Tidewater Inc. F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

| About: Tidewater, Inc. (TDW)
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Tidewater Inc. (NYSE:TDW) F2Q08 Earnings Call October 26, 2007 9:00 AM ET

Executives

Dean E. Taylor - Chairman, President and CEO

J. Keith Lousteau - CFO, EVP and Treasurer

Joseph M. Bennett - Sr. VP, Principal Accounting Officer and Chief IR Officer

Stephen W. Dick - EVP

Analysts

Ken Sill - Credit Suisse

Pierre Conner - Capital One Southcoast

Michael Ferra

Daniel Burke - Johnson Rice & Company

Operator

Good morning. My name is Darlene and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2008 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I will now turn the call over to Mr. Dean Taylor, Chairman, President and CEO of Tidewater Incorporated. Mr. Taylor, you may begin your conference.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Thank you, Darlene. Good morning, everyone, and welcome to Tidewater's fiscal 2008 second quarter earnings conference call. The period ending, September the 30th, 2007. I'm Dean Taylor, Tidewater's Chairman, President and CEO and I will be hosting the call this morning.

With me today are Keith Lousteau, our Executive Vice President and Chief Financial Officer, Jeff Platt, Principal Accounting Officer and Chief Investing Relations Officer, Steve Dick, Executive Vice President, in charge of Strategic Relationships, Shipyard Operations and Vessel Acquisitions and Dispositions. Bruce Lundstrom, our new Senior Vice President, General Counsel and Secretary, and Nancy Morovich, our Senior Vice President for Strategic Planning and Analysis.

We will follow our usual format this morning. I will start with some comments about our just released earnings results. Following my remarks I will turn the call over to Keith for detailed review of the numbers as well as our new build and vessel replacement program. I will then return with the discussion of our view of our markets and a review of our strategy. We will then open the call for questions. At this time, I will ask Keith to read our Safe Harbor statement and then we can get started.

J. Keith Lousteau – Chief Financial Officer, Executive Vice President and Treasurer

Thank you, Dean. Good morning, everyone. During today's conference call, Dean, I and other Tidewater management may make certain comments and statements which may be considered forward looking. I know that you understand that there are risk, 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 today during this conference call. Back to you Dean

Dean E. Taylor – Chairman, President and Chief Executive Officer

Thanks. Okay let’s begin. Earlier this morning Tidewater reported earnings for the September 30th 2007 quarter. Our 2008 second fiscal quarter of $86.5 million or $1.56 for fully diluted share. Consistent with our guidance issued on October the 16th. Revenues for the quarter increased 4.4% sequentially from the June quarter to $319 million.

Our overall fleet day rate in the September quarter of $10,064 increased 2.2% from the June quarter average. Day rate improvement, which increased steadily throughout the quarter, was driven primarily by a 6% increase from the June’s average. Our 220 international total supply, supply vessels for a component of our fleet. In our view this improvement reflects the willingness of international operators to bid up day rates and enter into more term contracts to ensure that they have the vessels to accomplish the growing offshore work programs.

This trend should be a positive for Tidewater’s outlook, because over 85% of our revenues come from international markets. On the other hand the financial results also reflect the quarter marked by an overall steady utilization rate of 77% or just over 87% if you exclude our 51 stack vessels. Essentially flat with last quarters, last year’s quarterly rate and down eight tenths of a percentage point from the June quarter. The reasons for the essentially flat utilization will be discussed later in the call.

Overall however, our outlook is one for further market growth and it is important that we continue to execute our long standing fleet renewal program, which included the delivery of four new vessels during the September quarter and also included the addition of nine more vessels, to our new construction order book. In order to keep Tidewater well positioned to capitalize on positive market trends. Again more about these developments later after I update you on two very unfortunate events – one that occurred during the quarter and one just three days ago.

On August 23rd a dedicated Tidewater employee lost his life on one of our newly acquired vessels mobilizing from the Middle East to West Africa, was lost rounding the southern tip of Africa. And on Tuesday of this week, two of our Tidewater crewmen lost their lives while attempting during a significant storm, to rescue over 80 individuals that had been forced to evacuate a jack-up rig, next to a platform in the Bay of Campeche, off of Mexico after an apparent gas leak on the platform. We are deeply saddened and disappointed by, what now are seven lost time accidents for the first seven months of this fiscal year, including five fatalities.

Though our total recordable incident rate or TRIR through the 24th of October this year 0.21 for 200,000 man hours is good and at present is the second best in our company’s history. And though it compares favorably to American industry in general, we consider it unsatisfactory. We cannot and will not be satisfied until we have eliminated fatalities and lifetime accident in our workplace. We advise you of these losses because we believe that only by making our shortcomings public, will we eliminate them. Our dedicated 8,000 plus employees and our many loyal customers deserve that we prevent recurrence of these types of incidents. Risks that of our workplace must be mitigated, in such a fashion to produce a safety performance that is expected of us and for which our companies stands. Another important issue, our internal SEPA investigation is famous for third party agents that assist Tidewater in procuring temporary importation permits for our vessels in Nigeria is ongoing.

We also recently announced that our audit committee has requested our Washington DC based special counsel to expand the SCPA review to include, our use of third party marketing and other agents, and emigration and customs practices in other countries. While maybe sometime before we offer further updates on either of these matters we can advise you though we continue to work alongside other industry participants, to seek an acceptable long term resolution of the Nigerian temporary importation permit issue. We have adopted alternative processes for obtaining Nigeria temporary importation permits that are functioning in the short term. A longer term industry solution is still important.

Let me now spend a few minutes talking about the effective regulatory and maintenance dry dockings from our quarterly results. As you have seen in this morning’s release our vessel revenues for the quarter, increased 1.5% over the prior quarter to $297.4 million. That gain reflects the negative impact of about $6 million of lost revenue, due to the timing of vessel dry dockings, especially for several of our large deep water vessels and a number of our other new vessels. The magnitude of the lost revenues and increased costs, associated with these dry dockings means that as more of these newer vessels populate our fleet, the pattern of our future quarterly earnings growth may change from our historic experience. The impacts of these dry dockings on our quarterly earnings is a dynamic that we will need to monitor as we go forward with our fleet renewal program.

With deep water vessel day rates in the $20,000 to $40,000 per day range, the loss of say 30 days of revenues is no longer an insignificant event, especially when contrasted to our older smaller vessels where earning day rates that were substantially lower. When one adds multiple deep water high revenue generating vessels to the deep water world, in any given quarter our, revenues will be noticeably impacted as well as our profitability.

Profitability is impacted because our operating posture in the dry docking were not totally eliminated and the repair and maintenance expense associated with these large vessels is greater than for our older, smaller and fully depreciated vessels. Dry dock timing is not a serious issue generally on a year-to-year basis. However on a quarter-to-quarter basis dry dockings can distort the underlying trends of Tidewater’s business. We will do our best to give you additional information to help you anticipate the impact dry dockings may have on future quarterly earnings.

With those initial comments let me turn the call over to Keith to review the financial numbers for the quarter who will provide a status update on our vessel new building program. Keith?

J. Keith Lousteau – Chief Financial Officer, Executive Vice President and Treasurer

Good morning. Once again the information we do not plan on filing our Form 10-Q today. The regulatory filing date for such a required filing is November the 9th. We fully expect to have the form filed plenty ahead of that time, but because of the nature of the ongoing inquiry, into the foreign corrupt practices in the Nigerian situation, we feel that that’s to delay the filing of the 10Q as long as possible, so that we can provide the best possible information whenever we do file it.

As we said we did issue a press release this morning. It is an expanded type of press release which has many of the tables revolving around the individual fleet status and the fleet economics for the quarter. As Dwayne mentioned we reported this morning earnings for the quarter fully diluted of $1.56. You might remember that June quarter, which would sound like it was rather ho hum which was a quarter which we reported $1.55 and going back to the same September quarter, a year ago when one fact is out the $0.31 gain in that, quarter from the sale of a substantial number of tugs at that point; that quarter would have also showed a net income on the bottom line of about $1.55. The significant difference between the September quarter that we are reporting today and the last quarter is $0.07 difference in the gain on sale while in the June quarter we had significantly higher sales. On an after tax basis, the difference between the two quarters was about $0.07 so the quarter on a stand alone basis is a little bit better than last quarter, a little bit better than what initially we looked at when you factor out the difference in the gain on sales. As we have said for a long time, we think the going rate of about $2 million to $2.5 million per quarter on vessel sales, is about the right number on recurring basis. Overall revenues we are reporting today were up about 4%, but the significant number as Dean mentioned was about a 1.5% rise in vessel revenues, because of the nature that dry docks were starting to play in our industry. When I get through with my comments here and I will be a little briefer than normal, I am going to ask Joe Bennett to explain to everyone a little bit about the dry docking cycle, how sometimes these things can get aggregated into a quarter, how sometimes they can slide from quarter to quarter.

And more importantly we historically have always looked at dry docks as an expense item, one to be considered from quarter to quarter but it is certainly evolving now, as Dean is mentioning, with Deepwater vessels and some of them generating revenues up to $50,000 and $55,000 per day. Dry dockings are certainly starting to have an effect on revenue from quarter to quarter.

The tax rate for the quarter, it came in at about 18% that’s because we have made an overall adjustment as to what we anticipate the annual rate to be. We believe now that the annual rate, the taxation rate for Tidewater should end the year at about 18.5%. In the first quarter we started with the belief that, that might be about 19%. The adjustment down to 18.5% on annual basis resulted in the quarter going down to 18%. When one looks at the numbers and looks at the significance of our international operations in relationship to the domestic operations, one can see where the tax rate would be going down a little bit as international earnings are generally subjected to a lower tax rate in the domestic earnings, which attacks that full 35%.

One of the things I would like everybody to look at when the call is over, look at the number of average shares outstanding for the quarter, the number has fallen. We did have an active buy back program during the quarter. Dean will mention some numbers later on. We ended the quarter with about 54.9 million shares outstanding. We would think a fully diluted number for the next quarter, before any additional buy backs would fall and probably in about the $55.2 million, range as opposed to the $55.5 million used in this quarter. So the program was active and we bought back about a million shares.

Looking at cost numbers a little bit for the quarter, you see that cost came in at $142 million. In this call a quarter ago we gave guidance we thought the number would be between $136 million and $140 million. We had a little bit of excess cost unanticipated, some emergency dry docks. We had a couple of items in other vessel costs that we don’t think will be repeated into the future and insurance number unfortunately. Although the insurance number for the quarter does not appear to be unusually large, because of the incidents that Dean has talked about. The insurance number did not; enjoy the benefits of some credits that we would have anticipated, from an improving safety record from quarter to quarter. We do maintain substantial self deductibles within our risk programs and those types of incidents do affect the bottom-line and create a little bit of volatility.

More importantly looking-forward you will hear that this is a quarter that we anticipate taking delivery of about 8 more vessels. Those vessels during the quarter are not expected to generate an awful lot of revenue. In most cases we do have more revenue to the new job. We would think new vessels in this quarter are going to add to our expenses about $3 million to $4 million; and this is a quarter where we think dry docking expense will be up a little bit again. In fact we think it will be about $2 million higher than last quarter. Although we think the revenue affect this quarter will be less dramatic than last quarter, but speaking in terms of cost, I would guide that $142 million cost number of last quarter, when you take into account that the $3 million to $5 million of additional cost on the new fleet and perhaps $2 million of dry dockings. I feel comfortable saying that we estimate the cost for the quarter will be in the $147 million to a $149 million range.

Dean mentioned a $6 million number as being the revenue effect of dry docks last quarter. That number, dry docks themselves cost us much more than that. The $6 million reduction in revenue was the net difference in revenue loss from the June quarter to the September quarter, for the additional type of dry dockings that were being done and I think our current estimate is, even though we will do more expense dry dockings in this December quarter, as I mentioned perhaps about $2 million more, we think the effect on revenue will be less dramatic than it was in September. In fact we think we should have a net revenue pick up of $3 million to $4 million in the December quarter, from the difference in dry docking and the type of vessels that are being dry docked.

Looking at some of the individual classes and their results and this is where I would like to pay particular attention because, we think we did have some very positive revenue items that developed during the quarter, even though they were obviously offset by the negative dry docking numbers that resulted in a revenue growth of only overall 1.5%. When you look at the domestic deep water fleet we did add one vessel late in the quarter, we took delivery of our eighth domestic deep water vessel going optimistic a little bit we are reporting an average day rate for the September quarter of $23,382. The previous quarter we were almost dead on at $23,432 and today we still, we were averaging about $22000 in that class as we sit here today.

In the 9, in the September quarter we had a utilization factor rated at 95%, which was actually up from the 91% we reported in the June quarter. Activity in the domestic deep water for those 8 vessels remains quite strong. but I am going to have to guide anyone who is trying to run a model that 3 of those 8 vessels are scheduled for dry dockings in the December quarter so we believe even though utilization for that fleet today maybe running at 94%, 95%, we think the average for the December quarter will probably come in something around 75%, because of those 3 dry dockings.

In the supply tooling, supply division where we operated 35 vessels domestically in the last quarter the average day rates were basically unchanged from the previous quarter. We averaged $11,856. We currently are averaging a number that is less than that. People would have to tell you that the inland or the shallow water, the shelf activity on the Gulf of Mexico was affected negatively last quarter. Currently the day rate is averaging around $11,200. Our utilization in that segment was down last quarter to 56.6% from 61% in the June quarter and today we are probably averaging about 50% utilization in regard to that activity.

Many of the independent drillers have evidently, in September and into early October have taken the position that its hurricane season still and putting rigs and boats on charter taken them off, with hurricane scares and going back where something that was worth delaying a few months. So that activity generated some reviews to revenue last quarter.

Internationally, and this is where the dry dock story runs through the revenue line, we still operate about 30 deep water vessels. The average day rate the last quarter fell from the previous quarter at the rate of $23,175 down to $22,423. Those significant fall off in day rates in the real world or in the marketing world, the fall off was due to 3 our biggest anchor handlers being off charted due to dry docks during the quarter. Today we are averaging a day rate that’s right back up in the $23,500 range. Utilization in that segment fell last quarter to 91.8% from the previous quarter of 96.3%. So this is what we were talking about when just in one class you start losing 5% utilization of vessels that are averaging $23,000 or $24000 a day, over 30 vessels, over 90 days. Serious deterioration of revenue. All of the vessels or the bigger vessels in that class are now back, they are fully operational. In addition to getting the day rate back up to the historical rates, we believe for this quarter we are going to average 93% to 94% utilization in that class.

Internationally and we think this is the real, the most positive story from the quarter, the 221 supply, and tolling supply vessels that we operate internationally, we saw an almost, we saw a slightly in excess of $600 or 6% day rate average increase up to $10,080. The previous quarter we had announced a day rate average of $90,478 so nice $600 gain. Utilization, even though this class obviously participates quite strongly in any dry docks just because of the number of vessels, utilization for the quarter came in right at 76.9% which was almost a perfect match to the previous quarter 77.4%. The day rates have increased even slightly higher than that $600 increase from last quarter. Today we would tell you that we think we are averaging about $10,300 in this class and even though we are going to have a significant number of dry docks in that class, we would think that utilization for the quarter should come in at about 76%. Those are the classes that we generally highlight in our initial comments.

Going on a little further, obviously our balance sheet continues to remain quite strong. We do have 2 or 3 capitalized leases on our books now that international leases that we undertook as ways of getting owners to sell us some equipment so we are carrying a total debt number in our books now, we are 353 as opposed to the historical $300 million, you will see in your notes we have had outstanding. But even using that number our gross debt to total equity number is about a 15.5% ratio, when you take into account the amount of cash we have on a net basis, our debt is less than 2%.

We currently and I think you will hear some more comments on this, we currently have 50 vessels under construction, I think Steve will go through a little bit later on the details of what they are. They represent a total value of $851 million; $603 million is yet to be expended, as we said there is a table in the press release that indicates we have 8 vessels scheduled for delivery in the balance of this fiscal year. We believe that our cash flows in paying off this $600 million are yet to be paid unto $ 851 million contracted. It will be something in line with the balance of this fiscal year. We have commitments of about $156 million. The 09 fiscal year our commitments are about $267 million and then the 2010 year and forward about $180 million at that point. So these money amounts that are easily managed.

We said we did buy some shares back during the quarter. Dean will give you a little bit more statistics on that and one final and positive item that you may not have seen yet, but we do have an ongoing tax case and tax controversy between Tidewater and the IRS. Last week, late last week the district court, the federal district court for the eastern district of Louisiana ruled that a summary judgment in favor of Tidewater.

A total indication of the Tidewater position is too early to determine exactly where the internal revenue service is going to go on their appeal. We would expect that there probably will be one. But it’s an item that would free up approximately $30 million of equity back to the books of Tidewater’s position were ultimately maintained as we expect it to be. And would have a slight effect on tax rates as we go forward perhaps to the tune of $0.01 or $0.02 per share on a go-forward basis. So obviously good news in the first round of getting that one decided. And once again now since we are talking about dry dockings both from the expense point of view and the effect it is starting to have on the revenue, we have asked Joe to prepare a few comments here today as to the timing and how they get bunched up. Joe you have got some comments on dry docking.

Joseph M. Bennett – Senior Vice President, Principal Accounting Officer and Chief Investor Relations Officer

Yes thanks Keith. I just wanted to mention we put out a free release a week or so ago. I had quite a few questions in regards to dry dockings and why aren’t they more predictable. So I just wanted to cover a couple of points and try to put it straight in people’s minds why the timing is so uncertain for dry dockings. First off, most of our vessels are under regulatory requirements to do two dry dockings in a 5 year period. There is flexibility in the timing of those dry dockings and that we can do the first dry docking if we care to after two years and then the next one would need to do for 3 more years or vice versa. 3years to begin with and then 2 years later or anything in between. So obviously that minimum year provides us quite a bit of flexibility. With that flexibility we take into consideration customer demands, we take into consideration ship yard availability. Things like that that cause the, if you want to call scheduled dry dockings to move around quite a bit even within the quarter.

So predicting I get questions often times on dry dockings for the next year and of course we have our thoughts as to which ones we will do, which ones we have to do with drop dead dates etc. But it does provide us a lot of flexibility to do what is right under the circumstances as we go through a quarter or any given period. On top of that I would just like to remind everybody that what our accounting policy is. Keith talked about an increase, an expected increase in dry docking expense during this coming December quarter, that’s only kind of half of the store. Our accounting policies during the original depreciable life of our assets in most cases for us, its 25 years all dry docks are expensed as incurred. After that original depreciable life is finished then those dry dockings because we are extending the lives of those assets are capitalized and depreciated over a two and a half year period in concert with that twice in five year period. So we could have any given quarter with higher or lower dry docking expense or capitalized dry dockings. So we, as Keith said we will try to give you more color as we move through quarters in regards to all of that. That’s all the comments I had in regards to that. And I will turn it back to Dean.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Okay Keith and Joe thank you very much. Before we move to the Q & A session, Steve why don’t you tell everyone, what the breakdown is of our 50 vessels either on order or under construction.

Stephen W. Dick – Executive Vice President

Sure. We continue to kind of canvass the world on where we can get the most bank for our buck and the type of equipment that we are looking for. As it turns out today, we have got 50 vessels on order at various places and that would be China that would be Indonesia/Singapore, India, Brazil and of course the U.S. So its, the challenge today is to get the pricing that you want and also the delivery of the equipment and that’s getting to be more of a challenge everyday but I think we are managing that okay and we are certainly getting some interesting pricing from around the world. So as it turns out our breakdown of the vessels that we have got on order is the Deepwater vessels. The anchor handlers we have got 6 that are on order, 11 PSVs for the replacement kind of the heart of the Tidewater’s existing equipment, the anchor handlers 4000 to 8000 horsepower, we have got 16 of those on order. And medium size PSV’s 8 of those and the rest is made up of some tugs that we got on order that have assignments, have contracts, we will going to those contracts and also some passenger carrying vessels for various of our clients. And as Keith said that when you put that altogether that’s about $850 million of commitment that we have and we are still looking at it, at those things, still looking at opportunistically being able to acquire equipment for specific assignments as they come along and I think we are kind of managing that okay. That’s about where we are at the moment. Dean?

Dean E. Taylor – Chairman, President and Chief Executive Officer

Okay, Steve, thank you very much. Just a few more comments about operations before we get into Q&A session. As I mentioned in my opening remarks the 6% day rate increase over the June quarter achieved by our International Towing supply and Straight supply vessels, is a reflection of how strong off shore support vessels, markets are globally. The importance of that segment of Tidewater’s fleet and the September quarter financial results should not be under estimated, as it helped offset the slight decrease in sequential fleet utilization in the flat slightly lower day rate comparisons for a number of our other vessel classes as Keith pointed out, which were also impacted to a certain extent by the dry dockings in the quarter.

Recently oil and gas companies offered $2.9 billion in high bids to acquire A grids in the Gulf of Mexico. These A grids were located primarily in the deep water and mid depth water regions of the Central Gulf. That nevertheless reflects growing confidence by our customers on the future of offshore markets globally. At the present time the offshore drilling industry has 68 new floaters and 76 jack up drilling rigs under construction, all of which will be needed by the Petroleum companies to drill their growing backlogs of worldwide leases and acreage, both here and abroad and in both deep and shallow water. All these rigs will require vessels to support their work. New offshore technology developments continue to extend to the frontiers of operations for oil and gas companies; to help to lower their finding and development costs.

In the energy market increasingly constrained in meeting its oil production growth targets, every possible resource will need to be exploited. With our fleet renewal program we are increasing our fleet flexibility to serve all of the growing offshore markets, regardless of water depth. There seem to be few factors at work that will alter the macro trends remarkably in the foreseeable future. Therefore we will continue to renew and reposition our worldwide fleet as necessary to meet the market’s demands.

Over the past year Tidewater’s operations and marketing personnel have done a superb job in adjusting our presence in the Gulf of Mexico market, appropriately and repositioning vessels into more vibrant international markets. Once the largest and most important offshore market, the Gulf of Mexico has rapidly evolved into nearly another regional offshore market. Organizationally Tidewater is also adapted by adding additional international responsibilities. The management’s team members who only a few years ago were totally dedicated to the Gulf of Mexico operations. We will continue to size our fleet and organization to meet the shifting markets within the Gulf although we will retain the ability to reposition assets into the Gulf if and when it should strengthen.

Operating is an almost totally international offshore vessel companies not without its challenges. Making sure that we have a robust compliance program that encompasses both the laws of the United States, as well as those of every local country in which we operate is a key objective. Increasing training and development for our internationally based workforce will be a key part of our efforts. As we take aggressive steps to advance our international presence and our international management team, we also are working hard to find and build the right mix of new vessels to compete successfully and to satisfy our customers’ needs. Today as Steve told you we have 50 vessels under construction as part of our fleet renewal program that has seen us commit $2.4 billion since the year 2000, to either build or buy 179 new vessels. We continue to search for additional vessels to add to our fleet renewal program and are committed to spending annually, at least $300 million to $500 million for the next few years for vessels, assuming we can find them at the right price and of the right quality.

New vessels represent only one of our corporate developing goals. We continue to search for ways to significantly expand our fleet through an acquisition. However as we have said before we will pursue the right acquisition at the right time and only when we believe it can be done at the right price. In the meantime as Keith mentioned we spent about $61 million in the quarter buying 950,000 of our shares. This leaves us with roughly $139 million of our $200 million share repurchase authorization available, to take advantage of future market opportunities to further reduce our share count as an additional way to enhance shareholder value, besides paying our $0.60 per share annual dividend. We will continue to strive to deliver outstanding returns to our shareholders while renewing our fleet’s earning capacity and fulfilling the operation and geographic needs of our customers.

We are also dedicated to providing the safest workplace possible, for our 8000 employees. As we do all of this, we do not lose site of our obligation to be good stewards of the capital, our shareholders have entrusted to us. With that, Darlene, let's open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Ken Sill.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Hi Ken.

Ken Sill – Credit Suisse

Good morning guys.

Dean E. Taylor – Chairman, President and Chief Executive Officer

How are you doing?

Ken Sill – Credit Suisse

Doing well, enjoying the break in the weather finally. I don’t think anybody in Houston wants to be at work today.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Let’s get off the phone!

Ken Sill – Credit Suisse

Let’s get to it. So I was very interested to hear your comment of the increasing number of term and actually extended term contracts internationally. I guess there is good and bad with that. But the good news is it gives you more visibility. The bad is that actually probably going to start slowing down the rate of increase internationally on the AHTS’s? As you get more on term I guess or where we stand on that process is really the other question.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Well we still have we think a good mix Ken with the 50-50 that will mean 50% of our vessels long-term, 50% on spot or shorter term. So we think there is still plenty of room for day rate increases as we termed some of these vessels up and you have seen I think you, yourself have been somewhat surprised in our ability to continue to raise rates through time, and we, I am not at the point where I feel like day rates are close to topping off.

Ken Sill – Credit Suisse

Okay and then you said there was the terms were getting longer could you discuss what the term contract’s duration is now versus where they were, say a year ago?

Dean E. Taylor – Chairman, President and Chief Executive Officer

Well it used to be, I don’t know, I cant go back and say whether it was a year ago or just; but it used to be term contracts internationally were 1 to 2 years and with an outlier of maybe 3 to 4 years but now most of the operators are looking at 2 to 3 year contracts and some of the outliers might be up as long as 5 years. So to us that indicates that the operators continue to feel like they are going to be busy and they feel like they would like to lock in rates for longer periods of time. Now that may or may not be other company’s experience but that’s been ours.

Ken Sill – Credit Suisse

And just a follow up question on that. Where are these contracts being signed relative to spot rates? Are you getting a little bit of a discount or are there silent term contracts in your current spot?

Dean E. Taylor – Chairman, President and Chief Executive Officer

I mean some we have no discounts, some we don’t want to tie up vessels for longer term, some in South America for instance; we would expect to get a rate better than spot rates. It just depends on with roughly 300 vessels internationally, I mean it just depends on the opportunity time but each one we evaluate on its own merits and we don’t necessarily take a position that want to give a discount here for such and such term or they are a premium force, I have a premium for it. For spot we try to evaluate each on their own merits.

Ken Sill – Credit Suisse

Okay. Thank you very much.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Hey Ken. Good talking to you.

Operator

Your next question comes from the line of Pierre Conner.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Hi Pierre.

Pierre Conner – Capital One Southcoast Inc.

Gentlemen. Dean first my sympathies to you and the Tidewater family in the losses recently.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Thank you very much Pierre.

Pierre Conner – Capital One Southcoast

First on the market team, the 220 some international Toll Tow supply vessels rate increases are very impressive so I don’t want to get into that a little bit more. Can you give us some metrics on the number of vessels in that segment that did roll up? What percent of that class reprised in the quarter that allowed you get that kind of an increase, roughly maybe if not exact?

Dean E. Taylor – Chairman, President and Chief Executive Officer

You got everybody in here shaking their head. I don’t think we track it by that metric, we--

Pierre Conner – Capital One Southcoast

Between somewhat on Ken’s question being I guess you got two trends going, you got some markets and I am going to ask you about these markets in a second, where you got some nice increases in the leading spot rates, it occurs you are getting more term. I am trying to carry this into subsequent quarters obviously. If the entire fleet was able to get new pricing during the quarter then I have got to see some continued strength. This is some percentage of the fleet that reprised; the remaining fleet has that opportunity as well?

Dean E. Taylor – Chairman, President and Chief Executive Officer

Jeff is off in Angola on an assignment but Keith you want to take a standby, I think Pierre you have to look at just what’s happened since the end of the quarter…

Pierre Conner – Capital One Southcoast

Yes.

Dean E. Taylor – Chairman, President and Chief Executive Officer

What figures Keith gave you just now to show you things aren’t coming off. Keith you want to…

J. Keith Lousteau – Executive Vice President and Chief Financial Officer

We run monthly statistics, obviously when we get our monthly reports Pierre and it was interesting that every month the day rate was up from the previous month so it was, its hard to answer directly your original question. We, for a long time we have said we thought our international kind of average contract for this class was between year and a quarter and a year and a half and that would have indicated 15% to 20% of the fleet turning over every quarter. But we saw day rate increases in every month and the month of September was the greatest of the three to come to this number, and as we said September obviously was much higher than the average for the quarter. So, to answer your question it is somewhat speculative, perhaps 25%, 30%, 35% of the international fleet turned over. We did add I think a couple of vessels, couple of the new deliveries went in to this class that probably helped a little bit, those were some vessels that probably were $18,000 to $20,000 range but say 20%, 25% of the class probably turned it over during that quarter…

Joseph M. Bennett – Senior Vice President, Principal Accounting Officer and Chief Investor Relations Officer

Yes, little more color on it too is that if you were to look at the 220 boats in there, people think of those as being our older class of boats and they’re probably correct. The split out in those numbers is about 180 of those are older boats and 40 are new boats and each of those obviously have their own dynamics as they turn over with each of them getting different rates of increases as they flip over. So that’s why it’s a little more complicated, we obviously know exactly what each one of our vessels are doing and which ones are rolling over but it’s a real mix of activity within that big class.

Pierre Conner – Capital One Southcoast

Okay that commentary is helped for us to think about what continued opportunities there are and that’s why I was getting at it. so we go down in some of the other markets spending, without I suppose disclosing too much where your competitors may want to chase in these markets but I think public debt out there in ODS indicates that, it looks like an Asia Pacific region. Just within the last two months some nice increases in leading day rates are jumping and where else you got about thinking that put 50 vessels sort of there, first correct me if I am wrong on that and then, is there something going on, is that one of your stronger regions or would you point to something else stronger?

Dean E. Taylor – Chairman, President and Chief Executive Officer

What I would rather do is point to the weaker regions, its not many and I think we have said before that of course Gulf of Mexico is experiencing one it’s doldrums periods but I don’t know that, that’s permanent, pronounced dead on more than one occasion and I think you look to your politically sort of the macro picture. I think that the Gulf club will probably come back and I just returned along with some of my cohorts here from an industry conference and I think just the macro picture is going to imply more and more pressure for our company to open up drilling off both coasts of our country. That’s going to take a while probably yet but I think the Gulf of Mexico has a rule of law, the rules are well defined and pretty well followed and I think that that market will actually get better but it’s going to be a question of time.

Another market that’s not very good for us in terms of relativity is the Middle East, except India. India is a very fine market but the Middle East tends to have more local competition, hence they have a lot of old boats hence they have a lot of relationship type contracts where some guy is the brother-in-law of the Sheikh or something like that. And so you don’t get a really good shot at the work but you take away those two exceptions, you can put your finger at anywhere in the world and every place else market place is pretty dog on good.

Pierre Conner – Capital One Southcoast

So equally strong among the remaining markets?

Dean E. Taylor – Chairman, President and Chief Executive Officer

Yes.

Pierre Conner – Capital One Southcoast

My last question may be more for Steven. It relates to the incremental vessels you added to the order book during the quarter. Were any of those ones that already had keels laid i.e. did you pick it up somebody had started under speculative or other term or this all new stuff that you added to the order book? And obviously the follow on, is there still opportunity for some of those that are--

Stephen W. Dick – Executive Vice President

These were, some of them were vessels that were slated to be built but in the future and we stepped into other peoples’ shoes to take over the construction. The only other ones were some opportunistic buys where, you buy a vessel at a time to fulfill a requirement that the, but the shipyard orders were all orders that were in place and we slipped into to take over the construction.

Pierre Conner – Capital One Southcoast

Okay so actually that wasn’t my question say about having keel laid but they are actually slots already that you have picked up?

Stephen W. Dick – Executive Vice President

Yes.

Pierre Conner – Capital One Southcoast

And then is that the predominant opportunity for you going forward is if I look at this order book and I can calculate numbers and 500 ultimately in 2011. Is that your shopping list out of that future order book?

Stephen W. Dick – Executive Vice President

I think it depends on the opportunities. Some of them we were, they were vessels that we had specked out and then had shipyards had quotations on and we have awarded them and we have not so it’s a mixture but the ones in the last quarter were stepping in someone else’s slot.

Pierre Conner – Capital One Southcoast

Excellent. Gentlemen you have been kind. Thank you. I will turn it back.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Thanks Pierre. Good talking to you. Thanks for your sympathy as well.

Operator

The next question comes from the line of Michael Ferra [ph].

Dean E. Taylor – Chairman, President and Chief Executive Officer

Good morning.

Michael Ferra

Good morning.

Dean E. Taylor – Chairman, President and Chief Executive Officer

How are you?

Michael Ferra

Not too bad. How are you? I am going to touch just quickly on the term contract issue on the international side. We have seen term shrink pretty dramatically for international jack ups over the last few months and it very much trended toward spot assets again. And I just want to ask, do you not expect to see any of that effects spill over into the OSC side?

Dean E. Taylor – Chairman, President and Chief Executive Officer

I am not paying as much attention to the jack up companies as probably as you are but we are seeing it, we are not seeing a reduction in terms. And to the contrary we track every opportunity almost daily and we are not seeing movements towards spot orders internationally for our equipment, certainly in the domestic market that’s the trend. But we are not seeing that internationally and I don’t know, I think the big, there is a couple of relatively big questions and one of course is when all the new rigs come into the market will all of the old rigs keep working? And I think that’s the bigger question, probably then whether we tend to have more spot orders and term orders. The bigger question I think is do all the old rigs work? If they do then that’s one scenario and if they don’t that’s certainly another one.

Michael Ferra

Okay. And then also I wanted to ask about incremental opportunities to move more OSVs out of the Gulf of Mexico shelf. How many more do you think you could reasonably take out? How many more would you want to take out?

Dean E. Taylor – Chairman, President and Chief Executive Officer

We don’t have a goal per se. Again we, our communications internally are pretty good and what we do and of course we are in a AVA program and we are all graded by, our bonuses are all paid based on AVA creation. So that tends to eliminate parochialism in terms of hoarding of assets. The guys are very generous, one with the other in terms of moving equipment to better opportunities. So the poor fellow who is managing our Gulf of Mexico business in the last year, he has probably lost 20 pieces of equipment and he’s gladly given them up because he knows that ultimately it’s better for the company. And so, do we have a goal? The goal is to increase AVA an profitability of our company and as an opportunity it develops internationally we will look at it and see whether it makes more sense to keep a vessel in the Gulf or not. I am, so I don’t think we have a goal, our goal is profitability and EVA.

Michael Ferra

Okay and all the opportunities though as prevalent as they were say, 6 months ago? Do you still feel you have number of opportunities to bid equipment out there?

Dean E. Taylor – Chairman, President and Chief Executive Officer

We do, we sure do.

Michael Ferra

Okay that’s good. And then also wanted to jump back to the Middle East to real quickly where you talked about kind of some discounts, kind of some pricing you get out there, we are probably going to see more recount growth there, than any other region over the next 18 months or so. So do you expect pricing out there to sought of eventually meet up to other international standards or at least get closer over the next year or so?

Dean E. Taylor – Chairman, President and Chief Executive Officer

Absolutely. Should get closer and also I think that because of safety concerns the Middle East will eventually become more like other markets simply because they are not going to tolerate or really maintain the equipment and fully operate the equipment as they have in the past for long time.

You know for a long time I mean Saudi Aramco was not active off shore at all. And one of the things that I think lies there the claim that they can increase production almost at the turn of a valve. They’ve charted all of these jack ups for off shore work and seems to me that’s’ an indication that they can’t ramp up production as much as they had indicated that they could.

But they are going to be much more demanding I think in terms of what equipments they will accept into their market place and we see more and more international operators there in the Middle East as well and they are pretty demanding as to what kind of equipment they are allowed to serve them. So, on the whole I think that the pricing will be approximate better international pricing as we move forward.

Michael Ferra

Okay that’s very helpful. And one last one if I can, rates from the Gulf of Mexico Deepwater, I know you guys don’t have many vessels out there but I saw they were kind of flattish this quarter and I think if I heard correctly from Keith that they are sort of down about 1200 or so now versus the average. I just want to get a sensible, what was going on there?

J. Keith Lousteau – Chief Financial Officer, Executive Vice President and Treasurer

The nature in the mix of vessels, at one point we had an anchor handler that was in there, the Coral Thorn, which is now operating out of Trinidad so you move out a vessel that on a spot they could have earned $50,000 to $75,000. And the addition of the new vessel that came out went on a nice turn charter job that was I think few dollars less than the average 2 so perhaps that did it. But no even though I did give you a number that was about $1200 less than the average for last quarter, that's probably the mixture of fog work versus to term work that we have there. I don't think there's any meaningful movement in the day rates in the Deepwater Gulf of Mexico. Just a quirk, of some calculations I’m afraid.

Dean E. Taylor – Chairman, President and Chief Executive Officer

And also a result of some vessels being on fire. And when they are on fire day rate averages down.

Michael Ferra

Okay but you said the leading edge is sort of flattish in the Deepwater Gulf of Mexico?

Joseph M. Bennett – Senior Vice President, Principal Accounting Officer and Chief Investor Relations Officer

For us it is.

Michael Ferra

Great. Thank you very much, guys.

Dean E. Taylor – Chairman, President and Chief Executive Officer

I'm not sure that that, I'm not sure that your company that Deepwater rates in the gulf are flattish. I'm not sure that's right. I think for the time being, that may be right but I'm not sure that's necessarily what the future market holds.

Michael Ferra

Okay.

Dean E. Taylor – Chairman, President and Chief Executive Officer

I hope I'm sufficiently confusing.

Michael Ferra

All right.

Dean E. Taylor – Chairman, President and Chief Executive Officer

I don't think, I don't think rates necessarily have left the Gulf of Mexico, if that makes any more sense.

Michael Ferra

It does. Fair enough. Thank you, sir.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Daniel Burke.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Hi, Daniel.

Daniel Burke – Johnson Rice & Company

Good morning all. Thank you for the little bit of additional clarity in understanding how the 220 international Tow supply boats, in terms of categorization. I was curious, if you look at the 180 older vessels and you look at the 40 newer vessels within that class, is the trajectory of rate improvement in each vessel set similar or are the older vessels seeing more static rate and it's really more, you can back into this, but more a function of mix shift that’s driving that rate through right now?

Dean E. Taylor – Chairman, President and Chief Executive Officer

You know, Daniel, in our presentations, we have a slide that shows the rate of progression of growth for the old vessels and the new vessels broken out. and if you look, certainly the rate of progression of rates for the older vessels is not as steep as that of the newer vessels. So I think that’s probably about as good a way an answer to your question as I can give you. It’s just, the slope of that line certainly made for the older vessels, is not as deep for the newer vessels.

Daniel Burke – Johnson Rice & Company

Okay. And then one for Keith. Keith I think I asked I asked this question last quarter, but checking the OpEx guidance at 147 or 149; if you were to look ahead another quarter, its your final quarter the fiscal year, maybe the dry dock expense line wont be as impressive at that point. I guess what I’m trying to ask you is, you think that 147 or 149 is a number you’ll hold for the next two quarters or are we going to continue to see it creep on a sequential quarter basis?

J. Keith Lousteau – Chief Financial Officer, Executive Vice President and Treasurer

I would tell you that it was something we paid a lot attention to in the last few days and we’ve beaten up on our field to give us some dry docking numbers for the quarter. I would tell you that today, I would actually take that number perhaps down a couple of million and tell you, my range today for the fourth quarter would be 145 to 147; just because w anticipate dry dockings in the fourth quarter to be noticeably a meaningful less than they are scheduled for the December quarter now. So on the other hand, we’ll have 8 new vessels that won’t be in the full time this quarter, but they will be fully operation in the next quarter. but operating cost, we would say 145 to 147 as we view the fourth quarter right now.

Daniel Burke – Johnson Rice & Company

So the fourth quarter you get the full year benefit, big chunk asset coming in and also across the fleet you’ll be looking at lower level of dry dock? Is your current impression--

J. Keith Lousteau – Chief Financial Officer, Executive Vice President and Treasurer

In the fourth quarter as now but you did. A lower level of expense dry dock.

Daniel Burke – Johnson Rice & Company

Okay. Alright I understand the difference.

J. Keith Lousteau – Chief Financial Officer, Executive Vice President and Treasurer

Okay.

Daniel Burke – Johnson Rice & Company

And then Dean one last question. Selling older assets obviously is part of the Tidewater model, but given that the use of your EBA model and the fact that you’ve had the ability to deploy a lot more assets to your customer base internationally through your bill deliveries recently. As well as the vessels coming out of the Gulf of Mexico, is there any opportunity to maybe increase the pace of sale on some of your older assets?

Dean E. Taylor – Chairman, President and Chief Executive Officer

Steve, I’m not going to dodge your question, I’m not [inaudible] to Steve but I would say we have, we have one guy, that’s all he does is worried about disposable assets. Of course we tie one hand behind his back, when we say you cant sell to the competitor unless we feel like the competitor is not really a competitor and that would be in competitors competing in a market that we really are not much interested in. I would say that sales have tended to, for whatever reason in the last couple of months, to flow down a little bit. But it varies. It’s crazy. Sometimes things will go quiet, the phone wont ring for 2 weeks and then next week you’ll sell 7 vessels. And it’s hard to say, we like to do it in an orderly manner and we like to, again make sure that these things at a concurrent point aren’t going to come back and haunt us in our business. But it’s hard to say Daniel how it’s going to play out in nay one particular quarter. As of right now we have a couple of things in the works but, last as I recall this time I think all of a sudden toward the end of the year, all of a sudden all kinds of things started happening. So it’s just hard to say.

Daniel Burke – Johnson Rice & Company

Fair enough. Thanks for the comment.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Thanks Daniel.

Operator

And there are no questions at this time.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Okay while I thank everyone for your participation in our today and wish everyone the best. Thank you for your interest in our company. Thanks.

Operator

This concludes today’s conference call. You may now disconnect.

Dean E. Taylor – Chairman, President and Chief Executive Officer

Thank you Darlene.

Operator

You’re welcome.

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