Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (08-11-08 10:14 AM)

Trico Marine Services Inc. CEO JOSEPH S COMPOFELICE bought 10000 shares on 8-05-2008 at $23.35

BUSINESS OVERVIEW

We are a leading provider of marine support vessels to the offshore oil and gas industry, operating primarily in international markets, with operations in the North Sea, West Africa, Mexico, Brazil, Southeast Asia, and the U.S. Gulf of Mexico. Using our larger and more sophisticated vessels, we provide support for the construction, installation, repair and maintenance of offshore facilities, the deployment of underwater remotely operated vehicles, (“ROVs”), sea floor cable laying, and trenching services. We intend to leverage our experience, relationships and assets to become a leading supplier of vessels to the subsea services market. Compared to our traditional towing and supply market, we believe the subsea services market is growing at a faster rate and provides a higher rate of return on new vessel construction.
Consistent with our subsea services market strategy, on November 23, 2007, we acquired all of the outstanding equity interests of Active Subsea ASA, a Norwegian public limited liability company (“Active Subsea”), for approximately $247 million in an all cash transaction. Active Subsea has eight multi-purpose service vessels, (“MPSVs”) currently under construction and scheduled for delivery in 2008 and 2009. These vessels are designed to support subsea services, including performing inspection, maintenance, and repair work using ROVs, dive and seismic support, and light construction activities. We have entered into long-term contracts for three of these MPSVs with contract periods ranging from two to four years. Two of these contracts also provide for multi-year extensions. The acquisition of Active Subsea more than doubles the number of vessels in our fleet with subsea capabilities and allows us to further leverage our global footprint and broaden our customer base to provide subsea services and support to subsea construction companies.
Our diversified fleet of vessels provides a broad range of other services to offshore oil and gas operators, including transportation of drilling materials, supplies and crews to drilling rigs and other offshore facilities and towing of drilling rigs and equipment from one location to another. As of December 31, 2007, our fleet, together with vessels held in joint ventures, consisted of 64 vessels, including ten large capacity platform supply vessels, six large anchor handling, towing and supply vessels, 41 supply vessels, six crew boats, and one line handling (utility) vessel. Additionally, we have 11 vessels on order for delivery in 2008 and 2009, including the eight MPSVs from the Active Subsea acquisition.
With respect to the 11 vessels we have on order as of December 31, 2007, their estimated delivery schedules (subject to potential delays) are as follows: two in the second quarter of 2008, three in the third quarter of 2008, two in the fourth quarter of 2008, and four in the first quarter of 2009. Four vessels are under contracts with terms up to five years, including options to renew.
We also hold a 49% equity interest in Eastern Marine Services Limited (“EMSL”), a Hong Kong limited liability company in which China Oilfield Services Limited (“COSL”) holds a 51% equity interest. EMSL develops and provides international marine support services for the oil and gas industry in China, other countries within Southeast Asia, and Australia. Of the 14 vessels we contributed to EMSL, five were mobilized to China during the first half of 2007, another eight will be bareboated by us until planned mobilizations to China during 2008, and the remaining vessel will be bareboated by us until the expiry of an existing contract.
We generate the majority of our revenues by chartering our marine support vessels on a day rate basis. We typically retain operational control over chartered vessels and are responsible for normal operating expenses, repairs, wages, and insurance, while our customers are typically responsible for mobilization expenses, including fuel costs.
We are a Delaware holding company formed in 1993. We provide all of our services through our direct and indirect subsidiaries in each of the markets in which we operate. Our domestic subsidiaries include Trico Marine Assets, Inc., which owns the majority of our vessels operating in the Gulf of Mexico and other international regions excluding the North Sea, and Trico Marine Operators, Inc., which operates all of our vessels in the Gulf of Mexico. In addition to our domestic operations, we operate internationally through a number of foreign subsidiaries, including Trico Shipping AS, which owns our vessels based in the North Sea. Please read Note 4 to our Consolidated Financial Statements included herein in Item 8 for a discussion of our reorganization in 2005.
Our principal executive offices are located at 3200 Southwest Freeway, Suite 2950, Houston, Texas 77027. Our website address is www.tricomarine.com where all of our public filings are available, free of charge, through website linkage to the Securities and Exchange Commission. The information contained on our website is not part of this annual report.

Unless the context represents otherwise, references to “we,” “us,” “our,” “the Company” or “Trico” are intended to represent Trico Marine Services, Inc. and its subsidiaries.
Growth Strategy
Our growth strategy focuses on improving the quality and stability of our cash flows while creating stockholder value throughout cyclical fluctuations in our industry. The key components of our business strategy are described below.
• Expand our presence in the subsea services markets. We seek to partner with companies providing subsea services by offering sophisticated vessels that serve as platforms for subsea work. We expect that the resulting charter contracts will generally produce higher margins and will be longer in duration than those in our traditional towing and supply market. The acquisition of Active Subsea is expected to position us to be one of the largest new subsea vessel operators in the world. We believe the subsea market is growing at a faster rate and will provide a higher rate of return on new vessel construction than our traditional towing and supply market.

• Continue to upgrade our fleet. Our upgrade program aims to improve our fleet’s capabilities and reduce its average age by focusing on more sophisticated next-generation vessels with broad customer applicability which can be deployed worldwide. Our upgrade program has a specific emphasis on vessels capable of supporting a variety of subsea work. We intend to continue to increase the number of vessels we have working in the subsea market by:
• purchasing vessels from subsea service companies for cash in return for long-term contracts;

• constructing purpose-specific vessels for customers under long-term contracts;

• acquiring companies that own these vessels or have favorable contracts to build such vessels; and

• Converting certain platform supply vessels that can be readily upgraded when current charter contracts expire, through the addition of cranes, moon pools, helidecks and accommodation units to make them more suitable for subsea and/or seismic activities.
• Continue to focus on international markets. We will continue to capitalize on our experience, personnel and fleet to expand our presence in emerging markets, while leveraging the strengths of our global partners. Our goal is to continue to efficiently deploy our vessels into profitable operations, potentially through the use of joint ventures, and with an emphasis on prudent mobilizations from the Gulf of Mexico to regions that have stronger long-term growth fundamentals, more favorable contracting terms and lower operating cost structures. Consistent with this strategy, we have reduced the number of our vessels in the Gulf of Mexico by more than 50% since 2004.

• Leverage our global geographic presence to exploit repositioning opportunities . By leveraging the expertise and resources of our global operations, we seek to identify and exploit opportunities to reposition vessels that are underutilized or inefficiently utilized. By moving assets among geographic regions or utilizing vessels in alternative service modes, we believe we can increase profitability.

• Maintain a conservative financial profile. We use a centralized and disciplined approach to pricing to achieve a balance of spot exposure and term contracts. Our expansion into the subsea market is intended to have a stabilizing influence on our cash flows, resulting from the longer-term contracts more prevalent in that market sector as compared to our traditional towing and supply business. We also intend to maintain our conservative capital structure, which we believe is a prudent financial strategy in our highly cyclical industry.
Our Fleet
Marine support vessels are used to support the installation, repair and maintenance of offshore facilities, the deployment of under water ROVs, sea floor cable laying and trenching services, to transport equipment, supplies and personnel to drilling rigs and to tow drilling rigs and equipment. The principal types of vessels that we operate can be summarized as follows:
Multi-Purpose Service Vessels. Multi-purpose service vessels (“MPSVs”) are vessels capable of providing a wide range of maintenance and supply functions in the offshore oilfield services business. These vessels offer sophisticated equipment (such as cranes, moonpools, and helipads), and capabilities (such as dynamic positioning and firefighting). MPSVs are designed to carry large equipment, accommodate a large number of personnel, and are generally used as platforms for subsea service providers.

Subsea Platform Supply Vessels. Subsea platform supply vessels (“SPSVs”) are platform supply vessels that have been placed into subsea service (seismic or subsea). These vessels have capabilities similar to those of a typical PSV but may have additional capabilities such as diesel electric power and dynamic positioning. SPSVs have large open deck space enabling “bolt-on” applications for deck equipment placement and may be of North Sea or USG class vessel design.
Platform Supply Vessels. Platform supply vessels (“PSVs”) are used primarily for certain international markets and deepwater operations. PSVs serve drilling and production facilities and support offshore construction, repair, maintenance and subsea work. PSVs are differentiated from other offshore support vessels by their larger deck space and cargo handling capabilities. Utilizing space on and below-deck, PSVs are used to transport supplies such as fuel, water, drilling products, equipment and provisions. Our PSVs range in size from 200 feet to nearly 300 feet in length and are particularly suited for supporting large concentrations of offshore production locations because of their large deck space and below-deck capacities.
Anchor Handling, Towing and Supply Vessels. Anchor handling, towing and supply vessels, (“AHTSs”), are primarily used to set anchors for drilling rigs and tow mobile drilling rigs and equipment from one location to another. In addition to these capabilities, AHTSs can be used for supply, oil spill recovery efforts, and tanker lifting and floating production, storage and offloading (“FPSO”) support roles. AHTSs are characterized by large horsepower vessel engines (generally averaging between 8,000-18,000 horsepower), shorter afterdecks, and specialized equipment such as towing winches.
Supply Vessels. Supply vessels generally are at least 165 feet in length and are designed primarily to serve drilling and production facilities and support offshore construction, repair and maintenance efforts. Supply vessels are differentiated from other types of vessels by cargo flexibility and capacity. In addition to transporting deck cargo, such as pipe, other drilling equipment, or drummed materials, supply vessels transport liquid and dry bulk drilling products, potable and drill water, and diesel fuel.
Crew Boats. Crew boats generally are at least 100 feet in length and are used primarily for the transportation of personnel and light cargo, including food and supplies, to and among drilling rigs, production platforms, and other offshore installations. Crew boats are constructed from aluminum and as a result, generally require less maintenance and have a longer useful life without refurbishment relative to steel-hulled supply vessels. All of our crew boats range from 110 to 155 feet in length.
Line Handling Vessel. The line handling vessels are outfitted with specialized equipment to assist tankers as they load from single buoy mooring systems. These vessels support oil offloading operations from production and storage facilities to tankers, and transport supplies and materials to and among offshore facilities.

As of December 31, 2007, the average age of our vessels was 19 years. A vessel’s age is determined based on the date of construction, provided that the vessel has not undergone a substantial refurbishment. However, if a major refurbishment is performed that significantly increases the estimated life of the vessel, we calculate the vessel’s age based on an average of the construction date and the refurbishment date.
Vessel Maintenance. We incur routine dry-dock inspection, maintenance and repair costs under U.S. Coast Guard regulations and to maintain American Bureau of Shipping, Det Norske Veritas, or other certifications for our vessels. In addition to complying with these requirements, we also have our own comprehensive vessel maintenance program that we believe allows us to continue to provide our customers with well maintained, reliable vessels.

We incurred approximately $16.9 million, $20.4 million, and $8.5 million in dry-docking and marine inspection costs in the years ended December 31, 2007, 2006 and 2005, respectively.
Non-regulatory dry-docking expenditures that are considered major modifications, such as lengthening a vessel, installing new equipment or technology, and performing other procedures which extend the useful life of the marine vessel, are capitalized and depreciated over the estimated useful life. All other non-regulatory dry-docking expenditures are expensed in the period in which they are incurred.
Dispositions of assets . Consistent with our strategy to further streamline our operations and to focus on core assets, in 2005, we initiated a strategy to dispose of our older, less utilized marine assets. This process resulted in the sale of three vessels, including two cold stacked supply vessels, and one active crew boat in the first quarter of 2007. In addition, we sold four vessels in 2006 and nine vessels in 2005.
Our Market Areas
We operate primarily in international markets, with operations in the North Sea, West Africa, Mexico, Brazil and Southeast Asia, as well as in the U.S. Gulf of Mexico. We continue to execute our strategy to expand our international presence. We expect that the acquisition of Active Subsea will allow us to further diversify our revenues and cash flows. The eight MPSVs under construction for Active Subsea are designed to work in all of our operating regions and provide a variety of services. During the year 2007, we had on average 36 vessels operating in international markets, with $185.5 million in revenues (or 74.1% of worldwide revenues) attributable to international operations. This represents an increase of 8 vessels over the vessels we had operating in international markets during 2006, and an increase of $39.6 million in revenues attributable to international operations.
Delivery of our 11 newbuild vessels over the next two years will allow us to focus on geographic areas where subsea activity has experienced significant growth over the past 24 months, including West Africa, Brazil, Mexico, and the mid-to-deepwater regions of the Gulf of Mexico. We continually evaluate our vessel composition and level of activity in each of these regions as well as other market areas for possible future strategic development.
North Sea. The North Sea market area consists of offshore Norway, Great Britain, Denmark, the Netherlands, Germany, Ireland, and the area west of the Shetland Islands. Historically, it has been the most demanding of all offshore areas due to harsh weather, erratic sea conditions, significant water depth and long sailing distances. The entire North Sea has strict vessel requirements which prevent many vessels from migrating to the area. Contracting in the region is generally for term work, often for multiple years. As of December 31, 2007, we had nine PSVs and six AHTSs actively marketed in the North Sea. Independent oil companies, national oil companies, and major oil companies historically predominated drilling and production activities in the North Sea; however, over the past few years, an increasing number of new, smaller entrants have purchased existing properties from the traditional participants or acquired leases, leading to an increase in drilling and construction.
West Africa. We operate from several ports in West Africa that are managed from our office in Lagos, Nigeria. In West Africa, we currently have vessels operating in Nigeria and Angola. Several operators have scheduled large scale offshore projects, and we believe that vessel demand in this market will continue to grow. As of December 31, 2007, we had one crew boat and 12 supply vessels actively marketed in West Africa. West Africa has become an area of increasing importance for new offshore exploration for the major international oil companies and large independents due to the prospects for large field discoveries in the region. We expect drilling and construction activity in this region to expand over the coming years.
Gulf of Mexico. The Gulf of Mexico is one of the most actively drilled offshore basins in the world with approximately 4,000 production platforms. Shallow water drilling primarily targets natural gas, and deepwater activity is split between natural gas and oil. The weather is generally benign, and harsh environment capable equipment is unnecessary. As of December 31, 2007, we had a total of 17 actively marketed vessels in the Gulf of Mexico, including 13 supply vessels and four crew boats. Independent oil companies have become the most active operators in the shallow water Gulf of Mexico. Independent and major international oil companies are more active in the deeper water regions. In general, drilling activity in the shallow water Gulf of Mexico has decreased in recent years as drilling rigs have moved to other markets.

Mexico. We currently have operations from two ports in Mexico that are managed from our office in Ciudad del Carmen. This market is characterized primarily by term work and recently has experienced modest increases in day rates. As of December 31, 2007, we had eight supply vessels actively marketed in Mexico. The Mexican constitution requires that Mexico operates all hydrocarbon resources in the country through its national oil company, PetrĂłleos Mexicanos (Pemex). We principally serve the construction market and are seeking to increase our services directly to Pemex. We believe that vessel demand in this market will continue to grow.
Southeast Asia. In June 2006, we entered into an agreement with COSL to form EMSL. EMSL’s commercial office is located in Shanghai, China. EMSL provides marine transportation services for offshore oil and gas exploration, production and related construction and pipeline projects in China, Australia, and Southeast Asia. This region has experienced tremendous economic growth and is projected to continue to increase its energy consumption. Trico contributed 14 vessels to EMSL in exchange for its 49% interest and $17.9 million cash. Of the 14 vessels we contributed to EMSL, five were mobilized to China during the first half of 2007, another eight will be bareboated by us until planned mobilizations to China during 2008, and the remaining vessel will be bareboated by us until the expiry of an existing contract. Expansion into this geographic region is an integral part of our continued international growth strategy. We are excited about the region’s demographics and growth potential.
Brazil. Offshore exploration and production activity in Brazil is concentrated in the deepwater Campos Basin, located 60 to 100 miles from the Brazilian coast. As of December 31, 2007, we had one line handler and one PSV actively marketed in Brazil. Both of these vessels are contracted to Petróleo Brasileiro S.A. (“Petrobras”), the state-owned oil company and the largest operator in Brazil. We expect to further expand our operations in Brazil, particularly as it relates to the subsea services market.
Please read Note 17 to our Consolidated Financial Statements included herein in Item 8 for a more detailed discussion of our segment and geographic information.
Customers and Charter Terms
Our principal customers in the North Sea are major integrated oil companies and large independent oil and gas companies as well as foreign government owned or controlled companies that provide logistics, construction and other services to such oil companies and foreign government organizations. The charters with these customers are industry standard time charters. Current charters in the North Sea include periods ranging from spot contracts of just a few days or months to long-term contracts of several years.
We have entered into master service agreements with substantially all of the major and independent oil companies operating in the Gulf of Mexico. Most of our charters in the Gulf are short-term contracts (60 to 90 days) or spot contracts (less than 30 days) and are cancelable upon short notice. Because of frequent renewals, the stated duration of charters frequently has little relation to the actual time vessels are chartered to a particular customer.
As of December 31, 2007, approximately 61% of our actively marketed fleet was committed under term contracts of various lengths. Some contracts contain options, at the customer’s sole discretion, to extend the contract for a specified length of time at a specified rate, while other contracts do not contain such option periods.

Due to changes in market conditions since the commencement of the contracts, average contracted day rates could be more or less favorable than market rates at any one point in time.
Charters are obtained through competitive bidding or, with certain customers, through negotiation. The percentage of revenues attributable to an individual customer varies from time to time, depending on the level of exploration and development activities undertaken by a particular customer, the availability and suitability of our vessels for the customer’s projects, and other factors, many of which are beyond our control. No individual customer represented more than 10% of consolidated revenues during 2007, 2006 or 2005, respectively.
Competition
The level of offshore oil and gas drilling, production and construction activity primarily determines the demand for marine support vessels. Such activity is typically influenced by exploration and development budgets of oil and gas companies, which in turn are influenced by oil and gas commodity prices. The number of drilling rigs in our market areas is a leading indicator of drilling activity.
Competition in the marine support services industry primarily involves factors such as price, service, safety record, reputation of vessel operators and crews, and availability and quality of vessels of the type and size required by the customer. We have several global competitors with operations in most or all of our market areas, and various other regional competitors in each market area.
Environmental and Government Regulation
We must comply with extensive government regulation in the form of international conventions, federal, state and local laws and regulations in jurisdictions where our vessels operate and/or are registered. These conventions, laws and regulations govern matters of environmental protection, worker health and safety, vessel and port security, and the manning, construction and operation of vessels. The International Maritime Organization, or IMO, has made the regulations of the International Safety Management Code, or ISM Code, mandatory. The ISM Code provides an international standard for the safe management and operation of ships, pollution prevention and certain crew and vessel certifications which became effective on July 1, 2002. IMO has also adopted the International Ship & Port Facility Security Code, or ISPS Code, which became effective on July 1, 2004. The ISPS Code provides that owners or operators of certain vessels and facilities must provide security and security plans for their vessels and facilities and obtain appropriate certification of compliance.
As we operate vessels in U.S. coastwise trade, we are also subject to the Shipping Act, 1916, as amended (“1916 Act”), and the Merchant Marine Act of 1920, as amended (“1920 Act,” or “Jones Act” and, together with the 1916 Act, “Shipping Acts”), which govern, among other things, the ownership and operation of vessels used to carry cargo between U.S. ports. The Shipping Acts require that vessels engaged in the U.S. coastwise trade be owned by U.S. citizens and built in the U.S. For a corporation engaged in the U.S. coastwise trade to be deemed a U.S. citizen: (i) the corporation must be organized under the laws of the U.S. or of a state, territory or possession thereof, (ii) each of the president or other chief executive officer and the chairman of the board of directors of such corporation must be a U.S. citizen, (iii) no more than a minority of the number of directors of such corporation necessary to constitute a quorum for the transaction of business can be non-U.S. citizens and (iv) at least 75% of the interest in such corporation must be owned by U.S. “citizens” (as defined in the Shipping Acts). Should the Company fail to comply with the U.S. citizenship requirements of the Shipping Acts, it would be prohibited from operating its vessels in the U.S. coastwise trade during the period of such non-compliance.
We believe that we are in substantial compliance with currently applicable laws and regulations. The risks of incurring substantial compliance costs, liabilities and penalties for non-compliance are inherent in offshore marine operations. Compliance with environmental, health and safety laws and regulations increases our cost of doing business. Additionally, environmental, health and safety laws change frequently. Therefore, we are unable to predict the future costs or other future impact of these laws on our operations. There is no assurance that we can avoid significant costs, liabilities and penalties imposed as a result of governmental regulation in the future.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
We generated record revenues and significantly expanded our presence in the subsea services market during 2007. In 2007, we reported net income of $62.9 million, or $4.16 per diluted share, on revenues of $256.1 million, an improvement over 2006 net income of $58.7 million, or $3.86 per diluted share, on revenues of $248.7 million. Our 2007 performance reflected continued strong industry demand for marine transportation vessels worldwide, coupled with higher overall day rates in the North Sea, and certain favorable changes in the tax law in Norway.
Consistent with our subsea services market strategy, on November 23, 2007, we acquired of all of the outstanding equity interests of Active Subsea ASA, a Norwegian public limited liability company (“Active Subsea”), for approximately $247.6 million. We used available cash to fund this acquisition. Active Subsea has eight multi-purpose service vessels, or MPSVs, scheduled for delivery in 2008 and 2009 that are designed to support subsea services, including performing inspection, maintenance and repair work using ROVs, dive and seismic support and light construction activities. We have entered into long-term contracts for three of these MPSVs with contract periods ranging from two to four years. Two of these contracts also provide for multi-year extensions.
We believe that the subsea market is in a major upturn driven by increased drilling activity and resulting demand for installation and maintenance of subsea equipment. The acquisition of Active Subsea more than doubles the number of vessels in our fleet with subsea capabilities and allows us to further leverage our global footprint and broaden our customer base to include subsea services and subsea construction companies.
At December 31, 2007, we have eleven newbuild vessels in construction including those obtained in our acquisition of Active Subsea. These newbuild vessels will significantly improve the quality and age of our fleet when they are delivered in 2008 and 2009.
As more fully described in Note 9 to the Consolidated Financial Statements included herein in Item 8, the Norwegian Tonnage Tax legislation, which was enacted in December 2007, retroactively provides for a tax exemption on profits earned after January 1, 2007. As a result, we recognized a tax benefit of $2.8 million for the year ended December 31, 2007 related to the change in tax legislation.
Key Focus for 2008 and Outlook
We believe the following trends should impact our earnings:
• increasing demand for our vessels in West Africa, Mexico, Brazil, Southeast Asia and other emerging markets;

• the reliability of supply in major oil production nations such as the United States, the Middle East and Nigeria; as affected by weather, geopolitical instability and other threats;

• continued high demand for vessels due to increased activity in areas ancillary to existing markets; and

• seasonal weather conditions in the North Sea and the Gulf of Mexico and their impact on offshore development operations.
In the future, we expect that emerging international markets such as West Africa and Southeast Asia, among other regions, and subsea activity will command a higher percentage of worldwide oil and gas exploration, development, production and related spending and will result in greater demand for our vessels. To capitalize on this long-term growth potential, we intend to invest in new vessels which can benefit from the growth in subsea activity and to deploy additional existing vessels to these regions as market conditions warrant or opportunities arise.
Sustained high oil and gas prices, increasing energy demand from China and other emerging markets, and threatened reliability of supply in major oil producing nations have resulted in increased offshore drilling, construction and repair activity worldwide by independents, major international energy companies and national oil companies. We expect international offshore drilling, exploration and production activity to remain strong for the remainder of 2008. However, it is unknown how much U.S. based vessel demand will be affected by the reduced number of jack-up rigs which service offshore drilling and exploration in the shelf region the U.S. Gulf of Mexico. The Company continues to deploy its fleet to international markets, thereby reducing its Gulf of Mexico fleet size and, as a result, reducing exposure to the volatility of the non-term charter portion of the U.S. Gulf of Mexico market. As the Company invests in the delivery of services in the subsea market, the Company expects to further reduce the volatility of non-term charter revenues by entering into longer term contracts in higher growth markets.
2005 Reorganization and Fresh-Start Accounting Adjustments
We exited bankruptcy protection on March 15, 2005. In accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code , we adopted “fresh-start” accounting as of March 15, 2005. Fresh-start accounting is required upon a substantive change in control and requires that the reporting entity allocate the reorganization value of our company to our assets and liabilities in a manner similar to that which is required under Statement of Financial Accounting Standards No. 141, Business Combinations . Under the provisions of fresh-start accounting, a new entity has been deemed created for financial reporting purposes.
We recognized a gain of $166.5 million on debt discharge due to the reorganization of our capital structure, the discharge of the $250 million 8.875% senior notes due 2012 (the “Senior Notes”) and the related accrued interest. During the first quarter of 2005, we expensed $6.7 million in fees related to the reorganization. Upon our reorganization, the excess of fair value of net assets over reorganization value (“negative goodwill”) was allocated on a pro-rata basis and reduced our non-current assets, with the exception of financial instruments, in accordance with SFAS No. 141. These fresh-start adjustments resulted in a charge of $219.0 million during 2005.
For purposes of Management’s Discussion and Analysis, we have combined the financial results for the Predecessor and Successor companies’ for the year 2005. The combined results for the year ended December 31, 2005 represent a non-GAAP financial measure.
Results of Operations
Charter Hire Revenues and Direct Operating Expenses. Our revenues and operating income are driven primarily by our fleet size and capabilities, vessel day rates and utilization. Our operating costs are primarily a function of our active fleet size. The most significant direct operating costs are wages paid to vessel crews, maintenance and repairs, marine inspection costs, supplies and marine insurance. We are typically responsible for normal operating expenses, repairs, wages and insurance, while our customers are typically responsible for mobilization expenses, including fuel costs.
The level of offshore oil and gas drilling, production and construction activity primarily determines the demand for our vessels. Such activity is typically influenced by exploration and development budgets of oil and gas companies, which in turn are influenced by oil and gas commodity prices. The number of drilling rigs in our market areas is a leading indicator of drilling activity.
The size, configuration, age and capabilities of our fleet, relative to our competitors and customer requirements also impact our day rates and utilization. In the case of supply vessels and platform supply vessels, their deck space and liquid mud and dry bulk cement capacities are important attributes. In certain markets and for certain customers, horsepower, dynamic positioning systems and fire-fighting systems are also important requirements. For crew boats, size and speed are important factors.
Our industry is highly competitive and our day rates and utilization are also affected by the supply of other vessels with similar configurations and capabilities available in a given market area.

The table below sets forth by vessel class, the average day rates and utilization for our vessels and the average number of vessels we operated during the periods indicated. Average day rates are calculated by dividing a vessel’s total revenues in a period by the total number of days such vessel was under contract during such period (excluding the effect of amortization of deferred revenues on unfavorable contracts). Average vessel utilization is calculated by dividing the total number of days for which a vessel is under contract in a period by the total number of days in such period.

Revenues:
Charter hire revenues were $250.2 million, $243.4 million and $171.8 million for the years ended December 31, 2007, 2006 and 2005 respectively. The increase in revenues for 2007 compared to 2006 was primarily driven by increased day rates for our North Sea class vessels. The increase in 2006 charter hire revenues compared to 2005 was primarily a result of significantly higher day rates across all classes of vessels and slightly higher utilization in both North Sea class vessels and Gulf class supply vessels.
For our North Sea class PSVs and AHTSs, average day rates increased by 32% and 25% for the years ended December 31, 2007 and 2006, compared to the comparable prior period. Utilization remained relatively constant during the years ended December 31, 2007, 2006 and 2005. The increased day rates during 2007, compared to 2006, were primarily due to strong spot market rates for AHTSs and a favorable exchange rate in the North Sea due to a weakening dollar. The increased average day rates for 2006, compared to 2005 can be attributed to increased demand for North Sea vessels during 2006 caused by shortages in the supply of available vessels and increased exploration and production and construction activities.
For the Gulf class supply vessels, average day rates decreased 22% in 2007 compared to a 71% increase in 2006 compared with 2005 with utilization increasing 14% and 10% for the years ended 2007 and 2006 respectively. The decrease in day rates in 2007 can be attributed to decreased activity in the Gulf of Mexico as more shallow water jack-up rigs left the region to work in other parts of the world. As a result, we redeployed a portion of the Gulf of Mexico fleet to other geographic areas, primarily West Africa and Mexico. In addition, we assigned vessels to longer term contracts with marginally lower average day rates. The increase in day rates for 2006 compared to 2005 can be attributable to high activity levels in the Gulf of Mexico created after hurricanes Katrina and Rita for assessment and repair work and a greater number of shallow water jack-up rigs. As a result of redeploying our Gulf of Mexico fleet to other parts of the world under term contracts, average utilization rates for Gulf class supply vessels increased in the years 2007 and 2006 compared to prior periods.
Day rates for our crew boats and line handler increased 20% and 99% with utilization decreasing 9% and 4% for the years ended December 31, 2007 and 2006 respectively. The increase in day rates can be attributed to the sale of vessels that were operated under bareboat agreements in 2005 and 2006. The decrease in utilization can be attributed to an increase in maintenance and classification work during 2007 and 2006.
Amortization of non-cash deferred revenues decreased $3.4 million and $5.8 million for the years ended December 31, 2007 and 2006, respectively primarily due to the expiration in both years of certain unfavorable contracts recorded at the exit date. This amortization was required after several of our contracts were deemed to be unfavorable compared to market conditions on the exit date, thus creating a liability required to be amortized as revenues over the remaining contract periods.

Other Vessel Income increased $4.0 million in 2007 compared to 2006, mainly due to increased bed and bunk revenues in the North Sea and West Africa, where the company continues to redeploy vessels. Other Vessel Income was slightly higher by $0.7 million in 2006 compared to 2005, mainly due to increasing presence in West Africa where opportunities for bed and bunk revenues are greater than the Gulf of Mexico
Direct operating expenses:
Direct vessel operating expenses increased by $20.1 million, or 19% in 2007 compared to 2006, primarily due to the following factors: increased mobilization and supply costs of $8.9 million in connection with redeploying vessels to international markets; increased repair and maintenance costs of $6.4 million, primarily related to continued high utilization of our North Sea Class vessels; increased crew labor cost of $8.3 million driven by a highly competitive labor market and a weaker U.S. dollar; partially offset by decreased classification costs of $3.5 million.
Direct vessel operating expenses increased from 2006 compared to 2005 by $21.7 million, or 25% primarily due to the following factors: increased classification and mobilization costs of $14.8 million primarily attributable to the destacking of nine cold stacked vessels to be mobilized to West Africa and Southeast Asia; increased labor cost of $5.9 million as a result of higher vessel utilization, crew labor rates, and an increased pension obligation in the North Sea of $1.1 million.
General and administrative expenses:
General and administrative expenses increased $13.7 million, or 50% in 2007 compared to 2006, primarily related to increases of $5.0 million in corporate compensation expense and non-cash stock compensation expense, primarily due to changes in executive management, increased administrative costs of $2.3 million related to establishing operations in Southeast Asia and West Africa, increases of $3.5 million associated with information system upgrades and professional fees associated with the successful proxy contest and pursuit of acquisitions that did not materialize, and $1.0 million related to the weakening U.S. dollar in areas in which we operate.
General and administrative expenses increased in 2006 by $1.7 million or 7% over 2005, primarily due to increased professional fees of $1.6 million associated with the consummation of the EMSL partnership and information system upgrades, increased payroll costs of $0.6 million primarily incurred to retain and recruit senior management, partially offset by reduced severance benefits paid in 2006.
Depreciation and amortization expense:
Depreciation and amortization expense decreased $0.6 million, or 3% in 2007 compared to 2006 primarily as the result of the sale of vessels in 2007. Depreciation expense decreased $2.1 million in 2006 compared to 2005 as a result of the reduction of the net book value through recordation of negative goodwill during fresh-start accounting on March 15, 2005, and a reduction of our fleet due to vessel sales.
Impairment on assets held for sale, net of recoveries:
During the fourth quarter of 2005, we committed to a plan to sell the Stillwater River SWATH crew boat, and recorded an impairment write down adjustment of $2.2 million in connection with our assessment of net realizable value. In 2006, we recorded an additional impairment of the Stillwater of $3.2 million. Partially offsetting this loss was $0.6 million in insurance recoveries received during 2006 related to 2005 damages from Hurricanes Katrina and Rita. In 2007, the company recognized a $0.1 million impairment of a supply vessel.
Gain on sales of assets:
Gain on sales of assets increased $1.6 million in 2007 compared to 2006 due to the sale of four vessels in the first quarter of 2007. We recognized a gain of $1.3 million in 2006 primarily due to the sale of three crew boats and a cold-stacked supply vessel. In 2005, we recognized a $2.5 million gain on the sale of assets, after completing the sale of three cold-stacked vessels, five line handlers and two PSVs.

Other Vessel Income increased $4.0 million in 2007 compared to 2006, mainly due to increased bed and bunk revenues in the North Sea and West Africa, where the company continues to redeploy vessels. Other Vessel Income was slightly higher by $0.7 million in 2006 compared to 2005, mainly due to increasing presence in West Africa where opportunities for bed and bunk revenues are greater than the Gulf of Mexico
Direct operating expenses:
Direct vessel operating expenses increased by $20.1 million, or 19% in 2007 compared to 2006, primarily due to the following factors: increased mobilization and supply costs of $8.9 million in connection with redeploying vessels to international markets; increased repair and maintenance costs of $6.4 million, primarily related to continued high utilization of our North Sea Class vessels; increased crew labor cost of $8.3 million driven by a highly competitive labor market and a weaker U.S. dollar; partially offset by decreased classification costs of $3.5 million.
Direct vessel operating expenses increased from 2006 compared to 2005 by $21.7 million, or 25% primarily due to the following factors: increased classification and mobilization costs of $14.8 million primarily attributable to the destacking of nine cold stacked vessels to be mobilized to West Africa and Southeast Asia; increased labor cost of $5.9 million as a result of higher vessel utilization, crew labor rates, and an increased pension obligation in the North Sea of $1.1 million.
General and administrative expenses:
General and administrative expenses increased $13.7 million, or 50% in 2007 compared to 2006, primarily related to increases of $5.0 million in corporate compensation expense and non-cash stock compensation expense, primarily due to changes in executive management, increased administrative costs of $2.3 million related to establishing operations in Southeast Asia and West Africa, increases of $3.5 million associated with information system upgrades and professional fees associated with the successful proxy contest and pursuit of acquisitions that did not materialize, and $1.0 million related to the weakening U.S. dollar in areas in which we operate.
General and administrative expenses increased in 2006 by $1.7 million or 7% over 2005, primarily due to increased professional fees of $1.6 million associated with the consummation of the EMSL partnership and information system upgrades, increased payroll costs of $0.6 million primarily incurred to retain and recruit senior management, partially offset by reduced severance benefits paid in 2006.
Depreciation and amortization expense:
Depreciation and amortization expense decreased $0.6 million, or 3% in 2007 compared to 2006 primarily as the result of the sale of vessels in 2007. Depreciation expense decreased $2.1 million in 2006 compared to 2005 as a result of the reduction of the net book value through recordation of negative goodwill during fresh-start accounting on March 15, 2005, and a reduction of our fleet due to vessel sales.
Impairment on assets held for sale, net of recoveries:
During the fourth quarter of 2005, we committed to a plan to sell the Stillwater River SWATH crew boat, and recorded an impairment write down adjustment of $2.2 million in connection with our assessment of net realizable value. In 2006, we recorded an additional impairment of the Stillwater of $3.2 million. Partially offsetting this loss was $0.6 million in insurance recoveries received during 2006 related to 2005 damages from Hurricanes Katrina and Rita. In 2007, the company recognized a $0.1 million impairment of a supply vessel.
Gain on sales of assets:
Gain on sales of assets increased $1.6 million in 2007 compared to 2006 due to the sale of four vessels in the first quarter of 2007. We recognized a gain of $1.3 million in 2006 primarily due to the sale of three crew boats and a cold-stacked supply vessel. In 2005, we recognized a $2.5 million gain on the sale of assets, after completing the sale of three cold-stacked vessels, five line handlers and two PSVs.

During 2005, the variance from the Company’s statutory rate was primarily due to the non-deductibility of fresh-start adjustments and non-inclusion of the gain on debt discharge, both of which were recorded upon emergence from bankruptcy. In addition, other non-deductible losses (including restructuring costs), income contributed by the Company’s Norwegian subsidiary for which income taxes were provided at a lower rate and the U.S. net deferred tax asset valuation allowance also contributed to the variances from the statutory rate. In prior years, the variance from the Company’s statutory rate was primarily due to the valuation allowance on U.S. net deferred tax assets, lack of deductibility of costs associated with the financial restructuring and, to a lesser extent, income contributed by the Company’s Norwegian subsidiary for which income taxes were provided at the Norwegian statutory rate of 28%. Income tax expense of $12.3 million for the year ended December 31, 2005 was primarily related to our Norwegian operations.
Noncontrolling interest in loss of consolidated subsidiary:
The noncontrolling interest in loss of consolidated subsidiary of $2.4 million and $2.0 million for the years ended December 31, 2007 and 2006, respectively, primarily represents the noncontrolling interest’s share of EMSL’s loss partially offset by the noncontrolling interest’s share of our Mexican partnership’s income. The losses in EMSL are primarily a result of business start-up, mobilization and maintenance and classification costs incurred to destack the five cold-stacked supply vessels to be mobilized to Southeast Asia.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
The average day rates, utilization for our vessels and average number of vessels, by vessel class is broken out between our Towing and Supply operations and our Subsea operations. Average day rates are calculated before the effect of amortization of deferred revenue on unfavorable contracts. Charter hire revenue for the first quarter of 2008 was down $2.5 million from the first quarter of 2007, primarily due to weakening day rates in the OSV vessel category in the Gulf of Mexico.

Towing and Supply Vessels. AHTS revenues increased $2.7 million in the first quarter 2008 compared to the first quarter of 2007 due to stronger day rates which more than offset a five percentage point decline in utilization. PSV revenues remained relatively stable in the first quarter of 2008 compared to the first quarter of 2007 as day rates were modestly lower and utilization remained consistent period over period. OSV revenues were down $4.9 million due to reduced day rates, offset by slightly higher utilization in the Gulf of Mexico.

Subsea Vessels . Our Subsea vessel revenues were up $0.8 million over the first quarter of last year as both day rates and utilization were higher.
The following information should be read in conjunction with the consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
Revenues. Charter hire revenues of $58.1 million decreased $2.5 million for the first quarter of 2008 compared to the same period a year ago primarily due to significantly lower day rates on our offshore supply vessels working in the Gulf of Mexico. We remain committed and continue to redeploy vessels to emerging international markets to increase utilization and to stabilize and/or increase our future cash flow. During the first quarter of 2008, three supply vessels were mobilized from the Gulf of Mexico, including two to Southeast Asia and one to West Africa. We also sold one supply vessel previously operating in the Gulf of Mexico.
Other vessel income of $1.0 million decreased $0.3 million in the first quarter of 2008 compared to the same period a year ago primarily as a result of revenue generated by the early termination of a charter hire contract in 2007.
Direct Operating Expenses. Direct vessel operating expenses of $33.0 million increased $1.6 million in the first quarter of 2008 compared to the first quarter of 2007, primarily due to continued mobilization of our fleet to international locations, weakening of the U.S. dollar which increases the dollar equivalent cost of our international businesses, and increased repair and maintenance costs on some of our older supply vessels.
General & Administrative Expenses. General and administrative expenses of $10.8 million increased $3.6 million for the first quarter of 2008 compared to the first quarter of 2007, primarily due to expanding our operations across West Africa, changes in management personnel throughout the Company, and the impact of European currencies’ continuous strengthening against the U.S. dollar.
Depreciation and Amortization Expense. Depreciation and amortization expense of $6.7 million increased $1.3 million in the first quarter of 2008 compared to the same period a year ago primarily due to the strengthening of the Norwegian Kroner increasing the dollar value of our North Sea vessels and the subsequent depreciation expense.
Gain on Sale of Assets. Gain on sale of assets for the first quarter of 2008 of $2.8 million was primarily related to the February 2008 sale of the land and buildings comprising our Houma, Louisiana facility Gain on sale of assets for the first quarter of 2007 of $2.8 million reflected the sale of four vessels.
Interest Expense. Interest expense decreased $0.8 million for the first quarter 2008 compared to the first quarter of 2007, as we are capitalizing interest of $1.2 million on the 11 vessels that we have under construction for the three months ended March 31, 2008.
Interest Income. Interest income of $1.6 million decreased $1.1 million in the first quarter of 2008 compared to the same period a year ago. The 2007 period included interest income from our investments in available-for-sale securities which were sold in late 2007 to partially fund our acquisition of Active Subsea.
Income Tax Expense. Consolidated income tax expense in the first quarter of 2008 was $2.3 million, which is primarily related to the income generated by our U.S., West African and Norwegian operations. The Company’s first quarter 2008 effective tax rate of 16.3% differs from the statutory rate primarily due to tax benefits associated with the Norwegian Tonnage Tax Regime, the Company’s permanent reinvestment of foreign earnings, and state and foreign taxes. Also impacting the Company’s effective tax rate was a reduction in Norwegian taxes payable related to a dividend made between related Norwegian entities during the quarter. We recorded income tax of $8.9 million in the first quarter of 2007, which was primarily related to income generated by our U.S. and Norwegian operations. The Company’s first quarter 2007 estimated tax expense was later reduced significantly due to tax legislation changes made in Norway during the fourth quarter of 2007.

Noncontrolling Interest in Consolidated Subsidiary. The noncontrolling interest in the income of our consolidated subsidiary of $0.8 million for the first quarter of 2008 represents the noncontrolling interest’s share of EMSL’s income. In 2007 there were significant start up costs associated with EMSL primarily as a result of dry-dock completions and mobilization of five cold-stacked vessels.
Liquidity and Capital Resources
Debt
Senior Convertible Debentures. In February 2007, we issued $150.0 million of our Senior Debentures. The Senior Debentures are convertible into cash and, if applicable, shares of the our common stock, par value $.01 per share, based on an initial conversion rate of 23.0216 shares of common stock per $1,000 principal amount of debentures (which is equal to an initial conversion price of approximately $43.44 per share), subject to adjustment and certain limitations. If converted, holders will receive cash up to the principal amount, and, if applicable, excess conversion value will be delivered in common shares. Holders may convert their Senior Debentures at their option at any time prior to the close of business on the business day immediately preceding the maturity date only under the following circumstances: (1) prior to January 15, 2025, on any date during any fiscal quarter (and only during such fiscal quarter) if the last reported sale price of our common stock is greater than or equal to $54.30 (subject to adjustment) for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five business-day period after any 10 consecutive trading-day period (the “measurement period”) in which the trading price of $1,000 principal amount of Senior Debentures for each trading day in the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; (3) if the Senior Debentures have been called for redemption or (4) upon the occurrence of specified corporate transactions set forth in the Indenture. Holders may also convert their Senior Debentures at their option at any time beginning on January 15, 2025, and ending at the close of business on the business day immediately preceding the maturity date. The conversion rate will be subject to adjustments in certain circumstances. In addition, following certain corporate transactions that also constitute a fundamental change (as defined in the Indenture), we will increase the conversion rate for a holder who elects to convert its Senior Debentures in connection with such corporate transactions in certain circumstances.
The Senior Debentures bear interest at a rate of 3.00% per year payable semiannually in arrears on January 15 and July 15 of each year. The Senior Debentures will mature on January 15, 2027, unless earlier converted, redeemed or repurchased.
We may not redeem the Senior Debentures before January 15, 2012. On or after January 15, 2012, we may redeem for cash all or a portion of the Senior Debentures at a redemption price of 100% of the principal amount of the debentures to be redeemed plus accrued and unpaid interest to, but not including, the redemption date. In addition, holders may require us to purchase all or a portion of their Senior Debentures on each of January 15, 2014, January 15, 2017 and January 15, 2022. In addition, if we experience specified types of corporate transactions, holders may require us to purchase all or a portion of their Senior Debentures. Any repurchase of the Senior Debentures pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the debentures to be purchased plus accrued and unpaid interest to the date of repurchase.
The Senior Debentures are senior unsecured obligations of the Company and rank equally in right of payment to all of the Company’s other existing and future senior indebtedness. The Senior Debentures are effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of our assets collateralizing such indebtedness and any liabilities of our subsidiaries.
U.S. Credit Facility. On January 31, 2008, the Company entered into a $50.0 million three-year credit facility (the “U.S. Credit Facility”) secured by an equity interest in direct material domestic subsidiaries, a 65% interest in Trico Marine Cayman, LP, and a pledge on the intercompany note due from Trico Supply AS to Trico Marine Operators, Inc. The commitment under this revolving credit facility reduces to $40 million after one year and $30 million after two years. Interest is payable at LIBOR plus an applicable margin ranging from 1.25% to 1.75%. The outstanding balance as of March 31, 2008 was $10.0 million.

EMSL Credit Facility Agreement. On June 25, 2007, EMSL, a jointly owned subsidiary of the Company, entered into a credit facility agreement (the “EMSL Credit Facility”). The EMSL Credit Facility is a secured revolving/term loan that will allow EMSL to borrow up to $5.0 million for financing of general working capital. It is collateralized by a first preferred mortgage on one vessel and bears an annual interest rate of London Interbank Offered Rate (“LIBOR”) plus a 0.08% margin. The maturity date of the EMSL Credit Facility is June 25, 2010.
NOK Revolver. We entered into our Norwegian Kroner revolving credit facility (the “NOK Revolver”) in June 1998. In April 2002, this credit facility was amended by increasing the capacity to NOK 800 million ($157.4 million at March 31, 2008) and revising reductions to the facility amount to provide for NOK 40 million ($7.9 million at March 31, 2008) reductions every six months starting in March 2003. The NOK Revolver provides for a NOK 280 million ($55.1 million at March 31, 2008) balloon payment in September of 2009. Amounts borrowed under the NOK Revolver bear interest at the Norwegian Interbank Offered Rate (“NIBOR”) plus 1.0%. At March 31, 2008, the NOK Revolver had a total facility amount of NOK 326 million ($64.2 million) with no outstanding balance.
The NOK Revolver is collateralized by mortgages on nine North Sea class vessels and contains covenants that require the North Sea operating unit to maintain certain financial ratios and places limits on the operating unit’s ability to create liens, or merge or consolidate with other entities. The NOK Revolver provides for other covenants, including affirmative and negative covenants with respect to furnishing financial information, insuring our vessels, maintaining the class of our vessels, mortgaging or selling our vessels, borrowing or guaranteeing loans, complying with certain safety and pollution codes, paying dividends, managing our vessels, transacting with affiliates, flagging our vessels and depositing, assigning or pledging our earnings. We are currently in compliance with the financial covenants in the NOK Revolver.
Subsea Credit Facility . On April 24, 2008 the Company entered into an eight-year multi-currency revolving credit facility in the amount of $100.0 million or equivalent in foreign currency, secured by first preferred mortgages on Trico Subsea AS vessels, refund guarantees related thereto, certain additional vessel-related collateral, and guarantees from Trico Supply AS, Trico Subsea Holding AS and each subsidiary of Trico Subsea AS that acquires a vessel. The commitment under this multi-currency revolving facility matures on the earlier of the eighth anniversary of the delivery of the final vessel and December 31, 2017. The commitment under facility reduces in equal quarterly installments of $3.125 million commencing on the earlier of the date three months after the delivery of the eighth and final vessel and June 30, 2010. Interest is payable at LIBOR plus an applicable margin ranging from 1.25% to 1.50% . The facility also subjects Trico Supply AS and its subsidiaries to certain financial and other covenants including, but not limited to, affirmative and negative covenants with respect to indebtedness, liens, declaration or payment of dividends, sales of collateral , loans, consolidated leverage ratio, consolidated net worth and collateral coverage.
Capital Requirements
Our ongoing capital requirements arise primarily from our need to maintain or improve equipment, invest in new vessels, provide working capital to support our operating activities and service debt.
As a regular part of our business, we review opportunities for the acquisition of other oilfield service assets and interests in other oilfield service companies and related businesses, and acquisitions of, or combinations with, such companies and related businesses. Any acquisition opportunities we pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. There can be no assurance that additional financing will be available on terms acceptable to us, or at all.
We operate through three primary operating segments: the North Sea, the U.S., and West Africa. The North Sea and the U.S. business segments have been capitalized and are financed on a stand-alone basis. Debt covenants and U.S. and Norwegian tax laws make it difficult, to some extent, for us to effectively transfer the financial resources from one segment for the benefit of the other.

Recent Changes in Norwegian Tax Laws. As a result of recent changes in Norwegian tax laws, all accumulated untaxed shipping profits generated between 1996 and December 31, 2006 in our tonnage tax company will be subject to tax at 28%. Two-thirds of the liability (NOK 251 million, $49.4 million) is payable in equal installments over 10 years. The remaining one-third of the tax liability (NOK 126 million, $24.8 million) can be met through qualified environmental expenditures. Any remaining portion of the environmental part of the liability not expended at the end of ten years would be payable to the Norwegian tax authority at that time.
EMSL. EMSL had $6.4 million in cash at March 31, 2008. Pursuant to the shareholders agreement, we will be required to fund start-up costs in accordance with our equity ownership to the extent that these start-up costs exceed EMSL’s available cash and line of credit.
Cash Flows
Our primary sources of cash flow during the three months ended March 31, 2008 were provided by operating activities, borrowings under our revolving credit facilities, the exercise of warrants, and asset sales. The primary uses of cash were payments for the additions to property and equipment. During the first three months of 2008, the Company’s cash balance increased $11.7 million to $143.2 million from $131.5 million at December 31, 2007.
Net cash provided by operating activities for the three months ended March 31, 2008 was $5.7 million, a decrease of $20.6 million from the same period a year ago. Significant components of cash provided by operating activities during the quarter ended 2008 included net earnings of $10.9 million, adjusted for non-cash items of $18.5 million and changes in working capital balances of $12.9 million.
Net cash used in investing activities was $23.2 million for the three months ended March 31, 2008, compared to $27.0 million for the same period a year ago. For the quarter ended March 31, 2008, investing cash flows included $27.9 million of additions to properties and equipment and we anticipate additional expenditures of approximately $100.0 million over the remainder of 2008, primarily associated with construction of vessels acquired from Active Subsea. Our investing cash flows also include $5.1 million of proceeds from the asset sales and a $3.7 million decrease in restricted cash related to the transfer of the remaining four vessels associated with the second closing of EMSL in January 2008. In the first quarter of 2007, investing cash outflows was primarily related to the purchase of available-for-sale securities of $27.5 million.
Net cash provided by financing activities was $23.6 million for the three months ended March 31, 2008, compared to $145.2 million for the same period a year ago. In 2008, financing activities included draws on the EMSL and U.S. Credit Facilities in the amount of $2.0 million and $10 million, respectively, in addition to net proceeds received from the exercise of warrants and options of $11.9 million. In February, 2007, we issued $150.0 million of 3% senior convertible debentures due in 2027 (the “Senior Debentures”). We received net proceeds of approximately $145.2 million after deducting commissions and offering costs of approximately $4.8 million. Net proceeds of the offering were used for the acquisition of Active Subsea, financing of our fleet renewal program and for general corporate purposes.

CONF CALL

Geoff Jones

I am Geoff Jones, CFO of Trico, and I will start with our forward-looking statements. The statements in this conference call regarding business plans or strategies, projected benefits from our acquisition of DeepOcean and other joint ventures, partnerships, projections involving revenues, operating results, forecasts from operations, anticipated capital expenditures and other statements which are not historical facts are forward-looking statements. Such statements involve risks and uncertainties and other factors detailed in the company's Forms 10-Q and 10-K, registration statements, and other filings with the Securities and Exchange Commission.

Should these risks or uncertainties materialize or the consequences of such a development worsen or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those expected. The company disclaims any intention or obligation to publicly update or revise such statements, whether as a result of new information, future events, or otherwise.

Now, our CEO, Joe Compofelice, will review the second quarter operations.

Joe Compofelice

Good morning and thanks for dialing in to our second quarter call. A great deal has changed in Trico during the quarter that's a bit of an understatement. So I'll start of with the most significant events beginning with the acquisition of DeepOcean and CTC Marine. While though it was one acquisition as you know there are two operating business in there and we expect to mange them as free standing profit centers.

In mid May, Trico acquired control of DeepOcean and CTC in a somewhat surprising transaction that was announced on May 16, at which point we owned about 52% of the company. By June 30, we owned over 90% of the company and as of now for all practical purposes we own 100% of these companies -- the acquisition was finished through a mandatory cash tender offer.

As investors and analysts I believe you'll find our published second quarter results exceptionally complicated, as a result of a) gaining control in the middle of the second quarter, having multiple percentages of ownership during the quarter, the intricacies of what you all know as purchase accounting for acquisitions, and finally even more complicated by the concept of a "imbedded derivative" associated with the convertible notes that were sold to finance the acquisition. It was also a financial hedge transaction that was in place at DeepOcean for those of you who have know us for a long-time that's not something you are likely going to see us do in the future and so there is the cost of unwinding that transaction.

So, I'm going to comment on the fundamentals of what's going on and Geoff Jones will address this most non-cash related accounting issues. I'm going to talk about the fundamentals of the Subsea service and the trenching business we acquired, and the current levels of activities for these businesses and for the second quarter the actual operations of our Towing and Supply division. So, let me start with DeepOcean.

The acquisition of DeepOcean moves us deeply into the area of services with a very high engineering component. This company performs structural inspections, modular handling of equipment for light construction for example setting a single slot tress in place, jumper installations, other subsea installation, seabed mapping of pipelines, pipeline inspections.

Right now, they are very involved in subsea decommissioning projects in the North Sea. But the most fundamental thing they have is a recurring regular inspection repair and maintenance business. So, in this regard, it's differentiated from what I would call a large construction company, whose businesses are characterized by epic contracts that have lump sum or fixed price aspects to it. This is a day rate business and often we are working with those large contractors, like Technip, like Saipem, like Subsea, doing 7 day rate work, as subcontractors to them.

Now for the second quarter for DeepOcean and here I'm speaking for full second quarter, and it's a little awkward speaking about it because in the numbers you are looking at there is no full second quarter. So, we are talking about a period where we didn't note anything until May 16th and then the percentages drop and so it's a little confusing. I think the only sensible way to talk about it is from the context of a full second quarter. They had some negative effect of vessel delays, as you will hear our Towing and Supply division does, and frankly the whole industry does.

But the quarter was characterized by strong EBITDA margins every bit where we expected them to be due to our diligence. They won several major new contracts with a revenue value of approximately $250 million. Their vessel delays, while individually they might have been longer or shorter than our Towing and Supply division judged from when we bought the company just a few months ago, they are not material events. The vessel that adversely affected EBITDA in the second quarter has been delivered and is under contract for Statoil for five years for inspection, repair and maintenance. That would be the third large vessel that DeepOcean has under a five year contract, and should be received any day now.

The backlog of firm orders for DeepOcean is a $600 million, as of June 30th. So, overall while the second quarter had some negative effect from vessel delays, we don't see that affected DeepOcean in the third quarter and the backlog is very strong and the margins are good and I can't think of a better deal that we could have done.

Second, I'll talk about the CTC trenching division. They also experienced effect of a vessel delay, the bad vessel also has been delivered, it's called the Volantis, it's a large vessel, it's 107 meters because all of our new vessels are the latest technology DP II. This Volantis vessel is designed for handling the trencher and ROV launched and recovery, but different from the vessels that we currently operate. This includes a large carousel that actually lays the flexible pipe and lays fiber optic cable in addition to burying that flexible pipe and fiber optic cable. So it's a very broad service vessel.

As of June 30th, CTC has a firm backlog for over 90% of their second half targeted revenues, and that backlog is a little over $170 million at June 30th. CTC has the world's largest and newest fleet of trenching vessels. From a vessel point of view that we operate, the average age is only five years. I failed to mention as to DeepOcean, the vessels we operate, the average age is only seven years.

In the case of CTC, as important as the vessels are themselves, is the trenching and jetting equipment that goes with it and it is similarly new. CTC also has a small, but we expect growing, presence in the telecom market and since June we started on a long six month laying burial project for Alcatel and that contract has the ability to be extended for a second six months.

In the second half of 2008, CTC has two additional contracts for cable lay, and also in the fourth quarter starting on a major new project in Brazil, direct to a ACRG, a large engineering company for Petrobras. So both of these businesses I think have an outlook that's very consistent with our expectations when we brought it. They have a very strong backlog, and I expect to see positive things in the second half, and beyond that. Our outlook for Subsea just improves everyday.

Our towing and supply division as the analysts have been reporting, the North Sea experienced very weak, in fact I think there may have been an analyst that called them dreadful, spot market day rates for anchor handlers in the North Sea, and that was definitely true. It had a negative effect on Trico that was partially offset by improving day rates in all of the other markets, and extremely high utilization in the Gulf of Mexico.

We've talked about our sensitivity to spot market rates, and those of you who really follow the anchor handlers know that the swings are more than substantial. So we made a decision in June to reduce our exposure to the spot market. Let me carefully describe that we have four anchor handlers in the spot market at Trico and that's been the case since these vessels were brought in the late 90s.

Today all four of those spot market vessels are on term work. We started making that change early in June and those four vessels; one is working for Petrobras through the rest of the year, almost to the end of the year at substantially higher rates. We are talking $70,000 a day on term work and I am not sure the spot market or anchor handlers other than for a week ever got to $70,000 in the North Sea.

We have another one working for Gazflot, the Russian company in the Barents Sea. It's on a term contract so we get paid everyday. It can only work till October, because in that part of the world things freeze up or icebergs or something and you've got to move out of the area. Then we have two anchor handlers on very attractive rates to Statoil. They just finished working offshore Ireland, on Ireland's west coast and so as of today and for the third quarter Trico has virtually, if not completely no North Sea spot market exposure.

On the topic of vessel deliveries; Trico had 11 on order to refresh everybody and DeepOcean and CTC had four more. So in the third quarter we've either taken delivery of three of the four vessels, or are taking delivery or are in sea trials, I will describe each one. Three of the four that were scheduled for the third quarter. The Volantis I have already described, the cable lay and trenching vessels for CTC. A large vessel I described for DeepOcean, that's on contract with Statoil. The Trico Mystic which is in river trails today and so it should be on ticket in August and it's already under contract through a contractor in Mexico for Petrobras and we have one more -- no that's it for the third quarter. And then we have a couple scheduled for the fourth quarter.

With the acquisition of DeepOcean, we're taking this opportunity to reconsider the second four of the eight vessels being built in India. When we acquired Active Subsea in November of last year, we basically acquired forward eight vessels, and we've struggled with delivery on those, no doubt about it. The first four are being built as intended, but we were able to get a lot input from DeepOcean because it's frankly getting very specific input from customers and users. In fact, they're the customer on the first two. So as a result of that we have decided on the last four to upgrade our design of all four of those vessels to a larger vessel, offering more capabilities and providing more marketing opportunities.

This enables Trico and DeepOcean bids, and Trico bids with other Subsea contractors to have a vessel with more capacity. This actually adds a few more months to the delivery schedule. We feel this is the right decision. Fully embracing our new Subsea platform and strategy is far more important to us than the negative short-term effects on EBITDA of adding three, four, five more months to the delivery schedule. We just end up with better vessels.

Now, don’t think we're starting those vessels from scratch, because then your obvious question was going to be - the price of these vessels might double mostly because of the steel cost. Virtually all, probably greater than 95% of the steel for these last four vessels is already on the ground, waiting to be formed into a hull. Those last four vessels we'll be referring to is the Mk III version of the VS470.

So, going forward notwithstanding some weakness in the North Sea for Towing and Supply in the second quarter and notwithstanding the second quarter effective vessel deliveries, we feel in terms of the markets, very good Towing and Supply for the third and fourth quarter and especially good about DeepOcean and CTC given the very high ratio of their backlog, a combined backlog of almost $800 million going forward. It's almost two years worth of revenue. We do see normalization of spot market rates in the North Sea, but again it's become absolutely unimportant to us in the third quarter and the fourth quarter after that, we will reconsider our position and see what happens.

So, with that, I'll have Geoff go over now some of the number detail and some of these accounting issues for the second quarter.

Geoff Jones

Thank you. As Jim mentioned, the financial results for the quarter reflect our acquisition of DeepOcean and because the acquisition was accomplished in steps, the results are difficult to interpret. But I'll try and make it as clear as possible to get pass the accounting noise and how the actual business is performing.

Our EPS was a loss to $0.20 for the quarter on total revenues of $104 million after getting effect to a non-cash charge of $4 million net of taxes or $0.27 per share diluted. This compares with earnings per share of $0.73 on total revenues of $59 million for the first quarter of 2008.

Now, the second quarter net loss and loss per share were reduced by a non-cash charge of $5.9 million, as a result of accounting for derivatives related to the 6.5% convertible debt instruments and foreign currency hedging. Now, it's important to point out that this is a completely non-cash swap charge driven by the complex accounting rules surrounding embedded derivative and is highly unusual.

Net income without the effect of these charges would have been $1 million or $0.07 per share dilutive. In addition, the results were adversely affected by the conversion of DeepOcean and CTC Marine results from IFRS to U.S. GAAP and the additional depreciation and amortization associated with purchase accounting.

Operating income for the second quarter was $4.3 million compared to the $11.5 million for the first quarter, but adjusting for the gain on sale of assets in Q1, we would be comparing operating income of $4.3 million for Q2 to $8.7 million for Q1. Now, as you may expect in an acquisition there is more noise below the operating income line than there is above the operating income line so I'll try and bifurcate the discussion to make it easier.

In our Towing and Supply division, operating income for the second quarter was $4.7 million on total revenues of $54.6 million compared to the operating income of $11.5 million or $8.7 million excluding the gain on sales of assets on total revenues of $59 million in the first quarter.

The comparable decrease of $4 million primarily reflects a surprisingly weak North Sea spot market in the second quarter, which adversely affected both the rates and utilization of our anchor handlers working in the spot market. On average, anchor handler rates for the quarter were down 16% from Q1 and utilization was down 9 percentage points. Now, the good news is that our average anchor handler rates are currently increasing and are approaching those reported in Q1 with utilization at 88%. Rates in our other markets continued to be strong.

Towing and Supply division, second quarter 2008 revenues consisted of 85% international including 51% from the North Sea and 23% from West Africa. The five Subsea platform supply vessels or SPSVs showed a substantial increase in day rate to almost $22,000 for the quarter, offset by a decrease in utilization to 77% due to the planned dry docking and upgrade of one of the vessels.

For our offshore supply vessels or OSVs, markets were stable to strengthening in all markets. Currently we have 11 OSVs in the US Gulf of Mexico which are earning day rates approaching $9,000 a day, utilization is almost a 100%. Following the end of the quarter, we mobilized two crew boats internationally from the US Gulf of Mexico.

Looking at the income statement, below the operating income line, interest expense of $6.2 million is about $6 million higher than the prior quarter due to increased debt levels to finance the acquisition and non-cash charge of $1 million related to the accounting for the 6.5% converts we issued.

Included in other loss net of $5.2 million, our non-cash charge is totaling $4.8 million related to the derivatives I mentioned earlier, again associated with the recent convert issue and foreign exchange hedges.

Our effective tax rate for the quarter was 25%, and we expect the book tax rate to be about 23% for the year, but more importantly our cash tax rate to be about 7%.

CapEx wise, we spent $26 million in the second quarter and expect to spend approximately $118 million of total CapEx in the remainder of 2008. That will leave around $158 million in CapEx to be spend relating to construction projects currently in hand.

At the end of the quarter, we had unrestricted cash and cash equivalents of almost $170 million. In addition, we had almost $150 million available under our Norwegian revolvers, and our total debt balance exceeded just over $900 million.

Now let's talk about the acquisition of DeepOcean and how it affected the quarterly numbers. Commencing May 16th through June 30th, we acquired in steps 99.07% of the shares of DeepOcean, and we're in the process of acquiring the balance.

The total acquisition cost was approximately $690 million including acquisition related fees, and we funded the acquisition with available cash, borrowings under an existing and new credit facilities assurance of $300 million of 6.5% convertible senior notes.

Since it was a step acquisition, we owned various percentages of DeepOcean throughout the quarter, but to put it simply, we owned an average of 68% of DeepOcean for the second half of the second quarter. So when you look at the income statement, we think that is consolidating a 100% of DeepOcean for half a quarter above the line or 50%, then eliminating an average non-controlling interest of 32% or really 16% below the line.

So, that's it for the half quarter, our Subseas services divisions which consist of DeepOcean and our five Subsea platform supply vessels, reported operating income of $2.9 million on revenue of $34.2 million.

Traditionally the second and third quarter, the peak season for Subsea in the North Sea, the low operating income was primarily due to the deferral of a Subsea decommissioning project in North Sea until Q3 and dry docking and crane installation on one of our owned vessels.

Subsea services division, second quarter 2008 revenues consisted of 97% outside the United States, including 77% from North Sea and 20% from Mexico. Also for the half quarter, our Trenching division, CTC Marine, reported an operating loss of $3 million on revenues of $15.5 million and was also effected by the deferral of the decommissioning project. As well as the deferrals in pipe laying, ploughing work, and a trenching project involving the Volantis to the third quarter.

Again, in the division there were the adverse effect of increased depreciation and amortization driven by purchase accounting. The Trenching division's second quarter revenues consisted of 100% outside the United States including 45% from Southeast Asia, and just over 30% from the Northsea. So as you can see, even though we've only owned DeepOcean and CTC Marine since the middle of May, the fact that the Subsea and Trenching segments are project driven, does landed of sales 30.46, it was a potential for lumpy quarters as projects shift from one quarter to another.

However, with the backlog that Joe had referred to of almost two years of revenue in the Subsea Entrenching divisions, we are looking forward to reaping the benefits of operating in the Subsea space going forward.


SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

1691 Views