Tidewater's (TDW) CEO Jeffrey Platt on Q4 2016 Results - Earnings Call Transcript

| About: Tidewater, Inc. (TDW)

Tidewater, Inc. (NYSE:TDW)

Q4 2016 Earnings Conference Call

May 26, 2016 11:00 AM ET


Joseph Bennett – Executive Vice President and Chief Investor Relations Officer

Jeffrey Platt – President and Chief Executive Officer

Jeffrey Gorski – Executive Vice President and Chief Operating Officer

Quinn Fanning – Executive Vice President and Chief Financial Officer

Bruce Lundstrom - Executive Vice President, General Counsel & Secretary


Daniel Burke – Johnson Rice

Mark Brown – Seaport Global Securities


Welcome to the Fiscal Year 2016 Fourth Quarter Earnings Conference Call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

And I will now turn the call over to Joe Bennett.

Joseph Bennett

Thank you, John. Good morning, everyone, and welcome to Tidewater's fourth quarter and full fiscal year 2016 earnings results conference call for the period ended March 31, 2016. I'm Joe Bennett, Tidewater's Executive Vice President and Chief Investor Relations Officer, and I want to thank you for your interest in Tidewater.

With me this morning on the call are our President and CEO, Jeff Platt; Jeff Gorski, our Executive Vice President and Chief Operating Officer; Quinn Fanning, our Executive Vice President and CFO and Bruce Lundstrom, our Executive VP, General Counsel & Secretary.

We will follow our usual conference call format. Following our opening formalities, I'll turn the call over to Jeff for his initial comments to be followed by Quinn's financial review. Jeff will then provide some final wrap-up comments and we will then open the call for your questions.

During today's conference call, we may make certain comments that are forward-looking and not statements of historical fact. I know that you understand that there are risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we may make during today's conference call.

Additional information concerning the factors that could cause actual results to differ materially from those stated or implied by the forward-looking statements may be found in the Risk Factors section of Tidewater's most recent Form 10-K.

With that, I will turn the call over to Jeff.

Jeffrey Platt

Thank you, Joe, and good morning, everyone. Yesterday, after the markets closed, we reported a net loss for our fourth quarter of fiscal 2016 ended March 31, 2016 of $81.8 million or $1.74 per share, inclusive of two items highlighted our quarterly earnings press release, and $0.87 per share after-tax non-cash asset impairment charge and then a $0.18 per share after-tax foreign exchange loss reflected in our equity and net earnings loss of unconsolidated companies related to our joint venture company in Angola.

If we adjust our results for these after-tax charges, our loss for the quarter would have been $32.4 million or $0.59 per common share. It's disappointing to report a loss for any quarter or fiscal year, especially since our operating performance was relatively solid, considering this very challenging business environment.

We generated a 45% vessel operating margin for the fourth quarter, which compared favorably with our 39% margin a year ago. Our revenues this quarter were 43% below those of the same quarter a year ago. But as you all know, last year was a very different environment for the offshore business. Sequentially quarter-to-quarter, our revenues declined 15% again a reflection of the continued erosion of the global oil service market.

Vessel operating margin is a key metric for measuring operational performance, because it captures all of the categories of operating expenses that we can and must control. As we have stated previously, we have no control over oil prices or the corresponding activity levels of our clients. What we can control within limits, our expenses such as recurring costs, repair and maintenance expenses and insurance costs. Our 45% vessel operating margin this quarter follows a 41% margin we generated in the December quarter and a 40% margin for each of the September and June quarters.

Given the business environment we have been dealing with for the past year, achieving vessel operating margin at or around 40%, speaks for the outstanding job, our employees have done and aggressively reducing operating costs in order to mitigate the impact of reduced revenues and then managing our global operations through this downturn. The team has done a good job in reducing G&A as well, and I commend them for their efforts.

Our operating performance for the quarter reflected a continuation of our strong safety record. We ended the quarter and the full fiscal year, with zero lost time accidents. This marks the third time in Tidewater's history that we completed a full fiscal year without a lost time accident.

Our total recordable incident ratio or TRIR for the fiscal year ended at 0.08 per 200,000 man-hours worked. Our safety performance in fiscal 2016 is the best in Tidewater's long history. And I want to again thank all our employees for their dedication to operating safely every day. In addition to being the right thing to do, our commitment to safety directly impacts our bottom line.

We have achieved lower-than-expected claims costs and we were paying lower insurance premiums in fiscal 2017. Additionally, working safely improves our vessel on higher time, and is a significant part of the value we provide to our clients. Our safety performance also speaks to the fact that despite the challenging offshore market, we will not sacrifice any of Tidewater's core values, safety, compliance and quality of service and what we believe would be at this very misguided pursuit of cost reduction.

Adherence to this core value such Tidewater part from our competition. Included in our press release was an update on the status of our discussions with our lenders and noteholders. Like other companies in the energy and energy services business, we are seeking really from a covenant in our bank facilities and certain note agreements that require us to maintain 3 to 1 ratio of EBITDA to interest expense.

Our current internal financial forecast indicates that we will not remain in compliance with this interest coverage covenant as early as the end of the first quarter of our fiscal 2017, which ends on June 30, 2016. We would be expected to report whether or not we were in compliance with this convent, can concurrent with the announcement of our first quarter's results in mid-August.

As a result, our independent accountant’s opinion that accompanies our March 31, 2016 consolidated financial statements includes an explanatory paragraph related to our projected non-compliance with the interest coverage covenant during fiscal 2017. And the resulting doubt that is raised about the company's ability to continue as a going concern unless and until the company secures amendments and our waivers from our lenders and noteholders of the minimum three to one EBITDA to interest coverage covenant prior to any possible covenant breach.

In addition, certain of our loan agreements require that we receive an unqualified opinion in regards to our fiscal year-end financial statements. So the explanatory paragraph in and of itself is an event of default under certain of our loan agreements. We have secured temporary waivers of the audit opinion requirement that provides us with additional time to continue negotiations with our lenders and noteholders through August 14, which again is when we expect to report results for the first quarter fiscal 2017.

We have been working with our lenders and noteholders to secure the necessary amendments and our covenant waivers to our debt arrangements and to avoid the delivery of an audit opinion without the referenced explanatory paragraph. But the clock of quarterly reporting has prevented us from completing negotiations and securing all the necessary approvals, before we were required to file our form 10-K. The Tidewater management team will, of course continue to engage with our lenders and noteholders to achieve a good outcome within the timeframe of our temporary waiver.

Let me now turn the call over to Quinn, to walk you through the financial details of our results and expand on some of my earlier comments and address our outlook for the near-term. Quinn?

Quinn Fanning

Thank you, Jeff. Good morning everyone. As you know, we issued our earnings press release after the market closed yesterday. We plan to file our annual report on Form 10-K through the EDGAR filing service sometime this afternoon.

As Jeff noted, we reported an adjusted loss per diluted common share of $0.69 for the March quarter. Vessel revenue for the March quarter at approximately $160 million was down approximately $33 million or approximately 15% quarter-over-quarter. Approximately $19 million or approximately 58% of the quarter-over-quarter change reflects our stacking of previously active vessels that we expect to be underutilized in the coming quarters.

Lower vessel revenue in the March quarter as a result of the 91 day quarter was largely offset by lower loss revenue, due to fewer vessels that were dry-docked. The average active vessel count at 198 vessels was down 17 vessels quarter-over-quarter. During the just completed quarter, we stacked 12 previously active vessels, we also reactivated two previously stacked vessels and dispose of three vessels that were stacked at December 31, 2015.

As a result, the stacked fleet during the March quarter averaged 73 vessels and was that 77 vessels at March 31 or up 7 vessels from the previous quarter's end, somewhat reflecting a reduced pace of vessel stacking versus what we have seen in prior quarters.

For reference, vessel revenue for the just completed quarter is down approximately 43% relative to the March quarter of fiscal 2015. Active vessel utilization at 73% was down approximately one percentage point quarter-over-quarter and average day rates at approximately $13,700 were up approximately 6% quarter-over-quarter.

Vessel operating cost in the March quarter at approximately $98 million were down approximately $27 million or approximately 22% quarter-over-quarter. Most significant reductions both in dollar and percentage terms were crew costs, which were down approximately $16 million or approximately 22% quarter-over-quarter.

Supplies and fuel costs and insurance costs were also down quarter-over-quarter and repair and maintenance costs were essentially flat quarter-over-quarter, reflecting modest expenses related to regulatory dry-docks in both the December and March quarters.

Approximately $12 million or approximately 40% of the quarter-over-quarter decrease in vessel operating cost relates to our recent stacking of underutilized vessels and approximately half of that amount relates to crew costs.

Of the remaining plus or minus $10 million quarter-over-quarter decrease in crew cost, approximately $5 million related to our reversal of expense accruals in regards to our former Venezuelan subsidiary following the February 2016 ruling of the World Bank's exit arbitration panel, the details of which were previously disclosed by the company.

Given the uncertainties surrounding the amount and timing of our ultimate collection from the Republic of Venezuela however, the company has not recognized any gain associated with the exit award, which aggregated $65.7 million at March 31, 2016. For reference, vessel operating cost were down approximately $100 million, or down approximately 50% relative to the March quarter of fiscal 2015.

As Jeff noted, vessel level cash operating margin for the March quarter was approximately 45% which largely reflects stacking and other cost-cutting initiatives designed to mitigate the impact of lower vessel revenue. Excluding the accrual reversals relate to our Venezuela subsidiary, the vessel operating margin was approximately 41%.

Total general and administrative expense in the March quarter at approximately $37 million was up approximately $1 million quarter-over-quarter, and part due to higher professional services costs. In addition, the reduction in G&A has resulted down the revaluation of equity-based compensation costs that we saw in previous quarters was not a factor in the March quarter, as our stock prices not materially different on March 31 and was on December 31.

For reference, G&A for the March quarter of fiscal 2016 was down approximately $8 million or approximately 19% relative to G&A in the March quarter of fiscal 2015. Combined OpEx and G&A in the March quarter is down approximately $108 million year-over-year or approximately $431 million annualized.

CapEx, net of proceeds from asset dispositions and shipyard refunds and canceled contracts in the March quarter was approximately $30 million. Remaining payments on six vessels under construction as of March 31 are approximately $68 million or approximately $37 million when netted against approximately $31 million of remaining amounts due from shipyards at March 31, which assumes Tidewater will not exercise options to except an additional six vessels that are currently under construction.

Subsequent to the March 31 balance sheet date, we took delivery of one 310 foot U.S. flag deep-water PSV. Payments on this vessel made subsequent to March 31 are approximately $5.5 million. So remaining payments on the five vessels currently under construction is now approximately $62 million and future CapEx related to ship construction that have expected shipyard refunds is now approximately $31 million.

Our current expectations that we will receive approximately $12 million in shipyard refunds in the current quarter and approximately $19 million in shipyard refunds in the December quarter, again assuming that we don't exercise the options to except the successful.

With regards to fleet profile and performance, as I mentioned earlier, Tidewater's active fleet averaged 198 vessels in the March quarter. Active deep-water vessels averaged 69 vessels in the March quarter and were down 12 vessels quarter-over-quarter. Active towing-supply vessels averaged 87 vessels in the March quarter and were down four vessels quarter-over-quarter. Active other vessels, which included crew boats and offshore tugs, averaged 41 vessels and were down two vessel quarter-over-quarter.

As I noted earlier, utilization of the active fleet at approximately 73% was down approximately 1 percentage point quarter-over-quarter. Average day rates at approximately $13,700 were down approximately $9,000 or approximately 6% quarter-over-quarter.

Utilization of active deep-water vessels in the March quarter was approximately 72% they were up approximately 5 percentage points quarter-over-quarter. Utilization of active towing-supply vessels was approximately 73% or down approximately 3 percentage points quarter-over-quarter. Utilization of other vessels was approximately 76% and was down approximately 6 percentage points quarter-over-quarter.

Average day rates for deep-water vessels at approximately $20,900 were down approximately $1,800 or approximately 8% quarter-over-quarter. Average day rates for towing-supply vessels at approximately $12,700 were down approximately $650, or about 5% quarter-over-quarter. Average day rates for the other vessels at about $4,500 a day down $600 or about 13% quarter-over-quarter.

Looking at our four geographic reporting segments, the Sub-Saharan Africa/Europe segment, which accounted for approximately 39% of consolidated fourth quarter vessel revenue, vessel revenue was off approximately 9% quarter-over-quarter. Average active vessel count in the Sub-Saharan Africa/Europe segment at 90 vessels was off four vessels quarter-over-quarter. The average active Sub-Saharan African fleet at 84 vessels was off four vessels quarter-over-quarter and the active – excuse me and the average active North Sea fleet at six vessels was flat quarter-over-quarter. Active vessel utilization across the Sub-Saharan Africa/Europe segment at 75% was up about 1 percentage point quarter-over-quarter, and average day rates at approximately $11,600 were down about $500, or about 4% quarter-over-quarter.

Within the Sub-Saharan Africa/Europe segment, active utilization of Sub-Saharan Africa at approximately 75% was basically flat quarter-over-quarter. Active utilization of the North Sea fleet at approximately 79% was like away flat quarter-over-quarter. Average day rate in Sub-Saharan Africa in the North Sea respectively at $11,500 a day and approximately $12,300 a day, respectively down $440 and $950 or about 4% and 7% respectively.

For the Americas segment, which accounted for approximately 36% of consolidated fourth quarter vessel revenue. Vessel revenues down approximately, 16% quarter-over-quarter. The average active fleet in the Americas segment at 50 vessels was down 11 vessels quarter-over-quarter.

Utilization of active vessels in Americas segment at approximately 73% was up about 5 percentage points quarter-over-quarter. Average day rates within the Americas segment at approximately $19,200 a day in the March quarter were down about 4% quarter-over-quarter.

In the MENA segment, which accounted for approximately 20% of fourth quarter consolidated vessel revenue, vessel revenue was down about an 11% quarter-over-quarter. The active fleet in MENA at 40 vessels down two vessels quarter-over-quarter. Utilization of active vessels in MENA at approximately 72% was down about 4 percentage points quarter-over-quarter. And average day rates in MENA at approximately $13,700 in the March quarter were down about 2% quarter-over-quarter.

In the Asia-Pac region, which accounted for the remaining 5% of fourth quarter consolidated vessel revenue, vessel revenue was down about an 11% quarter-over-quarter. The active vessel count in Asia-Pac at 17 vessels was down one vessel quarter-over-quarter. Utilization of active vessels in Asia-Pac at approximately 68% was down about 15 percentage points quarter-over-quarter. And average day rates in Asia-Pac at approximately $9,300 were down about 30% quarter-over-quarter, largely reflecting our windup at least for now of activity in Australia.

Turning to financing and investment issues, cash flow from operations for the three months and 12 months ended March 31 was respectively $62 million and $253 million. CFFO for the comparable periods of fiscal 2015 was approximately $83 million and approximately $359 million. At March 31, our net due from affiliate related to our Angolan operations was approximately $151 million or down approximately $84 million over the preceding 12-month period.

Tidewater's Angola-related cash collections in the fiscal year were approximately $215 million – excuse me, were approximately $215 million, which is comparable to the $213 million of vessel revenue related to our Angolan operations that we have recognized during the same 12-month period. Company also receives an approximate $15 million dividend from Sonatide during fiscal 2016.

As to non-operating uses of cash, CapEx for the 12 months ended March 31 was approximately $194 million, $57 million of which was funded by proceeds from asset dispositions and the return by shipyards of milestone payments that were previously paid by Tidewater pursuant to cancel vessel construction contracts. Relative to fiscal 2015, CapEx was down approximately $170 million year-over-year.

Total debt and net debt at March 31 was approximately $2.05 billion and approximately $1.37 billion respectively. Net debt is down approximately $82 million since March 31, 2015. Net debt to net book capital at 3/31/2016 was approximately 37%, which is unchanged from the previous quarter. Cash at 3/31 was approximately $678 million and includes the proceeds for our previously reported mid-March draw on our $600 million revolving credit facility.

In closing, I'll just briefly supplement Jeff's just comments regarding the status for our discussions with our lenders and noteholders. In our opinion, we expect to accompany our year-end financial statements. As noted in our press release, at March 31, 2016, we were incompliance with all financial covenants set forth in our bank agreements and note indentures. Including the three to one minimum EBITDA to interest coverage covenant.

Our current internal financial forecast however indicates that we may no longer be incompliance with the minimum interest covenant in fiscal 2017 and as of that uncertainty that has triggered the explanatory paragraph and we expect to be included in Deloitte's audit opinion that will be filed with our 10-K later today.

The explanatory paragraph included in the audit opinion, in of itself is an event of default on our bank loan agreement and the agreements the govern our Troms Offshore subsidiary's loan agreements. The lenders under our bank facility and the Troms Offshore finance parties have granted the company a limited waiver through August 14, 2016 regards the audit opinion related event of default under their agreements. The temporary nature of these waivers requires the reclassification or otherwise long-term debt as a current liability.

As Jeff indicated, the fact that we are in compliance with all financial covenants at March 31, 2016 and the granting of the temporary waivers in regards to the audit opinion requirement should provide us with a reasonable amount of time, secure amendments and/or waivers to the existing debt agreements.

We will need to certify covenant compliance in regards to June quarter's results in mid-August. As previously disclosed, such amendments and/or waivers may require the granting of collateral, the accepting of reduced borrowing capacity or are making other concessions. We will also need to successfully harmonize the interest for our lenders and note holders, recognizing that many traditional capital sources are seeking to reduce exposure to the energy and energy services sectors.

In sum, we have undertaken significant cost reduction initiatives in order to mitigate the impact of lower vessel revenue. As I noted earlier, with the termination of a number of ship construction projects, the CapEx that is required to complete our remaining ship construction projects is relatively modest. These actions together with our board suspension of the company's common stock dividend and share buyback authorization should position the company relatively well to successfully manage through what maybe weaker offshore market through at least calendar 2017. Operationally, our intent is to live within our means, i.e. we do not anticipate a need for external financing in order to execute our business plan.

At present, the company's capital structure is unsecured. We have no significant schedule debt maturities until December 2017, when we have an approximate $70 million scheduled note maturity.

In regards to our mid-March draw in the revolving credit facility, this was the step at the company took reluctantly. Given the currently challenging operating environment and business outlook, we felt that the draw was approved [indiscernible], signed to bolster our liquidity position and to enhance our financial flexibility.

Management's priority in the near term is to try and negotiate amendments and our waivers with our debt arrangements that will be acceptable to all stakeholders.

And with that, I'll turn the call back over to Jeff.

Jeffrey Platt

Thanks, Quinn. Our outlook for our industry has become somewhat more optimistic in recent weeks, as crude oil prices have been raising. Our optimism however is tempered by our understanding of the challenges, our customers continue to face and how they are responding. The increase in oil prices happened so quickly that our customers had little time to assess whether the new prices are sustainable, warranting their adjustment of their outlook and spending plans. We believe our clients remain focused on completing the organizational adjustments they have made in order to deal with lower oil prices that were expected to last for an extended period of time. Yes, $50 dollars a barrel of oil is better than $26 in February.

However, one shouldn't lose sight of the fact that oil prices today have merely returned to where they were in October and November of last year. The concern is that until oil prices established a plateau sufficiently high and long enough for oil company managers to gain confidence in the recovery that improves their offshore project economics, our market will remain challenged.

What we know is the physics of the petroleum industry is at work. The inevitable production declines of 3% to 4% annually in conventional reservoirs and 60% to 70% in the unconventionals, coupled with the sharp cutback in global drilling and completion activity will limit future supply.

Additionally, as usually happens after oil prices have fallen, consumption is rising. In its main May monthly oil report, the IEA increased its estimate for oil consumption in the first quarter of 2016, although they haven't yet increased their full year estimate.

As oil supply and demand begins to balance with supply likely moving into a deficit position, the glut of old oil inventories will begin to ease. Following oil inventories, we'll sustain higher oil prices.

Unfortunately, it will take time for this scenario to unfold. Given the lag between higher oil prices and the need for more offshore drilling, we would be surprised if our market shows meaningful improvement within the next 24 months.

As managers, we'll continue to focus on controlling those things that we can't control; vessel operating costs, dry-docking expenses, capital expenditures and our G&A costs. This operating philosophy is part of Tidewater's core disciplines. Outstanding safety performance, attention to maintaining a high standard of compliance and delivering high-quality service every day to our customers. We believe these disciplines help distinguish our operations from those of our competitors and are important for securing work in the highly competitive marketplace we confront.

We continue working closely with our customers to improve operational efficiencies to help reduce their cost, will hopefully not forcing vessel day rates lower. There will come a point, however, at which we cannot further reduce our day rates without damaging the core values of our company. Something we are not willing to do and something we don't believe our customers want us to do. They recognize the importance of the service industry plays in their offshore operations. The reality is that everyone is dealing with limited cash flows.

As Quinn just explained, in fiscal 2016, we did well generating cash from operations and reducing capital expenditures. Our focus will remain on generating cash, while protecting our balance sheet and preserving access to sufficient liquidity. At the same time, we will not yield to the temptation to cut corners with any of our core values of safety compliance and quality of service.

Tidewater has a largest global footprint in the industry, which provides us the ability to seek out and respond to market improvements wherever they may appear. That flexibility will become increasingly important as the next few years unfold. We have the longest institutional history in this industry, having managed to 60 plus years of ups and downs. We are an experienced management team from our boat captains and shore-based personnel on up to the highest levels of management and our Board of Directors.

We are dedicated to doing everything within our control to protect our franchise and to deliver value to our shareholders. Right now, that means operating defensively by reducing costs and closely scrutinizing additional investment in the business. Nonetheless, we're also focused on assuring that we are well-positioned when the cycle turns up, so we can rapidly grow our market presence, restore our earnings capability and deliver a better share price and returns to our loyal shareholders.

We're now ready for your questions. John, if you can open up the lines, please.

Question-and-Answer Session


Thank you. We'll now take questions. [Operator Instructions] And we have a question from [indiscernible] from Cowen.

Unidentified Analyst

Hey, thanks for taking my question. So, starting off with the – on the finance side, if the revolver were to be converted into a secured facility, would that in fact your operations and anyway and how does that impact the other senior note?

Jeffrey Platt

I guess it's a difficult to prejudge negotiations that have been completed, but as we've highlighted over a number of months now, successfully securing amendments to our bank and other credit facilities. We expect to require concessions on the part of the company, those concessions could include the granting of collateral, the reduction of borrowing capacity, pricing et cetera, et cetera. I think it's important for everybody to understand though that, the current capital structure of the company is entirely unsecured to the extent that we were to grant collateral, to any of the existing finance parties, it would be done on a pro-rata basis.

So, any collateral that is granted in an example to the bank group would be shared by the existing senior note holders and we also have a parent company guarantee that supports the Troms financing and as a result the Troms lenders which is relatively small part of the capital structure, would like to us to be on a [indiscernible] basis. So I guess the bottom line is, this currently were unsecured. We recognized that achieving the amendments that we see will probably require confessions which may include collateral but to the extent that we grant collateral, we grant about on a pro rata basis across [indiscernible] purpose this entire interest bearing capital structure. Does that answer your question?

Unidentified Analyst

That does and that's helpful. My follow up would be just thinking about beyond the government amendments of labor if you think about delevering the balance sheet and just curious as to how you think about what can be done and then especially given on the equity issuance that have been taken well by investors, what are the thoughts around equity issuance?

Jeffrey Platt

We certainly follow very closely to what extent investors are coming back into the oilfield services space. I don't think we would put anything on the table as a primary focus or take anything off the table. Our focus is on securing the amendments and our waivers to the existing debt arrangements and ultimately continuing to improve upon the company's financial profile as is probably obvious from balance sheet that we filed with our press release. We believe we have adequate liquidity today, so equity would not necessarily be focused on increasing what is already a large liquidity position. I think what we would probably do is let the negotiations with our existing debt providers play out and as we put that behind us, we'll consider all alternatives and improve the company's financial profile and relative positioning.

Unidentified Analyst

And last one if I may sneak in, pretty impressive vessel margins around 45%. Is it fair to say that's where it's kind of like a line drawn in sand that we will try to adjust the – we'll try to manage our vessel margins around that level and stack accordingly?

Quinn Fanning

No. We've worked very hard as a company to mitigate reality of lower revenue. As Jeff highlighted, there are certain lines that we can't go beyond or we're not going to compromise safety compliance or the high level of service that our customers have come to expect from the Tidewater franchise. But we've lifted every rock and we continue to do so to try and streamline the operations and reduce costs. But I won't say there is anything magical about 40%. 40% is what we've been able to achieve by responding to the current revenue reality. But to suggest the certain margin as line in the sand artificially pretends know what future day rates will be. We don't know the answer of that.

Unidentified Analyst

That's very helpful.

Quinn Fanning

Again, we will optimize margins within the constraints that Jeff has outlined.

Unidentified Analyst

Thanks for the time.


And our next question is from [indiscernible].

Unidentified Analyst

Hi. Thank you for taking my call. I have four questions. What's the cost of stack, the 77 vessels annually? What's the value to sell all 77 stacked vessels versus scrapping just at the stacked vessels and will you consider moving the stacked vessels to raise more liquidity to be able to pay-off all outstanding liabilities? Thank you.

Jeffrey Platt

Well the cost of stacked was currently 77 vessels, while it is not consistent across the stacked fleet, because we have a different locations at which we stack and in some cases, we have fewer and in some places we have more vessels, which create certain scale-based economies.

What we're trying to highlight is that, we are not taking where many cases has very new equipment and putting up it in the grass and hoping for the best. And as a result, our stack cost may be higher than some of our competitors who may not be approaching their stack fleet in the same way. We call it smart stacking, I think the phrase has been used by the some of the rig owners as well.

But importantly, our expectation is that those vessels will be well-positioned to return to the market when the demand supports it, bottom-line is that our stack costs run about a $1,000 plus or minus per day, per vessel.

So, you can do the math on that depending up on your expectations in terms of the trend and the stack fleet. So, that's the cost to maintain the stack fleet, the value of those vessels in a disposition scenario, I guess at the end of day, it requires a buyer and a price and the ability to write a check.

Our sense today is that the bid for OSVs is relatively weak today, but I wouldn't say that we are precluding the disposition of vessels, either as part of a high grading exercise or to generate liquidity, which as you would suspect would be primarily focused on reducing outstanding debt.

We have no specific plan to sell the 77 vessels or any other vessels that are in stack. That said, I would highlight that over a decade or so, we've consistently sold 10 vessels to 15 vessels per quarter. We continue to sell largely the smaller lower book value vessels, while maintaining the higher spec, bigger vessels and it's also worth noting that much of what we sell tends to be outside the oil and gas market, whether it's Caribbean cargo trade, Nigerian security or whatever. And we have done that, over many, many years successfully, the fact of the matter is, there is not a lot of demand for these ships in the oil and gas space and we're not looking to do a fire sale, I guess this is the punch line.

Jeffrey Gorski

And the other thing too, if the vessels, the stack fleet comprises probably 65 new vessels, 64, 65 new vessels. So, these are not older pieces of equipment. This is good equipment that ultimately will be returning to work, hopefully as the market improves. Did that answer your...

Unidentified Analyst

That's my question. Thank you.

Jeffrey Gorski

Thank you.


Our next question is from Dan Burke from Johnson Rice.

Jeffrey Platt

Hi, Daniel.

Daniel Burke

Good morning, guys.

Quinn Fanning

Hi, Dan.

Daniel Burke

There was a small piece of that last question, I want to follow-up on, were you all consider any scrapping of stacked assets and then also what's the book value of the stack fleet, can we get that?

Jeffrey Platt

I'll answer the second to the first part first, again as I just said, most of that fleet, the larger percentage of it is newer equipment. So, I'm not sure that scrapping makes sense and now we don't have a -- we do not have an intention to start scrapping new equipment. There's still some older ships that are part of that and very much we look at the way to dispose that properly and scrapping might be the ultimate, the ultimate end. Quinn, you want to...

Quinn Fanning

To your other question, the carrying value as of March 31 of the vessels and stack as of March 31 was approximately $785 million or approximately $12.3 million per vessel.

Daniel Burke

Okay. All right. Thanks guys.

Quinn Fanning

Basically [indiscernible] those average that's the average of 77.

Jeffrey Gorski

And Daniel just the new fleet, the 65 or the 64 that I referenced of the stack fleet, the average age of that is probably right around eight years, to give you an idea of what that looks like.

Daniel Burke

Okay, that's helpful.

Jeffrey Gorski

And some [indiscernible] vessels, I think we have later on the last call, we had two vessels that were delivered from yards and end of the stack based on the available demand for those vessels.

Daniel Burke

Okay, okay. That's helpful. And then just one on the fundamental side, Quinn you'd alluded to a little bit of a deceleration in the phase of stacking. What if anything drove that in the just concluded quarter, I think any reason to anticipate that slower pace of stacking is sustainable?

Quinn Fanning

It's tough to speculate as to the trend of stacking, ours is not a market that has multi-quarter visibility typically and even less so in the market that has access capacity, because the motivation our customers to grab a vessel, because they're concerned about not getting one and it's reduced. But no, obviously you know I think as we've articulated in previous calls or at investor forms, we have a strategy which is designed to try and maintain economic utilization of the vessels that we are marketing or operating and that's typically plus 70%.

So there is overall global demand which I think we are probably more exposed to than any company given our operating footprint, that generate certain amount of vessels demand for the market, we – whatever share we get and in many cases historically, we've gotten probably more than our historical through cycle market share in a weaker market, has an operating footprint than each of our customers, kind of priority risks et cetera, but the kind of swing factor that we are managing is what we stack or what would reactivate on a global basis and by geographies in order to sustain that kind of 70% plus utilization, where we think we can actually make reasonable cash operating margins, probably not reasonable returns on capital today that has been deemphasized as a financial priority.

Daniel Burke


Quinn Fanning

Does that answer.

Daniel Burke

Yeah, yeah, no that is. And then just a last one and a quick one, that this, it was my understanding I think you alluded to it earlier to be clear, if you will collateralize any portion of the debt, essentially all the debt including all of the senior notes would be collateralized, correct or which actually collateralized?

Quinn Fanning


Daniel Burke

I'm sorry could you repeat that.

Quinn Fanning

That is our expectation.

Daniel Burke

Okay. Okay guys, look I appreciate the time. Thank you.

Quinn Fanning

Thank you.


Our next question is from Mark Brown from Seaport Global Securities.

Mark Brown

Thank you. Hi guys, how are you doing?

Jeffrey Platt

Hi, Mark.

Jeffrey Gorski

Hi, Mark.

Mark Brown

I just wanted to ask on the given your macro outlook seeing fairly conservative, I think you said 24 months you would not expect a meaningful improvement in the market and I just wanted to check if that based, I mean, if oil prices were to go to $65 by the end of this year, would you still hold to that view and is it just a question of there's just too much supply that's on contract that has to get work through before we can it's like to see any kind of recovery.

Jeffrey Platt

All right, Mark. Once the price of oil goes back up, it's kind of be there for a period of time that our clients feel that it's sustainable. Again getting back to $65, I think there is a lot of – there is more support for that today than it was a month ago that it might get there. In this market I think taking the conservative approach to it is the right thing to do. But there is no doubt that we have certainly the demand side rig counts are falling from a high of around 720 this offshore working rigs on a worldwide basis to somewhere it seems to have bottomed in the – right at about the 500 has been bouncing around the high 490s to 500 and that's where it is currently as a week ago. So that that number starts to – need to start climbing up and at the same time, there is no doubt that there's still another 350 OSVs under construction that have yet to be delivered not to say that all of those will bake into the market, in fact, we think there's probably a fairly high percentage of those that never will come into the market to compete. So again when you kind of look through all of that I think that that all factors into what we think how the market will unfold.

Mark Brown


Jeffrey Platt

I hope we are onto the more conservative side, we will certainly welcome it. But again, we can react quickly when it does, but I think taking I think a little more longer bend to it is the proven thing to do.

Mark Brown

That's great color Jeff. I had another question on one of your line items is equity and net losses of unconsolidated companies, and I think that includes the carrying value of your Sonatide joint venture. Can you just explain why that was negative $6.5 million for the quarter?

Jeffrey Platt

Yeah, the P&L line item which is what you referred to, which is the equity/loss and our consolidated affiliates or earnings in consolidated affiliates is our 49% share of the joint ventures, net earnings for the period, which was a net loss largely, as Jeff highlighted as the result of the devaluation of the Angolan kwanza and the revaluation – the resulting revaluation of the kwanza denominated bank balances are maintained by the joint venture, which is not part of our consolidated financials.

To your other question, which is the caring value of the joint venture, I believe our caring value of Sonatide, which is one of the tables on the 10-K is in the mid $30 million area and obviously that has been adjusted quarter-by-quarter for our share of earnings and loses since the formation of the joint venture.

Mark Brown

Okay [indiscernible]. And I just had one other question, just you're talking about you're unwind from Australia and there is some demand in Australia, it's not, I was just curious, if there were local content kibitzed type issues, barriers for you or was it just you wanted – there just wasn't enough work to have that critical massive vessels in that region?

Jeffrey Platt

It is the amount of work, it's a – that's a very high-cost area. You have that the local labor cost is very high, end of the day, it is just to wind-up some big projects related really a lot to the L&G and some other drilling projects, but it's more the – again the lack of new opportunity, we can certainly go back into Australia relatively quickly, but it's a high operating cost area at the end of the day. The kibitzed side, there really is not a kibitzed issue as a German's Act or some of the other countries we operate in. You do have the crewing issue with the Australian labor unions and it's pretty expensive at the end of the day.

Mark Brown

Okay. Thanks.

Jeffrey Platt

And so we're really not able to move a cost structure as we have another areas to respond to you know the lower revenue which is part of functioning of our projects coming in conclusion and part of function of weak day rates. But we have been able to move labor cost down in most jurisdictions those of where that are so strong union presence it makes some more difficult.

Mark Brown

Okay. Thank you very much.

Jeffrey Platt

Thank you, Mark.


And we have no further questions at this time.

Jeffrey Platt

John, thank you for hosting us today. We appreciate everyone's involvement in this call and hope everyone has great day. Thank you very much.


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

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