Trico Marine Services Q2 2008 Earnings Call Transcript

Trico Marine Services (TRMA)

Q2 2008 Earnings Call

July 24 2008, 8:30 am ET

Executives

Geoff Jones - VP and CFO

Joe Compofelice - Chairman and CEO

Analysts

Judson Bailey - Jefferies & Company, Inc.

Lars Krogh - Kistefos

Randy Laufman - Imperial Capital

Peter Winkler - Formula Capital

Presentation

Operator

Good day, everyone, and welcome to the Trico Marine Services Investors Call. This call is being recorded. At this time, I would like to turn the call over to the Chief Financial Officer, Mr. Geoff Jones. Please go ahead, sir.

Geoff Jones

I am Geoff Jones, CFO of Trico, and I will start with our forward-looking statements. The statements in this conference call regarding business plans or strategies, projected benefits from our acquisition of DeepOcean and other joint ventures, partnerships, projections involving revenues, operating results, forecasts from operations, anticipated capital expenditures and other statements which are not historical facts are forward-looking statements. Such statements involve risks and uncertainties and other factors detailed in the company's Forms 10-Q and 10-K, registration statements, and other filings with the Securities and Exchange Commission.

Should these risks or uncertainties materialize or the consequences of such a development worsen or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those expected. The company disclaims any intention or obligation to publicly update or revise such statements, whether as a result of new information, future events, or otherwise.

Now, our CEO, Joe Compofelice, will review the second quarter operations.

Joe Compofelice

Good morning and thanks for dialing in to our second quarter call. A great deal has changed in Trico during the quarter that's a bit of an understatement. So I'll start of with the most significant events beginning with the acquisition of DeepOcean and CTC Marine. While though it was one acquisition as you know there are two operating business in there and we expect to mange them as free standing profit centers.

In mid May, Trico acquired control of DeepOcean and CTC in a somewhat surprising transaction that was announced on May 16, at which point we owned about 52% of the company. By June 30, we owned over 90% of the company and as of now for all practical purposes we own 100% of these companies -- the acquisition was finished through a mandatory cash tender offer.

As investors and analysts I believe you'll find our published second quarter results exceptionally complicated, as a result of a) gaining control in the middle of the second quarter, having multiple percentages of ownership during the quarter, the intricacies of what you all know as purchase accounting for acquisitions, and finally even more complicated by the concept of a "imbedded derivative" associated with the convertible notes that were sold to finance the acquisition. It was also a financial hedge transaction that was in place at DeepOcean for those of you who have know us for a long-time that's not something you are likely going to see us do in the future and so there is the cost of unwinding that transaction.

So, I'm going to comment on the fundamentals of what's going on and Geoff Jones will address this most non-cash related accounting issues. I'm going to talk about the fundamentals of the Subsea service and the trenching business we acquired, and the current levels of activities for these businesses and for the second quarter the actual operations of our Towing and Supply division. So, let me start with DeepOcean.

The acquisition of DeepOcean moves us deeply into the area of services with a very high engineering component. This company performs structural inspections, modular handling of equipment for light construction for example setting a single slot tress in place, jumper installations, other subsea installation, seabed mapping of pipelines, pipeline inspections.

Right now, they are very involved in subsea decommissioning projects in the North Sea. But the most fundamental thing they have is a recurring regular inspection repair and maintenance business. So, in this regard, it's differentiated from what I would call a large construction company, whose businesses are characterized by epic contracts that have lump sum or fixed price aspects to it. This is a day rate business and often we are working with those large contractors, like Technip, like Saipem, like Subsea, doing 7 day rate work, as subcontractors to them.

Now for the second quarter for DeepOcean and here I'm speaking for full second quarter, and it's a little awkward speaking about it because in the numbers you are looking at there is no full second quarter. So, we are talking about a period where we didn't note anything until May 16th and then the percentages drop and so it's a little confusing. I think the only sensible way to talk about it is from the context of a full second quarter. They had some negative effect of vessel delays, as you will hear our Towing and Supply division does, and frankly the whole industry does.

But the quarter was characterized by strong EBITDA margins every bit where we expected them to be due to our diligence. They won several major new contracts with a revenue value of approximately $250 million. Their vessel delays, while individually they might have been longer or shorter than our Towing and Supply division judged from when we bought the company just a few months ago, they are not material events. The vessel that adversely affected EBITDA in the second quarter has been delivered and is under contract for Statoil for five years for inspection, repair and maintenance. That would be the third large vessel that DeepOcean has under a five year contract, and should be received any day now.

The backlog of firm orders for DeepOcean is a $600 million, as of June 30th. So, overall while the second quarter had some negative effect from vessel delays, we don't see that affected DeepOcean in the third quarter and the backlog is very strong and the margins are good and I can't think of a better deal that we could have done.

Second, I'll talk about the CTC trenching division. They also experienced effect of a vessel delay, the bad vessel also has been delivered, it's called the Volantis, it's a large vessel, it's 107 meters because all of our new vessels are the latest technology DP II. This Volantis vessel is designed for handling the trencher and ROV launched and recovery, but different from the vessels that we currently operate. This includes a large carousel that actually lays the flexible pipe and lays fiber optic cable in addition to burying that flexible pipe and fiber optic cable. So it's a very broad service vessel.

As of June 30th, CTC has a firm backlog for over 90% of their second half targeted revenues, and that backlog is a little over $170 million at June 30th. CTC has the world's largest and newest fleet of trenching vessels. From a vessel point of view that we operate, the average age is only five years. I failed to mention as to DeepOcean, the vessels we operate, the average age is only seven years.

In the case of CTC, as important as the vessels are themselves, is the trenching and jetting equipment that goes with it and it is similarly new. CTC also has a small, but we expect growing, presence in the telecom market and since June we started on a long six month laying burial project for Alcatel and that contract has the ability to be extended for a second six months.

In the second half of 2008, CTC has two additional contracts for cable lay, and also in the fourth quarter starting on a major new project in Brazil, direct to a ACRG, a large engineering company for Petrobras. So both of these businesses I think have an outlook that's very consistent with our expectations when we brought it. They have a very strong backlog, and I expect to see positive things in the second half, and beyond that. Our outlook for Subsea just improves everyday.

Our towing and supply division as the analysts have been reporting, the North Sea experienced very weak, in fact I think there may have been an analyst that called them dreadful, spot market day rates for anchor handlers in the North Sea, and that was definitely true. It had a negative effect on Trico that was partially offset by improving day rates in all of the other markets, and extremely high utilization in the Gulf of Mexico.

We've talked about our sensitivity to spot market rates, and those of you who really follow the anchor handlers know that the swings are more than substantial. So we made a decision in June to reduce our exposure to the spot market. Let me carefully describe that we have four anchor handlers in the spot market at Trico and that's been the case since these vessels were brought in the late 90s.

Today all four of those spot market vessels are on term work. We started making that change early in June and those four vessels; one is working for Petrobras through the rest of the year, almost to the end of the year at substantially higher rates. We are talking $70,000 a day on term work and I am not sure the spot market or anchor handlers other than for a week ever got to $70,000 in the North Sea.

We have another one working for Gazflot, the Russian company in the Barents Sea. It's on a term contract so we get paid everyday. It can only work till October, because in that part of the world things freeze up or icebergs or something and you've got to move out of the area. Then we have two anchor handlers on very attractive rates to Statoil. They just finished working offshore Ireland, on Ireland's west coast and so as of today and for the third quarter Trico has virtually, if not completely no North Sea spot market exposure.

On the topic of vessel deliveries; Trico had 11 on order to refresh everybody and DeepOcean and CTC had four more. So in the third quarter we've either taken delivery of three of the four vessels, or are taking delivery or are in sea trials, I will describe each one. Three of the four that were scheduled for the third quarter. The Volantis I have already described, the cable lay and trenching vessels for CTC. A large vessel I described for DeepOcean, that's on contract with Statoil. The Trico Mystic which is in river trails today and so it should be on ticket in August and it's already under contract through a contractor in Mexico for Petrobras and we have one more -- no that's it for the third quarter. And then we have a couple scheduled for the fourth quarter.

With the acquisition of DeepOcean, we're taking this opportunity to reconsider the second four of the eight vessels being built in India. When we acquired Active Subsea in November of last year, we basically acquired forward eight vessels, and we've struggled with delivery on those, no doubt about it. The first four are being built as intended, but we were able to get a lot input from DeepOcean because it's frankly getting very specific input from customers and users. In fact, they're the customer on the first two. So as a result of that we have decided on the last four to upgrade our design of all four of those vessels to a larger vessel, offering more capabilities and providing more marketing opportunities.

This enables Trico and DeepOcean bids, and Trico bids with other Subsea contractors to have a vessel with more capacity. This actually adds a few more months to the delivery schedule. We feel this is the right decision. Fully embracing our new Subsea platform and strategy is far more important to us than the negative short-term effects on EBITDA of adding three, four, five more months to the delivery schedule. We just end up with better vessels.

Now, don’t think we're starting those vessels from scratch, because then your obvious question was going to be - the price of these vessels might double mostly because of the steel cost. Virtually all, probably greater than 95% of the steel for these last four vessels is already on the ground, waiting to be formed into a hull. Those last four vessels we'll be referring to is the Mk III version of the VS470.

So, going forward notwithstanding some weakness in the North Sea for Towing and Supply in the second quarter and notwithstanding the second quarter effective vessel deliveries, we feel in terms of the markets, very good Towing and Supply for the third and fourth quarter and especially good about DeepOcean and CTC given the very high ratio of their backlog, a combined backlog of almost $800 million going forward. It's almost two years worth of revenue. We do see normalization of spot market rates in the North Sea, but again it's become absolutely unimportant to us in the third quarter and the fourth quarter after that, we will reconsider our position and see what happens.

So, with that, I'll have Geoff go over now some of the number detail and some of these accounting issues for the second quarter.

Geoff Jones

Thank you. As Jim mentioned, the financial results for the quarter reflect our acquisition of DeepOcean and because the acquisition was accomplished in steps, the results are difficult to interpret. But I'll try and make it as clear as possible to get pass the accounting noise and how the actual business is performing.

Our EPS was a loss to $0.20 for the quarter on total revenues of $104 million after getting effect to a non-cash charge of $4 million net of taxes or $0.27 per share diluted. This compares with earnings per share of $0.73 on total revenues of $59 million for the first quarter of 2008.

Now, the second quarter net loss and loss per share were reduced by a non-cash charge of $5.9 million, as a result of accounting for derivatives related to the 6.5% convertible debt instruments and foreign currency hedging. Now, it's important to point out that this is a completely non-cash swap charge driven by the complex accounting rules surrounding embedded derivative and is highly unusual.

Net income without the effect of these charges would have been $1 million or $0.07 per share dilutive. In addition, the results were adversely affected by the conversion of DeepOcean and CTC Marine results from IFRS to U.S. GAAP and the additional depreciation and amortization associated with purchase accounting.

Operating income for the second quarter was $4.3 million compared to the $11.5 million for the first quarter, but adjusting for the gain on sale of assets in Q1, we would be comparing operating income of $4.3 million for Q2 to $8.7 million for Q1. Now, as you may expect in an acquisition there is more noise below the operating income line than there is above the operating income line so I'll try and bifurcate the discussion to make it easier.

In our Towing and Supply division, operating income for the second quarter was $4.7 million on total revenues of $54.6 million compared to the operating income of $11.5 million or $8.7 million excluding the gain on sales of assets on total revenues of $59 million in the first quarter.

The comparable decrease of $4 million primarily reflects a surprisingly weak North Sea spot market in the second quarter, which adversely affected both the rates and utilization of our anchor handlers working in the spot market. On average, anchor handler rates for the quarter were down 16% from Q1 and utilization was down 9 percentage points. Now, the good news is that our average anchor handler rates are currently increasing and are approaching those reported in Q1 with utilization at 88%. Rates in our other markets continued to be strong.

Towing and Supply division, second quarter 2008 revenues consisted of 85% international including 51% from the North Sea and 23% from West Africa. The five Subsea platform supply vessels or SPSVs showed a substantial increase in day rate to almost $22,000 for the quarter, offset by a decrease in utilization to 77% due to the planned dry docking and upgrade of one of the vessels.

For our offshore supply vessels or OSVs, markets were stable to strengthening in all markets. Currently we have 11 OSVs in the US Gulf of Mexico which are earning day rates approaching $9,000 a day, utilization is almost a 100%. Following the end of the quarter, we mobilized two crew boats internationally from the US Gulf of Mexico.

Looking at the income statement, below the operating income line, interest expense of $6.2 million is about $6 million higher than the prior quarter due to increased debt levels to finance the acquisition and non-cash charge of $1 million related to the accounting for the 6.5% converts we issued.

Included in other loss net of $5.2 million, our non-cash charge is totaling $4.8 million related to the derivatives I mentioned earlier, again associated with the recent convert issue and foreign exchange hedges.

Our effective tax rate for the quarter was 25%, and we expect the book tax rate to be about 23% for the year, but more importantly our cash tax rate to be about 7%.

CapEx wise, we spent $26 million in the second quarter and expect to spend approximately $118 million of total CapEx in the remainder of 2008. That will leave around $158 million in CapEx to be spend relating to construction projects currently in hand.

At the end of the quarter, we had unrestricted cash and cash equivalents of almost $170 million. In addition, we had almost $150 million available under our Norwegian revolvers, and our total debt balance exceeded just over $900 million.

Now let's talk about the acquisition of DeepOcean and how it affected the quarterly numbers. Commencing May 16th through June 30th, we acquired in steps 99.07% of the shares of DeepOcean, and we're in the process of acquiring the balance.

The total acquisition cost was approximately $690 million including acquisition related fees, and we funded the acquisition with available cash, borrowings under an existing and new credit facilities assurance of $300 million of 6.5% convertible senior notes.

Since it was a step acquisition, we owned various percentages of DeepOcean throughout the quarter, but to put it simply, we owned an average of 68% of DeepOcean for the second half of the second quarter. So when you look at the income statement, we think that is consolidating a 100% of DeepOcean for half a quarter above the line or 50%, then eliminating an average non-controlling interest of 32% or really 16% below the line.

So, that's it for the half quarter, our Subseas services divisions which consist of DeepOcean and our five Subsea platform supply vessels, reported operating income of $2.9 million on revenue of $34.2 million.

Traditionally the second and third quarter, the peak season for Subsea in the North Sea, the low operating income was primarily due to the deferral of a Subsea decommissioning project in North Sea until Q3 and dry docking and crane installation on one of our owned vessels.

Subsea services division, second quarter 2008 revenues consisted of 97% outside the United States, including 77% from North Sea and 20% from Mexico. Also for the half quarter, our Trenching division, CTC Marine, reported an operating loss of $3 million on revenues of $15.5 million and was also effected by the deferral of the decommissioning project. As well as the deferrals in pipe laying, ploughing work, and a trenching project involving the Volantis to the third quarter.

Again, in the division there were the adverse effect of increased depreciation and amortization driven by purchase accounting. The Trenching division's second quarter revenues consisted of 100% outside the United States including 45% from Southeast Asia, and just over 30% from the Northsea. So as you can see, even though we've only owned DeepOcean and CTC Marine since the middle of May, the fact that the Subsea and Trenching segments are project driven, does landed of sales 30.46, it was a potential for lumpy quarters as projects shift from one quarter to another.

However, with the backlog that Joe had referred to of almost two years of revenue in the Subsea Entrenching divisions, we are looking forward to reaping the benefits of operating in the Subsea space going forward.

And with that I would like to now hand the call over for question and answers. Thank you.

Question-and-Answer-Session

Operator

(Operator Instructions). We will go first to Jud Bailey with Jefferies & Company.

Judson Bailey - Jefferies & Company, Inc.

Thank you. Good morning. Question first on your day rates. You would list out that the July average in comparison to what they did for the June quarter. Can you give a little color on the PSV segment and also the Subsea segment, they are down a little bit, but I imagine is that a mix issue or some vessels coming off for dry dock. Can you give us a little color around that please?

Geoff Jones

Yes Jud, on the Subsea segment on those SPSVs, you will see utilization was down in the second quarter. The vessels are supposed going through some dry dock. So it is a mix issue as the vessel comes back, it slightly adjusted downwards the average rate. Again on the PSVs that is a mix issue as well.

Judson Bailey - Jefferies & Company, Inc.

Okay, and next question is on the need of vessels being built in India. Joe, you mentioned you are going to upgrade for the last four, can you give us little more color as far as the cost involved and I presume you are looking for higher day rate potential or maybe quantify what that could be?

Joe Compofelice

Yes, I think for all four vessels $24 million, $25 million about $6 million each, when we acquired Active Subsea, our valuation was based on pricing all of those vessels at $28,000 a day for a 15% cash-on-cash internal rate of return, fully tax affected at 35%, which obviously is neither our book rate and four times higher than our cash rate.

We have never quoted anything there in terms of a time chart. I am not talking bear board. I am talking of time chart below 31,000 on those and for the new ones that we are upgrading; we are probably looking at $3,000 or $4,000 a day higher. So when you compare it to the $28,000 a day we started with, it is probably a point or two more internal rate of return. The big addition is the boat is wider and because boats are always longer than they are wide when you add width. You add a good percentage increase in cargo space, dead weight load and stability on the vessel which effects how far you might reach and how deep you could go from the cranes?

Judson Bailey - Jefferies & Company, Inc.

Okay. If you could also provide us a quick update on the first four vessels, what the delivery schedules looking like for the first four?

Geoff Jones

The first one is due November, fourth quarter

Judson Bailey - Jefferies & Company, Inc.

Okay.

Geoff Jones

I am hesitating a bit because I am looking over at my sidekick here. Then we have two in the third, then we have two around the first half of the year.

Judson Bailey - Jefferies & Company, Inc.

Okay. Then the fourth would be sometime in the second half then?

Geoff Jones

No. I think I would talk about the other four in the first half of 2010. As I said, the good news is we have all the steel. However, the bad news is we have held off on building the hulls, while we spend a couple of months with DeepOcean making the decision on a bigger better vessel. The vessel has become quite popular I understand one of our competitors DOF has just placed an order for the same vessels with the same shipyard in India.

Unidentified Analyst

Okay. I am sorry. I meant that the fourth vessel of the first four is that going to be a second half '09 delivery.

Geoff Jones

Yes.

Unidentified Analyst

Okay. I will turn it back to somebody else. Thanks.

Operator

We will take our next question from Lars Krogh Kistefos.

Lars Krogh - Kistefos

Good morning and congratulation on the DeepOcean acquisition. As Trico transforms from the pure OSV Company to modern engineering services based company, how would Trico specifically provide information and data points for analysts and investors to better understand and follow the key underlying different operating businesses?

Joe Compofelice

That is a very difficult question, Lars. We both know that, but it is a good question. I think the things to think about is you cannot look at it like the Towing and Supply because the concept of average day rate does not apply. The concept of day rate applies, but you might have two similar vessels, Edda Flora and the Edda Fauna has an example. One of them might have a very different ROV spread for example doing via these three private year contracts with Statoil that is for inspection, repair and maintains of their pipeline network in the North Sea.

So, if you have you are in a phase where you got the inspection and maintenance type ROVs on there. That day rate could be significantly less then the day rate. When there is repair that is called for, we will bring the vessel in, we have two huge module handling units, that is stood on the deck of the boat over the moon pool and that rate goes substantially higher well that is going on.

Then that is why it is hard to do it on an average day rate basis and you would never see any of our subsea and trenching competitors do that. I think the data points are utilization of all vessels in each not, there is really no way to break them out other than trenching and subsea services.

I think secondly is the depth of the backlog. I think that is going be an important data point. I think we will be disclosing operating income and EBITDA for each of the three profit centers. The thing they really watch from my point of view on each of CTC and DeepOcean is the percentage of EBITDA margin. In other words, no matter what type of work we are doing, are we getting the right prices for it? Have we bid it right? Which means anticipating your cost right.

The other thing is average length of contract. See Trico in the North Sea in towing and supply has several five-year contracts. Now, the contracts that DeepOcean for example has with Statoil, those are quite unusual for a subsea service company to have a five-year inspection, repair, and maintenance contract. It is more likely to be a little bit project oriented, i.e. a 9-month project for audit somewhere in the world. However, I would say those would be the four things.

Lars Krogh - Kistefos

Okay, thank you. I wanted just to know two addition questions. One relating to the share buyback program. At the current share price will you now be engaged in the buyback program?

Joe Compofelice

Our share buyback program continues to be authorized by our board. However, right now I would say our priority is delivering the company. We believe that the stock is a shocking bargain, is the language I would use. However, delivering the company I think is the best thing to do right now. We typically have a very conservative approach to our balance sheet and DeepOcean and CTC took us towards the edge of our comfort range, notwithstanding the fact we have almost $200 million in cash right now, I think the numbers are $170 million or something. However, I think our priority will be right now delevering.

Lars Krogh - Kistefos

Okay. Final question, how are you progressing with becoming a Non-Jones Act company? What is a current timeframe?

Joe Compofelice

Well, we have never given a timeframe, but we continue with our strategy. The Jones Act move is in part associated with reducing the volatility in earnings and stabilizing our cash flow. So in the second quarter as an example, we moved two boats out of the Gulf of Mexico spot market onto two-year term contracts direct with PEMEX. So we have four of our existing 12 vessels in the Gulf of Mexico that are likely candidates to go through those moves.

Now in order to do that, you have to line up the contract first, and then you go through the process; maybe there is a SOLAS qualification, maybe there is a mobilization period, and then it finally gets there. So the pacing item on any decision about plying coast-wide trade in the Gulf of Mexico is the function of getting the rest of our earning assets or as many as we can outside of those of that market into long international markets on term work which means to us more than a year, successfully, and that is the pacing item and that goes based on customer demand.

If we would have been talking, whereas we did talk on the call last quarter, we would not have been able to say at that time that two boats were definitely leaving the Gulf to go to PEMEX. Now we can say that and I am hoping in the third and fourth quarter we will have similar news to report.

Lars Krogh - Kistefos

Okay, thank you.

Operator

(Operator Instructions). We will go next to Randy Laufman, Imperial Capital.

Randy Laufman - Imperial Capital

Hi, good morning. Question just on the (inaudible) is that were mobilized during the quarter. I am wondering if you could try to and give us some details surrounding that and potentially quantify what the impact was? Was that, did that take up all of June or what was exact timing on that?

Joe Compofelice

Yes, first of all Randy, its four. We had -- This started at the beginning of the second quarter and for the prior 10 years, we had four anchor handlers in the spot market in the North Sea. Okay, all four of those had been mobilized to term contracts. One in Brazil, one in the Barents Sea, and two I say around the North Sea but on term work.

I did disclose, which is not typical for us but to give you a point of reference, the rate on the one in Brazil at $70,000 a day. So you all can check that, you look at our average spot rates and net vessels, which is twice what we got in the second quarter in the spot market in the North Sea.

The others are not quite as high but very, very good rates, substantially higher than the second quarter spot market average and in the third quarter, all four of those spot market vessels will not be in the spot market and we will be on term work and frankly through most of the fourth quarter that is true, our goal is to go all the way through the fourth quarter without any spot exposure. Does that give you some detail?

Randy Laufman - Imperial Capital

Sure can you just give us a little bit more detail on the timing like was it did they start to move in June?

Joe Compofelice

Yes, three in June so you are going to catch the full third quarter impact and one in the middle of July.

Randy Laufman - Imperial Capital

Okay great and then can you go in to a little bit more detail on the CTC trenching business? It was an operating loss. I know there were some decommissioning and delays but wondering if you could comment on the operating loss for that segment.

Joe Compofelice

Well, my first comment is it may not have really been an operating loss. There is an awful lot of noise in these numbers. An awful lot of noise and I do not want to use this the call for going through all of that accounting, but that business had a targeted EBITDA when we looked at the acquisition for the full year 2008. Obviously we do not disclose what that number is, but you just have to accept the fact that we were not dummies when we bought it and it had really, really good margins. I expect their actual margins for the year to be very close to that number.

Now you get part of the issue when you look at operating income Randy I will mention one accounting thing under purchase accounting is the step up in basis of the assets. You go through revaluation of contracts there are all kinds of stuff running around in there but CTC's contracts are very unlike DeepOcean's. CTC's contracts if they have a 60 day contract that is a long contract and that is the way those vessels are priced.

So you might have a vessel that is going to do four 30 day contracts. So if you did two of those in the first quarter none in the second, one in the third and none in the fourth. You could see where the lumpiness comes from. So there were already two significant project delays, one from the first half to the third quarter and one from the first half to the fourth quarter. So CTC is always going to be for an analyst like yourself or an investor the toughest one to stay on top of the numbers but we will do everything we can to help, short of giving guidance.

Randy Laufman - Imperial Capital

Okay that is helpful, thank you. Then you mentioned the step up in assets and the higher depreciation related to the acquisition. Can you give us an idea how much that was and what the go forward depreciation may look like?

Geoff Jones

Yes Randy I would say on an annual basis go forward depreciation for the whole company probably $25 million a quarter may be. The step up bumps it up about $2.5 million on month actually.

Randy Laufman - Imperial Capital

Okay great I will jump back in queue. Thanks a lot.

Operator

We will take our next question (inaudible)

Unidentified Analyst

Hi, gentlemen. My first question is, can you walk us through the order book for the competing vessels for the subsea market?

Joe Compofelice

I am not sure, Robert I completely understand the question. You give me order book in terms…

Unidentified Analyst

My question is for the active subsea vessels that you have in the order book. Can you walk me through the order book of competing vessels?

Joe Compofelice

I know I can give you when ours are delivered, but I am not sure what order book of competing means. Who else has ordered VS470s.

Unidentified Analyst

Yes, and similar vessels that other can use in that manner?

Joe Compofelice

Well I would say for a VS470, whether it is the original one or the Mk III, it is consistent with our strategy of middle of the stairway vessels. So I would say a very large percentage of the world's subsea fleet could do what a VS470 does. If you are acquiring because of what we do if we want a contract and getting out of in front of it, we are on the deep ocean Petrobras contract that originally had a VS470 in it. That vessel is coming in late and we have a front runner that happens to be called the (inaudible), down there doing the work.

Now, when you look at the two vessels you would say, they look very different. They do, I do not know that for sure, but if they did, the customer would only take it if it were able to perform the same functions. So, in this business, a vessel deliveries delay, that is the bad news. The good news is vessel availability is very tight, but the industry and we are one instant of this comes up with front-runners as we have done.

Unidentified Analyst

I want to ask to your point the vessels you are ordering are middle of the fairway vessels as you specifically stated. If you can just walk me through in the competitive universe what type of order book there is in those vessels, like we know for the specific PSV/OSV market, it would be very helpful to me.

Joe Compofelice

Believe me it is not because I do not know; I am still having trouble following the question, but I think now I under stand more. In the PSV, let's call it the towing and supply vessel business, there is about 700 on the low side, 750 on the high side, vessels on order, which represents a little over 20% potential increase in the fleet. While I am talking about that let me say that I do not know if any of our competitors, and certainly not us that are experiencing any "Excess supply" because of those deliveries. Demand is still stronger.

On the Subsea services side, multipurpose services side, excluding the very large ones, which are not in our space, and those would be saturation diving vessels and seismic vessels and heavy construction vessels. We have no position or future plans in that space. If we talk about generalized multipurpose subsea vessels, we are talking about the same percent increase in the number of vessels, and I think that number is between 20 and 30 on order, maybe a little bit above that. It is about the same percent increase in capacity as the towing and supply base. However, of course it comes off a much smaller installed base. Is that helpful?

Unidentified Analyst

Yes that is really exactly what I was trying to get at Joe. The second question I have for you is, I am just trying to match up based on the question that one of the earlier callers had on share buybacks, and your statements that at the current point you want to deliver the company more than buying back shares. Most of your debt is converts, and it is at incredibly low interest rates. So, I am just having a disconnect in understanding how buying back the low interest rate debt that you have is a better return to shareholder than buying back shares at the current level?

Joe Compofelice

I have a couple of comments. We are not talking about paying down the low cost converts, they are non-call five, non-call seven, we view that as in terms of intermediate term as almost permanent capital, particularly with the net stereo settlement feature of the first one and the absolute ability to take them out with shares on the Sec-1. We are talking about general liquidity, and so when you talk about what is the best return to shareholders, there is a short-term and a long-term dimension.

I refuse to get close to the line of a liquidity issue for long-term purposes. So while I would never argue with you that the return today to shareholders is better to buyback a share stock, I am not willing to get that close to the line giving the CapEx that we have going forward.

Unidentified Analyst

Thank you, Joe. I appreciate, you answering my questions.

Joe Compofelice

Thank you.

Operator

We will go next to Peter Winkler, Formula Capital

Peter Winkler - Formula Capital

Hey, thanks for taking the call. Given current valuations market conditions and the overall new transformation of the company, will it be surprising to see Trico's stock at the same level or lower this time next year?

Joe Compofelice

We are not going to forecast something like that. I could never. Let me tell you, you tell me and I talked to a lot of guys on this call all the time and so you will hear a familiar theme here. Somebody says why is the stock price so low. When we look at our stock price, there is no doubt because of vessel deliveries I believe and weak North Sea spot rates in towing and supply, we have been hammered a little bit more than others. However, we are talking about to see different peer groups we measure being down 21% and that is being down 25% and who knows maybe this morning it gets worst.

That is not materially out of line given our North Sea spot market exposure and the importance of vessel deliveries to a smaller company like Trico than other companies. However, I have to add on the list and often tell the people on this call; I think the answer to our current stock price is more on your part of the street. I do not know whether General Motors goes into bankruptcy, I do not know what is overall driving this thing, I do not know what the influence of credit crisis is, I do not know what the influence of the week dollar is. Yes I know very less of that, I know the stuff than you all do.

So the last thing I am going to do is to forecast anything about the stock price going forward up or down or anything close to that I will say we do have obviously, the management always has a little better insight into earnings and cash flow over what I call the relevant period. Now withstanding the pressure from Wall Street the relevant period for us is barely the next quarter. Particularly in our business so over the relevant period and I look at our earnings and cash flow expectations that I would say our stock is not nearly where it should be, but as to the influences that have caused that or what those influence might mean I am particularly unqualified to do that.

Peter Winkler - Formula Capital

Great thank you.

Operator

There are no further questions at this time. I will turn things back over to Mr. Jones for additional closing comments.

Geoff Jones

Okay thank you. As usual I would like to thank everyone for their participation in the call and their continued support for the company and we look forward to talking to you again. Thank you.

Operator

Thank you. Once again everyone that does conclude today's teleconference. We do appreciate your participation today. You may disconnect at this time.

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