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| TDW > SEC Filings for TDW > Form 10-Q on 29-Jul-2009 | All Recent SEC Filings |
29-Jul-2009
Quarterly Report
In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that this Quarterly Report on Form 10-Q and the information incorporated herein by reference contain certain forward-looking statements which reflect the company's current view with respect to future events and financial performance. Any such forward-looking statements are subject to risks and uncertainties, and the company's future results of operations could differ materially from its historical results or current expectations. Some of these risks are discussed in this report and include, without limitation, fluctuations in worldwide energy demand and oil and gas prices; fleet additions by competitors and industry overcapacity; changes in capital spending by customers in the energy industry for offshore exploration, development and production; changing customer demands for different vessel specifications, which may make some of our older vessels technologically obsolete for certain customer projects or in certain markets; instability of global financial markets and difficulty in accessing credit or capital; acts of terrorism and piracy; significant weather conditions; unsettled political conditions, war, civil unrest and governmental actions, especially in higher risk countries of operations; foreign currency fluctuations; and enforcement of laws related to the environment, labor and foreign corrupt practices.
Forward-looking statements, which can generally be identified by the use of such terminology as "may," "expect," "anticipate," "estimate," "forecast," "believe," "think," "could," "continue," "intend," "seek," "plan," and similar expressions contained in this report, are predictions and not guarantees of future performance or events. Any forward-looking statements are based on current industry, financial and economic information, which the company has assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. The company's actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments that affect us will be those that we anticipate and have identified. The forward-looking statements should be considered in the context of the risk factors listed above and discussed in Items 1, 1A, 2 and 7 included in the company's Annual Report on Form 10-K for the year ended March 31, 2009, filed with the Securities and Exchange Commission (SEC) on May 14, 2009 and elsewhere in the Form 10-Q. Investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Management disclaims any obligation to update or revise the forward-looking statements contained herein to reflect new information, future events or developments.
In addition, in certain places in this report, we refer to reports published by third parties that purport to describe trends or developments in energy production and drilling and exploration activity. The company does so for the convenience of our stockholders and in an effort to provide information available in the market that will assist the company's investors in a better understanding of the market environment in which the company operates. However, the company specifically disclaims any responsibility for the accuracy and completeness of such information and undertakes no obligation to update such information.
The following information contained in this Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and related disclosures and the company's Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 14, 2009.
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 403 owned and operated vessels (including joint-venture vessels and vessel withdrawn from service) 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
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 and its 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. The company believes that competition for skilled crew personnel may intensify, particularly in international markets, as, according to ODS-Petrodata, 615 new-build support vessels are currently under construction and approximately 285 are scheduled to enter the global fleet during calendar year 2009, although the number and timing of delivery of new-build support vessels is very much in question currently given the global recession and tight financial markets which may influence the ultimate number of vessels built and delivered. 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 within a given period to meet regulatory requirements. Drydocking costs are incurred only if the company believes a drydocking can be justified economically, taking into consideration the vessel's age, physical condition and future marketability. If the company elects to forego a required drydocking, the company will either stack or sell the vessel, as it is not permitted to work without the proper regulatory certifications. When the company drydocks a productive vessel, the company not only foregoes vessel revenues and incurs drydocking cost, but also continues to incur vessel operating and vessel depreciation costs. 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 vessels 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 any disruptive effect on its revenues and costs, inflationary pressures on 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 cannot predict 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 a variety of factors, including the company's safety record and the cost of insurance, 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
The company has previously reported in its 2009 Annual Report on Form 10-K that it has been in discussions with Sonangol regarding a Sonangol proposal to increase its control over Sonatide Marine Services Ltd., an Angolan joint venture between Sonangol and a Tidewater subsidiary. The company has an indirect 49% interest in Sonatide. The parties have exchanged proposals since the date of the last disclosure, and discussions continue as the parties seek to reach an amicable resolution of the matter. However, no assurance can be given that agreement between the parties will be reached. The consequences of failing to reach agreement on these matters are not currently known, but the failure to reach agreement could very well impair the company's ability to continue to compete effectively for business in Angola in the future. More Tidewater vessels are deployed in Angola than in any of its other countries of operation, and a significant portion of revenues derived from the company's largest customer, Chevron, are derived through the company's operations in Angola.
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 is continuously evaluating how a prolonged global recession is affecting the development plans of exploration and production (E&P) companies and global demand for its 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 is challenging given the continuing fragility of the global economic recovery and the instability in the financial and commodity markets. During the first quarter of fiscal 2010, the recession has resulted in a decrease in demand for offshore support vessel services primarily in the U.S. Gulf of Mexico (GOM), leading to an industry-wide reduction in charter rates and utilization rates on vessels operating in the U.S. GOM. At present, the trends in exploration, development and production activity are generally negative, and customers are actively seeking pricing concessions from the company.
Given the foregoing market 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 inconsistent liquidity in financial markets.
In an effort to stabilize falling crude oil prices, OPEC cut production of crude oil by 4.2 million barrels per day (a nearly 5% cut in global oil supplies) as of January 1, 2009. OPEC's production curtailment appears to have helped stabilize crude oil prices, which fell to approximately $30 to $35 per barrel price level during the quarter ended March 31, 2009. Crude oil prices have rebounded since the first quarter of calendar 2009, and as of mid-July 2009, crude oil was trading in the range of $59 to $65 per barrel, which is far below its all time closing high of approximately $147 per barrel in mid-July 2008. Given continuing reduced demand due to the global recession, 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 capital and liquidity constraints. 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 depressed during calendar year 2009, the company expects that utilization and day rates for its international-based vessels will weaken. Given the volatility of oil pricing and demand, management is unable to predict what the company's actual experience will be in calendar year 2009. The company's international customers are actively seeking pricing concessions from the company and the company is addressing requests for pricing concessions on a case-by-case basis. In response to the weaker crude oil price and the uncertainty related to its effect on E&P spending, the company began stacking and removing from its active international-based fleet those vessels that cannot find charter hire contracts. At the beginning of the current quarter, the company had 46
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. Even before the global economic crisis occurred, exploration and development activity in the GOM had fallen off significantly, particularly in non-deepwater areas. As a consequence, the demand for offshore marine vessels in the shallow water GOM diminished over the past few years and has declined even further due to the deterioration in the global business environment and economy, the significant reduction in commodity prices (particularly natural gas pricing) and the lack of available credit. At current quarter end, jackup rig utilization in the U.S. GOM approximated 35% compared to approximately 75% in calendar year 2004. Additionally, total mobile offshore rig utilization stood at approximately 52% at current quarter end compared to 84% one year ago and 72% five years ago. 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 were declining from a peak of $13.00 per Mcf in July 2008, in part, because inventory levels for natural gas increased more than expected during the summer of 2008. Inventories continued at high levels even during the winter drawdown season, despite a relatively cold winter, due to the strong supply growth and weak demand (particularly from the industrial sector) resulting from the global recession. Inventories are well oversupplied on a year-over-year basis as of mid- July 2009 and natural gas prices are in the range of $3.25 to $3.70 per Mcf in mid-July 2009, a significant decline from its peak of $13.00 per Mcf in July 2008. Many analysts have stated their expectation that natural gas prices will continue to deteriorate during calendar year 2009 until market-driven production shut-ins shrink gas supply or demand increases. The company believes that it is unlikely that natural gas demand will increase meaningfully in the near term. In addition, possible increases in liquid natural gas (LNG) imports and unconventional gas production could also negatively impact natural gas supply/demand fundamentals. Given the historically strong correlation between commodity prices, drilling and exploration activity and demand for the company's vessels in the GOM, the company expects utilization rates and day rates for its vessels in the GOM market to remain weak, particularly if natural gas prices deteriorate further, and, as such, management anticipates the company's U.S.-based results of operations during the remainder of fiscal 2010 will be poor relative to fiscal 2008 and 2009. In response to the deteriorating GOM market conditions, the company began to stack and remove from its active fleet those vessels that cannot find attractive charter hire contracts. At the beginning of the current quarter, the U.S. GOM had 15 stacked vessels, two of which were sold during the current quarter. During the quarter ended June 30, 2009, the company stacked an additional seven vessels for a total of 20 stacked vessels as of June 30, 2009. In recent months, drydockings associated with stacked vessels have been deferred. In addition, crew personnel reductions have taken place, and effective June 1, 2009, wages on the remaining crew personnel were reduced by approximately 15%.
The company's assets are highly mobile. Historically, when the U.S. market weakened, the company redeployed some of its vessels to international markets where, market conditions permitting, the vessels could benefit from stronger demand and average day rates and statutory income tax rates that are typically lower than in the United States. Given the current challenges in international markets, the company's ability to mitigate the effects of a weakened GOM market by redeploying vessels to other markets may be reduced
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, there are several energy policy changes in Washington D.C. that will likely change how energy in the United States is produced and consumed. Some of the major proposed policy changes (which will not likely take effect or have a material impact in the near-term) focus on creating energy standards and efficiencies, provide financing for clean energy generation, and emphasize greater renewable energy usage. Other proposed policy changes focus on eliminating some of the drilling tax incentives available to E&P companies, which will likely increase the cost of drilling and, in turn, may negatively impact development plans of E&P companies and/or increase the cost of energy to consumers. The company's management will not know the full impact the proposed policy changes will have on the offshore energy industry until the policies are adopted. In addition, in June 2009, the U.S. Senate Committee on Energy and Natural Resources voted in favor of a bill that will expand offshore drilling in the eastern Gulf of Mexico, which is currently off limits to offshore drilling.
The deepwater offshore energy market is a growing segment of the energy market and is one sector of the global energy market that has yet to experience any significant negative effects from the global economic recession. During the past few years, worldwide rig construction escalated 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 155 rigs, which will supplement the current approximately 750 movable rigs worldwide. Investment is also being made in the floating production market, in which approximately 49 new floating production units are currently under construction and are expected to be delivered over the next five years to supplement the current approximately 315 floating production units worldwide. Analysts have reported that several drilling rigs currently on order have been cancelled and/or delayed due to the global recession and tight financial markets, which may influence the ultimate number of rigs built and delivered. Moreover, to the extent the rigs are 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.
As noted above, 615 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 ODS-Petrodata. The current worldwide fleet of these classes of vessels is estimated at approximately 2,200 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 840 that are at least 25 years old, that are nearing or exceeding original expectations of their 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 combined negative effects of these new-build vessels on vessel utilization and vessel pricing. Additional vessel demand should be created with the addition of new drilling rigs and floating production units over the next few years that is referenced above, which should help minimize the negative effects of up to 615 new-build support vessels (platform supply vessels and anchor handlers only) being added to the offshore support vessel fleet. It is unknown at this time the full extent to which the global recession will influence the utilization of equipment currently in existence or the ultimate timing of delivery and placing into service of new drilling rigs, floating production units and vessels currently under construction. Analysts have reported some offshore vessel construction contract cancellations as a result of the global recession and tight financial markets, which may influence the ultimate number of vessels built and delivered.
During the first quarter of fiscal 2010, the company continued to focus on maintaining its competitive advantages, increasing its presence in international markets, and modernizing its vessel fleet in order to generate future earnings capacity. A key element of the company's strategy continues to be the preservation of its strong cash position to support the construction of the industry's largest fleet of new vessels.
The company's consolidated net earnings for the first quarter of fiscal 2010 decreased 48%, or $40.3 million, due primarily to a $48.6 million provision for Venezuelan operations as disclosed in Note 6 of Notes to the Consolidated Financial Statements included in Part I, Item 1 of this report. Excluding the provision for Venezuelan operations ($47.7 million after tax), the company's consolidated net earnings for the first quarter of fiscal 2010 increased approximately 9%, or $7.4 million, over the net earnings generated during the same period of fiscal 2009, primarily due to lower vessel operating costs. The company recorded $326.6 million in revenues during the first quarter of fiscal 2010, which is a decrease of approximately $13.4 million, or 4%, over the revenue earned during the same period of fiscal 2009. The company's international-based vessel revenues decreased a modest 1%, or $2.3 million, during the first quarter of fiscal 2010 as compared to the same period in fiscal 2009, while the United States (U.S.) vessel revenues decreased approximately $15.7 million, or 39%, during the same comparative period. Other marine revenues increased approximately $4.5 million, or 38%, during the same comparative periods. International-based vessel operating costs decreased approximately 9%, or $14.4 million, while the company's U.S.-based vessel operating costs decreased approximately 37%, or $8.7 million, during the same comparative . . .
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