Asia, we would excuse with the – but as I was trying to describe on the call that market is evolving and where is – there is a lot of low spot vessels in that market. There are certainly working today and I think we work for the next couple of years. There are not going to be the vessels of that region needs over the next five years to ten years and these vessels are 20 years investments.

So, we are looking for more advanced fleet in this readily available in Southeast Asia and trying to find them, but what we think our acceptable asset prices.

J.B. Lowe – Cowen & Co. LLC

All right, that’s all I had. Thanks so much.

Quintin V. Kneen

Thank you.

Operator

The next question comes from Bill Dezellem at Tieton Capital Management.

Bill J. Dezellem – Tieton Capital Management LLC

Thank you. Would you please help to reconcile the North Sea and what you are experiencing there? Specifically, you had mentioned that the weather was particularly harsh in the first quarter and yet it was seasonally stronger and higher than the fourth quarter. Those two kind of seem to be and conflicting little help would be great, please?

Quintin V. Kneen

Okay. As we mentioned, what happened there, is it actually extended duration lot of spot charters, because they got caught out actually in the weather we are unable to work. So, and allow some of those spot contracts to grow for a longer period of time and it certainly kept the market pretty tight. So, from our standpoint, where we were – we actually did very well in January, February March and even into April have seen more benign weather, which we typically see, but as we look forward to May and June, we know that a number of vessels are more than 20 vessels will be leaving or contracted to work in the spot market, or out of the spot market, I should say in the North Sea. So the opportunities is – really is ramping back up and we’re starting to see that movement already.

Quintin V. Kneen

Yes. In certain other way, generally, in the North Sea, you’re not going to do anything you don’t have to do in the winter time, just because of the weather conditions. But there is a lot of stuff that you still have to do and when the weather is particularly bad, it makes that work even more difficult, as far as we get the boat out and get the boat against the rig and so forth. So, bad weather actually increases the activity in the winter months.

Bill J. Dezellem – Tieton Capital Management LLC

Thank you both.

Operator

(Operator Instructions) And our first question – our next question comes from Mark Brown at Global Hunter Securities.

Mark W. Brown – Global Hunter Securities LLC

Hi guys, one question I had is, just on your press release you show forward contract cover comparing the current contract cover to where we were 12 months ago, and it looks like it’s down particularly in Southeast Asia and the Americas, relative to what the number 12 months ago and I was just wondering if you had any comments on why that is or your duration of your contract shorter or you’re just choosing to have more of your vessels in the spot market, just any color would be appreciated?

Quintin V. Kneen

Some of that has to do with just the timing of particular contract or some are just rolling off little bit sooner than others. and during the year, you’ll see a little calendar year fluctuation and from year-to-year, you’ll see some quarter-over-quarter fluctuations. Generally, we’re comfortable with spot exposure around the world today. So the spot exposure that we have in Southeast Asia, they are actually part of rolling programs and I expect that that probably is going to roll – most of it can be easier to roll from contract-to-contract over the next several months.

So contract cover in Southeast Asia is probably a little bit higher and that number would illustrate and the exposure in the Americas – the Americas is generally a spot market, it’s been a little soft, blocking things up in the Gulf of Mexico over the next couple of months could make some sense, but blocking them up past a couple of months doesn’t make too much sense for us.

Mark W. Brown – Global Hunter Securities LLC

Okay. The multi-purpose supply vessel, I might have missed her, but it sounds like that’s not an Arctic Class that you’re interested in and I was just curious why not consider investing in that market?

Quintin V. Kneen

I don’t know that we’ve said that we’re not interested in the market. it’s not where we’re building at the moment; quite a lot of operators are building those vessels. there is a potential for those vessels to do well. however, the investment is substantial. And so from our standpoint, we see the value in building the hard new generation MPSVs at the moment. I’d also like to say we won’t look at and continue to look at MPSVs. but today, we’re just not having, we’re not building anything.

James M. Mitchell

Okay. And I would also say Mark; this is very much a return on capital focus for us. What we see in some of these larger specialized assets is a low utilization, high day rate format, similar to anchor handlers. But what often happens in that market, especially as it gets a built-up is that people get nervous about the low utilization and as they put them on higher and they sacrifice day rate to do so in terms of cannibalizing the market, so all these more specialized assets, they’re definitely the real market for them. I haven’t seen the returns on investment in those assets more attention than we’re giving to the PSV market today.

Mark W. Brown – Global Hunter Securities LLC

All right. well, thank you very much.

James M. Mitchell

Thank you.

Operator

Our next question comes from Matt Conlan at Wells Fargo.

Matt D. Conlan – Wells Fargo Securities LLC

Hey guys. You certainly covered a lot of grounds here. But I just have a question on your Gulf of Mexico in a new entrance. The four newbuilds, are they all committed on contract at this point? You said the first one is going on a term contract, are the other three committed at this point as well?

Quintin V. Kneen

No, they’re not.

Matt D. Conlan – Wells Fargo Securities LLC

They’re not, okay. When you are marketing those, would you prefer to put them on contract?

Quintin V. Kneen

No. I apologize, we’ve already answered this question a little earlier, but the idea really is that the first vessel is on a multi-year, the third – sorry the second, third and fourth vessel, we’ve not really put pen to paper yet, were actually the negotiating contracts for numbers two and three. but at this point, we’re still waiting. We’re a little bit careful about signing contract today where the market is a little bit soft as opposed to later half where you’ll expect a ramp up in activity.

Matt D. Conlan – Wells Fargo Securities LLC

Okay, great. thank you. That helps me. sorry I missed it earlier.

Operator

At this time, we show no further questions. And so that will conclude today’s question-and-answer session. I would like to turn the conference back over to Mr. Kneen for any closing comments.

Quintin V. Kneen

Well, thank you Amy and thanks everyone for their interest in GulfMark Offshore and we look forward to updating you again, in July. Good-bye.

Operator

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

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