Tidewater Earnings Call Nuggets: Vessel Operating Costs and Consolidation Opportunities

Tidewater (NYSE:TDW) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Vessel Operating Costs

Jeff Tillery – Tudor, Pickering, Holt & Co.: You’ve talked about the R&M inflation expected for the full year in the 10% to 15% range. Can we think about the overall operating costs for the vessel fleet as inflating kind of in that same range year-over-year?

Quinn P. Fanning – EVP and CFO: Our hope is, is that labor inflation would not be at that level. We’ve generally been trending levels less than that and I’m not seeing any numbers that would suggest that we are going to be heating anywhere close to 15% labor inflation. On a unit basis, obviously, we will closely track the vessels that we’re accruing.

Jeff Tillery – Tudor, Pickering, Holt & Co.: Taking into account the amount of labor you need to hire, should we think about that overall cost numbers being up in that 15% range year-over-year?

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Quinn P. Fanning – EVP and CFO: I think the, obviously, in weaker markets, labor has tended to move with the exception of a couple of key jurisdictions either down or trend flat, the jurisdictions I would highlight that was not the case over the last couple of years, that were otherwise a week market for Brazil and Australia, and more recently the U.S. Gulf of Mexico. We’ve also had like many in the offshore space pressure tied to specific technical skills, where we’re competing for individuals with some of the rig owners and that’s specifically the DP operator, but I think the – where I would instead focus you on labor costs is where we have tracked relative to vessel revenue, it’s not a perfect measure. For the general matter we have been in the low 30s as a percentage of vessel revenue in the cyclical trough or rebuilding period. And we tend to – at least keep on our operating footprint presently below the 30% level in a decent market. But again, as I mentioned, region by region cost of those percentage vessel revenue can be quite volatile and America as an example are probably 7 to 8 percentage points higher than some of the African regions…

Jeff Tillery – Tudor, Pickering, Holt & Co.: There is good rate progression, across the board this quarter. So it sounds like the only thing that you might consider unusual in the March quarter was a couple of hundred dollars a day and the towing supply group that was from mobilization, amortization is that a fair characterization of the March quarter?

Quinn P. Fanning – EVP and CFO: No, I guess, to make one point, it was not an amortization of demobilization fee, it was actual cash paid to us by customer in connection with contractual agreements, it did have defect though of maybe, distorting is a bad word, but day rates did include the demobilization fees (indiscernible) explains by class. And of the $800 quarter-over-quarter progression I think it was $200 some. But we cleared certain geographies we are experiencing somewhat rate progression. I’d say the 7,000 to 10,000 rate course of our classes trending better than the smaller vessels within that class and certain markets likewise are doing better than others. But we are optimistic about the class as Jeff and I both mentioned that’s just not moving us fast as we like it to and certainly the trends in the jackup market would hopefully change that a bit in the coming quarters.

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Jeff Tillery – Tudor, Pickering, Holt & Co.: But kind of the underlying trend of improvement we saw in the quarter, really nothing unusual to negate that, that we saw in the March quarter, just little bit of help from some of the lump sum payments.

Quinn P. Fanning – EVP and CFO: Correct.

Jeffrey M. Platt – President and CEO: We agree with that.

Consolidation Opportunities

Ian Macpherson – Simmons & Company: Thank you for the helpful color on the evaluation around Troms. It seems like Tidewater has resisted Norwegian market for some time, and in periods what’s changed was Troms involved in opportunistic situation or have you seen the strategic imperative of the cold water harsh environment in geographic market, becoming too important to avoid at this point. And just thoughts on further consolidation opportunities in the market going forward?

Jeffrey M. Platt – President and CEO: It wasn’t purpose for the Tidewater did not participate in the Norwegian market it has been always been one that we’ve kept an eye on in the North Sea market as a whole, sometimes that was a good thing, sometimes it wasn’t such a good thing when that market gets good it can get good. I think it is a natural progression for us where we are with the fleet recapitalization. We certainly take note of what our clients are doing they lead the way and certainly the Arctic harsh water environment seems to have some tremendous opportunities and when we look at that we look it for the right opportunities not just an iron purchase we wanted to have the competency of a management team that has the experience operating that to add to Tidewater and it came out to be what we think as a very good fit for Tidewater and I think one that certainly positions us well today and also looking ahead as the Arctic unfolds which it may turn out to be the very large new opportunities that our clients are certainly excited about and we are going to be positioned to grow with that. So, that’s little bit of the insight with respect to the Troms acquisition and I guess the second part of your question. Could you repeat it again?

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Ian Macpherson – Simmons & Company: What you think about the opportunities that for further MD&A?

Jeffrey M. Platt – President and CEO: That’s nothing new. Our (indiscernible) has always been to acquire vessels or potential companies to have some consolidation. When you look at what we’ve actually done buying companies certainly is a pretty short list you have to go back ways so we’ve done that. But a lot of the assets that we have acquired since we started the recapitalization we’ve done a pretty good job of buying assets that are already committed to the industry that is our (vent) and again our financial position allows us to make a move when the opportunities present itself. We’d always to like to see consolidation. It is still a fragmented market. We are certainly looking all the time at potential opportunities for Tidewater…

Ian Macpherson – Simmons & Company: Then, just lastly on Troms, since the 6.5 to 7.5 EBITDA range that you’ve described, is there any – are there any aspects of the backlog on that fleet that could better distort it from the current market rates when we’re thinking about the run rate for year two or year three of that acquisition. Are there any contracts to below market or et cetera?

Quinn P. Fanning – EVP and CFO: They do have some term coverage, which I guess relative to current market rates. One could argue should price up in due course, but to be clear, the – I would say EBITDA is a function of what your day rate and OpEx assumptions would be and I would certainly acknowledge that – smart people can disagree on the precise rate that group of assets can realize in the market, but just to clarify one point, the range of EBITDA multiples I use would capture effectively a 10-vessel fleet, which includes the three STX Pan Ocean vessels, which effectively were frontrunners to this transaction and are essentially identical sisters to some of the vessels in Troms. There is also the one vessel that is under construction that will be delivered in early ’14 and the one option vessel, so that’s where you get to 10 vessels with the average price, I think I said $58 million on average and 6.5 to 7.5 times fully delivered EBITDA.

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Ian Macpherson – Simmons & Company: Then, just lastly, does Troms bring you the shore base support that you need to run this fleet or do you foresee additional investment on that side to round out?

Jeff A. Gorski – EVP and COO: Very confident management team. They run a tight ship up there. I think it’s going to fit nicely in Tidewater and I think that we have the ability to grow without much shore base expansion.

Quinn P. Fanning – EVP and CFO: The shore base is not an (indiscernible). We do have an office or Troms, I should say, has office in Oslo, which has corporate and marketing personnel in it. But the real operating bases in Troms, which is in northern Norway and we think that’s a very positive point of differentiation for the platform as it’s developing, jumping off point in the Barents Sea and some of the other cold water markets that we’re interested in.

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