Tidewater Inc (TDW) 2002 Q1 法說會逐字稿

Good morning. I will be your conference facilitator. At this time I would like to welcome everyone to the first quarter 2003 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 period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad. This call will be available for replay beginning at 2:00 p.m. EST today through July 24th, 2002. The conference ID number for the replay is 4838114. Again, the conference ID number for the replay is 4838114. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

I would now like to turn the call over to Mr. Dean Taylor, President and CEO. Please go ahead. Sir.

Thank you. I am Dean Taylor our CEO and President of Tidewater. I will be hosting my conference. With me are Bill O'Malley, our Chairman; Keith Lousteau, CFO; Cliffe Laborde, executive Vice President, secretary and general counsel; Stephen Dick our Executive Vice-President in charge of our operations; and Joe Bennett, our vice president, controller and principle accounting officer.

Keith will follow momentarily with the usual safe harbor statement and review of our quarterly numbers. We will also provide an update on the new build and vessel replacement programs. I will follow Keith with an overview of Tidewater's markets as well as our strategic direction going forward. We will leave plenty of time for questions. But I do ask each of you to limit your questions to one or two so that we have a chance to speak with as many participants as possible.

I would like to preface Keith's review by speaking to Tidewater for recent quarterly results. I would like to reaffirm the comment we made in the press release this morning regarding our earnings. We had a strong quarter excepting our domestic business unit. The international business is solid in utilization and day rate levels in several 6 our key overseas markets continued to encourage us.

We understand that quarterly profit did not measure up to street expectations. Yet in view of the environment in which we find ourselves in our domestic markets we are nonetheless pleased with Tidewater's ability to show net income levels well in excess of 23 million dollars. This doesn't mean we are content with our domestic results. Nevertheless, we are confident Tidewater's conservative fiscal policies and operating strength will maintain its ability to produce positive results in tough times.

I had an early mentor at Tidewater who has since passed on. He used to encourage me when I would get down by reminding me this is not a business for the faint of heart. In these days when markets and industry specific industries are down and scandals scare and challenges confront, I harken to his words. I look at what our company is, the course we have set, and how we report it. I am confident that these times will pass and that the steps we have taken and will yet take will reap significant rewards as our future unfolds.

Now to Keith for a review of our quarterly results.

Good morning. Once again I would like to thank everyone for showing their continued interest in EuroTidewater. To start off with two or three little housekeeping type of announcements I want to remind everyone that we did file our 10-K this morning, and it should be available to everyone through electronic media. This is something we have always done and we notice with a little bit of pride that the SEC is now proposing that in the future everyone be required to release their 10-Q before having their conference call. Once again we feel like we have been on the edge of that for some period of time now.

Our press release did go out first thing this morning announcing the actual earnings. It went out before the opening of the financial markets. As is customary and perhaps more important than normal as people try to determine where Tidewater's domestic market may be heading I must now remind you of the inherent risk in discussing and talking about forward-looking information. In regard to that I must go through the procedure of reading for you one more time our statement on forward-looking information.

During today's conference call, Dean, I, and other Tidewater's management may and probably will make certain comments which are not statements of historical fact. And thus they constitute forward-looking statements. I know you understand that there are risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comments we may make today.

Before jumping right into the numbers, I thought I wanted to make a little comparison for you here. You may be asking yourself how could Dean begin this call with a statement like this was a strong quarter for Tidewater except for our domestic business? Well, I am not going to be the one who is going to back off from that position that we had a strong quarter. Unfortunately, it is true that the June quarter was the first quarter since June of 2000 that Tidewater reported an operating loss from domestic activities. In fact, domestic operating loss for this quarter amounted to 3.3 million dollars. How can that be considered strong, solid or even good? Well, in light of what Tidewater is today versus what Tidewater was at that point a mere 24 months ago, we use the word strong and solid to describe the earnings of this quarter. We have gone through a full cycle here in the domestic market, one where a mere 24 months ago we reported about a 5.5 million dollar loss from marine operations.

12 months ago that number accreted up to where we reported a gain of 28 million dollars for the quarter of June, 2001. Dramatic 31 million dollar swing in earnings for one market over 24 months. We have been saying for quite awhile now that the best we can ever ask of any investor is to understand what Tidewater is today. And in doing that I would like you to remember a couple of statistics here. That mere 24 months ago when Tidewater had its last loss in the Gulf of Mexico, our international operating profit for that same month was 12.2 million dollars. We reported earnings of 8 million dollars, and earnings on an EPS basis of 15 cents a share. Here we are having gone full cycle in the Gulf of Mexico and in this quarter, as I said a mere 24 months later, we are reporting international operating revenues of 36.4 million dollars. That's a quick 300% increase in operating income. And we are reporting earnings per share of 41 cents overall earnings of 23 million dollars which is almost a 280% increase during that period of time.

So the backup for the statement that it was a solid quarter is obvious and it is based on - the base that we built in - that is inherent in our international operations. Enough of the preaching to the choir, so to speak.

Let's now get into looking at numbers for this quarter and what they really do look like.

We reported earnings of 41 cents a share. We think that was on revenues of 160 million dollars. We feel like it was a solid quarter. No unusual items. It did include about 2 cents net after tax gain on sale of assets. That was down from last quarter where the number was exceptionally high and at that pretax number of a million five. It is where we were saying for a long time it was a normal quarter in doing those items.

From a year ago unfortunately sales were down during that period of time from 187 a year ago down to 156 during this period of time. That was made up of year on year numbers. An increase of over 16 million dollars quarter on quarter in the international areas. But once again I use the word unfortunate in that domestic sales fell by 43 million during that period of time. So year on year earnings were down from 69 cents which was kind of the at the peak of our earnings during this gestic cycle a year ago to where we are today reporting 41 cents. Kind of enough of year on year. Let's get into looking at a little bit of the quarter to quarter comparisons.

The June quarter saw our domestic sales fall by 6 million dollars down to a low level of 25 million. That's a 20% decline from last quarter. Internationally our sales were off 2 million dollars from 133 to 131 million. That's about 1.6% off. We will talk about that a little more when we get into utilization statistics and I want to go on the record early on. We read no significance into that number. We had significant dry dockings in the international areas during the quarters. We lost revenues during that period of time. And we had a customer or two who did fleet jockeying early in the quarter. We want to point out we see no significance in that situation. We see nothing but solid and good results from the international operations into the future. Once the comparison of last quarter's EPS of 50 cents to this one's 41 we think as we said in the last conference call, last quarter's normalized would have been about 46 cents. If you want to compare us to our last quarter, in our comparison, it is about 46 to this quarter's 41. Attributable mainly to the 6 million fall in gross sales on our operations domestically.

We are using a tax rate of 32 and a half percent. That is a little bit lower than our historical norm for the last few years. It can be directly tied to the lack of profitability from our domestic operations.

As we have switched from an operating profit into an operating loss position, the magnitude of tax that we will be paying to the states is greatly diminished for this fiscal year.

Operating cost during the quarter were controlled quite well again. They came in at 91 million dollars versus last quarter's of 92.7 million. We continued to do - as your management team, a an admirable job of squeezing dollars of profitability out of dollars of revenues. Our cash operating margin this quarter was 42% as compared to 43.8 last quarter. And we remind everyone that even at that 42% rate that there is a certain amount of controllable costs that we have chosen to maintain incurring it by holding together our domestic fleet at a level much higher than that is currently being utilized. We continue to have a number of vessels and crews ready to go back to work instantaneously when the up take in the Gulf of Mexico does come about.

During the quarter we incurred 23 die docks at a cost of 8.2 million dollars for the September quarter we now estimate we will have about 21 dry docks at a cost of about 9.2 million dollars. (Before September put period).

We have three new pieces of equipment entering the fleet during the quarter. We would anticipate that last quarter's operating costs of 91 million probably will be up a little bit in this quarter. Something in the 92 to 94 million dollar range. Hopefully at the top of that range which would mean that more boats have gone back to work in the domestic market than operated during the last quarter.

Looking a little bit at the individual statistics, the Deepwater segment in the Gulf of Mexico we operated two vessels last quarter. In this current quarter we will have three. We will have four operating in that market with now the second delivery from our quality ship yard of our second deporter marker and vessel in the Gulf of Mexico available for service. But last quarter we had two average day rate during the quarter was 13,500. And average utilization was 91%. At the moment utilization is 67%, where two out of three vessels are working and the fourth vessel that is now coming off of trials does not have a contract as we speak today.

Towing and towing supply business in the Gulf of Mexico, quarterly rates, day rate in the quarter fell from the previous quarters. The June quarter we reported 6550. This quarter we are reporting 6100 dollars. That today holds steady.

We speak from a marketing perspective of holding rates in the gulf and have not lowered our rates. But yet you are seeing what's coming through here of 400 dollar a day average decrease that is easily explained by the fact that in our last conference call we mentioned the fact that for our multiple vessel customers, for those customers utilizing four to six to seven pieces of equipment we instituted some discounts in that time and it is reflected in this quarter's day rate.

International area last year, we had 24 Deepwater boats working. Day rate average for last quarter was 11,500 dollars. The previous quarter we reported 11,400. Today's rates are right in line with the 11,500, 11,550. We reported utilization during the quarter of 87% which was a slight take down from the 89% due to some mobilizations of vessels from area to area. Today we are operating right in that 89 percent range on the Deepwater equipment. Deepwater equipment internationally continues in line with last quarter.

The backbone of the fleet, the supply and the towing supply vessels, last quarter we operated 184 of those vessels. Day rates held almost absolutely steady request the previous quarter. We are reporting to you today a number of about 6475 dollars, last quarter it was 6450 dollars. Rates today are definitely right in line with the reported number of 6475. Utilization during the quarter took a little dip. It came in right at 80% whereas we had been reporting about 81 and a half in the previous quarters.

Once again no significance should be associated with that slight blip there. Some vessel repositioning took place. A number of dry docks and today we are glad to say the utilization numbers are right back in the 81.2 range. We feel quite strong and solid in that particular area.

Review our balance sheet a little bit. Our balance sheet continues to remain very strong. For the first time in a long time you will see outstanding debt under the revolver. We had 99 million dollars of debt outstanding. That on an equity of 1.3 billion gave us 7% debt to equity ratio. We have just about peaked out drawing down on our line of credit under our current new building program.

The funds have been used to fund ship yard cash calls as they have come about. We would anticipate the 99 million getting up to maybe 110 to 115 at the - at the March 31st year end numbers date. And then we would start coming back down from that point. We just about maxed out under the current program.

Outstanding commitments as of June 30th for vessels we have under construction amount to 262 million dollars. We have 32 vessels being built. The remaining ship yard commitments on those vessels are 262 million dollars. I think the total commitment was well over 500,000. So we are about halfway through with that program.

For the balance of this fiscal year, the March '03 year, of that 262 million, 147 million looks like it will be paid over the next nine months. During that period of time we should deliver 15 vessels. From July 1st forward, we anticipate taking delivery of 11 platform supply vessels and four crew boats. For next fiscal year, March of '04 we are planning on taking 14 vessels delivery and cash expenditures should be about 104 million dollars. And then going out to fiscal '05 would be the tail of the dog, about 11 million dollars for three vessels being delivered at that point in time.

As I mentioned a little bit earlier we will in this quarter, the September quarter, we will be taking delivery of 3 Deepwater vessels. We have taken delivery overseas of a new 755L, the [Rigdan Tide] and the [Bell Hightower.]

Kind of closing and going back to Dean here with a few comments, I want to remind everybody in the audience of Tidewater's dividend policy. We have our annual stockholders meeting and current directors meeting here on Thursday. Management will be recommending that we continue the dividend. I don't make that statement in light of the fact that any other consideration was being given. I just wanted to remind it. Dividend will probably be declared at that time. Tidewater continues to be committed to paying its dividend which historically has been 60 cents a share over the last number of years. In today's markets that dividend itself is providing an absolute terms of high yield dividend. It is yielding one of the highest dividends in the oil service industry. It is returning to our stockholders 30 to 35% of earnings. And we remind we are continuing to pay the dividend all at a time. We are reinvesting (indiscernible) annually in EuroTidewater.

And in one comment, Tidewater has come in under the radar screen at the SEC. We have all seen the published rules recently about the 1,000 largest public companies where the CEOs and the CFOs are personally having to certify us through the validity of financial statements. As you said our revenue numbers today do not put us in that group of companies having to do that. But I want you to know that if those rules were to be imposed at Tidewater, I certainly without hesitation would have no problem in certifying such financial statements.

Back to Dean for his comments.

Thank you, Keith. I don't think it's a really good idea to try to make predictions regarding the energy markets in general. In fact, I read a report that was issued yesterday from someone who is probably listening who said something to the effect that we would keep an keen eye on - earnings because CAPEX will say more about second half 02 than most of management. I guess that diminishes what I have to say.

For whatever it is worth I will make a few remarks and predictions. One thing I think that is pretty important and I think it has been minimized by the marketplace is the price of oil relative to the price of gas. There is an awful lot of uncertainties surrounding the present state of the north American gas market characterizes storage levels, and future prices. It is easy to minimize the continued strength in oil prices that has prevailed for some time.

Most of the customers served by Tidewater and our international operations are much more leveraged for oil than to gas. This is illustrated by the solid profitability of our overseas operations. Our markets in west Africa, South Africa, and parts of Latin America remain very strong. Tidewater has a broad and deep infrastructure, we are fortunate to count most of the major national international oil companies as our customers. Fully two-thirds of our fleet including most of our newest and largest vessels, those that presently command premium day rates if their work areas operate internationally.

The weakest spot in the overseas arena as I am sure all of you have heard is the North Sea. We have almost nothing in the North Sea market. Yet I am aware there is a concern regarding leakage of large vessels from the North Sea into some of our principle markets, particularly west Africa.

It is true that there may be some leakage of North Sea vessels into other areas. But we have only seen a small amount of this thus far. Tidewater has been able to maintain its market share with core customers and international regions outside of the North Sea. It is possible that this may become progressively more difficult, especially if the situation in the North Sea lingers. I believe the quality of our vessels, our safety record, the physical and practical demands of where we work, and contractual support to several large term projects with major customers will serve as effective hedges against significant new entrance into our core overseas markets.

We think the fact that Tidewater has been a principle player in the markets over the long-term is important to our customers. As is our sophisticated infrastructure. This isn't to say we don't constantly don't monitor these markets and adjust short-term - as necessary. But we believe we should be able to maintain consistently high profit margins.

It would be nice to conclude my remarks with positive descriptions in the overseas. The domestic off shore rig count that began to show early signs of improvement in April, stalled out and weakened slightly in May and June. Remained flat thus far in July.

Incremental rig demand in Mexico could ease the idle vessel somewhat. It may help us to some extent. But I don't think it will alleviate the problem to a great degree. We have heard a lot of uncertainty and caution on other conference calls regarding the anticipated uptrend in the Gulf of Mexico drilling activities. But with - apparently the economy is no longer weakening, but inching rather than striding forward. We won't guess to the gulf recovery timing.

All we will say the recovery should be a when rather than if event. We caution that when it occurs, we will still have to deal with some overhang of vital equipment before rates can once again strengthen from current levels. Even in the face of this though, we at Tidewater are holding at the heretofore idea that sacrificing utilization to maintain day rates. There hasn't been a time when utilization was in the 20% range with average day rates above 6,000 dollars.

Strategy of maintaining rates by sacrificing utilization was not enough to keep our domestic operations positive this quarter as Keith told you. As demand has been too low too long. So far we believe this is the right strategy for Tidewater as we have been able to maintain domestic income levels higher than previous (indiscernible). We are going to continue to monitor this strategy closely.

We intend to stay the course of our previously chosen plan in the gulf. When the upturn occurs, we believe we should see the real benefit of this pricing strategy as rates should rise from a plateau much above a start than any previous upturn.

Keith stole my upturn on the dividend. It has a greater than 2% yield. Many chided us for even having a dividend awhile ago. I think the dividend is the second or third highest in our sector.

Finally concerning the areas of accounting practices and corporate governance, our accounting practices have always been, thanks to my predecessors, extremely conservative and simple. As Keith has said in the past, what you see is clearly what you get at Tidewater. Keith and I intend to keep Tidewater's accounting on the same course.

Regarding corporate governance, we at Tidewater already have good governance. Most of the changes that are proposed at various entities are already in practice at Tidewater.

We at Tidewater are not faint of heart. We look forward to a future that will reward those investors that stay the course with us. It will reward them based on solid results, reported in a straightforward fashion and achieved by well thought and executed strategy.

Now we will take questions. Thank you. 00:30:13

At this time I would like to remind everyone if you would like to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q and A roster.

Your first question comes from Kurt Hallead of RBC Capital Markets.

Kind of question I have for you is I think you answered a lot of questions with respect to the domestic markets. You guys are definitely taking this pricing umbrella strategy - in a sense of price element reduction in the market out there. Is that consistent with what you guys are seeing as well. Or is this a strategy really been able to kind of keep the market propped fairly significantly?

I think that the description of pricing umbrella is not a good one. I think it is more a pricing parachute. What has happened is we have been able to slow everything down. But we can't stop the other guys from competing with each other. What has happened is you have a lot of guys competing with each other that keep dragging it down. We slowed that process down. But we don't stop it.

And I don't think it is going to change until some of this demand that we think is pent up and is about ready to come forth really does come forth. We are pretty close to that point in my opinion. But we sort of said this at the last conference call and got burned. I am afraid to get too far out in front.

Our activity is slowly picking up. One thing I will say that is encouraging. On some of the spot equipment that we are putting out to work, we have been getting some calls from people that we haven't had calls from in awhile. And we have been able to get very nice rates on boats that are going out either by themselves or in pairs. I would say that's a good sign.

It seems to me there is not that much overhang out there or we wouldn't be getting calls from people from whom we haven't gotten calls from in awhile.

Basically some of the capacity has been soaked up by the competition may be lower pricing and now some of the spot market work is coming to you guys.

Seems to me that's the case. Couple of our competitors their utilization is up this quarter as compared to last. What this means to me is there is less overhang out there right now.

Do you think there will be net attrition to the fleet in 2002 and 2003? Or is the gulf market going to be sized for 150 rates?

We will have some attrition. And I expect one or two competitors will have some attrition. Certainly the public companies I think have done a nice job of sort of managing the equipment that needs to go to dry dock. Some of the private companies, I don't know what they are up to. But I do think that there will be some attrition, yes.

Then given your strong balance sheet position, and your desire to want to keep it that way, how do you go about finding a balance between maybe effectuating some addition consolidation in the business with maintaining a very strong balance sheet? How do you manage that challenge? You got the wherewithal to make things happen, yet you want to maintain a strong balance sheet?

You have to have a willing seller as well as a willing buyer. And some of the - I think some people are still a little bit proud of their - what they might have. So I think it is consolidation at this point is unlikely.

You generally your strategy is not a consolidation adverse strategy?

That's absolutely correct.

Your next question comes from [Ken Seal] of CSFB.

Good morning, guys. Dean, we never intend to minimize what you might have to say. We think you will be reluctant to say any way.

I got a plug in for you any way.

I wanted to ask of any potential bright spots you might see demandwise in international markets. Clearly the increase in day rates is not robust right now. Where are bid rates versus current spot rates? Are you seeing any leading indicators in the lead counts in the rig counts in Africa or southeast Asia.

The west Africa is not growing. A few units have come over and injected themselves. But the (indiscernible) there are a few floaters floating around there. But the Deepwater looks like it will heat up. It hasn't yet. It may be some time out in the future. But it is a nice balance and we got a nice business there. But I see west Africa as just kind of staying like it is, unless there is an influx of jack up equipment and that doesn't appear likely at the moment.

I mean bid rates are kind of in line with the current rate you guys are realizing until you see some of the floaters go to work.

That's correct. That will be Deepwater work that will take up a different mix of vessels than traditionally support the west African market.

Any - you seeing any other international markets.

Ken, there is plenty happening in Mexico. I think what will be interesting is what happens in Brazil. I am optimistic about Brazil. But I think Mexico will be very interesting. We talked about this last conference call. And I told you that I thought that stuff that was being predicted for Mexico would happen. And that seems to be bearing out. So I think that's going to be a nice market. Currently for the foreseeable future.

Southeast Asia also seems to be doing okay.

How much incremental Gulf of Mexico capacity could migrate down to Mexico? How much can be met with what's already there? And how much is incremental?

Most will be coming from someplace else I think. They are (indiscernible) Mexican flag equipment. People with new fleets or small fleet hesitate to give up U.S. flag to go down there. Those who have boats and flags of convenience can get there easier than others. It will be interesting to see how it plays out. Most of the Mexican flag equipment (indiscernible). I think the equipment will have to come from elsewhere.

How big are you in Mexico or do you see it as an incremental.

We have been big in Mexico for a long time. We have a nice business.

Your next question comes from Bill Herbert of Simmons and Company.

Question for you, Deepwater Gulf of Mexico, you got two, three boats working there. Fourth coming out without a contract. Is that market getting weaker in your view? Is it staying flat? Holding steady? At current levels? Where are we now and what are your expectations going forward for Deepwater Gulf of Mexico?

Well, I think - I frankly think right now it is steady. I don't see - there are a couple of bids out there of which we are aware. But I don't see a lot of growth immediately. That doesn't mean that couldn't change.

But I will say also we think that the market for our Deepwater equipment in the Gulf of Mexico is under priced right now. We have seen some bidding that would - people are putting equipment to work at rates that we really don't think make a whole lot of sense. It may be that we will take some of this equipment and move it internationally if we don't feel like it is going to work at the right levels here domestically.

How many boats do you foresee, new boats being constructed, over the next 12 to 18 months entering this market, boats that are being built and are expected to be hitting the water over the next 12 to 18 months?

Well, one company it is hard to understand what they are doing because sometimes they put out a little disinformation as well as information. So I can't comment on that one. [Hornbeck] made an announcement about some boats they are building. And I think there is another private company that has got a couple in the pipeline. But we are not seeing very much.

So if the market is holding steady, baring a significant revival here in activity with respect to the market as a whole and Deepwater, and new boats coming into the market by definition you are going to have to have boats leave the Gulf of Mexico to other waters (indiscernible) correct?

A lot of boats, these boats are becoming super shell boats. That's leaving the market as far as you are concerned, Bill that, we see a little bit of that happening. But remember the kind of first generation of Deepwater supply both in the Gulf of Mexico started off when it went from 180 to 220, and went to 240. We are seeing some 225, and 230s, and 240, are now coming back as a super shelf boat and the new Hornbecks and Tidewaters, and hopefully the other company's boats are replacing them on the off shore. You are not seeing them leave the total market. You are seeing a shift where they are utilized.

That leads me to the balance sheet and in relation to the replacement program for the new generation of OSBs in the Gulf of Mexico, given the fact that you are having some of the first generation boats being crowded out to become super shelf boats in your words, Keith, and the revival in the Gulf of Mexico, lower than what we thought, what is your sense with respect to the replacement program for your standard OSBs, and the pace at which you want to prosecute that?

Boy, that's a long question. I would say, Bill, it is not - we look at that pretty closely. And I think for the time being we are still on course. We will modify it as we think. But I think we are still on course. We recently had a strategy session where we all bailed out of here for awhile and looked at this pretty closely. I want to - one of the reasons I think that we still are on course is we will be able to deploy much of this equipment internationally if we don't feel that the rates are proper domestically.

But, it is something - we will continue to look at it closely. We are not going to jump in it head long. We will do it in a measured way. I am confident we won't get too far ahead of ourselves.

Can you refresh us as to what "on course" means? I mean specify what the program is in terms of timing and magnitude.

Well, the timing - the timing is relatively current. What we are looking at, we have advertised heretofore that we are looking at 200 million dollars a year in new equipment. Next to that domestically versus international, I don't think I want to say right now. I just feel like there are enough competitors on the line where I don't want to tip my hand too much.

But I think 200 million a year is a good number for you to use.

With that thought, 200 million dollars per year, new boats coming in, you retire the old boats so it is not a net addition to the fleet. Correct?

We have been doing that in a very disciplined fashion. Yes.

Your next question comes from Jim Crandell of Lehman Brothers.

One general question, one specific question. Can you on the specific question, can you review the contract status of the Deepwater vessels that will be ready to enter the market over the balance of the year? And can you make a comment generally about these supply and demand for Deepwater vessels and how it is chasing up internationally over the next 12 months?

This is Steve Dick. I would say internationally certainly in west Africa, Deepwater is where everyone seems to be headed from Angola to Nigeria, and even the Congo, and Gabon in between. We have a good bit of Deepwater equipment there already. And there certainly will be a market for some of that going on after that. And southeast Asia is beginning to look good. And as Dean mentioned earlier, South America business is holding very well. And there is noise about Deepwater. Not a lot of actual activity at present. But it looks promising.

Can you comment specifically on your vessels that are coming out here over the next several months and the contract status of those vessels.

The first vessel that came out the first week of July immediately went on contract. Hit 755 L, went to work in Africa. We added a vessel not included in our construction program, Jim. We bear boated - bare boated a vessel for three years that we took delivery of the first week of July. It is not included in the three I said were coming in this quarter. It immediately went on a job in Nigeria. The other two we sent to [Damon Bankston,] it is finishing sea trials and DP certification, actively marketed in the gulf but has no contract for it. The other vessel in this quarter, the [Bell Hightower] that will be delivered in Singapore, once again because of contract itself the delivering is running 45 days late. We took a posture of not committing to a firm contract. It probably has another 10 or 15 days of sea trials. It does not have a fixed home to go to either. But it is a little easier to say that the real marketing push on that vessel did not begin until recently. Because we didn't know exactly when it was coming out of the yard. Three owned vessels this quarter, and total 4 added to the fleet. Two wet immediate to the jobs, and the other two don't have jobs.

I would mention, Jim, the other two are (indiscernible) in bids and bids that are still active. And we do not have a response yet from the customer.

So the fact we don't have something signed up yet, that could change rapidly. We think we made some competitive bids. But there have been some delays in announcing awards by some of our major customers.

And how many new vessels will you have coming on in the December quarter.

We are going to have the first two of our Gulf of Mexico replacement PSVs coming in. We will have the final - we will have one more of Deepwater boats from quality. We will have a new construction in Brazil. We will have the first of our - what's being called mini supply boats, we are calling them a fast supply boat in the Gulf of Mexico - that will be a new class of equipment for us. That is 175 fast supply boat. And we also will have one more vessel in Singapore in the next quarter, one of the big supply boats.

Last question, have you been happy with both the cost versus your budget and the quality and timing for building Deepwater vessels both in the various places that you are building them.

Not as happy as we would like to be. I would say about half of them have done as well or better than our expectations and about half haven't.

Any place that you are building out where there have been either overruns or disappointments in quality?

Yes. There are two places where we have had overruns. One place where we have a quality issue. And I think I will just leave it at that.

You can leave it at that. But does that affect future deliveries as well? And might it be a problem here for future vessel deliveries.

Not at this time.

Vessel delivery schedule I gave you entails our best estimate as of yesterday afternoon including all of those delays, Jim. When I gave you the two boats coming in, in '05, that includes the latest on the tail end of said coming in on the back end. So those numbers I gave you early on, include everything we anticipate, the late deliveries.

Your next question comes from [Gabe Marshank] of Sigma Capital.

Hi. I am looking at longer term and looking on the balance sheet, at the end of fiscal 2002, you had 998 PP and E. (Indiscernible.) I know there was some reduction due to FAS 142. But that is not enough to make the recommendation. I am trying to reconcile.

I am looking at the June on June quarter. June of 2001 quarter was 19.1 million. This year for the same June quarter it is 20 million. So it is up and it is up - both of those have amortization of goodwill taken out of them. It has been excluded in those. I am not sure -

Gabe, can you repeat the time period you were comparing.

I was looking at the progression of balance sheet stated net PP and E. It goes from 556 to about 771 million to 998 million at the end of fiscal 2002, presumably just over a billion now. That is nearly doubling in net PP and E. Yet depreciation in the quarter 20 million that's an annual rate of 80 million that's the same you saw in fiscal 2000. I don't understand quite how you had the PP and E on the balance sheet can double or go up by 80% and depreciation stay flat.

You have a mix in depreciation. As Keith said from June's last year to this year's, it is not that significant. It is a result of older vessels coming to the end of their useful lives, having some modifications and repair cost that is are capitalizing fairly small amount. Those are written off over a short period of time. You have the mix of additional depreciation and consider that all of this equipment that is being added to the fleet is being depreciated at a rate of 25 years. So the additional depreciation cost is not all that significant. And you have the offset of older vessels coming off of the depreciation schedule.

There has been no change in depreciation policy during that period of time. We are kind of feeling around here for the right answer to your question. But it is not a result of the way we calculate depreciation. The only thing that has happened during that period of time was the lack of amortization of goodwill from that point forward.

Were the older vessels depreciated at 25 years as well.

Yes.

Your next question comes from [Pierre Conner] of Hibernia/Southcoast Capital.

Some questions about market activity in some of the international segments probably for you, Steve. Dean alluded to southeast Asia being okay. And wondering if you can give some expansion on that. If you thought there was some strength. Had you heard about potential activity increases. India is an area we heard. Can you comment about that, first?

Peter, it turns out I end up supervising that area from a distance. I guess there has been a fair amount of increased activity publicized for India. For the time being I guess I am a little more skeptical of that than I was last quarter in comparison to Mexico. I think typically the Mexicans have been a little bit more consistent in following through some of their plans than what has occurred in India. But it looks like a good chance of what they are advertising to occur in India will go forward.

Also in Indonesia and Malaysia there is a lot of activity. (indiscernible). But between Indonesia, Malaysia, and India, I would say there are nice prospects in the far east.

I guess the west Africa question goes to Steve. Some of the work was term work related to projects. Are those progressing as you expected? Is there some timing issues? Are they coming along nicely.

As with most projects in west Africa, you have to kind of gear up for a little postponement. And some of the projects are dragging on. But there is enough on going and enough independence that rigs and boats are going from operator to operator up and down the west coast. So it is a steady business. And it is a nice business. But unless there is a lot of Deepwater, there is going to be some. But it looks to be pretty steady.

My sense was there was some additional demand due to some more projects that were coming on potentially calendar of next year.

I will take part of that. I was just with the head of southern gulf this weekend. As was Steve. We both were at a meeting. He - my feeling is that he is pretty enthusiastic about what they have got coming forward. I am sure you know listening to the Exxon and others, that they have been stymied in terms of their projects moving forward as fast as they would like.

I think that's about to change. I can't guarantee it. I am making a prediction. But I - my feeling is I got a lot of good feelings out of our time spent with the southern gulf people this weekend.

That's helpful. And then one more back into the gulf again on this same question that we have been kicking around a lot.

But you know a note that consensus rates have been holding flat, for the whole gulf not Tidewater, for the last two months. And as you have said the rate of decrease is far slower this time than the last.

Two perspectives to this, Dean. Your premium to that consensus rate is as a result of your desirability, does that have stability with time or grow? Do you have to get increasing overall rates and then kind of related to that, if we don't see an increase in the gulf activity and kind of go along at the same rate, does that begin to collapse or are you hold it?

Everything is a question of time. But I would say that it is sort of hard to have some of your customers mad at you. We are in the service business. And we have some people that are mad at us because we are holding these prices up and consequently providing this parachute for other people. So much so that some people don't even invite to us dinner any more. That's discouraging. Longer term if this thing goes on another year, and I don't think it will. But if it goes on a long time, it is something we just almost look at daily. We have got customers coming in and telling me and Steve - not customers, salesmen tell Steve and me we are nuts.

And I think for the time being - I actually think that we are pretty much close to the bottom right now. What makes me say that, just because I think we are seeing a little bit of a pickup. We have some customers saying they may slow down toward the end of the year. I have a feeling that will be balanced out with people who will be increasing their activity levels. I also think more people will.

But it is sort of a guess: The gas prices coming down recently have really thrown a wrench into everybody's thought process I think.

So if you are asking long-term can we continue to hold the rates up about the way we have the last year, I would say the rate of recrease would be about the same. But it is a tough act to pull off.

Don't construe my comments to convey that I believe that that would happen in terms of activity levels maintaining flat. But I wanted to get your perspective on what is driving the difference.

And then lastly, Keith, a lot of people have been talking about options and treatment. Can you comment on your treatment and perspective there.

We have (indiscernible) the accounting pronouncements, and disclosed in our 10-K every year the magnitude of options and what the charge against earnings would have been had we had used such an option or charged them against earnings.

It is interesting one of your co-analyst in the industry put out a report last week of all oil service companies where they took earnings for the last two years and they went back and did a pro forma, both asking about the extent overhang, and what the outstanding earnings would have been if the companies had been forced to expense options. The report itself showed defect on Tidewater's earnings for the last couple of years would have been 5% diminishment in earnings. That was in kind of the upper portion of the lower 1/3 of the oil service industry.

So we have at Tidewater consistently utilized options as a long-term incentive program. But the magnitude of those has been moderate. Our board of directors and in particular our compensation committee continues to be very much concerned not from the financial side but as to the absolute overhang of the amount of shares and in our 10-Q I think the number fully diluted on March 31st, and nothing issued since then, had all the previous options been exercised on that day would have added 8% to the outstanding shares.

So we think historically earnings would have been reduced by about 5%. The maximum overhang to the market today of all options is about 8%.

Okay. Appreciate your candor, and straightforwardness.

Next question comes from Mike Clark of Merrill Lynch.

Good afternoon. Just wondering, question for Steve. Have you taken a look at demand over the next 12 to 24 months just from servicing Deepwater production platform, sort of excluding swings in the floater market, what kind of new tonnage whether he need to service the production platforms in the golden triangle.

Golden triangle consists of what?

Gulf of Mexico, west Africa, Brazil.

I don't know how to answer that other than there is a number of projects that are on going. There are some on the - that are on the board but haven't come to fruition yet. We have got a stream of Deepwater vessels we have taken delivery of, and a few that are coming out over the next few years. And I think they will be absorbed into the market. I don't know how else to answer that.

I will try to answer at least part of it. In terms of Brazilian market you may or may not be aware of - at one point in time the Brazilian ship owners put pressure on the Brazilian government to get [Petrograss] to require Brazilian flag vessels to service that market. Consequently there are vessels there signed out to work that market. And we have two vessels.

There are about 70 foreign flag vessels working in the Brazilian market right now. And about 15 I think have been signed up by [Petrograss] in one form or other for new construction. Of the 70 down there, a good number are mature tonnage we would say. So I would think there are going to be a number of vessels that will be taken up by the Brazilian market, even those that do not have Brazilian flags. [Petrograss] will not allow the marketplace to be captured by Brazilian flag owners because they have had a very bad experience in the past. They want international competition in that market.

So I think that there is a good - there will be a nice place for some vessels in that market, west Africa we know some Exxon projects will come to fruition. They will need more tonnage in addition to the tonnage already there now.

The United States - I was reading a report that it seems to me the management service put out in terms of future deport services in the Gulf of Mexico. That looks promising. We are going to get it exactly right? Who knows. But I think - all of the things we bring to the table, especially our safety record although from time to time we have a setback, we are still by far the safest company out there in the service business. That means a lot to our customers. And our infrastructure and financial strength. We have got a lot of things going for us.

And I think we are making some really nice - in terms of management transition, I think we got a really good team here. I am confident. I hate to see the stock market the way it is and our stock price the way it is, but I think we are making the right moves. It is not coming as fast as we want. It is out of our control. But I think we are moving just where we want to go.

Follow up to Bill's question, you mentioned some crowding out of older tonnage in the Gulf of Mexico, I am wondering what extent you are seeing that in international markets Fany.

None yet. Not seeing any.

Last question, I am wondering how many vessels in the gulf you guys have warm stacked. You mentioned you had a few in your back pocket waiting for the upturn.

We could crew and get to work another 40 vessels almost immediately.

Again, if you would like to ask a question please press star and then the number one on the telephone keypad. At this time there are no further questions. Mr. Taylor, do you have any closing remarks?

I do not. Thank you very much. Thanks everyone for listening.

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