Tidewater's CEO Presents at 2012 Barclays CEO-Energy Conference (Transcript)

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 |  About: Tidewater, Inc. (TDW)
by: SA Transcripts

Unidentified Analyst

Good morning, everyone. I want to keep things moving right along. Up next we have Jeff Platt, President and CEO of Tidewater. Jeff was promoted to the CEO role in June, taking over following Dean Taylor’s retirement. Jeff has been with Tidewater since 1996 and served as the company’s COO prior to his promotion. Please welcome Jeff Platt.

Jeff Platt

Well, good morning, everybody. Thank you for attending here for Tidewater. We are happy to be at Barclays and take you through the Tidewater story. First, we’ve got to get through the Safe Harbor statement to satisfy the lawyers and I think that’s about as much time, we won’t spend on that.

Key takeaways today as Quinn and I do the presentation, and walk through it, again with Tidewater, story begins with safety, that’s the first thing that we need to provide to our clients. It’s absolutely paramount in the industry.

Certainly, after Macondo, that’s been all more underscored. Our journey to safe operations had begun much earlier than that, have a slide today to show you where we are in comparison with some other companies, clients of ours as well to show the safety programs and the effects that they have on our operations.

The tide is turning, recently over the last 12 months or so, when you look at the rig counts that’s the single biggest proxy for our, the strength of our business. Our vessels do other things than supply and support drilling rigs, but when you look at the health of the drilling operations worldwide, that’s probably the single one proxy that gives you an indication of the state of our business. So we’re drilling that a little bit.

And I will take a look at how we’ve done historically through the peaks and valleys through the through-cycle, four cycle going from a trough up to a peak and then back to what we think we are now as is climbing up the other side of the recent trough. To give you some perspective on how the company has performed through that and certainly, where we are today, I think an indication of where we think this can go.

Always, Tidewater, the big the story for us is we have the largest worldwide scope of operations worldwide, value proportion that we provide to our clients is whether they drill in offshore China, Australia, the Middle East, Brazil, in the U.S.. There is Tidewater operations nearby.

And really today, the two, there is only two major oilfield offshore provinces that we don’t have Tidewater vessels working in, one is the Caspian, we have work there recently, recently in the last couple of years, and also in the North Sea, that traditionally for us has been a holding pattern for vessels. Today we don’t have anything, as little as a year ago. We had a couple of vessels, in fact working that spot market. But other than that, there are Tidewater operations nearby and in every major oil -- offshore oil province in the world.

Again, the story for us over the last seven, eight years has been the recapitalization of fleet. My predecessor Dean Taylor, this was his duty. He inherited a fleet, relatively old vessels. But over the last 10 years and mostly recently in the last five or six, we have invested heavily and today, we think we have the most capable and certainly, the youngest world of fleet operating in our space.

And then we’ve done all that, at the same time, we have been, I think very conservative approach. We have taken on a little bit of debt. Quinn has done a nice job. With that, we have got ourselves in a shape that, quite frankly, we made the reinvestments and the balance sheet is still world class as far as we are concerning, certainly in our space it is the envy I think of most of our competitors.

Talking a little bit about safety, we used the snake, holding a snake that’s just a visual. We use that internally and externally. Again, we’ve got 8,000 employees worldwide, about 80 different cultures and nationalities, lots of different languages.

When you talk about holding a dangerous snake, everyone can realize that the dangerous snake looks bad and can be a bad thing, if you speak English, if you speak Spanish, if you speak French. So we look at our operations like holding that snake, if you let it go that snake can turnaround and bite you. So, again, that just the visualization.

And looking at the statistics, this is going back to 2002, Tidewater is the blue rectangle by comparison that’s Dow Chemical, Chevron and Exxon/Mobil. Again, all of those are companies I think that are known for their world class commitment to safety and their safety results.

This is a recording of total recordable incident ratio, rates per 200,000 men hours worked, less is better than more. You see the whole industry is a whole. It’s a downward trend which is a good thing.

And Tidewater in blue, again, I think, we back up very favorably and this is something that we have to do, its absolutely a must for the clients and its certainly a right thing to do as far as our personal and employees are concerned.

Turning a little bit to the backdrop on the industry and looking at way that this is going back to January 2004, the dark blue is the number of jackups working, yellow is floaters. You can see a couple of big events recently peaks or recent near-term peaks in September -- August-September of 2008, I believe that was right before the economic world kind of meltdown the crisis. The jackup market really took the blunt of that, that was the big drop-off in the blue right in the middle of that slide.

Floaters to a lesser extent, they slowdown a bit, but they continue to increase and that little drop-off I think in 2010 that was post-Macondo, a lot of that was the work here in the Gulf of Mexico that had really slowdown. We just recently had the two year anniversary of being Macondo accident this past April.

But since that time you can see we are in upward trend in both jackups and floaters, and floaters are all-time high and jackups. I think we are just about to the point of me reaching what was the peak drilling in back in 2008, so we are back at that point.

In drilling, and again, that was the peak in 2008, that’s where the dotted line is. And take a look what the numbers look like. Again, this is coming really right from that chart and then also looking at the number of rigs under construction and the vessel population back in July 2008 about 600 rigs actively, that’s Mobil drilling rigs, working on a worldwide basis, about a 190 rigs under construction at that time.

The OSV population, and again, we are talking PSV’s, anchor handlers, tow and tow supply, taking our crewboats and tugs and the smaller stuff, really looking at the core business.

There is a little over 2,000 vessels active in that space and at that time it was 700 -- over 700 vessels under construction. If you run the numbers that gives a rig ratio, vessel to rig ratio, a little, right at 3.4. We have seen historically when that ration is at or below 4. It’s typically very good news for us. It gives us the pricing power as its gets above 4 and continues upward then there is a bit of an oversupply and we lose that pricing power, that just sort of a rough index.

Just to understand, if you go out and find the rig that doesn’t mean there is four boats or 3.5 boats working for rig, that’s all the pull-through for all of the other work that’s going on in the oil patch, if you will, so it just a proxy for it.

Taking a look at January 2011, where we, I think at the bottom of the trough, we’ve seen that, working rigs about 540, rigs under construction have dropped to 118, OSV population up to 2,600, you can see that the vessels under construction had dropped to 367 and again, the rig ratio or the vessel to rig ratio approaching 5.

Today, 2012, we have about 650 rigs working worldwide, nice run up, continue to see that increase. Rigs under construction, the order book has pick back up, just under 190 rigs, then if you drill into that it’s probably split almost 50-50 between floaters and high spec jackups, and then you look at the floaters, it’s almost all dynamically positioned, I think this is all, but two more rigs under construction today in the deepwater side. So definitely the new equipment coming in is DP, deepwater equipment and then on jackups it’s greater than 300-footage, it’s the higher spec equipment.

OSV population is up to about 2,800 and the OSV is under construction, it’s peaked up over the last 12 months or actually in the last six months, excuse me, a year and half to about 428 today, and if you do the math, then you are about 4.3. So, that’s kind of where we are, but you need to drill a little bit more into those numbers.

Let’s play a little what if game, if the rigs continue to peak up, peak a number 725. I don’t think that’s an unrealistic expectation or the model, with 650 today, there is a 188 under construction.

Assuming that the ones that are being delivered is certainly on the deepwater side, don’t really displace much. Order equipment is not a whole lot of order, deepwater rigs, we feel they are going to get pushed out of the market.

The jackups, it’s a little bit different question. Will all the new jackups be all incremental? Probably not, they will probably push some equipment at the back side. But again, moving up somewhere in the term of maybe 75 rigs from where we are today given if there is a 190 under construction, I think that’s a fair approximation or a fair bet.

Looking at the OSV population, dropped to 2,550 and I will get, what’s modeling on that. But if we can get to that point and actually have a little bit of a drop-off in the number of OSVs, this is the rig ratio. It will come up to a vessel rig ratio of 3.5, which we think would be actually a pretty good index or a pretty good number for us, indicating that the market would be pretty healthy.

So the question is how do you drop the number of OSVs? And really it’s the story of the older vessels getting pushed out of the market. If you take a look at this, this is the kind of histogram of vessel age profiles.

Everything that’s in gold to the right, that’s newer tonnage, the vessels in red and blue. The red are the number of OSVs that are greater than 30 years old today and the blue are greater than 25 years old.

And if you add up those two populations, there is roughly 700 -- between 700 and 800 vessels that we think that are greater than 25 years old, but in fact some of those or a lot of those that are even stacked today. But those will continue to get pushed out of the back.

So if you take that 700 and some off of the previous slide, that’s where you see the drop-off in the number of OSVs, actually those still a shrinking in the overall numbers. So we think the new vessels coming in. There is more than enough old vessels that we pushed out of the back side to keep the market in pretty good balance in our favor.

I’m trying to mention, Tidewater where we are at today and again, this is just OSVs, taking out the crewboats and the tugs, a lot of companies put their numbers together and they lump everything into it. This is just looking again. If PSVs, anchor handling, tow and tow supply to meet the business if you will, Tidewater in blue were about 252 units today, vessels today. Our next nearest competitor is 151 and you can see how the numbers go up.

One takeaway from the slide is that that number five, that’s the average number of 300 and some odd owners, so it’s still. You have a group of market leaders if you will, but it is still a fragmented business when you look at the total ownership and the number of vessels worldwide, lots of small players on a worldwide basis.

Talking a little bit about how we’ve done through cycle on earnings. Just going back to fiscal 2004, which was the last trough that we think when you take a look at the -- in the cycle, about a buck three in earnings, as those rigs peaked on the rig slide at fiscal 2009 and fiscal 2008, we’ve got up to just under $8 a share at that time. And of course, the fall-off of going back into the trough that we are in now, I think we’ve touched bottom and we are absolutely starting to climb up the backside.

So a point I will make here is, as you can see the trough for us is a little over $2 a share, previously on the last three cycles was a $3. So the idea being, the troughs hopefully aren’t nearly as deep for us and hopefully, the upside also has some additional upside to get through that $7.90 a share.

Global strength and for time, while we don’t really have competitors, there is one competitor that has I think somewhat a close geographic stretch. Most of our competitors tend to be regionalized. We are the really only true worldwide service provider in our space.

And what that does or how we’ve gotten there. It’s over 50 years ago, we stepped out. Venezuela was our first step out. Today, we are not in Venezuela. I think everyone here knows we had a little disagreement with the President down there. But I expect at some point, we will be back in Venezuela. Nonetheless, it’s 50 years international experience. It’s not new to us. Operating internationally is what we do and have being doing for sometime.

Unmatched scales, scope of operations, I have a map to kind of show you our operations on the ground, our fleet deployment. I think you will know better, feel when you look at that. And overall, we think again, being in all of these different markets, I think is a -- it’s a way for us to have a blended portfolio if you will.

At times in the industry, you’ll get certain regions for whatever reasons, be it a political or a tax regime change, we will get very hard and very good. Today, we are seeing it more across the board, which is good.

Nonetheless, us being and having access to all of the different markets I think allows us to capitalize to get our assets in play in the right markets to get the best return for our shareholders.

Larger contracts, larger contracts, typically international, the contracts run from one to maybe three years, some as long as four. Typically the domestic contracts tend to be a little bit shorter. So, overall, you have a longer contract linked typically internationally. Better utilization, again when you are on a term contract, in effect your utilization is dictated by how efficient you operate your vessels.

You keep the vessels maintained well. You get the right people on them. You have the term contract. You don’t have the drop-off at the end of the contract, if it’s coming up every 90 days or so. Credit to your contract, it tends to move the whole utilization up.

And higher day rates, again, it allows us to play in the markets. Certain markets have more advantages to us or to the service providers anyone time. With the scope and scale of operations we have, we can move assets there to capitalize on that.

And likewise, when a market gets depressed or maybe some competitors come in and operating at rates that really don’t make a lot of sense, it allows us to move the assets out to movable asset base.

And again, when you look at who we do business for? It’s who you would expect operating on the world stage, solid base of national oil companies and the IRCs.

Looking at the actual footprint of where we work. Let me use the boots on the ground slide. These actually represent Tidewater land support personnel and resources and the way we work, we don’t work through third-party agencies. There is going to be a Tidewater technical team, there is going to be Tidewater management team, the Tidewater financial team on the ground typically, very close to where the operations are.

We think that really serves our interest very well. Number one, you are close to client, a client who’s operating in East Africa. If there is a problem, he doesn’t want to have to rely on calling somebody back in Houston to fix a problem in East Africa. We’ve got people underground in East Africa, supporting that -- those activities.

And secondly, I think it gets you closer to the local issues, the local politics, what’s involved. Making sure you clearly understand the rules of the road with respect to laws and regulations.

We are a U.S. company and our compliance, and FCPA issues that we spend a lot of time, making sure that we are doing the right things, and doing it the way that our clients need them done, and the way that we have to do them as a U.S. company.

Kind of walking around where the fleets’ deployed and actually the fleet deployment on a percentage, this is a fair approximation for the revenue side as well. So our biggest business units are in Sub-Saharan Africa, about 130 ships working there. It’s about 50% of the fleet.

Coming over to the Americas, 63 vessels, that’s about 25% of the fleet. Middle East and North Africa and that really runs from India up to Egypt in that swab, that’s how we call about that unit, had about 35 units, just as a comment, certainly our activities in Saudi, I think over the last months we’ve kind of stumbled a little bit out of the block in getting some work over there. That’s been in a couple of years in the works for us getting the right organization set up over there.

We won some contracts, we had a couple of hiccups getting on but I think today that’s a growth story, a very good story for us and we are knock on, what I think we are going to continue to do well and we’ve turned the corner very much over there, very, very positive on that. And then in the Far East that runs from Australia up into China. It’s about 31 units over there, which is 12% of the fleet.

So that’s kind of brings it up. One last thing I’ll talk about, obviously the Gulf of Mexico certainly has shown some real signs of picking back up from Macondo. The regulatory agencies, I think that while they aren’t making it easy, they at least I think have a process in place that our clients understand. They may not agree with it, they may not like it.

But it’s a process that at least is allowing permits to be processed through such that deepwater drilling is certainly starting to pickup here in the Gulf of Mexico. And there is a lot of several deepwater rig projects that are about to pickup as we move into the next 12 months, next 18 months.

And there is a bit of shortage in deepwater U.S. flagged vessels. They come in at the bottom in quarter one fiscal '13 for us, which is the quarter that just ended in June about 6% of our vessels in revenue came out of U.S. Gulf is relatively small amount. I think that’s going to increase and overall on the world basis inclusive of what was in the U.S. but also what was outside of the U.S. We have about 36 U.S. flagged vessels.

So as the market improves here what we can do is actually pickup that equipment that might be working say in West Africa or maybe in a Brazil U.S. flagged deepwater equipment and bring that back to the U.S. And we do that really by the ongoing new build programs where we have new deepwater tonnage being built outside of the U.S. It can free up that Jones Act equipment.

So I think its going to allow us to participate in rebound here. And the good news for us is that the market is for those vessels is good here getting better, but its good elsewhere too in the world. So it’s actually good position to be in.

But we do have some capacity. I think to move some additional equipment back to the U.S. as long as the market continues to improve in the economic make sense for us. With that, I will turn it over to Quinn.

Quinn Fanning

Thank you, Jeff. Jeff started out as presentation highlighting a couple of different things that we think make the story unique. Number one is our culture of safety and operating excellence. Two is an operating footprint, which is unique in its probability. Again Jeff indicated, we really don’t have a single competitor that we see in every market.

And then finally a view that we have at least is that the fundamental backdrop is pretty constructive for continued improvement in the business. The next piece of what we think is differentiated story is our very significant investment in the fleet over the last number of years, really beginning in 2000 continuing today and on into the future.

I think the nature of that investment has changed in the last year and half or two years and that we were largely replacing older equipment that was falling of the backside and effectively replacing revenue in earnings. For last couple of years, we believe at least on a through-cycle basis we have been adding to earnings capacity.

And the defensive nature of the investment is somewhat in the rearview mirror at this point. So we believe we are investing at this point in a growing industry or in recapturing of perhaps lost market share over the last 10 years or so.

As I indicated, the investment has been quite substantial in excess of $4 billion of capital commitments over this decade long fleet renewal and expansion program. As you see, 90 plus percent, 93% in particular of that investment has been in the OSV space at the anchor handling, towing supply and PSV categories. Its about 200 ships or $3.8 billion. The vast majority of this is operational today but we do have an order book that we are delivering kind of plus or minus five vessels a quarter and you will see that continue over the next couple of years we believe.

This is the order book today. 26 ships you can see most of that is incremental exposure to the deepwater PSV space. As Jeff indicated, the rates that these vessels are largely servicing are DP vessels. There is no need for anchor handing of a deepwater drillship for dynamically positioned semi-submersible. That’s really where we have focused our investment and we have indicated our view over a number of years that the deepwater anchor handling class that the plus 10,000 brake horsepower, anchor handlers seem to be over build from our perspective.

There is no older equipment that’s falling of the backside that has reestablishing equilibriums. That is not the case however in the towing supply and supply class. That is a sub 10,000 brake horsepower anchor handler, really a towing supply vessel, its jackup support. And that’s a smaller PSV for us, I believe that would be 2800 deadweight tons or less. (Inaudible) as the older vessels dropping off as Jeff indicated that are over 25 or over 30 year old.

So we have been doing is really a two-pronged approach, one is replacing the older tonnage that is falling out of the market with the higher stacked vessels, the standard towing supply vessels now 5,000 brake horsepower as opposed to three or four, few years ago and for us that class its kind of 5,000 to 10,000 brake horsepower anchor handlers smaller PSVs. Essentially it’s a replacement fleet for the aging equipment.

And then there is a growth market, which is deepwater which we’ve also been investing heavily in. So you really see that is our focus as opposed to the larger anchor handlers. As you see at the bottom, we have reasonably modest remaining outflow expected associated with the commitment as of June 30th. However, that is not a static number. We continue to look at new construction and second hand vessel opportunities, but as I indicated earlier that’s more opportunistic than defensive at this point.

We have modified our taxes over time depending upon really the pricing in the second hand market and the availability the equipment that we want. And you can see the bars here, blue being acquisition vessels, gold being new construction commitments that Tidewater has made.

What I would ask you to focus on there’s a couple of different things really in the 2010 to 2012 period, while we think of ourselves as a through-cycle investor. We try to be opportunistic. Our focus is on through-cycle economics. We expect to operate the vessels for most of its useful life.

And when vessel pricing drops such as did in the financial crisis. We have doubled down on capital commitments, because we believe you can stub your toe in an operating environment and you should recover however if you may commit a bad decision on a 25-year asset you are going to be worrying that on your net for a long time.

So we’ve tried to do is when asset pricing is gotten atrophy, we have backed away from capital commitments that’s optimal together. And when ask the pricing has been particularly attractive from our perspective, we have been recently forward leaning in our investment program over and eight quarter run or so we’ve made a 1 billion plus in capital commitments across 50 ships. And we really think that’s creating the asset base that is going to allow us to optimize the next up cycle.

Over this -- I call it 12-year fleet renewal and expansion program. We have largely financed this effort from internally generated funds. This stacked bar chart do you see, the blue is our CapEx, the gold is our regular dividend which is now $1 a share little over 2% yield I guess. And then the red would be share buybacks.

And I’d ask you to compare that over time to the black line, which is cash flow from operations. And the message that we would leave you with here is for the vast majority of this fleet renewal program, we have funded the CapEx through cash flow from operations and disposition proceeds from the older equipment that we have sold.

And it’s really kind of fiscal '11 and beyond that we have been investing in excess of our operating cash flow and it become more relying on external financing. Now that’s -- isn’t meant for some harmonious we believe that an appropriate amount of debt is they could think from a shareholder perspective. We have taken our leverage all the way from zero net debt up to 22 on a net basis today. That is about third of some of our no vision competitors and generally stop at where the most of the American companies are today as well.

On a gross basis you see we’re at 27%, 28% I guess because we are sitting on a fair amount of cash in the balance sheet. That’s really a function of timing of investments. We don’t feel from a liquidity perspective we need a lot of cash in our balance sheet. We have a multi-year credit facility of $450 million, not a dollar which is outstanding today and that’s really our primary liquidity back stuff.

From our perspective, we have no great aspirations to return to zero net debt position if the market continues to improve. We think the right amount of debt is somewhere in the 25% to 35% zip code. We are very comfortable with the debt portfolio we put together over the last couple of years that’s going to average coupon of 4.2% or 4.3% at this point.

At least the financings, we’ve done last couple of years, it’s going to average life of nine years, use little bit of term debt in the bank market, give us some prepayment in optionality. But we liked that portfolio and if the market continues to improve we’ll either continue to invest in iron because we think that’s a good long-term proposition for shareholders. But we’ll do as we’ve done in the past and repatriate it to shareholders in the form of dividends buybacks or special dividends as you see in the 2008 period.

When asset pricing was frothy from our perspective, we get backed away from capital commitments and bought back $500 million or $600 million of stock in the four quarter period and we would look at that again. Again it would be in comparison to incremental investments in iron or investments in adjacent business. We should not be looking for hobbies as we’ve had in the past. I’ll call it 20 years ago, I guess, we’re in the compression business at one point.

We’ve no aspirations to do that again. But there is no desire to continue try and create through-cycle margin expansion and through-cycle value. Again we have plenty of dry powder at this point in terms of the cash and the balance sheet and unused bank capacity which we will use as I indicated to be opportunistic either on the corporate or fleet acquisition front.

Give you a little historical retrospective over the last six years or so. We see here is really vessel revenue and cash operating margin which is essentially our gross profit over -- call it one half or two cycles. You can see in the last cyclical peak which for us was roughly fiscal ‘09. We were well over $300 million of quarterly revenue.

I think we peaked that or average at least for fiscal ‘09 of $174 million in cash operating margin or in excess of 51%. Today we have very different fleet if you look at comparable equipment in the last cyclical peak. We probably crested in 62%, 63% gross profit margin percentage.

I think this will give you a sense of where we are today relative to last cyclical peaks. And today we’re in kind of spitting this since relative to $300 million quarterly revenue run rate again as compared to that $339 million average in fiscal ‘09. But if you look at margins, we’re looking for milestones for the management team, 300 is a good number. 50% in operating margin is a good number.

Today, we’ve got some wood to chop in terms of recapturing the margins that we saw in last cyclical peak and that obviously reflects so much different asset base. More technically sophisticated high respective equipment. We’ve also add labor inflation in certain key markets and other cost pressure notwithstanding the fact that rates have trended down in the last couple of years and are really just bottomed and certainly worked the way up at this point, we believe.

And a couple of new slides for this presentation which we hope will give you a better sense of the asset classes that we are more exposed to and how those are performing over the last number of years. This is where most of our investments been in the last couple of years. These deepwater PSVs which you can see we’re now averaging last quarter of 55 vessels, I guess. Average day rates in the last quarter were well over $24,000 a day. We’re at and have been at for some time effectively full utilization given the dry dock time.

But as you focused on is the delta between the dark blue line and dotted line and that’s essentially the downtime or off-charter time for this class of vessels. And we’ll see is that gap is reasonably consistent through time and represents more than anything else downtime between charters and drydock time. But really if you know your average vessels and you know your utilization adjusted day rate, you know your vessel revenue.

This is a metric we want our team to focus on but it’s a two-part equation of getting high day rates and having high up time. But this is something that we used to help us understand trends in the market. And I think what I’d want you to take away for deepwater PSV space is that we’re at or through day rates that we saw in the last cyclical peak.

So this is an asset class that’s leverage the floater growth and it’s one that’s performing pretty well in the fact we are at or above where we were in the last cyclical peak. And we’ve had lot of equipment in that space and a lot coming in on a quarter-by-quarter basis. Now, you’ve heard us talk about the deepwater anchor handling classes. This is the plus 10,000 brake horsepower equipment I referenced earlier.

We don’t have a lot of exposure to the space. We talk about it lot because investors want to know about it and this is really North Sea asset class more than anything else. What’s interesting is that the gaping out occasionally of the utilization adjusted day rate relative to stated day rate. And what you’re seeing over the last couple of quarters is that we’re improving uptime and as a result that gap is shrinking but we’re nowhere near where we were in terms of peak rates in the last cyclical peak for this asset class.

That’s a good news bad news story I guess in terms of utilization improvements but limited traction at day rates. I guess, we see good news as well in the fact that we got limited exposure to the space.

And then finally, our towing supply and supply class where we’ve got a lot of equipment. This is the shallow water jackup support. At times, utilization has been weak in part because of excess supply coming in particularly the Asian markets. What we saw last quarter really for the first time is very good traction in terms of utilization.

We had a six point jump quarter-over-quarter in terms of utilization for this class but we have not yet seen and we believe we are starting to see this traction in day rates on this class of equipment where we’ve got lot of exposure. So again we’re not at peak rates that we saw in fiscal ‘09.

We’re at decent rates from our perspective and we’re getting to a point where we’ve got pretty good utilization as well. So hopefully, we’ll continue to see traction in the deepwater PSV class which we’ve seen for a number of quarters now. Again, we’re at cyclical peak or better type rate. We’re starting to see traction in this asset class.

And again, we’ve got a little bit of wood to chop in terms of recovering OpEx inflation in the last couple of years. But by and large, we think things move in the right direction.

Where does that take us from here, this is a sensitivity we’ve presented in the past. If you look at our new fleet only, again this is assuming that the old equipment drops off the back side over the next couple of years. We’re at 86.2% utilization of the new fleet, little over $15,000 a day in day rates. Ignore everything else and you will get 350 in earnings out of that fleet.

On a standalone basis, given our cost structure that’s roughly $400 million of EBITDA. Give yourself a pump for 10% improvement in rates. Again the cross asset classes, this is still just recovering. Day rate that we lost in the down cycle you can see the operating leverage in the business is quite significant. That’s $5.50 in EPS based on our sensitivity, $500 plus million of EBITDA, another 10% in day rates and effectively full utilization which we saw, kind of, quarter in and quarter out during the FY ‘09 period.

You can see we can get to $8, $9 a share in earnings and nearly three quarters of $1 billion in EBITDA. Your question than how realistic is this. The implied operating margin of these numbers, it’s kind of mid 50s. As I mentioned earlier, we crested at 62%, 63% on the new equipment last cyclical peak. And if we look in the rearview mirror at least, again this is two 10% rate improvements. Essentially, we capturing, call it 90%, 95% of the rate loss over the last couple of years.

We’re blown and going, look at last four quarters or so, rates on average are up 1300 plus dollars a day or 10 plus percent. So this is not crazy talk and we certainly don’t believe these are peak earnings but we believe what the existing asset base we have, the order book we have, run rate, CapEx. These are very realistic numbers with the right market backdrop.

Very much appreciate your time and attention. If we can have questions, I guess, we’ll do it in the breakout session. Thanks so much.

Question-and-Answer Session

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