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| TDW > SEC Filings for TDW > Form 10-K on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Annual Report
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements as of March 31, 2009 and 2008 and for the years ended March 31, 2009, 2008 and 2007 included in Item 8 of this Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. The company's future results of operations could differ materially from its historical results or current expectations than those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" in Item 1A and elsewhere in this annual report. With respect to this section, the cautionary language applicable to such forward-looking statements described in "A Caution About Forward-Looking Statements" found before Item 1 of this Form 10-K is incorporated by reference into this Item 7. The following discussion should also be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and related disclosures.
Our Business
The company provides offshore service vessels and equipment to the global offshore energy industry through the operation of a diversified fleet of marine service vessels. Tidewater is one of the most internationally diverse companies in the offshore energy industry with over five decades of international experience and a total of 430 vessels servicing the energy industry. The company's revenues, net earnings and cash flows from operations are dependent upon the activity level of the vessel fleet. Like other energy service companies, the level of the company's business activity is driven by the level of drilling and exploration activity by our customers. Their activity, in turn, is dependent on crude oil and natural gas prices, which fluctuate depending on levels of supply and demand for crude oil and natural gas.
The company's revenues are driven primarily by the company's fleet size, vessel utilization and day rates. Because a sizeable portion of the company's operating costs (including depreciation) does not change proportionally with changes in revenue, the company's operating profit is largely dependent on revenue levels. Operating costs consist primarily of crew costs, repair and maintenance, insurance and loss reserves, fuel, lube oil and supplies and vessel operating lease expense.
Fleet size, fleet composition, geographic areas of operation and the supply and demand for marine personnel are the major factors which affect overall crew costs. In addition, the company's newer, technologically sophisticated anchor handling towing supply vessels and platform supply vessels generally require a greater number of specially trained fleet personnel than the company's older smaller vessels. Competition for skilled crew may intensify, particularly in international markets, as 670 new-build support vessels are currently under construction and approximately 350 are scheduled to enter the global fleet during calendar year 2009. If competition for personnel intensifies, the company's crew costs will likely increase.
The timing and amount of repair and maintenance costs are influenced by customer demand, vessel age and safety and inspection drydockings mandated by regulatory agencies. A certain number of drydockings are required over a given period to meet regulatory requirements. Drydocking costs are incurred only if the company believes a drydocking is economically justified, taking into consideration the vessel's age, physical condition and future marketability. If the company elects not to perform a required drydocking, the company will either stack or sell the vessel, as it is not permitted to work without the proper certifications. When the company takes a productive vessel out of service for drydocking, the company incurs not only the drydocking cost but also continues to incur operating costs and depreciation on the vessel. The company generally foregoes revenue from that vessel during the drydock period. In any given period, downtime associated with drydockings and major repairs and maintenance can have a significant effect on the company's revenues and operating costs.
Drydockings have taken on an increasing importance to the company and its financial performance. The company's older vessels, for which demand remained relatively strong during fiscal 2009, require more frequent and more expensive repair and drydockings, while some of its newer vessels, which were built after 2000, are now experiencing their first or second required regulatory drydockings. The combination of these factors has increased the company's expenditures for drydockings and incrementally increased the volatility
of the company's operating revenues and operating costs, thus making period-to-period comparisons more difficult. Although the company attempts to efficiently manage its fleet drydocking schedule to minimize the disruptive effect, inflationary pressures in shipyard pricing experienced in recent years and the heavy workloads at the shipyards resulted in increased drydocking costs, and increased days off hire at shipyards (thereby, increasing the company's loss of revenue on the drydocked vessel). Due to the global recession, the company does not know if the shipyard situation will improve in the foreseeable future. If there is no improvement, the company expects that the timing of drydockings in the future will result in continued quarterly volatility in repair and maintenance costs and loss in revenue. Fuel and lube costs can also fluctuate in any given period depending on the number of vessel mobilizations that occur.
Insurance and loss reserves costs are dependent on the company's safety record and can fluctuate from time to time. The company's vessels are generally insured for their estimated market value against damage or loss resulting from catastrophic marine disaster, adverse weather conditions, mechanical failure, collisions, and property losses to the vessel.
The company also incurs vessel operating costs which are aggregated under the "other" vessel operating cost heading. These costs consist of brokers' commissions, training costs and other costs. Brokers' commission costs are incurred primarily in the company's international operations where brokers assist in obtaining work for the company's vessels. Brokers are paid a percentage of day rates and, accordingly, commissions paid to brokers increase as the company's revenues increase. Other costs include, but are not limited to, satellite communication fees, agent fees, port fees, canal transit fees, vessel certification fees and temporary vessel importation fees.
Fiscal 2009 Business Highlights and Key Focus
During fiscal 2009, the company continued its focus on increasing its presence in international markets, maintaining its competitive advantage and modernizing its vessel fleet in order to generate future earnings capacity. The company is effectively utilizing its strong cash position to support the construction of the industry's largest fleet of new vessels. Operating management focuses on improving day rates and utilization and maintaining disciplined cost control.
During fiscal 2009, the company recorded $1.4 billion in revenues, which is an increase of approximately $120.7 million, or 9%, over its fiscal 2008 revenues. This increase reflects the strong industry fundamentals that were present in the first half of fiscal 2009, primarily in the company's international markets, which pushed total average day rates approximately 18% higher than the total average day rates achieved during fiscal 2008. Fiscal 2009 consolidated net earnings increased approximately 17%, or $58.1 million, as compared to fiscal 2008. The company's international operations continue to be the primary driver of its earnings and, during fiscal 2009, revenues generated from international vessel operations as a percentage of the company's total revenues were 87%.
The company's United States results of operations are primarily dependent on the demand and supply relationship for natural gas. The company's U.S.-based revenues decreased approximately 8%, or $12.9 million, during fiscal 2009 as compared to fiscal 2008, due to a decrease in the number of vessels operating in the U.S.-based portion of the Gulf of Mexico (GOM) and to an approximate 4 percentage point decrease in utilization rates on the remaining U.S.-based vessels despite an approximate 11% increase in average day rates. U.S.-based operating profit increased approximately 16%, or $4.8 million, due to approximately 17% lower vessel operating costs and approximately 15% lower depreciation expense.
The company's international results of operations are primarily dependent on the demand and supply relationship for crude oil. During fiscal 2009, international-based revenues and operating profit increased approximately 15% and 11%, or $154.1 million and $42.9 million, respectively, as compared to fiscal 2008, due to strong market fundamentals during the first half of fiscal 2009, which resulted in vessel day rate escalations and increases in the number of vessels operating internationally (because of vessel transfers from the U.S. market and the addition of newly constructed vessels that were added to the fleet). Fiscal 2009 international-based vessel revenues increases were partially offset by approximately 19% higher operating costs and 8% higher depreciation expense, as compared to fiscal 2008, due primarily to an increase in the number of vessels operating internationally.
In January 2008, the U.S. District Court for the Eastern District of Louisiana issued its final ruling in the company's favor with respect to a motion for summary judgment concerning the IRS disallowance of the company's tax deduction for foreign sales corporation commissions for fiscal years 1999 and 2000. In March of 2008, the IRS appealed the verdict to the Fifth Circuit Court of Appeals, which in April of 2009, affirmed the District Court's judgment. The IRS has 90 days within which to file a petition for review with the United States Supreme Court. Although the ultimate settlement of the liability is unpredictable, it is reasonably possible that this uncertainty will be resolved within the next twelve months. If this uncertainty is ultimately resolved in the company's favor, the company anticipates reversing its liability recorded for this issue, which includes liabilities recorded for similar deductions taken in years subsequent to fiscal 2000. As of March 31, 2009, the amount of the potential reversal, including interest, is approximately $32.5 million.
The company's strategy contemplates organic growth through the construction of vessels at a variety of shipyards worldwide and possible acquisitions of vessels and/or other owners and operators of offshore supply vessels. The company has the largest number of new vessels among its competitors in the industry, and it also has the largest fleet of older vessels in the industry. Because the company has a large number of older vessels, management regularly evaluates alternatives for its older fleet. The company will continue to pursue its long-term growth strategies on a disciplined basis and, in each case, will carefully consider whether proposed investments and transactions have the appropriate risk/reward profile.
The company's safety performance improved significantly during fiscal 2009. During fiscal 2009, the company experienced only one lost time accident compared to eight lost time accidents (which included six fatalities) during fiscal 2008. The company is committed to continuing to improve its record for the safety of the company's employees and the safety of its customers. The company's principal operations occur in offshore waters where the workplace environment presents safety challenges. Because the environment presents these challenges, the company works diligently to maintain workplace safety. Management regularly communicates with its personnel to promote safety and instill safe work habits through company media and safety review sessions. The company also regularly conducts safety training meetings for its seamen and shore staff personnel.
In 2009, the company has continued a significant vessel construction and acquisition program that began in calendar year 2000. This program has facilitated the company's entrance into deepwater markets around the world in addition to allowing the company to begin to replace its core fleet with fewer, larger, and more technologically sophisticated vessels. The vessel construction and acquisition program and the expansion program were initiated with the intent of strengthening the company's presence in all major oil and gas producing regions of the world through the replacement of aging vessels in the company's core fleet. During this decade, the company has purchased and/or constructed 157 vessels for approximately $1.9 billion. Between April 1999 and March 2009, the company also sold, primarily to buyers who operate outside of our industry, 353 vessels and scrapped or disposed of 85 vessels. Most of the vessel sales were at prices that exceeded their carrying values.
To date, the company has funded all of its vessel commitment programs from current cash balances, operating cash flow, and funds provided by its $300.0 million senior unsecured notes, its revolving credit facility, and various leasing arrangements. At March 31, 2009, the company had 46 vessels under construction for a total capital commitment of $991.9 million, of which the company has already expended $392.3 million. A full discussion of the company's capital commitments, scheduled delivery dates and vessel sales is disclosed in the "Vessel Count, Dispositions, Acquisitions and Construction Programs" section of Item 7 and Note 10 of Notes to Consolidated Financial Statements included in Item 8 of this report.
In July 2008, the company's Board of Directors authorized the company to repurchase up to $200.0 million in shares of its common stock in open-market or privately-negotiated transactions. The company will use its available cash and, when considered advantageous, borrowings under its revolving credit facility or other borrowings, to fund any share repurchases. The repurchase program will end on the earlier of the date that all authorized funds have been expended or June 30, 2009, unless extended by the Board of Directors. During fiscal 2009, $53.6 million was used to repurchase shares of the company's stock; however, no amounts were expended under the most recent share repurchase authorization during the year ended March 31, 2009. At March 31, 2009, $200.0 million was available to repurchase shares of the company's common stock pursuant to the July 2008 authorized stock repurchase program. The company will continue
to evaluate share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets.
Macroeconomic Environment and Outlook
During the last half of calendar 2008, worldwide demand for oil and gas dropped precipitously and energy prices sharply declined as a result of a global economic recession. The company continues to evaluate how a prolonged global recession might affect the development plans of exploration and production companies and global demand for offshore vessels. The company also continues to evaluate the potential impacts of the global recession and distress in credit and capital markets on the ability of shipyards to meet their scheduled deliveries of new vessels or the ability of the company to renew its fleet through new vessel construction or acquisitions. Also unknown is the potential effect that the recession may have on the company's more highly-leveraged competitors, including those companies' ability to continue to fund their construction commitments. Assessing the current situation with a high degree of confidence is challenging given the instability in the financial and commodity markets and the global economic recession. The recession may ultimately result in a decrease in demand for offshore support vessel services which would reduce charter rates and/or utilization rates and therefore have a material adverse effect on the company's results of operation and financial condition. During fiscal 2009, the company did not experience any significant negative effects from the financial crisis or tight credit markets. Trends in exploration, development and production activity, however, are generally negative and customers are actively seeking pricing concessions in regards to services provided by the company.
Given the foregoing uncertainties, the company continues to re-assess its stated strategies and investment plans. All statements made herein of the previously stated plans or the "current" plan or expectation of such should be considered in the light of the potential effects discussed in the preceding paragraph. While the magnitude of any change in plans, including investment plans, cannot be predicted at this time, it is likely that some adjustments will be necessary due to the global recession, the recent dramatic reduction in commodity prices, and the lack of liquidity in financial markets. The company operates in a highly competitive business environment that has many risks as disclosed in Item 1A of this report.
The number of operating drilling rigs in the U.S. offshore market is generally the primary driver of the company's expected activity levels and future profitability in the U.S. market. The offshore rig count in the GOM remains at historically low levels, in part, because the strength of the international drilling market has attracted numerous offshore drilling rigs from the U.S. to various international markets over the past few years. In addition, exploration and development activity in the GOM has fallen off significantly, particularly in non-deepwater areas. As a consequence, the demand for offshore marine vessels in the shallow water GOM diminished and is expected to remain weak, unless recent trends are reversed. Over the longer term, the company's U.S.-based fleet should be affected more by the active offshore rig count in the United States than by any other single outside influence. In addition, consolidation could result in the absorption of an oil and gas company with which the company has a strong commercial relationship into another company with which the company does not have such a relationship.
The prices of crude oil and natural gas are critical factors in E&P companies' decisions to retain their drilling rigs in the GOM market or mobilize the rigs to international markets. The company's United States results of operations are primarily dependent on the supply and demand relationship for natural gas, while the company's international results of operations are primarily dependent on the supply and demand relationship of crude oil. Prices for crude oil and natural gas have fallen dramatically from their respective peaks achieved in calendar year 2008 due to a global recession that has caused a precipitous drop in worldwide demand for oil and gas.
Before the recession onset, natural gas prices had declined because inventory levels for natural gas increased more than expected during the 2008 summer season largely due to strong, land-based natural gas drilling results. Production shut-ins in the offshore drilling market caused by Hurricanes Gustav and Ike eased some of the production growth but were insufficient to offset the natural gas supplied by land-based drillers. Inventories continued at high levels even during the winter drawdown season, despite a relatively cold winter, due to the strong supply growth and declining demand resulting from the recession. Natural gas prices were in the range of $3.45 to $3.60 per Mcf in mid-April 2009, a significant decline from its peak of $13.00 per Mcf in July 2008. Analysts expect gas prices to deteriorate further during calendar year 2009
until forced production shut-ins reverse gas supplies or demand increases. Given the historically strong correlation between commodity prices, drilling and exploration activity and demand for the company's vessels in the GOM, if gas prices remain weak during calendar year 2009, the company expects utilization rates and day rates for its vessels in the GOM market will continue to be depressed and, as such, management is unable to predict with confidence what the company's actual experience will be in calendar year 2009.
Crude oil prices had also retreated from the all time closing high of approximately $147 per barrel in mid-July 2008 and were in the $48 to $52 range in mid-April 2009. OPEC responded to falling crude prices by cutting production by 4.2 million barrels per day (a nearly 5% cut in global oil supplies) as of January 1, 2009 in an effort to stabilize prices. It is unknown whether crude oil prices will stabilize at levels that will continue to support significant levels of exploration and production spending by oil and gas companies. In addition, even if prices stabilize at levels that do support high levels of spending, it is uncertain if E&P companies will be able to sustain their level of capital expenditures because of reductions in available capital and liquidity. Given the historical strong correlation between commodity prices, drilling and exploration activity and demand for the company's vessels in the various international markets, if crude oil prices remain weak during calendar year 2009, the company expects that utilization and day rates for its international-based vessels will weaken. However, with the volatility of oil pricing and demand, management is unable to predict what the company's actual experience will be in calendar year 2009.
Oil and gas industry analysts have reported in their 2009 E&P expenditures (both land-based and offshore) surveys that global capital expenditures are forecast to decline by approximately 12% from calendar year 2008 levels. The surveys forecast that international capital spending will decline modestly, while North American capital spending is forecast to decrease more than 25% due to the continuing uncertainty in commodity pricing, tight credit markets and the global recession. In addition, these spending estimates may prove to be overly optimistic as they were based on average assumptions of approximately $58 per barrel of oil and $6.35 per mcf of natural gas price for calendar 2009. The GOM market consists primarily of the independents and smaller companies that employ more financial leverage and, as such, may face challenges raising capital funding for their respective drilling programs.
The company's assets are highly mobile. Should the U.S. market weaken further, the company has the ability to redeploy some of its vessels to international markets where, market conditions permitting, the vessels may benefit from stronger demand and average day rates and statutory income tax rates that are typically lower than in the United States. The company will continue to assess the demand for vessels in the GOM and in the various international markets and consider relocating additional vessels to international areas, although the ability of the company to continue to mobilize vessels among international markets will be subject to global market demand. The cost of mobilizing vessels to a different market are sometimes for the account of the company and sometimes for the account of a contracting customer.
During the quarter ended September 30, 2008, both U.S. President Bush and the U.S. Congress allowed the moratorium on offshore drilling in federal waters along the U.S. Pacific and Atlantic coasts to expire effective October 1, 2008. Although the lifting of the moratorium will not result in immediate drilling, the prospects for the future of offshore drilling in the new regions of the U.S. could be promising; however, in January 2009, U.S. President Obama took office, and it is not yet clear what the energy policy of his administration will be or what impact such policy will have on the offshore energy industry.
The deepwater offshore energy market is a growing segment of the energy market. Worldwide rig construction escalated in the past few years as rig owners capitalized on the high worldwide demand for drilling. Reports published during the most recently completed quarter suggest that over the next four years, the worldwide moveable drilling rig count will increase as new-build rigs currently on order and under construction stand at approximately 170 rigs, which will supplement the current approximately 745 movable rigs worldwide. In addition, investment is also being made in the floating production market where approximately 60 new floating production units are currently under construction and are expected to be delivered over the next five years to supplement the current approximately 310 floating production units worldwide. Given the recent financial crisis and global economic recession, it is possible that some of the drilling rigs currently on order might be delayed or cancelled. Moreover, to the extent built and delivered, it is believed that the new-build rigs will largely target international regions rather than the GOM due to longer
contract durations, generally lower operating costs and higher drilling day rates available in the international markets.
Approximately 670 new-build support vessels (platform supply vessels and anchor handlers only) are currently under construction and are expected to be delivered to the worldwide offshore vessel market over the next four years according to by ODS-Petrodata. The current worldwide fleet of these classes of vessels is estimated at approximately 2,100 vessels. An increase in vessel capacity could have the effect of lowering charter rates, particularly in the context of declining levels of exploration, development and production activity. However, the worldwide offshore marine vessel industry has a large number of aging vessels, including approximately 860 that are at least 25 years old, that are nearing or exceeding original expectations of estimated economic lives. These older vessels could potentially retire from the market within the next few years if the cost of extending the vessels' lives is not economically justifiable. Although the future attrition rate of these aging vessels cannot be accurately predicted, the company believes that the retirement of a portion of these aging vessels would likely mitigate the potential negative impacts that new-build vessels and reduced exploration, development and production activity may have on offshore support vessel demand. Additional vessel demand should be created with the addition of new drilling rigs and floating production units over the next few years, which should help minimize the negative effects of 670 new-build support vessels (platform supply vessels and anchor handlers only) being added to the offshore support vessel fleet. However, it is unknown at this time how the global recession will influence the utilization of equipment currently in existence or the ultimate delivery and placing into service of new drilling rigs, floating production units and vessels currently under construction.
Results of Operations
The following table compares revenues and operating expenses (excluding general and administrative expenses, depreciation expense and gains on sales of assets) for the company's vessel fleet and the related percentage of total revenue for the years ended March 31. Vessel revenues and operating costs relate to vessels owned and operated by the company, while other marine revenues relate to third-party activities of the company's shipyards, brokered vessels and other . . .
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