10-K 1 glf20171231b_10k.htm FORM 10-K glf20171231b_10k.htm
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-33607

 

GulfMark Offshore, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

76-0526032

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 
   

842 West Sam Houston Parkway North, Suite 400

 

Houston, Texas

77024

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 963-9522

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.01 par value per share

Equity Warrants to purchase Common Stock

NYSE American

NYSE American

(Title of each class) (Name of each exchange on which registered)

                                  

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation in S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☑

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was $4,471,867 calculated by reference to the closing price of $0.22 for the registrant’s Class A common stock on the New York Stock Exchange on that date.

 

Number of shares of common stock, $0.01 par value per share, outstanding as of March 30, 2018: 7,221,645

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 
 

 

 

TABLE OF CONTENTS

 

   

Page

     

PART I

   

Item 1.

Business

5

 

General Business

5

 

Worldwide Fleet

6

 

Operating Segments

11

 

Other

14

Item 1A.

Risk Factors

20

Item 1B.

Unresolved Staff Comments

34

Item 2.

Properties

34

Item 3.

Legal Proceedings

    34

Item 4.

Mine Safety Disclosures

 34

     

PART II

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    35

Item 6.

Selected Financial Data

 37

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    39

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

  56

Item 8.

Financial Statements and Supplementary Data

58

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

90

Item 9A.

Controls and Procedures

90

Item 9B.

Other Information

91

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance

 91

Item 11.

Executive Compensation

95

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

104

Item 13.

Certain Relationships and Related Transactions, and Director Independence

107

Item 14.

Principal Accountant Fees and Services

108

     

PART IV

   

Item 15.

Exhibits and Financial Statement Schedules

109

Item 16.

Form 10-K Summary

111

 

2

 
 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K, particularly in Part I, Item 1 “Business” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain or be identified by the words “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “foresee,” “should,” “could,” “would,” “may,” “might,” “will,” “project,” “forecast,” “budget” and similar expressions. In addition, any statement concerning future financial performance (including, without limitation, future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by or against us, which may be provided by management, are also forward-looking statements as so defined. Statements made by us in this report that contain forward-looking statements may include, but are not limited to, information concerning our possible or assumed future results of operations and statements about the following subjects:

 

 

the effects of our Chapter 11 Case on our operations, including our relationships with employees, regulatory authorities, customers, suppliers, banks, insurance companies and other third parties, and agreements;

 

the effects of our Chapter 11 Case on our company and on the interests of various constituents, including holders of our common stock, par value $0.01 per share, or Common Stock, and debt instruments;

 

our ability to access the public capital markets;

 

our ability to continue as a going concern in the long term;

 

the potential adverse effects of our Chapter 11 Case on our liquidity, results of operations, or business prospects;

 

our ability to execute our business plan;

 

the cost, availability and access to capital and financial markets;

 

tax planning;

 

market conditions and the effect of such conditions on our future results of operations;

 

demand for marine supply and transportation services;

 

supply of vessels and companies providing services;

 

future capital expenditures and budgets for capital and other expenditures;

 

sources and uses of and requirements for financial resources;

 

market outlook;

 

operations outside the United States;

 

contractual obligations;

 

cash flows and contract backlog;

 

timing and cost of completion of vessel upgrades, construction projects and other capital projects;

 

asset impairments and impairment evaluations;

 

assets held for sale;

 

business strategy;

 

growth opportunities;

 

competitive position;

 

expected financial position;

 

interest rate and foreign exchange risk;

 

debt levels and the impact of changes in the credit markets and credit ratings for our debt;

 

timing and duration of required regulatory inspections for our vessels;

 

plans and objectives of management;

 

effective date and performance of contracts;

 

outcomes of legal proceedings;

 

compliance with applicable laws;

 

declaration and payment of dividends; and

 

availability, limits and adequacy of insurance or indemnification.

 

These types of statements are based on current expectations about future events and inherently are subject to a variety of assumptions, risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those expected, projected or expressed in forward-looking statements. It should be understood that it is not possible to predict or identify all risks, uncertainties and assumptions. Factors that could impact these areas and our overall business and financial performance and cause actual results to differ from these forward-looking statements include, but are not limited to, assumptions, risks and uncertainties associated with:

 

 

the risk factors discussed in Part I, Item 1A “Risk Factors”;

 

operational risk;

 

volatility in oil and natural gas prices or significant and sustained or additional declines in oil and natural gas prices;

 

sustained weakening of demand for our services;

 

general economic and business conditions;

 

3

 

 

 

the business opportunities that may be presented to and pursued or rejected by us;

 

insufficient access to sources of liquidity;

 

changes in law or regulations including, without limitation, changes in tax laws;

 

fewer than anticipated deepwater and ultra-deepwater drilling units operating in the Gulf of Mexico, the North Sea, offshore Southeast Asia or in other regions in which we operate;

 

unanticipated difficulty in effectively competing in or operating in international markets;

 

the level of fleet additions by us and our competitors that could result in overcapacity in the markets in which we compete;

 

advances in exploration and development technology;

 

dependence on the oil and natural gas industry;

 

drydocking delays or cost overruns on construction projects or insolvency of shipbuilders;

 

inability to accurately predict vessel utilization levels and day rates;

 

lack of shipyard or equipment availability;

 

unanticipated customer suspensions, cancellations, rate reductions or non-renewals;

 

uncertainty caused by the ability of customers to cancel some long-term contracts for convenience;

 

further reductions in capital expenditure budgets by customers;

 

ongoing capital expenditure requirements;

 

uncertainties surrounding deepwater permitting and exploration and development activities;

 

risks relating to our compliance with the Jones Act with respect to the U.S. citizenship requirements, and risks relating to the repeal, amendment or administrative weakening of the Jones Act or changes in the interpretation of the Jones Act;

 

uncertainties surrounding environmental and government regulations that could result in reduced exploration and production activities or that could increase our operations costs and operating requirements;

 

catastrophic or adverse sea or weather conditions;

 

risks of foreign operations, risk of war, sabotage, piracy, cyber-attack or terrorism;

 

public health threats;

 

disagreements with our joint venture partners;

 

assumptions concerning competition;

 

risks relating to leverage, including potential difficulty in maintaining compliance with covenants in our material debt or other obligations;

 

risks of currency fluctuations; and

 

the shortage of or the inability to attract and retain qualified personnel.

 

These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. There can be no assurance that we have accurately identified and properly weighed all of the factors that affect market conditions and demand for our vessels, that the information upon which we have relied is accurate or complete, that our analysis of the market and demand for our vessels is correct or that the strategy based on such analysis will be successful.

 

The risks and uncertainties included here are not exhaustive. Other sections of this report and our other filings with the Securities and Exchange Commission, or SEC, include additional factors that could adversely affect our business, results of operations and financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this report are based only on information currently available to us and speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or beliefs with regard to the statement or any change in events, conditions or circumstances on which any forward-looking statement is based. In addition, in certain places in this report, we may refer to reports published by third parties that purport to describe trends or developments in energy production and drilling and exploration activity. While we believe that each of these reports is reliable, we have not independently verified the information included in such reports. We specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.

 

4

 

 

PART I

 

ITEM 1. Business

GENERAL BUSINESS

Our Company

 

GulfMark Offshore, Inc., a Delaware corporation, was incorporated in 1996. Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer to GulfMark Offshore, Inc., its subsidiaries and its predecessors. We provide offshore marine support and transportation services primarily to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport materials, supplies and personnel to offshore facilities, and also move and position drilling and production facilities. The majority of our operations are conducted in the North Sea, offshore Southeast Asia and offshore the Americas. As of March 30, 2018, we operate a fleet of 69 owned or managed offshore supply vessels, or OSVs, in the following regions: 30 vessels in the North Sea, 10 vessels offshore Southeast Asia, and 29 vessels offshore the Americas. Our fleet is one of the world’s youngest, largest and most geographically balanced, high specification OSV fleets. Our owned vessels have an average age of approximately 11 years.

 

We have three operating segments: the North Sea, Southeast Asia and the Americas. Our chief operating decision maker regularly reviews financial information about each of these operating segments in deciding how to allocate resources and evaluate our performance. Our operations within each of these geographic regions have similar economic characteristics, services, distribution methods and regulatory concerns. All of the operating segments are considered reportable segments under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, No. 280, “Segment Reporting,” or ASC 280. For financial information about our operating segments and geographic areas, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Segment Results” included in Part II, Item 7, and Note 12 to our Consolidated Financial Statements included in Part II, Item 8.

 

Our principal executive offices are located at 842 West Sam Houston Parkway North, Suite 400, Houston, Texas 77024, and our telephone number at that address is (713) 963-9522. We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available free of charge to the public over the internet on our website at http://www.gulfmark.com and at the SEC’s website at http://www.sec.gov. Filings are available on our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. The preceding internet addresses and all other internet addresses referenced in this report are for information purposes only and are not intended to be a hyperlink. Accordingly, no information found or provided at such internet addresses or at our website in general (or at other websites linked to our website) is intended or deemed to be incorporated by reference in this report. You may also read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

Emergence from Bankruptcy Proceedings and Fresh Start Accounting

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition, or the Chapter 11 Case, under chapter 11 of title 11 of the United States Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court. On October 4, 2017, the Bankruptcy Court entered an order, or the Confirmation Order, approving the Amended Chapter 11 Plan of Reorganization, as confirmed, or the Plan. On November 14, 2017, or the Effective Date, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case. On the Effective Date, we adopted and applied the relevant guidance with respect to the accounting and financial reporting for entities that have emerged from bankruptcy proceedings, or Fresh Start Accounting. Under Fresh Start Accounting, our balance sheet on the Effective Date reflects all of our assets and liabilities at their fair values. Our emergence and the adoption of Fresh Start Accounting resulted in a new reporting entity, or the Successor, for financial reporting purposes. To facilitate our discussion and analysis of our vessels, financial condition and results of operations herein, we refer to the reorganized company as the Successor for periods subsequent to November 14, 2017 and the Predecessor for periods prior to November 15, 2017.

 

On the Effective Date, the Predecessor implemented the terms of the restructuring support agreement, or the RSA, that the Predecessor had entered into with certain holders, or the Noteholders, of the Predecessor’s senior notes, to support a restructuring on the terms of the Plan.  The RSA provided for, among other things, a $125 million cash rights offering for Successor equity, the exchange of the Predecessor’s senior notes plus unpaid interest for Successor equity, the cancellation of all of the Predecessor’s Class A common stock and the issuance of Successor equity to the Predecessor’s stockholders.  The Successor also obtained a term loan and revolving credit facility upon emergence.

 

For a more detailed discussion of our bankruptcy proceedings and disclosure of our final Predecessor balance sheet as of November 14, 2017 and our beginning Successor balance sheet as of November 15, 2017 see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7, and Note 2 to our Consolidated Financial Statements included in Part II, Item 8.

 

5

 

 

Offshore Marine Services Industry Overview

 

We utilize our vessels to provide services to our customers supporting the construction, positioning and ongoing operation of offshore oil and natural gas drilling rigs and platforms and related infrastructure, and substantially all of our revenue is derived from providing these services. The offshore marine services industry employs various types of OSVs that are used to transport materials, supplies and personnel, and to move and position drilling and production facilities. Offshore marine service providers are employed by companies that are engaged in the offshore exploration and production of oil and natural gas and related services. Services provided by companies in this industry are performed in numerous locations worldwide. The major markets that employ a large number of vessels include the North Sea, offshore Southeast Asia, offshore West Africa, offshore the Middle East, offshore Brazil and the Gulf of Mexico. Vessel usage is also significant in other international markets, including offshore India, offshore Australia, offshore Trinidad, the Persian Gulf, the Mediterranean Sea, offshore Russia and offshore East Africa. The industry is fragmented with many multi-national and regional competitors.

 

Our business is directly impacted by the level of activity in worldwide offshore oil and natural gas exploration, development and production, which in turn is influenced by trends in oil and natural gas prices. In addition, oil and natural gas prices are affected by a host of geopolitical and economic forces, including the fundamental principles of supply and demand. In particular, the oil price is significantly influenced by actions of the Organization of Petroleum Exporting Countries, or OPEC. Beginning in late 2014, the oil and gas industry experienced a significant decline in the price of oil causing an industry-wide downturn that continues into 2018. Beginning in late 2014, oil prices declined significantly from early year levels of over $100 per barrel. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in the first quarter of 2016. Prices began to recover over the remainder of 2016, stabilizing at over $40 per barrel for much of the second and third quarters of 2016 and further increasing to over $50 per barrel by year end. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $60 per barrel in January 2018. The downturn of the last few years has significantly impacted the operational plans for oil companies, resulting in reduced expenditures for exploration and production activities, and consequently has adversely affected the drilling and support service sector. The ongoing and sustained decline in the price of oil that began in 2014 has materially and adversely affected our results of operations. These lower commodity prices have negatively impacted our revenues, earnings and cash flows, and further sustained low oil and natural gas prices could have a material adverse effect on our liquidity.

 

The characteristics and current marketing environment in each operating segment are discussed below in greater detail. Each of the major geographic offshore oil and natural gas production regions has unique characteristics that influence the economics of exploration and production and, consequently, the market demand for vessels in support of these activities. While there is some vessel interchangeability between geographic regions, barriers such as mobilization costs, vessel suitability and cabotage restrict migration of some vessels between regions. This is most notable in the North Sea, where vessel design requirements dictated by the harsh operating environment may restrict relocation of vessels into that market, and in the U.S. Gulf of Mexico, where entry into the market is subject to Jones Act restrictions. Conversely, these same design characteristics make North Sea capable vessels unsuitable for other areas where draft restrictions and, to a lesser degree, higher operating costs, restrict migration.

 

WORLDWIDE FLEET

 

In addition to the vessels we own, we manage vessels for third-party owners, providing support services ranging from chartering assistance to full operational management. Although these managed vessels provide limited direct financial contribution, the added market presence can provide a competitive advantage for the manager. In addition, as a result of the industry downturn, we have removed some vessels from active service (also called stacking) to preserve cash flow. The following table summarizes our overall owned, managed and total fleet changes since December 31, 2016 and our stacked vessels as of March 30, 2018:

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

    67       3       70  

New-Build Program

    1       -       1  

Vessel Additions

    -       -       -  

Vessel Dispositions

    (2 )     -       (2 )

November 14, 2017 - Predecessor

    66       3       69  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Dispositions

    -       -       -  

December 31, 2017 - Successor

    66       3       69  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Dispositions

    -       -       -  

March 30, 2018 - Successor

    66       3       69  
                         

Stacked vessels

    29       1       30  

 

6

 

 

Vessel Classifications

 

OSVs generally fall into one or more of seven functional classifications derived from their primary or predominant operating characteristics or capabilities. These classifications are not rigid, however, and it is not unusual for a vessel to fit into more than one of the categories. These functional classifications are:

 

 

Anchor Handling, Towing and Support Vessels, or AHTSs, are used to set anchors for drilling rigs and to tow mobile drilling rigs and equipment from one location to another. In addition, these vessels typically can be used in supply roles when they are not performing anchor handling and towing services. They are characterized by shorter aft decks and special equipment such as towing winches. Vessels of this type with less than 10,000 brake horsepower, or BHP, are referred to as small AHTSs, or SmAHTSs, while AHTSs in excess of 10,000 BHP are referred to as large AHTSs, or LgAHTSs. The most powerful North Sea class AHTSs have up to 25,000 BHP. All of our AHTSs can also function as platform supply vessels.

 

 

Platform Supply Vessels, or PSVs, serve drilling and production facilities and support offshore construction and maintenance work. They are differentiated from other OSVs by their cargo handling capabilities, particularly their large capacity and versatility. PSVs utilize space on deck and below deck and are used to transport supplies such as fuel, water, drilling fluids, equipment and provisions. PSVs typically range in size from 150 to 300 feet. Large PSVs, or LgPSVs, generally range from 210 to 300 feet in length, with a few vessels somewhat larger, and are particularly suited for supporting large concentrations of offshore production locations because of their large, clear after deck and below deck capacities. The majority of the LgPSVs we operate function primarily in this classification but are also capable of servicing construction support.

 

 

Fast Supply or Crew Vessels, or FSVs or crewboats, transport personnel and cargo to and from production platforms and rigs. Older crewboats (early 1980s build or earlier) are typically 100 to 120 feet in length and are designed for speed and to transport personnel. Newer crewboat designs are generally larger, 130 to 185 feet in length, and can be longer with greater cargo carrying capacities. Vessels in the larger category are also called fast supply vessels. They are used primarily to transport cargo on a time-sensitive basis.

 

 

Specialty Vessels, or SpVs, generally have special features to meet the requirements of specific jobs. The special features can include large deck spaces, high electrical generating capacities, slow controlled speed and varied propulsion thruster configurations, extra berthing facilities and long-range capabilities. These vessels are primarily used to support floating production storing and offloading; diving operations; remotely operated vehicles; survey operations and seismic data gathering; as well as oil recovery, oil spill response and well stimulation. Some of our owned vessels frequently provide specialty functions.

 

 

Standby Rescue Vessels perform a safety patrol function for a particular area and are required for all manned locations in the North Sea and in some other locations where oil and natural gas exploitation occurs. These vessels typically remain on station to provide a safety backup to offshore rigs and production facilities and carry special equipment to rescue personnel. They are equipped to provide first aid, shelter and, in some cases, function as support vessels.

 

 

Construction Support Vessels are vessels such as pipe-laying barges, diving support vessels or specially designed vessels, such as pipe carriers, used to transport the large cargos of material and supplies required to support the construction and installation of offshore platforms and pipelines. A large number of our LgPSVs also function as pipe carriers.

 

 

Utility Vessels are typically 90 to 150 feet in length and are used to provide limited crew transportation, some transportation of oilfield support equipment and, in some locations, standby functions.

 

The following table summarizes our owned vessel fleet by classification and by region as of March 30, 2018:

 

Owned Vessels by Classification

 
   

AHTS

   

PSV

                         

Region

 

LgAHTS

   

SmAHTS

   

LgPSV

   

PSV

   

FSV

   

SpV

   

Total

 
                                                         

North Sea

    3       -       24       -       -       -       27  

Southeast Asia

    8       2       -       -       -       -       10  

Americas

    -       2       21       4       1       1       29  
      11       4       45       4       1       1       66  

 

7

 

 

Vessel Construction, Acquisitions and Divestitures

 

During 2016, the Predecessor sold one older vessel from our North Sea region fleet and three vessels from our Southeast Asia fleet for combined proceeds of $6.5 million. The sales of these vessels generated a combined loss on sales of assets of $8.6 million. In March 2017, the Predecessor sold two fast supply vessels and recorded combined losses on sales of assets of $5.3 million.

 

At December 31, 2015, we had two vessels under construction in the U.S. that were significantly delayed. In March 2016, we resolved certain matters under dispute with the shipbuilder and reset the contract schedules so that we would take delivery of the first vessel in mid-2016 and the second vessel in mid-2017, at which time a final payment of $26.0 million would be due. We took delivery of the first of these vessels during the second quarter of 2016. Under the settlement, we could elect not to take delivery of the second vessel and forego the final payment, in which case the shipbuilder would retain the vessel. In May 2017, we elected not to take the vessel. We have no further purchase obligations under such contract.

 

We had a vessel under construction in Norway that was scheduled to be completed and delivered during the first quarter of 2016; however, in the fourth quarter of 2015 we amended our contract with the shipbuilder to delay delivery of the vessel until January 2017. Concurrently, in order to delay the payment of a substantial portion of the construction costs, we agreed to pay monthly installments through May 2016 totaling 92.2 million NOK (or approximately $11.0 million) and to pay a final installment on delivery in January 2017 of 195.0 million NOK (or approximately $23.3 million at delivery). We paid such final installment and took delivery of this vessel in January 2017.

 

 

Vessel Additions Since December 31, 2016

 

 

 

Year

 

Length

   

 

   

 

 

Month

Vessel Region Type(1)

Built

 

(feet)

     BHP(2)      DWT(3)  

Delivered

                           

North Barents

N. Sea

LgPSV

2017

  304     11,935     4,700  

Jan-17

 

 

Vessels Disposed of Since December 31, 2016

     

Year

 

Length

             

Month

Vessel Region Type(1)

Built

 

(feet)

    BHP(2)     DWT(3)  

Disposed

                           

Mako

Americas

FSV

2008

  181     7,200     552  

Mar-17

Tiger

Americas

FSV

2009

  181     7,200     552  

Mar-17

 

(1) LgPSV - Large Platform Supply Vessel, FSV - Fast Supply Vessel

(2)BHP - Brake Horsepower

(3)DWT - Deadweight Tons

 

 

Maintenance of Our Vessels and Drydocking Obligations

 

We are required to make expenditures for the certification and maintenance of our actively marketed vessels, and those expenditures typically increase with the age of the vessels. We have determined that generally we will not maintain stacked vessels in class until they are likely to achieve positive cash flow in a return to market. However, we will determine the need to perform drydocks in some circumstances such as the ability to easily maintain class or a potential sale. The deferred drydocks will eventually be required prior to returning the vessels to active service and, depending on numerous factors such as length of time a vessel has been idle or stacked, the cost for such a drydock could be materially more than a normal drydock. The demands of the market, management judgment as to which vessels to market and which vessels to stack, the expiration of existing contracts, the commencement of new contracts, and customer preferences influence the timing of drydocks. Future drydock costs will depend on vessel activity and vessel class requirements. For accounting purposes, prior to the Effective Date the Predecessor expensed the cost of drydocks as the costs were incurred. Under Fresh Start Accounting, the Successor has elected to capitalize the cost of drydocks and amortize the costs to expense over 30 months.

 

8

 

 

Vessel Listing

 

As of March 30, 2018, we operate a fleet of 69 vessels. The 66 vessels that we own are listed in the table below (which excludes the three vessels we manage for other owners):

 

Owned Vessel Fleet

 

 

 

Year

Length

 

 

 

Vessel Region Type (1)

Built

(feet)

BHP(2) DWT (3)

Flag

 

 

 

 

 

 

 

 

Highland Challenger

N. Sea

LgPSV

1997

220

5,450

3,115

UK

Highland Rover

N. Sea

LgPSV

1998

236

5,450

3,200

Malta

North Stream

N. Sea

LgPSV

1998

276

9,600

4,585

Norway

Highland Fortress

N. Sea

LgPSV

2001

236

5,450

3,200

Malta

Highland Bugler

N. Sea

LgPSV

2002

220

5,450

2,986

UK

Highland Navigator

N. Sea

LgPSV

2002

276

9,600

4,510

Malta

North Mariner

N. Sea

LgPSV

2002

276

9,600

4,400

Norway

Highland Courage

N. Sea

LgAHTS

2002

262

16,320

2,750

Malta

Highland Citadel

N. Sea

LgPSV

2003

236

5,450

3,280

UK

Highland Eagle

N. Sea

LgPSV

2003

236

5,450

3,200

UK

Highland Monarch

N. Sea

LgPSV

2003

220

5,450

3,000

UK

Highland Valour

N. Sea

LgAHTS

2003

262

16,320

2,750

Malta

Highland Endurance

N. Sea

LgAHTS

2003

262

16,320

2,750

UK

Highland Laird

N. Sea

LgPSV

2006

236

7,482

3,102

UK

Highland Prestige

N. Sea

LgPSV

2007

284

10,767

4,993

UK

North Promise

N. Sea

LgPSV

2007

284

10,767

4,993

Norway

Highland Prince

N. Sea

LgPSV

2009

284

10,738

4,826

UK

North Purpose

N. Sea

LgPSV

2010

284

10,738

4,836

Norway

Highland Duke

N. Sea

LgPSV

2012

246

7,482

3,121

UK

North Pomor

N. Sea

LgPSV

2013

304

11,465

5,000

Norway

Highland Defender

N. Sea

LgPSV

2013

286

9,598

5,100

UK

Highland Chieftain

N. Sea

LgPSV

2013

260

9,598

4,000

UK

Highland Guardian

N. Sea

LgPSV

2013

286

9,598

5,100

UK

Highland Knight

N. Sea

LgPSV

2013

246

7,482

3,116

UK

North Cruys

N. Sea

LgPSV

2014

304

11,465

5,000

Norway

Highland Princess

N. Sea

LgPSV

2014

246

7,482

3,081

UK

North Barents

N. Sea

LgPSV

2017

304

11,935

4,700

Norway

 

 

 

 

 

 

 

 

Sea Sovereign

SEA

SmAHTS

2006

230

5,500

1,875

Panama

Sea Cheyenne

SEA

LgAHTS

2007

250

10,760

2,700

Malaysia

Sea Supporter

SEA

SmAHTS

2007

230

7,954

2,605

Panama

Sea Apache

SEA

LgAHTS

2008

250

10,760

2,700

Panama

Sea Choctaw

SEA

LgAHTS

2008

250

10,760

2,700

Malaysia

Sea Kiowa

SEA

LgAHTS

2008

250

10,760

2,700

Panama

Sea Cherokee

SEA

LgAHTS

2009

250

10,700

2,700

Panama

Sea Comanche

SEA

LgAHTS

2009

250

10,760

2,700

Panama

Sea Valiant

SEA

LgAHTS

2010

230

10,000

2,058

Malaysia

Sea Victor

SEA

LgAHTS

2010

230

10,000

2,058

Malaysia

 

9

 

 

Owned Vessel Fleet

 

 

 

Year

Length

 

 

 

Vessel Region Type (1)

Built

(feet)

BHP (2) DWT (3)

Flag

 

 

 

 

 

 

 

 

Highland Scout

Americas

LgPSV

1999

218

4,640

2,800

Panama

Austral Abrolhos

Americas

SpV

2004

215

7,100

2,000

Brazil

Orleans

Americas

LgPSV

2004

252

6,342

2,929

USA

Bourbon

Americas

LgPSV

2004

252

6,342

2,929

USA

Royal

Americas

LgPSV

2004

252

6,342

2,929

USA

Chartres

Americas

LgPSV

2004

252

6,342

2,929

Mexico

Iberville

Americas

LgPSV

2005

252

6,342

2,929

USA

Coloso

Americas

SmAHTS

2005

199

5,916

1,645

Mexico

Titan

Americas

SmAHTS

2005

199

5,916

1,645

Mexico

Bienville

Americas

LgPSV

2005

210

6,342

2,374

USA

Conti

Americas

LgPSV

2005

210

6,342

2,374

USA

St. Louis

Americas

LgPSV

2005

252

6,342

2,929

USA

Toulouse

Americas

LgPSV

2004

252

6,342

2,929

USA

Esplanade

Americas

LgPSV

2005

252

6,342

2,929

USA

First and Ten

Americas

PSV

2007

190

3,894

1,686

USA

Double Eagle

Americas

PSV

2007

190

3,894

1,686

USA

Triple Play

Americas

PSV

2007

190

3,894

1,686

USA

Grand Slam

Americas

LgPSV

2008

224

3,894

2,129

USA

Slam Dunk

Americas

LgPSV

2008

224

3,894

2,129

USA

Touchdown

Americas

LgPSV

2008

224

3,894

2,129

USA

Hat Trick

Americas

PSV

2008

190

3,894

1,686

USA

Jermaine Gibson

Americas

LgPSV

2008

224

3,894

2,129

USA

Homerun

Americas

LgPSV

2008

224

3,894

2,129

USA

Knockout

Americas

LgPSV

2008

224

3,894

2,129

USA

Hammerhead

Americas

FSV

2008

181

7,200

552

USA

Thomas Wainwright

Americas

LgPSV

2010

242

4,200

2,448

USA

Polaris

Americas

LgPSV

2014

272

9,849

3,523

USA

Regulus

Americas

LgPSV

2015

272

9,849

3,523

USA

Hercules

Americas

LgPSV

2016

286

10,960

5,300

USA

 

 

 

(1)

Legend:

LgPSV — Large platform supply vessel

PSV — Platform supply vessel

LgAHTS — Large anchor handling, towing and supply vessel

SmAHTS — Small anchor handling, towing and supply vessel

SpV — Specialty vessel, including towing and oil spill response

FSV – Fast Supply Vessel

(2)

Brake horsepower

(3)

Deadweight tons

 

10

 

 

OPERATING SEGMENTS

 

The North Sea Operating Segment

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

  24     3     27  

New-Build Program

  1     -     1  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

November 14, 2017 - Predecessor

  25     3     28  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

December 31, 2017 - Successor

  25     3     28  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

Intercompany Transfers

  2     -     2  

March 30, 2018 - Successor

  27     3     30  
                   

Stacked Vessels

  8     1     9  

 

 

Market and Segment Overview

 

We define the North Sea market as offshore Norway, Great Britain, the Netherlands, Denmark, Germany, Ireland, the Faeroe Islands, Greenland and the Barents Sea. Historically, this market has been the most demanding of all exploration frontiers due to harsh weather, erratic sea conditions, significant water depth and some long sailing distances. Exploration and production operators in the North Sea market have typically been large and well-capitalized entities (major and state-owned oil and natural gas companies and large independents) in large part because of the significant financial commitment required. Projects in the North Sea tend to be large in scope with long planning horizons. As a result, vessel demand in the North Sea has historically been more stable and less susceptible to abrupt swings than in other regions.

 

The North Sea market can be broadly divided into three service segments: exploration support; production platform support; and field development and construction (which includes subsea services). The exploration support services market represents the primary demand for AHTSs and has historically been the most volatile segment of the North Sea market. While PSVs support the exploration segment, they also support the production platform and field development and construction segments, which generally are not affected significantly by the volatility in demand for the AHTSs. Our North Sea-based fleet is oriented toward supply vessels that work production platform support and field development and construction, which are the more stable segments of the market.

 

Unless deployed to one of our other operating segments under long-term contract, vessels based in the North Sea but operating temporarily out of the region are included in our North Sea operating segment statistics, and all vessels based out of the region are supported through our onshore bases in Aberdeen, Scotland and Sandnes, Norway. The region typically has weaker periods of demand for vessels in the winter months of October through February primarily due to lower construction activity and harsh weather conditions affecting the movement of drilling rigs.

 

Market Development

 

Vessel demand in the North Sea is directly related to drilling and development activities in the region and construction work required in support of these activities. Geopolitical events, the demand for oil and natural gas in both mature and emerging countries, commodity prices and a host of other factors influence the expenditures of both independent and major oil and gas companies.

 

Exploration and development spending in the North Sea has declined in each year since the beginning of the market downturn that began in late 2014, as operators continue to be cautious in the lower oil price environment. Future commodity price uncertainty has put long-term planning and significant commitments to future spending on hold as operators focus on cost savings, efficiencies and cash preservation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Markets – North Sea” included in Part II, Item 7.  

 

11

 

 

The Southeast Asia Operating Segment

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

  10     -     10  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

November 14, 2017 - Predecessor

  10     -     10  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

December 31, 2017 - Successor

  10     -     10  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

March 30, 2018 - Successor

  10     -     10  
                   

Stacked Vessels

  5     -     5  

 

 

Market and Segment Overview

 

The Southeast Asia market is defined as offshore Asia bounded roughly on the west by the Indian subcontinent and on the north by China, then south to Australia and east to the Pacific Islands. This market includes offshore Brunei, Indonesia, Malaysia, Myanmar, the Philippines, Thailand, Australia, New Zealand, Bangladesh, Timor-Leste, Papua New Guinea and Vietnam. Traditionally, the design requirements for vessels in this market were generally similar to the requirements of the shallow water U.S. Gulf of Mexico. However, advanced exploration technology and rapid growth in energy demand among many Pacific Rim countries have led to more remote drilling locations, which has increased both the overall demand and the technical requirements for vessels. All vessels based out of the region are supported through our primary onshore base in Singapore.

 

Southeast Asia’s customer environment is broadly characterized by national oil companies of smaller nations and a large number of mid-sized companies, in contrast to many of the other major offshore exploration and production areas of the world, where a few large operators dominate the market. Affiliations with local companies are generally necessary to maintain a viable marketing presence. Our management has been involved in the region for many years and we continue to maintain long-standing business relationships with a number of local companies.

 

Market Development

 

Vessels in this market are often smaller than those operating in areas such as the North Sea. However, the varying weather conditions, annual monsoons, severe typhoons and long distances between supply centers in Southeast Asia have allowed for a variety of vessel designs to compete, each suited for a particular set of operating parameters. Vessels designed for the U.S. Gulf of Mexico and other areas, where moderate weather conditions prevail, historically made up the bulk of the vessels in the Southeast Asia market. However, over the last several years Southeast Asian and Chinese shipyards have been focusing on larger, newer and higher specification vessels for deepwater projects and inclusion in the larger vessel fleet.

 

Changes in supply and demand dynamics have led to an excess number of vessels. It is possible that vessels currently located in the Arabian/Persian Gulf area, offshore Africa or the U.S. Gulf of Mexico could relocate to the Southeast Asia market; however, not all vessels currently located in those regions would be able to operate in Southeast Asia and oil and natural gas operators in this region continue to demand newer, higher specification vessels. Some countries have specified age limitations for vessels to operate in territorial waters, which limitations could adversely affect our ability to work in those markets. In addition, speculative building at Southeast Asian and Chinese yards as described above has led to a significant overhang of new build vessels, particularly in the mid-size PSV class and smaller AHTSs. Southeast Asia is a dynamic market and from time to time certain types of vessels may be subject to more intense competition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Markets – Southeast Asia” included in Part II, Item 7.  

 

12

 

 

The Americas Operating Segment

 

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2016 - Predecessor

  33     -     33  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  (2 )   -     (2 )

November 14, 2017 - Predecessor

  31     -     31  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

December 31, 2017 - Successor

  31     -     31  

New-Build Program

  -     -     -  

Vessel Additions

  -     -     -  

Vessel Dispositions

  -     -     -  

Intercompany Transfers

  (2 )   -     (2 )

March 30, 2018 - Successor

  29     -     29  
                   

Stacked Vessels

  16     -     16  

 

 

Market and Segment Overview

 

We define the Americas market as offshore North, Central and South America, specifically including the United States, Mexico, Trinidad and Brazil. All vessels based in the Americas are supported from our onshore bases in the United States, Mexico, Trinidad and Brazil. During 2017, due to the continued lower crude oil price environment and the resulting negative impact on demand for OSVs, we experienced further significant downward pressure on our utilization and day rates in all areas in which we operate. In response, we have kept a number of vessels stacked to reduce operating expenses, preserve cash through deferred drydockings and improve the supply/demand balance in the market. We had 18 vessels of our 31 vessels stacked in the Americas at the end of 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Markets – Americas” included in Part II, Item 7.

 

Market Development  

 

U.S. Gulf of Mexico

 

Drilling in the U.S. Gulf of Mexico can be divided into three sectors: the shallow waters of the continental shelf, the deepwater and the ultra-deepwater areas. The continental shelf has been explored since the late 1940s and the existing infrastructure and knowledge of this sector allows for incremental drilling costs to be on the lower end of the range of worldwide offshore drilling costs. A surge of deepwater drilling in this sector began in the 1990s as advances in technology made this type of drilling economically feasible. Deepwater and ultra-deepwater drilling is on the higher end of the cost range, and the substantial costs and long lead times required in these types of drilling historically have made it less susceptible to short-term fluctuations in the price of crude oil and natural gas, although all offshore drilling sectors have been dramatically impacted by the current market downturn. We do not expect significant recovery in deepwater or ultra-deepwater drilling until there is some stability in oil prices for several consecutive quarters. Most of our active vessels operate in the deepwater and ultra-deepwater areas of the U.S. Gulf of Mexico.

 

At the end of 2017, industry reports indicated that there were 33 “floater” rigs (semi-submersibles and drillships) supporting deepwater drilling in the U.S. Gulf of Mexico with 23 in working locations. According to the U.S. Energy Information Administration, Gulf of Mexico federal offshore oil production accounts for 17% of total U.S. crude oil production. We expect there to be a marginal recovery in the number of active floaters in the U.S. Gulf of Mexico in the next 12 to 18 months. Since there is a significant oversupply of vessels in the market it will be up to the OSV operators to practice market discipline on vessel stackings, scrappings and reducing spot vessel availability. Vessels that have been stacked for several years now will require over $1.0 million in costs per vessel to complete a special survey and go through a reactivation process. Assuming continuation of current market conditions, we anticipate a few more quarters of low utilization and cash breakeven levels with gradual recovery into 2019 as older tonnage is removed permanently from the market and demand increases over time. Marine transportation companies that operate in the U.S. Gulf of Mexico continue to manage challenging operational and financial issues, some more severe than others. If market conditions do not stabilize as indicated above or instead deteriorate, we expect any eventual recovery to be further delayed.

 

13

 

 

In general, the U.S. Gulf of Mexico remains a protected market that is subject to U.S. cabotage laws that impose certain restrictions on the ownership and operation of vessels in the U.S. coastwise trade, which we refer to as Coastwise Trade. These laws are principally contained in 46 U.S.C. Chapters 121, 505 and 551 and the related regulations, which are commonly referred to collectively as the “Jones Act.” Under the Jones Act, Coastwise Trade is the transportation of merchandise and passengers for hire between points in the United States. Subject to limited exceptions, the Jones Act requires that vessels engaged in Coastwise Trade be owned and operated by U.S. citizens within the meaning of the Jones Act, which we refer to as U.S. Citizens, be built in and registered under the laws of the United States, and manned by predominantly U.S. Citizen crews.

 

As of the date of this report, we are actively marketing 11 DP-2 class OSVs in the U.S. Gulf of Mexico. These vessels support the shelf, deepwater and ultra-deepwater activities of the oil and gas industry including, but not limited to, seismic operations, oil and gas exploration, field development, production, offshore pipeline inspection and survey, subsea installation and oil recovery activities. We believe that drilling operators in the Gulf of Mexico generally prefer DP-2 class vessels. All of our U.S. flagged OSVs that are in the U.S. Gulf of Mexico are DP-2 class vessels.

 

Mexico 

 

Since 2005, we have operated Small AHTSs and other OSVs offshore Mexico. During the past several years, we have from time to time moved various vessels into and out of the area from the U.S. Gulf of Mexico. In December 2013, Mexico’s Congress approved a constitutional reform to allow private investment in Mexico’s energy sector which effectively ended the state controlled (Petróleos Mexicanos) 75-year monopoly on oil and natural gas extraction and production. Mexico’s recent shelf and deepwater oil auctions were reported to have surpassed expectations with awards by the National Hydrocarbons Commission to some of the world’s top oil and gas companies. We regularly operate two vessels offshore Mexico.

 

Trinidad

 

Over the past five years we mobilized several vessels between Trinidad and the U.S. Gulf of Mexico and the North Sea. Given recent licensing and exploration activity in nearby locations, including Suriname and Guyana, we anticipate having OSVs operating offshore Trinidad for the foreseeable future. We operated four vessels offshore Trinidad at the end of 2017, although two of those vessels completed their contracts and were mobilized back to the North Sea in January 2018.

 

Brazil

 

Brazil, which was once considered a key market for stable, long term PSV charters, continues to feel the effects of low oil prices which have resulted in the cancellation or renegotiation of numerous PSV charters as Petróleo Brasileiro S.A., or Petrobras, defers capital expenditures.  Also, many Brazilian PSV owners have asserted their rights to challenge foreign flagged vessels on their charters. We have mobilized all but one vessel out of the region.

 

Refer to Note 12 to our Consolidated Financial Statements in Part II, Item 8 for segment and geographical revenue, profit or loss and total assets data during our last three fiscal years.

 

OTHER

 

Seasonality

 

Operations in the North Sea are generally at their highest levels from April through August and at their lowest levels from December through February primarily due to lower construction activity and harsh weather conditions during the winter months, which reduces the demand for movement of drilling rigs and deliveries to offshore platforms. Vessels operating offshore Southeast Asia are generally at their lowest utilization rates during the monsoon season, which moves across the Asian continent between September and early March. The monsoon season for a specific Southeast Asian location generally lasts about two months. Activity in the U.S. Gulf of Mexico is often lower during the North Atlantic hurricane season of June through November, although following a hurricane, activity may increase as there may be a greater demand for vessel services as repair and remediation activities take place. Operations in any market may, however, be affected by seasonality often related to unusually long or short construction seasons due to, among other things, abnormal weather conditions, as well as market demand associated with increased or decreased drilling and development activities.

 

Other Markets

 

From time to time, we have contracted our vessels outside of our operating segment regions principally on short-term charters offshore Africa and in the Mediterranean region. We look to our core markets for the bulk of our term contracts; however, when the economics of a contract are attractive, or we believe it is strategically advantageous, we may operate our vessels in markets outside of our core regions. The operations of vessels in those markets are generally managed through our offices in the North Sea region.

 

14

 

 

Customers, Contract Terms and Competition

 

Our principal customers are major integrated oil and natural gas companies, large independent oil and natural gas exploration and production companies working in international markets, and foreign government-owned or controlled oil and natural gas companies. Additionally, our customers also include companies that provide logistic, construction and other services to such oil and natural gas companies and foreign government organizations. Generally, our contracts are industry standard time charters for periods ranging from a few days or months up to five years. Contract terms vary and often are similar within geographic regions with certain contracts containing cancellation provisions (in some cases permitting cancellation for any reason) and others containing non-cancellable provisions except in the case of unsatisfactory performance by the vessel. For the Successor period ended December 31, 2017, no customer accounted for 10% or more of the Successor’s total consolidated revenue. For the Predecessor period ended November 14, 2017, we recognized revenue from EOG Resources in the amount of $9.0 million in our Americas region, accounting for more than 10% of our total consolidated revenue. For the Predecessor year ended December 31, 2016, no customer accounted for 10% or more of the Predecessor’s total consolidated revenue. For the Predecessor year ended December 31, 2015, the Predecessor had revenue from BG Group and Anadarko Petroleum Corporation in our North Sea and Americas regions totaling $32.4 million and $31.9 million, respectively, each accounting for 10% or more of our total consolidated revenue.

 

Contract or charter durations vary from single-day to multi-year in length, based upon many different factors that vary by market. Additionally, there are “evergreen” charters (also known as “life of field” or “forever” charters), and at the other end of the spectrum, there are “spot” charters and “short duration” charters, which can vary from a single voyage to charters of less than six months. Longer duration charters are more common where equipment is not as readily available or specific equipment is required. In the North Sea region, multi-year charters are more common and historically have constituted a significant portion of that market. In the Southeast Asia region, term charters have historically been less common than in the North Sea and generally have terms of less than two years. In the Americas, particularly in the U.S. Gulf of Mexico, charters vary in length from short-term to multi-year periods, many with short-term cancellation clauses. In Brazil, Mexico and Trinidad contracts vary from spot contracts to multi-year term contracts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fleet Commitments and Backlog” included in Part II, Item 7.

 

Managed vessels add to the market presence of the manager but provide limited direct financial contribution. Management fees consist of a fixed annual fee. The manager is typically responsible for disbursement of funds for operating the vessel on behalf of the owner. Currently, we have three vessels under management.

 

Substantially all of our charters are fixed in British Pounds, or GBP; Norwegian Kroner, or NOK; Euros; or U.S. Dollars. We attempt to reduce currency risk by matching each vessel’s contract revenue to the currency in which its operating expenses are incurred.

 

We have numerous mid-size and large competitors in the North Sea, Southeast Asia and Americas markets, some of which have significantly greater financial resources than we have. We compete principally on the basis of suitability of equipment, price and service. In the Americas region, we benefit from the provisions of the Jones Act which limits vessels that can operate in the U.S. Gulf of Mexico to those with U.S. ownership. Also, in certain foreign countries, preferences given to vessels owned by local companies may be mandated by local law or by national oil companies. We have attempted to mitigate some of the impact of such preferences through affiliations with local companies.

 

Government and Environmental 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, ownership and operation of vessels, including cabotage requirements. Our operations are subject to extensive governmental regulation by the United States Coast Guard and the United States Customs and Border Protection, or CBP, as well as their foreign equivalents. The Coast Guard sets safety standards and is authorized to inspect vessels at will to enforce those standards and various laws, and the Coast Guard and National Transportation Safety Board are authorized to investigate vessel accidents and recommend improved safety standards. The CBP is authorized to inspect vessels at will to enforce compliance with immigration and trade laws and regulations. Further, with regard to environmental regulations, we are subject to the Environmental Protection Agency, or EPA, as well as analogous state and local environmental agencies. Our operations in the U.S. Gulf of Mexico may, from time to time, fall under the jurisdiction of the U.S. Bureau of Safety and Environmental Enforcement and its Safety and Environmental Management System regulations, in which case we are also required to certify that our maritime operations adhere to those regulations. In addition, we are subject to regulation by private industry organizations such as the American Bureau of Shipping and Det Norske Veritas. We are also subject to international laws and conventions and the laws of international jurisdictions where we operate. We believe that we are in compliance, in all material respects, with all applicable U.S. and international laws and regulations.

 

15

 

 

Maritime Regulations

 

We are subject to the Merchant Marine Act of 1936, which provides that, upon proclamation by the President of the United States of a national emergency or a threat to the security of the national defense, the Secretary of Transportation may requisition or purchase any vessel or other watercraft owned by United States citizens (which includes our company), including vessels under construction in the United States. If any of the vessels in our fleet were purchased or requisitioned by the federal government under this law, we would be entitled to be paid just compensation, which is generally the fair market value of the vessel in the case of a purchase or, in the case of a requisition, the fair market value of charter hire. However, we would not be entitled to be compensated for any consequential damages we suffer as a result of the requisition or purchase of any of our vessels.

 

Under the Jones Act, the transportation of merchandise or passengers for hire in Coastwise Trade is restricted to vessels that are qualified under the Jones Act, which are vessels that are owned and operated by U.S. Citizens, built in and registered under the laws of the United States, and manned by predominantly U.S. Citizen crews. A corporation is not considered a U.S. Citizen for purposes of owning and operating a vessel in Coastwise Trade unless:

 

 

the corporation is organized under the laws of the United States or of a state, territory or possession thereof;

 

the chief executive officer, by whatever title, and the chairman of the board of directors are U.S. Citizens;

 

no more than a minority of the number of directors of such corporation necessary to constitute a quorum for the transaction of business are non-U.S. Citizens; and

 

at least 75 percent of the ownership and voting power of each class or series of the shares of the capital stock is owned by, voted by and controlled by U.S. Citizens, free from any trust or fiduciary obligations in favor of, or any contract or understanding under which voting power or control may be exercised directly or indirectly on behalf of, non-U.S. Citizens.

 

We are currently a U.S. Citizen under these requirements and hence eligible to engage in Coastwise Trade. If we fail to comply with these U.S. Citizen requirements, however, we would no longer be considered a U.S. Citizen. Such an event could result in our ineligibility to engage in Coastwise Trade, the imposition of substantial penalties against us, including fines and seizure and forfeiture of our vessels, and the inability to flag our vessels in the United States and maintain a coastwise endorsement, each of which could have a material adverse effect on our financial condition and results of operations.

 

To facilitate compliance with the Jones Act, our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws: (i) limit the aggregate percentage ownership by non-U.S. Citizens of any class or series of our capital stock (including Common Stock) to 24% of the outstanding shares of each such class or series to ensure that ownership by non-U.S. Citizens will not exceed the maximum percentage permitted by applicable maritime law (presently 25%); (ii) provide that any issuance or transfer of shares in excess of such permitted percentage shall be ineffective as against our company and that neither our company nor its transfer agent shall register such purported issuance or transfer of shares or be required to recognize the purported transferee or owner as a stockholder of our company for any purpose whatsoever except to exercise our company’s remedies; (iii) provide that any such excess shares shall not have any voting or dividend rights; (iv) permit our company to redeem any such excess shares; and (v) permit the Board of Directors to make such reasonable determinations as may be necessary to ascertain such ownership and implement such limitations.

 

Environmental Regulations

 

Our operations are subject to a variety of federal, state, local and international laws and regulations regarding the emission or discharge of materials into the environment or otherwise relating to environmental protection. As some environmental laws impose strict liability for remediation of spills and releases of oil and hazardous substances, we could be subject to liability even if we were not negligent or at fault. These laws and regulations may expose us to liability for the conduct of or conditions caused by others, including charterers.

 

Numerous governmental authorities, such as the Coast Guard, EPA, analogous state agencies, and, in certain instances, citizens’ groups, have the power to enforce compliance with these laws and regulations and the permits issued under them. Failure to comply with applicable environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties, revocation of permits, issuance of corrective action orders and suspension or termination of our operations. Environmental laws and regulations may change in ways that substantially increase costs, or impose additional requirements or restrictions which could adversely affect our financial condition and results of operations. We believe that we are in substantial compliance with currently applicable environmental laws and regulations, but failure to comply with these laws and regulations could have material adverse consequences. Environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements could have a material adverse effect upon our capital expenditures, earnings or competitive position, including the suspension or cessation of operations in affected areas. As such, there can be no assurance that material costs and liabilities related to compliance with environmental laws and regulations will not be incurred in the future.

 

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International Safety Management and International Ship & Port Facility Security Codes

 

The International Maritime Organization, or IMO, has made the regulations of the International Safety Management Code, or ISM Code, mandatory through the adoption by flag states of the ISM Code under the International Convention for the Safety of Life at Sea. The ISM Code provides an international standard for the safe management and operation of ships, pollution prevention and certain crew and vessel certifications. IMO has also adopted the International Ship & Port Facility Security Code, or ISPS Code. 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. We believe all of our vessels presently are certificated in accordance with ISPS Code. The risks of incurring substantial compliance costs, liabilities and penalties for noncompliance are inherent in offshore marine operations.

 

International Labour Organization’s Maritime Labour Convention

 

The International Labour Organization’s Maritime Labour Convention, 2006, as amended, or the MLC, entered into force on August 20, 2013. Since then, 88 countries have ratified the MLC, making for a diverse geographic footprint of enforcement. The MLC establishes comprehensive minimum requirements for working conditions of seafarers including, among other things, conditions of employment, hours of work and rest, grievance and complaints procedures, accommodations, recreational facilities, food and catering, health protection, medical care, welfare, and social security protection. The MLC also provides a definition of seafarer that includes all persons engaged in work on a vessel in addition to the vessel's crew. Under this MLC definition, we may be responsible for proving that customer and contractor personnel aboard its vessels have contracts of employment that comply with the MLC requirements. We could also be responsible for salaries and/or benefits of third parties that may board one of our vessels. The MLC requires certain vessels that engage in international trade to maintain a valid Maritime Labour Certificate issued by their flag administration. Although the United States is not a party to the MLC, U.S.-flag vessels operating internationally must comply with the MLC when visiting a port in a country that is a party to the MLC.

 

Accordingly, we continue prioritizing certification of our vessels to MLC requirements based on the dates of enforcement by countries in which we have operations, recruit seafarers, perform maintenance and repairs at shipyards, or may make port calls during ocean voyages. Once obtained, vessel certifications are maintained, regardless of the area of operation. Additionally, where possible, we continue to work with certain flag states to seek substantial equivalencies to comparable national and industry laws that meet the intent of the MLC, but allow us to maintain our longstanding operational protocols and mitigate changes to our business processes. As ratifications of the MLC continue, we continue to assess our global seafarer labor relationships and fleet operational practices not only to undertake compliance with the MLC but also to gauge the impact of enforcement, the effects of which cannot be reasonably estimated at this time.

 

MARPOL

 

The International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978, or MARPOL, is the main IMO international convention covering prevention of pollution of the marine environment by vessels from operational or accidental causes. MARPOL has been updated by amendments through the years and is implemented in the United States by the Act to Prevent Pollution from Ships. MARPOL has six specific annexes. Of relevance to our operations, Annex I governs oil pollution, Annex V governs garbage pollution, and Annex VI governs air pollution.

 

MARPOL Annex VI, which addresses air emissions from vessels, requires the use of low sulfur fuel worldwide in both auxiliary and main propulsion diesel engines on ships. Annex VI also specifies requirements for Emission Control Areas, or ECAs, with stricter limitations on sulfur emissions in these areas. Historically, ships operating in the Baltic Sea ECA, the North Sea/English Channel ECA and the North American ECA were required to use fuel with a sulfur content of no more than 1% or use alternative emission reduction methods rather than the current 3.5% global (non-ECA) limit. Beginning in January 2015, the fuel sulfur content limit in ECAs was reduced to 0.1%. The MARPOL global limit on fuel sulfur content outside of ECAs will be reduced to 0.5% beginning in January 2020. We may incur additional compliance costs as part of our efforts to comply with Annex VI and other provisions of MARPOL. In addition, we could face fines and penalties for failure to meet requirements imposed by MARPOL and similar laws related to the operation of our vessels.

 

The Clean Water Act

 

The Clean Water Act, or CWA, imposes strict controls on the discharge of pollutants into the navigable waters of the United States. The CWA also provides for civil, criminal and administrative penalties for any unauthorized discharge of oil or other hazardous substances in reportable quantities and imposes liability for the costs of removal and remediation of an unauthorized discharge. Many states have laws that are analogous to the CWA and also require remediation of accidental releases of petroleum or other pollutants in reportable quantities. Our vessels routinely transport diesel fuel to offshore rigs and platforms and also carry diesel fuel for their own use. We maintain response plans as required by the CWA to address potential oil and fuel spills from either our vessels or our shore-based facilities.

 

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In addition, the CWA established the National Pollutant Discharge Elimination System, or NPDES, permitting program, which governs discharges of pollutants into navigable waters of the United States from point sources, such as vessels operating in the navigable waters. Pursuant to the NPDES permitting program, the EPA issued a Vessel General Permit, or VGP. The current Vessel General Permit, or the 2013 VGP, which became effective on December 19, 2013, applies to commercial vessels that are at least 79 feet in length and therefore applies to our vessels. The 2013 VGP requires vessel owners and operators to adhere to “best management practices” to manage the 27 types of covered discharges, including ballast water, which occur normally in the operation of a vessel. In addition, the 2013 VGP requires vessel owners and operators to implement various training, inspection, monitoring, recordkeeping, and reporting requirements, as well as corrective actions upon identification of each deficiency. The purpose of these limitations is to reduce the number of living organisms discharged via ballast water into waters regulated by the 2013 VGP. The 2013 VGP also contains requirements for oil-to-sea interfaces, which seeks to improve environmental protection of U.S. waters, by requiring all vessels to use an “Environmentally Acceptable Lubricant” in all oil-to-sea interfaces, unless not technically feasible. These regulations may increase the costs of compliance for our operations. In addition, failure to comply with the requirements of the 2013 VGP and other provisions of the CWA could result in the imposition of substantial fines and penalties. The 2013 VGP expires on December 18, 2018. We expect a new VGP to be proposed in 2018, which may lead to additional compliance costs.

 

The Oil Pollution Act

 

The Oil Pollution Act of 1990, or OPA, establishes a comprehensive regulatory and liability regime designed to increase pollution prevention, ensure better spill response capability, increase liability for oil spills, and facilitate prompt compensation for cleanup and damages. OPA is applicable to owners and operators of facilities operating near U.S. navigable waters and to owners, operators and bareboat charterers whose vessels operate in U.S. waters, which include the navigable waters of the United States (generally three nautical miles from the coastline) and the 200 nautical mile exclusive economic zone of the United States. Under OPA, owners and operators of regulated facilities and owners, operators and bareboat charterers of vessels are “responsible parties” and are jointly, severally and strictly liable for removal costs and damages arising from discharges or threatened discharges of oil from their facilities or vessels, respectively, up to their limits of liability (except if the limits are broken as described below) unless the discharge results solely from the act or omission of certain third parties under specified circumstances, an act of God or an act of war. “Damages” are defined broadly under OPA to include:

 

 

damages for injury to natural resources and the costs of remediation thereof;

 

damages for injury to, or economic losses resulting from the destruction of, real or personal property;

 

the net loss of taxes, royalties, rents, fees and profits by the United States government, and any state or political subdivision thereof;

 

lost profits or impairment of earning capacity due to property or natural resources damage;

 

the net costs of providing increased or additional public services necessitated by a spill response, such as protection from fire or other hazards or taking additional safety precautions; and

 

the loss of subsistence use of available natural resources.

 

OPA, through implementing regulations, currently limits the liability of responsible parties for discharges from non-tank vessels to $1,100 per gross ton or $939,800, whichever is greater. These limits are subject to increase. OPA’s liability limits do not apply: (1) if an incident was proximately caused by violation of applicable federal safety, construction or operating regulations or by a responsible party’s gross negligence or willful misconduct; or (2) if the responsible party fails or refuses to report the incident, fails to provide reasonable cooperation and assistance required by a responsible official in connection with oil removal activities, or without sufficient cause fails to comply with an order issued under OPA. If an oil discharge or a substantial threat of discharge were to occur involving one of our shore-based facilities or vessels, we may be liable for removal costs and damages, which could be material to our results of operations and financial position. In addition, failure to comply with OPA may result in the assessment of civil, administrative and criminal penalties.

 

In addition, OPA requires owners and operators of vessels over 300 gross tons to provide the Coast Guard with evidence of financial responsibility to cover the cost of cleaning up oil spills from such vessels. We have provided satisfactory evidence of financial responsibility to the Coast Guard for all of our vessels that are over 300 gross tons.

 

Under the Nontank Vessel Response Plan Final Rule, which became effective October 30, 2013, owners and operators of nontank vessels are required by the Coast Guard to prepare and submit Nontank Vessel Response Plans, or NTVRPs. This rule implemented a 2004 statutory mandate expanding oil spill response planning standards that are applicable to tank vessels under OPA amendments to the CWA to self-propelled nontank vessels of 400 or more gross tons that carry oil of any kind as fuel for main propulsion and that operate on the navigable waterways of the United States. Under this rule, we are required to prepare NTVRPs and contract with oil spill removal organizations to meet certain response planning requirements based on the capacity of a particular vessel. We have, in all material respects, complied with these requirements.

 

OPA allows states to impose their own liability regimes with respect to oil pollution incidents occurring within their boundaries and many states have enacted legislation providing for unlimited liability for oil spills. Some states have issued regulations addressing financial responsibility and vessel response planning requirements. We do not anticipate that state legislation or regulations will have a material impact on our operations.

 

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Hazardous Wastes and Substances

 

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, also known as CERCLA or Superfund, and similar laws, impose liability for releases of hazardous substances into the environment. CERCLA currently exempts crude oil from the definition of hazardous substances for purposes of the statute, but our operations may involve the use or handling of other materials that may be classified as hazardous substances. CERCLA assigns strict liability to each responsible party for all response costs, as well as natural resource damages. CERCLA also imposes liability similar to OPA and provides compensation for cleanup, removal and natural resource damages. Liability per vessel under CERCLA is limited to the greater of $300 per gross ton or $5 million, unless the release is the result of willful misconduct or willful negligence, the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations, or the responsible person fails to provide reasonable cooperation and assistance in connection with response activities, in which case liability is unlimited. A responsible person may be liable to the United States for punitive damages up to three times the amount of any costs incurred by the federal Hazardous Substances Superfund as a result of such person’s failure to take proper action. We could be held liable for releases of hazardous substances that resulted from operations by third parties not under our control or for releases associated with practices performed by us or others that were standard in the industry at the time. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment.

 

The Resource Conservation and Recovery Act, or RCRA, regulates the generation, transportation, storage, treatment and disposal of onshore hazardous and non-hazardous wastes and requires states to develop programs to ensure the safe disposal of wastes. We generate non-hazardous wastes and small quantities of hazardous wastes in connection with routine operations. We believe that all of the wastes that we generate are handled, in all material respects, in compliance with RCRA and analogous state statutes.

 

Insurance

 

   We review our insurance coverages annually.  In particular, we assess our coverage levels and limits for possible marine liabilities, including pollution, personal injury or death, and property damage.  We can provide no assurance, however, that our insurance coverage will be available beyond the renewal periods, or that it will be adequate to cover future claims that may arise. Claims covered by insurance are subject to deductibles, the aggregate amount of which could be material. Insurance policies are also subject to certain exclusions and compliance with certain conditions, the failure of which could lead to a denial of coverage as to a particular claim or the voiding of a particular insurance policy. There can be no assurance that existing insurance coverage can be renewed at commercially reasonable rates or that available coverage will be adequate to cover future claims.

 

Litigation

 

We are not a party to any material pending regulatory litigation or other proceeding and we are unaware of any threatened litigation or proceeding, which, if adversely determined, would have a material adverse effect on our financial condition or results of operations.

 

Employees

 

We have approximately 950 employees located principally in the United States, the United Kingdom, Norway and Southeast Asia. Through our contract with a crewing agency, we participate in the negotiation of collective bargaining agreements for approximately 420 contract crew members, approximately half of our labor force, who are members of two North Sea unions. Wages are renegotiated annually in the second half of each year for the North Sea unions. We have no other collective bargaining agreements; however, we do employ crew members who are members of national unions but we do not participate in the negotiation of those collective bargaining agreements. We consider relations with our employees to be satisfactory. To date, our operations have not been interrupted by strikes or work stoppages. In addition, our obligations to our crew members are governed by the International Labour Organization’s Maritime Labour Convention which has been adopted in varying degrees by different flag states. We have adopted proactive procedures to ensure that we comply with or are entitled to an exemption from the Convention.

 

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ITEM 1A. Risk Factors

 

We operate globally in challenging and highly competitive markets, and our business is subject to a variety of risks, including the risks described below, which could cause our actual results to differ materially from those anticipated, projected or assumed in forward-looking statements. You should carefully consider these risks when evaluating us and our securities. The risks and uncertainties described below are not the only ones facing our company. We are also subject to a variety of risks that affect many other companies generally, as well as additional risks and uncertainties not known to us or that, as of the date of this report, we believe are not as significant as the risks described below. If any of the following risks actually occur, the accuracy of any forward-looking statements made by us, including in this report, and our business, financial condition, results of operations and cash flows, and the trading prices of our securities, may be materially and adversely affected.

 

We recently emerged from bankruptcy, which could adversely affect our business and relationships.

 

It is possible that our having filed for bankruptcy and our recent emergence from the Chapter 11 Case could adversely affect our business and relationships with vendors, suppliers, service providers, customers, employees and other third parties. Due to uncertainties, many risks exist, including the following:

 

 

key suppliers or vendors could terminate their relationship with us or require additional financial assurances or enhanced performance from us;

 

the ability to renew existing contracts and compete for new business may be adversely affected;

 

the ability to attract, motivate and/or retain key executives and employees may be adversely affected;

 

the ability to attract, motivate and/or retain employees may be adversely affected;

 

employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and

 

competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted.

 

The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation. We cannot assure you that having been subject to bankruptcy protection will not adversely affect our business or operations in the future.

 

In connection with the disclosure statement we filed with the Bankruptcy Court, and the hearing to consider confirmation of the Plan, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to continue operations upon our emergence from bankruptcy. Those projections were prepared solely for the purpose of the bankruptcy proceedings and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.

 

The continuing downturn in the oil and gas industry has had a significant negative effect on our results of operations and revenues, our customers’ ability to pay and our profitability.

 

Demand for our vessels and services, and therefore our results of operations, are highly dependent on the level of spending and investment in offshore exploration, development and production by the companies that operate in the energy industry. The energy industry’s level of capital spending is directly related to current and expected future demand for hydrocarbons and the prevailing commodity prices of crude oil and, to a lesser extent, natural gas. Hydrocarbon supply has increased at a faster pace than hydrocarbon demand, despite a significant decrease in exploration and development spending. This has resulted in significant declines in crude oil prices. When our customers experience low commodity prices or come to believe that they will be low in the future, they generally reduce their capital spending for offshore drilling, exploration and field development. The precipitous decline in crude oil prices that began in late 2014 and reached a 12-year low of less than $30/barrel in early 2016 resulted in a decrease in the energy industry’s level of capital spending. Although crude oil prices have improved from these low levels, if prices decline further or continue to remain depressed for an extended period of time, capital spending and demand for our services may remain similarly depressed. If certain major oil producing nations do not intend to reduce crude oil output the current over-supply environment may continue for the foreseeable future unless there is a significant increase in worldwide demand, which may not occur or may occur very slowly. These market conditions negatively affected our 2017 results and are expected to continue to significantly affect future results, particularly if exploration and production activity levels and, therefore, demand for our products and services, as well as our customers’ ability to pay, remain depressed or continue to decline. The decrease in demand for offshore services could cause the industry to experience a prolonged downturn. These conditions could have a material adverse effect on our business, financial condition and results of operations.

 

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We rely on the oil and natural gas industry, and volatile oil and natural gas prices impact demand for our services.

 

Demand for our services depends on activity in offshore oil and natural gas exploration, development and production. The level of exploration, development and production activity is affected by factors such as:

 

 

prevailing oil and natural gas prices;

 

expectations about future prices and price volatility;

 

worldwide supply and demand for oil and gas;

 

the level of economic activity in energy-consuming markets;

 

the worldwide economic environment, trends in international trade or other economic trends, such as recessions;

 

the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and maintain production levels and pricing;

 

the level of production in non-OPEC countries;

 

international sanctions on oil producing countries and the lifting of certain sanctions against Iran;

 

civil unrest and the worldwide political and military environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities involving the Middle East, Russia, other oil-producing regions or other geographic areas or further acts of terrorism in the United States or elsewhere;

 

the cost of exploring for, producing and delivering oil and natural gas;

 

reallocation of drilling budgets away from offshore drilling in favor of other priorities, such as shale or other land-based projects;

 

sale and expiration dates of available offshore leases;

 

demand for petroleum products;

 

current availability of oil and natural gas resources;

 

rate of discovery of new oil and natural gas reserves in offshore areas;

 

local and international political, environmental and economic conditions;

 

changes in laws and regulations;

 

technological advances;

 

ability of oil and natural gas companies to obtain leases and permits, or obtain funds for capital expenditures; and

 

development and exploitation of alternative fuels or energy sources.

 

An increase in commodity demand and prices will not necessarily result in an immediate increase in offshore drilling activity since our customers’ project development times, reserve replacement needs, expectations of future commodity demand, prices and supply of available competing vessels all combine to affect demand for our vessels. The level of offshore exploration, development and production activity has historically been characterized by volatility, and that volatility is likely to continue. The decline in exploration and development of offshore areas has resulted in a decline in the demand for our offshore marine services and may continue to do so or may worsen. Any such decrease in activity is likely to reduce our day rates and our utilization rates and, therefore, could have a material adverse effect on our financial condition and results of operations.

 

If we are unable to generate enough cash flow from operations to service our indebtedness or are unable to use future borrowings to fund other capital needs, we may have to undertake alternative financing plans, which may have onerous terms or may be unavailable.

 

If our business does not generate cash flow from operations in the future that is sufficient to service our outstanding indebtedness and other capital needs, we cannot assure you that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other capital needs. If operational performance does not improve significantly and oil companies do not increase spending for exploration and production activities, we expect to need additional sources of liquidity as a result of an inability to generate sufficient cash flow from operations to service our long-term capital needs. We have a substantial amount of indebtedness, and if we do not generate sufficient cash flow from operations in the future to satisfy our debt obligations and other capital needs, we may have to undertake alternative financing plans, such as:

 

 

refinancing or restructuring all or a portion of our debt;

 

obtaining alternative financing;

 

selling assets;

 

reducing or delaying capital investments;

 

seeking to raise additional capital; or

 

revising or delaying our strategic plans.

 

We cannot assure you, however, that we would be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, or that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations and capital requirements or that these actions would be permitted under the terms of our debt instruments. In addition, any effort to implement alternative financing plans would result in diversion of management time and focus away from operating our business and could also result in dilutive issuances of our equity securities or the incurrence of debt, which could adversely affect our business and financial condition.

 

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Our inability to generate sufficient cash flow in the future to satisfy our debt obligations or to obtain alternative financing could materially and adversely affect our business, financial condition, results of operations and prospects. Any failure to make required or scheduled payments of interest and principal on our outstanding indebtedness could harm our ability to incur additional indebtedness on acceptable terms. Further, if for any reason we are unable to satisfy our covenants, debt service or repayment obligations, we would be in default under the terms of the agreements governing such debt, which, if not remedied or waived, would allow our creditors to declare all such outstanding indebtedness to be due and payable. The lenders under our credit agreement would have the right to terminate their commitments to loan money, and such lenders could foreclose against our assets securing their borrowings, which would have a material adverse effect on our business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Emergence from Bankruptcy - Exit Credit Facility” and Note 2 to our Consolidated Financial Statements in Part II, Item 8.

 

Our ability to raise capital in the future may be limited, which could make us unable to fund our capital requirements.

 

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new secured debt securities, the secured debt holders would have rights senior to holders of Common Stock to make claims on our assets, and the terms of any additional debt could restrict our operations, including our ability to pay dividends on our Common Stock. If we issue additional equity securities, existing stockholders may experience dilution. Our Amended and Restated Certificate of Incorporation permits our Board of Directors to issue preferred stock which could have rights and preferences senior to those of our Common Stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our security holders bear the risk of our future securities offerings reducing the market price of our Common Stock or other securities, diluting their interest or being subject to rights and preferences senior to their own.

 

We may be unable to maintain compliance with financial ratio covenants in our outstanding indebtedness which could result in an event of default that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

 

Our credit agreement requires us to satisfy certain financial covenants, including the following:

 

 

minimum liquidity covenants of at least $15,000,000 in cash and $30,000,000 minimum liquidity;

 

a leverage ratio (total debt to 12 months EBITDA) of not more than 5.0 to 1.0, tested quarterly beginning December 31, 2020;

 

a total debt to capital ratio, tested quarterly, not to exceed 0.45 to 1.0; and

 

a collateral to commitment coverage ratio (the ratio of aggregate collateral vessels’ fair market value to the total outstanding amount, including commitments, of the facilities under our credit agreement) of at least 2.50 to 1.0.

 

As of December 31, 2017, we were in compliance with our financial covenants; however, we cannot guarantee that we will be able to comply with such terms at all times in the future. A failure to comply with the financial covenants in our credit agreement that is not waived by our lenders or otherwise cured could lead to a termination of our credit agreement or acceleration of all amounts due under our credit agreement, which would have a material adverse effect on our business, financial condition and results of operations. These restrictions may limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general, or to otherwise conduct necessary corporate activities.

 

Our credit agreement contains a number of covenants that limit our ability to make dispositions or investments, incur additional indebtedness and engage in other transactions, which could adversely affect our ability to meet our future goals.

 

Our credit agreement contains a number of covenants that limit our operational flexibility. The sale of collateral vessels that are pledged to secure our obligations under our credit agreement is subject to various restrictions and will trigger payment of a prepayment premium if made during the applicable premium payment period. Collateral vessel operations are also subject to a variety of restrictive provisions, including customary provisions related to vessel flag, registry, safety standards, environmental compliance, insurance, technical and commercial management, joint venture activities, modification limits, chartering scope limits, survey and inspection requirements, and other limitations. Proceeds of the facilities under our credit agreement may not be used to acquire vessels or finance business acquisitions generally.

 

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Under our credit agreement, we are also subject to restrictions on:

 

 

additional indebtedness;

 

additional liens on assets;

 

investments;

 

mergers and acquisitions;

 

vessel dispositions;

 

joint ventures;

 

vessel classification maintenance;

 

distributions to equity holders;

 

affiliate transactions;

 

leasing limits; and

 

other customary matters.

 

Our credit agreement also requires us to comply with certain financial covenants as discussed above. A breach of any of these covenants could result in a default under our credit agreement. If an event of default occurs, the lenders under our credit agreement may elect to declare all outstanding borrowings, together with accrued interest, to be immediately due and payable. The lenders under our credit agreement would also have the right in these circumstances to cancel any commitments they have to provide further borrowings. If we are unable to repay our indebtedness when due or declared due, the lenders thereunder would also have the right to proceed against the vessels and other collateral pledged to them to secure the indebtedness. We may also be prevented from taking advantage of business opportunities that arise because of the limitations that the restrictive covenants under our indebtedness impose on us.

 

We may not be able to renew or replace expiring contracts for our vessels.

 

We have a number of charters that will expire in 2018. Our ability to renew or replace expiring contracts or obtain new contracts, and the terms of any such contracts, will depend on various factors, including market conditions and the specific needs of our customers. Given the highly competitive and historically cyclical nature of our industry, we may not be able to renew or replace the contracts or we may be required to renew or replace expiring contracts or obtain new contracts at rates that are below, and potentially substantially below, existing day rates, or that have terms that are less favorable to us than our existing contracts, or we may be unable to secure contracts for these vessels. This could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Our industry is highly competitive, which could depress vessel prices and utilization and adversely affect our financial performance.

 

We operate in a competitive industry. The principal competitive factors in the marine support and transportation services industry include:

 

 

price, service and reputation of vessel operations and crews;

 

national flag preference;

 

operating conditions;

 

suitability of vessel types;

 

vessel availability;

 

technical capabilities of equipment and personnel;

 

safety and efficiency;

 

complexity of maintaining logistical support; and

 

cost of moving equipment from one market to another.

 

In addition, an expansion in the supply of vessels in the regions in which we compete, whether through new vessel construction, the refurbishment of older vessels, or the conversion of vessels, could lower charter rates, which could adversely affect our business, financial condition and results of operations. Many of our competitors have substantially greater resources than we have. Competitive bidding and downward pressures on profits and pricing margins could adversely affect our business, financial condition and results of operations.

 

An increase in the supply of offshore supply vessels would likely have a negative effect on charter rates for our vessels, which could reduce our earnings.

 

Our industry is highly competitive, with oversupply and intense price competition. Charter rates for marine supply vessels depend in part on the supply of the vessels. We could experience an increased reduction in demand as a result of the current oversupply of vessels. Excess vessel capacity has resulted from:

 

 

constructing new vessels;

 

moving vessels from one offshore market area to another;

 

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converting vessels formerly dedicated to services other than offshore marine services; and

 

declining offshore oil and gas drilling production activities.

 

In the past decade, construction of vessels of the types we operate has increased. Significant new OSV construction and upgrades of existing OSVs have intensified price competition. The resulting increase in OSV supply has depressed OSV utilization and intensified price competition from both existing competitors, as well as new entrants into the offshore vessel supply market. As of the date of this report, not all of the vessels currently under construction have been contracted for future work, which may further intensify price competition as scheduled delivery dates occur. Such price competition could further reduce day rates, utilization rates and operating margins, which would adversely affect our financial condition and results of operations.

 

As the markets recover or we change our marketing strategies or for other reasons, we may be required to incur higher than expected costs to return previously stacked vessels to class.

 

Stacked vessels are not maintained with the same diligence as our marketed fleet. Depending on the length of time the vessels are stacked, we may incur costs beyond normal drydock costs to return these vessels to active service. These costs are difficult to estimate and may be substantial.

 

We have been adversely affected by a decrease in offshore oil and gas drilling as a result of unconventional crude oil and unconventional natural gas production and the improved economics of producing natural gas and oil from shale.

 

The rise in production of unconventional crude oil and gas resources in North America and the commissioning of a number of new large liquefied natural gas export facilities around the world are, at least to date, primarily contributing to an over-supplied natural gas market. While production of crude oil and natural gas from unconventional sources is still a relatively small portion of the worldwide crude oil and natural gas production, production from unconventional resources is increasing because improved drilling efficiencies are lowering the costs of extraction. There is an oversupply of natural gas inventories in the United States in part due to the increased development of unconventional crude oil and natural gas resources. Prolonged increases in the worldwide supply of crude oil and natural gas, whether from conventional or unconventional sources, will likely continue to depress crude oil and natural gas prices. Prolonged periods of low natural gas prices have a negative impact on development plans of exploration and production companies, which in turn, results in a decrease in demand for offshore support vessel services. The rise in production of natural gas and oil, particularly from onshore shale, as a result of improved drilling efficiencies that are lowering the costs of extraction, has resulted in a reduction of capital invested in offshore oil and gas exploration. Because we provide vessels servicing offshore oil and gas exploration, the significant reduction in investments in offshore exploration and development has had a material adverse effect on our operations and financial position.

 

The ownership position of our significant stockholders limits other stockholders’ ability to influence corporate matters and could affect the price of our Common Stock.

 

As of March 30, 2018, based on their most recent Schedule 13D or Schedule 13G filings, Raging Capital Management, LLC beneficially owned 32.7% of our outstanding Common Stock, Captain Q, LLC beneficially owned 16.2% of our outstanding Common Stock and Canyon Capital Advisors LLC beneficially owned 15.4% of our Common Stock, which in total represents approximately 64.3% of our outstanding Common Stock. While these stockholders are not a group, these three stockholders in and of themselves have the ability to influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. These three stockholders may have interests that differ from other stockholders, and they may each vote in a way with which other stockholders disagree and one or more of them may be adverse in the future to the interests of other stockholders. The concentration of ownership of our Common Stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their Common Stock as part of a sale of our company, and may adversely affect the market price of our Common Stock. This concentration of ownership of our Common Stock may also have the effect of influencing the completion of a change in control that may not necessarily be in the best interests of all of our stockholders.

 

Due to the continuous evolution of laws and regulations in the various markets in which we operate, we may be restricted or even lose the right to operate in certain international markets where we currently have a presence.

 

Many of the countries in which we operate have laws, regulations and enforcement systems that are largely undeveloped, and the requirements of these systems are not always readily discernible even to experienced operators. Further, these laws, regulations and enforcement systems can be subject to frequent change or reinterpretation, sometimes with retroactive effect, and taxes, fees, fines or penalties may be sought from us based on such a reinterpretation or retroactive effect. While we endeavor to comply with applicable laws and regulations, our compliance efforts might not always be wholly successful, and failure to comply with such laws and regulations may result in administrative and civil penalties, criminal sanctions, imposition of remedial obligations or the suspension or termination of our operations in the jurisdiction. In addition, laws and regulations could be changed or be interpreted in new, unexpected ways that substantially increase our costs, which we may not be able to pass through to our customers. Any changes in laws, regulations or standards that would impose additional costs, requirements or restrictions could adversely affect our financial condition, results of operations or cash flows.

 

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A decrease in our customer base could adversely affect demand for our services and reduce our revenues.

 

We derive a significant amount of our revenue from a small number of offshore energy companies. Our loss of one of these significant customers, if not offset by sales to new or other existing customers, could have a material adverse effect on our business, financial condition and results of operations. In addition, in recent years, oil and natural gas companies, energy companies and drilling contractors have undergone substantial consolidation and additional consolidation is possible. Consolidation results in fewer companies to charter or contract for our services. Also, merger activity among both major and independent oil and natural gas companies affects exploration, development and production activity as the consolidated companies integrate operations to increase efficiency and reduce costs. Less promising exploration and development projects of a combined company may be dropped or delayed. Such activity may result in an exploration and development budget for a combined company that is lower than the total budget of both companies before consolidation, which could adversely affect demand for our vessels and thereby reduce our revenues.

 

Maintaining our current fleet size and configuration and acquiring vessels required for additional future growth require significant capital.

 

Expenditures required for the repair, certification and maintenance of a vessel typically increase with vessel age. These expenditures may increase to a level at which they are not economically justifiable and, therefore, to maintain our current fleet size we may seek to construct or acquire additional vessels. Also, customers may prefer modern vessels over older vessels, especially in weaker markets. The cost of adding a new vessel to our fleet can be substantial.

 

While we expect our cash on hand, cash flow from operations and available borrowings under our credit agreement to be adequate to fund our existing commitments, our ability to pay these amounts is dependent upon the success of our operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Emergence from Bankruptcy - Exit Credit Facility” included in Part II, Item 7. We can give no assurance that we will have sufficient capital resources to build or acquire the vessels required to expand or to maintain our current fleet size and vessel configuration.

 

We are subject to hazards customary for the operation of vessels that could adversely affect our financial performance if we are not adequately insured or indemnified.

 

Our operations are subject to various operating hazards and risks, including:

 

 

catastrophic marine disaster;

 

adverse sea and weather conditions;

 

mechanical failure;

 

navigation errors;

 

collision;

 

oil and hazardous substance spills, containment and clean up;

 

labor shortages and strikes;

 

damage to and loss of drilling rigs and production facilities;

 

war, sabotage, piracy, cyber-attack and terrorism risks; and

 

outbreak of contagious disease.

 

These risks present a threat to the safety of our personnel and to our vessels, cargo, equipment under tow and other property, as well as the environment. We could be required to suspend our operations or request that others suspend their operations as a result of these hazards. In such event, we would experience loss of revenue and possibly property damage, and additionally, third parties may make significant claims against us for damages due to personal injury, death, property damage, pollution and loss of business.

 

We maintain insurance coverage against many of the casualty and liability risks listed above, subject to deductibles and certain exclusions. We have renewed our primary insurance program for the insurance year 2018/2019. We can provide no assurance, however, that our insurance coverage will be available beyond the renewal periods, or that it will be adequate to cover future claims that may arise. Claims covered by insurance are subject to deductibles, the aggregate amount of which could be material. Insurance policies are also subject to compliance with certain conditions, the failure of which could lead to a denial of coverage as to a particular claim or the voiding of a particular insurance policy. There also can be no assurance that existing insurance coverage can be renewed at commercially reasonable rates or that available coverage will be adequate to cover future claims. If a loss occurs that is partially or completely uninsured, we could be exposed to substantial liability that could have a material adverse effect on our financial condition, results of operations and cash flows.

 

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We may not be fully indemnified by our customers for damage to their property or the property of their other contractors. Our contracts are individually negotiated, and the levels of indemnity and allocation of liabilities in them can vary from contract to contract depending on market conditions, particular customer requirements and other factors existing at the time a contract is negotiated. Additionally, the enforceability of indemnification provisions in our contracts may be limited or prohibited by applicable law or may not be enforced by courts having jurisdiction, and we could be held liable for substantial losses or damages and for fines and penalties imposed by regulatory authorities. The indemnification provisions of our contracts may be subject to differing interpretations, and the laws or courts of certain jurisdictions may enforce such provisions while other laws or courts may find them to be unenforceable, void or limited by public policy considerations, including when the cause of the underlying loss or damage is our gross negligence or willful misconduct, when punitive damages are attributable to us or when fines or penalties are imposed directly against us. The law with respect to the enforceability of indemnities varies from jurisdiction to jurisdiction. Current or future litigation in particular jurisdictions, whether or not we are a party, may impact the interpretation and enforceability of indemnification provisions in our contracts. There can be no assurance that our contracts with our customers, suppliers and subcontractors will fully protect us against all hazards and risks inherent in our operations. There can also be no assurance that those parties with contractual obligations to indemnify us will be financially able to do so or will otherwise honor their contractual obligations.

 

Failure to comply with the Foreign Corrupt Practices Act and similar worldwide anti-bribery laws may have an adverse effect on us.

 

Our international operations require us to comply with a number of U.S. and international laws and regulations, including those involving anti-bribery and anti-corruption. We do business and may do additional business in the future in countries and regions where strict compliance with anti-bribery laws may not be customary. In order to effectively operate in certain foreign jurisdictions, circumstances may require that we establish joint ventures with local operators or find strategic partners. As a U.S. company, we are subject to the regulations imposed by the Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business or obtaining an improper business benefit. We have an ongoing program of proactive procedures to promote compliance with the FCPA and other similar anti-bribery and anti-corruption laws, but we may be held liable for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be subjected to the FCPA or other similar laws.  Our personnel and intermediaries, including our local operators and strategic partners, may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future.  As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees or intermediaries, even if such parties are not always subject to our control or are not themselves subject to the FCPA or other similar laws to which we may be subject. Any allegation that we have violated the FCPA or other similar laws or any determination that we have violated the FCPA or other similar laws could have a material adverse effect on our business, results of operations, and cash flows.

 

Our Common Stock is subject to restrictions on non-U.S. Citizen ownership and possible required divestiture by non-U.S. Citizen stockholders.

 

Certain of our operations are conducted in the Coastwise Trade and are governed by U.S. federal laws commonly known as the Jones Act. The Jones Act restricts waterborne transportation of merchandise and passengers for hire between points in the United States to vessels owned and operated by U.S. Citizens. We could lose the privilege of owning and operating vessels in the Coastwise Trade and may become subject to penalties and risk seizure and forfeiture of our U.S.-flag vessels if non-U.S. Citizens were to own or control, in the aggregate, more than 25% of any class or series of our capital stock. Such loss would have a material adverse effect on our results of operations.

 

Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws authorize our Board of Directors to establish with respect to any class or series of our capital stock certain rules, policies and procedures, including procedures with respect to transfer of shares, to ensure compliance with the Jones Act. In order to provide a reasonable margin for compliance with the Jones Act, our Amended and Restated Certificate of Incorporation contains provisions that limit the aggregate percentage ownership by non-U.S. Citizens of any class or series of our capital stock (including the Common Stock) to 24% of the outstanding shares of each such class or series to ensure that ownership by non-U.S. Citizens will not exceed the maximum percentage permitted by the Jones Act (presently 25%). On the Effective Date, the maximum percentage of shares of Common Stock held by non-U.S. Citizens allowable under such provisions was reached. At and during such time that the limit is reached with respect to shares of Common Stock, we will be unable to issue any further shares of Common Stock or permit transfers of Common Stock to non-U.S. Citizens. Any issuance or transfer of shares in excess of such permitted percentage shall be ineffective as against us and neither we nor our transfer agent is required to register such purported issuance or transfer of shares or required to recognize the purported transferee or owner as a stockholder of our company for any purpose whatsoever except to exercise our remedies. Any such excess shares in the hands of a non-U.S. Citizen shall not have any voting or dividend rights and are subject to redemption by our company at a redemption price that may be paid in redemption warrants, cash or promissory notes at the discretion of our Board of Directors. As a result of these provisions, a purported stockholder who is not a U.S. Citizen may not receive any return on its investment in any such excess shares. Further, we may have to incur additional indebtedness, or use available cash (if any), to fund all or a portion of such redemption, in which case our financial condition may be materially weakened. The existence and enforcement of these requirements could have an adverse impact on the liquidity or market value of our equity securities in the event that U.S. Citizens were unable to transfer shares in our company to non-U.S. Citizens. Furthermore, under certain circumstances, this ownership restriction could discourage, delay or prevent a change of control of our company.

 

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So that we may ensure compliance with the Jones Act, provisions in our Amended and Restated Certificate of Incorporation permit us to require that owners of any shares of our capital stock provide confirmation of their citizenship. In the event that a person does not submit such documentation to us, those provisions provide us with certain remedies, including the suspension of voting and dividend rights and treatment of such person as a non-U.S. Citizen unless and until we receive the requested documentation confirming that such person is a U.S. Citizen. As a result of non-compliance with these provisions, an owner of the shares of our Common Stock may lose significant rights associated with those shares.

 

Our business could be adversely affected if we do not comply with the Jones Act.

 

We are subject to the Jones Act, which requires that vessels carrying merchandise or passengers for hire in Coastwise Trade be owned and operated by U.S. Citizens, be built in and registered under the laws of the United States, and manned by predominantly U.S. Citizen crews. Violations of the Jones Act would result in our losing eligibility to engage in Coastwise Trade, the imposition of substantial penalties against us, including fines and seizure and forfeiture of our vessels, and/or the inability to register our vessels in the United States with coastwise endorsements, any of which could have a material adverse effect on our financial condition and results of operations. Although we currently believe we meet the requirements to engage in Coastwise Trade, and there are provisions in our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws that were designed to assist us in complying with these requirements, there can be no assurance that we will be in compliance with the Jones Act in the future.

 

Circumvention or repeal of the Jones Act may have an adverse impact on us.

 

The Jones Act’s provisions restricting Coastwise Trade to vessels owned and operated by U.S. Citizens may from time to time be circumvented by foreign interests that seek to engage in trade reserved for U.S.-flag vessels owned and operated by U.S. Citizens and otherwise qualifying for Coastwise Trade. Legal challenges against such actions are difficult, costly to pursue and are of uncertain outcome. There have also been attempts to repeal or amend the Jones Act, and these attempts are expected to continue. In addition, the Secretary of the Department of Homeland Security may waive the requirement for using U.S.-flag vessels with coastwise endorsements in the Coastwise Trade in the interest of national defense. Furthermore, the Jones Act restrictions on the maritime cabotage services are subject to certain exceptions under certain international trade agreements, including the General Agreement on Trade in Services and the North American Free Trade Agreement. If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, the shipping of maritime cargo between covered U.S. ports could be opened to foreign-flag, foreign-built vessels or foreign-owned vessels. To the extent foreign competition is permitted from vessels built in lower-cost shipyards and crewed by non-U.S. Citizens with favorable tax regimes and with lower wages and benefits, such competition could have a material adverse effect on domestic companies, such as ours, in the offshore service vessel industry subject to the Jones Act.

 

Our U.S.-flag vessels may be requisitioned or purchased by the United States in the event of a national emergency or a threat to security.

 

We are subject to the Merchant Marine Act of 1936, which provides that, upon proclamation by the President of a national emergency or a threat to the security of the national defense, the Secretary of Transportation may requisition or purchase any vessel or other watercraft owned by United States citizens (which includes United States corporations), including vessels under construction in the United States. If our vessels were purchased or requisitioned by the federal government, we would be entitled to be paid just compensation, which is generally the fair market value of the vessel in the case of a purchase or, in the case of a requisition, the fair market value of charter hire, but we would not be entitled to be compensated for any consequential damages we suffer. The purchase or the requisition for an extended period of time of one or more of our vessels could adversely affect our results of operations and financial condition.

 

We are subject to war, sabotage, piracy, cyber-attacks and terrorism risk.

 

War, sabotage, pirate, cyber and terrorist attacks or any similar risk may adversely affect our operations in unpredictable ways, including changes in the insurance markets, disruptions of fuel supplies and markets, particularly oil, and the possibility that infrastructure facilities, including pipelines, production facilities, refineries, electric generation, transmission and distribution facilities, offshore rigs and vessels, and communications infrastructures, could be direct targets of, or indirect casualties of, a cyber-attack or an act of piracy or terror. War or risk of war or any such attack may also have an adverse effect on the economy, which could adversely affect activity in offshore oil and natural gas exploration, development and production and the demand for our services. Insurance coverage can be difficult to obtain in areas of pirate and terrorist attacks resulting in increased costs that could continue to increase. We periodically evaluate the need to maintain this insurance coverage as it applies to our fleet. Instability in the financial markets as a result of war, sabotage, piracy, cyber-attacks or terrorism could also adversely affect our ability to raise capital and could also adversely affect the oil, natural gas and power industries and restrict their future growth.

 

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A failure in our operational systems or cyber security attacks on any of our facilities, or those of third parties, may adversely affect our financial results.

 

Our business is dependent upon our operational systems to process a large amount of data and complex transactions.  If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected.  Our financial results could also be adversely affected if an employee or other third party causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems.  In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee or other tampering or manipulation of those systems will result in losses that are difficult to detect.

 

Due to increasing technological advances, we have become more reliant on technology to help increase efficiency in our business.  We use computer programs to help run our financial and operations sectors, and this may subject our business to increased risks.  Any cyber security attacks that affect our facilities or operations, our customers or any financial data could have a material adverse effect on our business.  In addition, cyber-attacks on our customer and employee data may result in a financial loss and may negatively impact our reputation.  Third-party systems on which we rely could also suffer such attacks or operational system failures.  Any of these occurrences could disrupt our business, result in potential liability or reputational damage or otherwise have an adverse effect on our business, operations and financial results.

 

Our tax expense and effective tax rate on our worldwide earnings could be higher if there are changes in tax legislation in countries where we operate, if we lose our tonnage tax qualifications or tax exemptions, if we increase our operations in high tax jurisdictions where we operate, if there are changes in the mix of income and losses we recognize in tax jurisdictions and/or if we elect to repatriate cash from our foreign operations in amounts higher than recent years.

 

Our worldwide operations are conducted through our various domestic and foreign subsidiaries and as a result we are subject to income taxes in the United States and foreign jurisdictions. Any material changes in tax laws and related regulations, tax treaties or their interpretations where we have significant operations could result in a higher effective tax rate on our worldwide earnings and a materially higher tax expense.

 

For example, our North Sea operations based in the U.K. and Norway have special tax incentives for qualified shipping operations, commonly referred to as tonnage tax, which provides for a tax based on the net tonnage capacity of qualified vessels, resulting in significantly lower taxes than those that would apply if we were not a qualified shipping company in those jurisdictions. There is no guarantee that current tonnage tax regimes will not be changed or modified which could, along with any of the above-mentioned factors, materially adversely affect our international operations and, consequently, our business, operating results and financial condition. Our U.K. and Norway tonnage tax companies are subject to specific disqualification triggers, which, if we fail to manage them, could jeopardize our qualified tonnage tax status in those countries. Certain of the disqualification events or actions are coupled with one or more opportunities to cure or otherwise maintain the tonnage tax qualification but not all are curable. Our qualified Singapore-based vessels are exempt from Singapore taxation through December 2027, with extensions available in certain circumstances beyond 2027, but there is no assurance that extensions will be granted. The qualified Singapore vessels are also subject to specific qualification requirements which, if not met, could jeopardize our qualified status in Singapore.

 

In addition, our worldwide operations may change in the future such that the mix of our income and losses recognized in the various jurisdictions could change. Any such changes could reduce our ability to utilize tax benefits, such as foreign tax credits, and could result in an increase in our effective tax rate and tax expense.

 

We may have higher than anticipated tax liabilities.

 

We conduct business globally and file income tax returns in various tax jurisdictions. Our effective tax rate could be adversely affected by several factors, many of which are outside of our control, including:

 

 

changes in income before taxes in various jurisdictions in which we operate that have differing statutory tax rates;

 

changing tax laws, regulations, and/or interpretations of such tax laws in multiple jurisdictions;

 

effect of tax rate on accounting for acquisitions and dispositions;

 

issues arising from tax audit or examinations and any related interest or penalties; and

 

uncertainty in obtaining tax holiday extensions or expiration or loss of tax holidays in various jurisdictions.

 

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We report our results of operations based on our determination of the amount of taxes owed in various tax jurisdictions in which we operate. The determination of our worldwide provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination by tax authorities in various tax jurisdictions. Any adverse outcome of such review or examination could have a negative impact on our operating results and financial condition. The results from various tax examinations and audits may differ from the liabilities recorded in our financial statements and could adversely affect our financial results and cash flows.

 

On December 22, 2017, President Trump signed into law the statute originally named the Tax Cuts and Jobs Act, or the 2017 Tax Act or TCJA. The TCJA contains significant changes to U.S. federal corporate income taxation, including a reduction of the federal statutory tax rate from 35% to 21% for U.S. taxable income, which results in a one-time remeasurement of deferred tax assets and liabilities at the newly enacted statutory rate of 21%. The 2017 Tax Act also includes a new limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, deemed repatriation resulting in one-time taxation of offshore earnings at reduced rates, the elimination of U.S. tax on foreign earnings (subject to certain important exceptions), and immediate expensing of qualified capital expenditures. We are currently evaluating the overall effect of the TCJA on our business and financial condition.

 

Adverse results of legal proceedings could materially adversely affect us.

 

We are subject to and may in the future be subject to a variety of legal proceedings and claims that arise out of the ordinary conduct of our business. Results of legal proceedings cannot be predicted with certainty. Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and may require significant expenditures and cause diversion of management attention. We may be faced with significant monetary damages or injunctive relief against us that could materially adversely affect a portion of our business operations or materially and adversely affect our financial position and our results of operations should we fail to prevail in such matters.

 

The ability to attract, recruit and retain key personnel is critical to the success of our business and may be affected by our U.S. Citizen requirements and our emergence from bankruptcy.

 

We depend to a significant extent upon the efforts and abilities of our executive officers and other key management personnel. There is no assurance that these individuals will continue in such capacity for any particular period of time. The loss of the services of one or more of our executive officers or key management personnel could adversely affect our operations.

 

Our Amended and Restated Bylaws provide that our chairman of the board and chief executive officer, by whatever title, must be U.S. Citizens. In addition, our Amended and Restated Bylaws specify that not more than a minority of directors comprising the minimum number of members of the Board of Directors necessary to constitute a quorum of the Board of Directors (or such other portion as the Board of Directors determines is necessary to comply with the Jones Act) may be non-U.S. Citizens. Our Amended and Restated Bylaws provide for similar U.S. Citizen requirements with regard to committees of the Board of Directors. As a result, we may be unable to allow a non-U.S. Citizen, who would otherwise be qualified, to serve as a director or as our chairman of the board or chief executive officer.

 

The ability to attract and retain key personnel may also be difficult in light of our emergence from bankruptcy, the uncertainties currently facing the business and changes we may make to the organizational structure to adjust to changing circumstances. We may need to enter into retention or other arrangements that could be costly to maintain. If executives, managers or other key personnel resign, retire or are terminated or their service is otherwise interrupted, we may not be able to replace them in a timely manner and we could experience significant declines in productivity.

 

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

 

Certain provisions of our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. These provisions provide for, among other things:

 

 

the ability of our Board of Directors to issue, and determine the rights, powers and preferences of, one or more series of preferred stock;

 

advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

limitations on convening special stockholder meetings;

 

the availability for issuance of additional shares of Common Stock; and

 

restrictions on the ability of any natural person or entity that does not satisfy the citizenship requirements of the U.S. maritime laws to own, in the aggregate, more than 24% of the outstanding shares of our Common Stock.

 

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These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our Common Stock and other securities. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

We may not be able to sell vessels to improve our cash flow and liquidity because we may be unable to locate buyers with access to financing or to complete any sales on acceptable terms or within a reasonable timeframe.

 

We may seek to sell some of our vessels to provide liquidity and cash flow. However, given the current downturn in the oil and gas industry, there may not be sufficient activity in the market to sell our vessels and we may not be able to identify buyers with access to financing or to complete any such sales. Even if we are able to locate appropriate buyers for our vessels, any sales may occur on significantly less favorable terms than the terms that might be available in a more liquid market or at other times in the business cycle.

 

The early termination of contracts on our vessels could have an adverse effect on our operations and our backlog may not be converted to actual operating results for any future period.

 

Most of the long-term contracts for our vessels and all contracts with governmental entities and national oil companies contain early termination options in favor of the customer, in some cases permitting termination for any reason. Although some of these contracts have early termination remedies in our favor or other provisions designed to discourage the customers from exercising such options, we cannot assure you that our customers would not choose to exercise their termination rights in spite of such remedies or the threat of litigation with us. Moreover, most of the contracts for our vessels have a term of one year or less and can be terminated with 90 days or less notice. Until replacement of such business with other customers, any termination could temporarily disrupt our business or otherwise adversely affect our financial condition and results of operations. We might not be able to replace such business or replace it on economically equivalent terms. In those circumstances, the amount of backlog could be reduced and the conversion of backlog into revenue could be impaired. Additionally, because of depressed commodity prices, restricted credit markets, economic downturns, changes in priorities or strategy or other factors beyond our control, a customer may no longer want or need a vessel that is currently under contract or may be able to obtain a comparable vessel at a lower rate. For these reasons, customers may seek to renegotiate the terms of our existing contracts, terminate our contracts without justification or repudiate or otherwise fail to perform their obligations under our contracts. In any case, an early termination of a contract may result in our vessel being idle for an extended period of time. Each of these results could have a material adverse effect on our financial condition, results of operations and cash flows.

 

We may be unable to collect amounts owed to us by our customers.

 

We typically grant our customers credit on a short-term basis. Related credit risks are inherent as we do not typically collateralize receivables due from customers. We provide estimates for uncollectible accounts based primarily on our judgment using historical losses, current economic conditions and individual evaluations of each customer as evidence supporting the receivables valuations stated on our financial statements. However, our receivables valuation estimates may not be accurate and receivables due from customers reflected in our financial statements may not be collectible. Our inability to perform under our contractual obligations, or our customers’ inability or unwillingness to fulfill their contractual commitments to us, may have a material adverse effect on our financial condition, results of operations and cash flows.

 

Our international operations are vulnerable to currency exchange rate fluctuations and exchange rate risks.

 

We are exposed to foreign currency exchange rate fluctuations and exchange rate risks as a result of our foreign operations. To reduce the financial impact of these risks, we attempt to match the currency of our debt and operating costs with the currency of the revenue streams. Because we conduct a large portion of our operations in foreign currencies, any increase in the value of the U.S. Dollar in relation to the value of applicable foreign currencies could adversely affect our operating revenue or construction costs when translated into U.S. Dollars.

 

A substantial portion of our revenue is derived from our international operations which are subject to foreign government regulation and operating risks.

 

We derive a substantial portion of our revenue from foreign sources. We therefore face risks inherent in conducting business internationally, such as:

 

 

foreign currency exchange rate fluctuations;

 

legal and governmental regulatory requirements;

 

difficulties and costs of staffing and managing international operations;

 

language and cultural differences;

 

potential vessel seizure or nationalization of assets;

 

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import-export quotas or other trade barriers;

 

difficulties in collecting accounts receivable and longer collection periods;

 

political and economic instability;

 

changes to shipping tax regimes;

 

risk arising from counterparty conduct;

 

imposition of currency exchange controls; and

 

potentially adverse tax consequences.

 

We cannot predict whether any such conditions or events might develop in the future or whether they might have a material effect on our operations. Our ability to compete in international markets may be adversely affected by foreign government regulations, such as regulations that favor or require the awarding of contracts to local competitors, or that require foreign persons to employ citizens of, or purchase supplies from, a particular jurisdiction.

 

Our subsidiary structure and our operations are in part based on certain assumptions about various foreign and domestic tax laws, currency exchange requirements and capital repatriation laws. While we believe our assumptions are correct, there can be no assurance that taxing or other authorities will reach the same conclusions. If our assumptions are incorrect or if the relevant countries change or modify such laws or the current interpretation of such laws, we may suffer adverse tax and financial consequences, including the reduction of cash flow available to meet required debt service and other obligations.

 

       U.S. federal income tax reform could adversely affect us.

 

On December 22, 2017, President Trump signed into law the 2017 Tax Act, which enacts a broad range of changes to the U.S. Internal Revenue Code. The 2017 Tax Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating losses, allows for the expensing of certain capital expenditures, and puts into effect a number of changes impacting operations outside of the United States including, but not limited to, the imposition of a one-time tax on accumulated post-1986 deferred foreign income that has not previously been subject to U.S. taxation, and possible U.S. tax implications associated with the treatment of certain foreign earnings. We continue to examine the impact this tax legislation may have on our business.

 

The overall impact of the 2017 Tax Act on our future financial results is subject to uncertainties and our financial results could be adversely impacted by certain aspects of the 2017 Tax Act, allowing a domestic corporation an immediate deduction in U.S. taxable income for a portion of its foreign-derived intangible income, and the base erosion anti-abuse tax. These factors could result in our 2018 provisional income tax expense effective tax rate to differ from our expectations.

 

Doing business through joint venture operations may require us to surrender some control over our assets and may lead to disruptions in our operations and business.

 

We operate in several foreign areas through joint ventures with local companies, in some cases because of local laws requiring local company ownership. While the joint venture partner may provide local knowledge and experience, entering into joint ventures often requires us to surrender a measure of control over the assets and operations devoted to the joint venture, and occasions may arise when we do not agree with the business goals and objectives of our joint venture partner, or other factors may arise that make the continuation of the relationship unwise or untenable. Any such disagreements or discontinuation of the relationship could disrupt our operations, put assets dedicated to the joint venture at risk, or adversely affect the continuity of our business. If we are unable to resolve issues with a joint venture partner, we may decide to terminate the joint venture and either locate a different partner and continue to work in the area or seek opportunities for our assets in another market. The unwinding of an existing joint venture could prove to be difficult or time-consuming, and the loss of revenue related to the termination or unwinding of a joint venture and costs related to the sourcing of a new partner or the mobilization of assets to another market could adversely affect our financial condition, results of operations or cash flows.

 

Vessel enhancement, repair and drydock projects are subject to risks, including delays, cost overruns, and ship yard insolvencies which could have an adverse impact on our results of operations.

 

Our vessel enhancement, repair and drydock projects are subject to risks, including delay and cost overruns, inherent in any large construction project, including:

 

 

shortages of equipment;

 

unforeseen engineering problems;

 

work stoppages;

 

lack of shipyard availability;

 

weather interference;

 

unanticipated cost increases;

 

shortages of materials or skilled labor; and

 

insolvency of the ship repairer or ship builder.

 

31

 

 

Significant cost overruns or delays in connection with our vessel construction, enhancement, repair and drydock projects could adversely affect our financial condition and results of operations. Significant delays could also result, under certain circumstances, in penalties under, or the termination of, long-term contracts under which our vessels operate. The demand for vessels we construct may diminish from anticipated levels, or we may experience difficulty in acquiring new vessels or obtaining equipment to repair our older vessels due to high demand, and both circumstances may have a material adverse effect on our revenues and profitability. Recent global economic issues may increase the risk of insolvency of ship builders and ship repairers, which could adversely affect the cost of new construction and the vessel repairs and could result, under certain circumstances, in penalties under, or termination of, long-term contracts relating to vessels under construction.

 

The operations of our fleet may be subject to seasonal factors.

 

Operations in the North Sea are generally at their highest levels during the months from April through August and at their lowest levels from December through February, primarily due to lower construction activity and harsh weather conditions during the winter months affecting the movement of drilling rigs. Vessels operating offshore Southeast Asia are generally at their lowest utilization rates during the monsoon season, which moves across the Asian continent between September and early March. The monsoon season for a specific Southeast Asian location generally lasts about two months. Activity in the U.S. Gulf of Mexico, like the North Sea, is often slower during the winter months when construction projects and other specialized jobs are most difficult, and during the hurricane season from June through November. Operations in any market may be affected by seasonality often related to unusually long or short construction seasons due to, among other things, abnormal weather conditions, as well as market demand associated with changes in drilling and development activities.

 

Upon our emergence from bankruptcy, the composition of our Board of Directors changed significantly.

 

Pursuant to the Plan, the composition of our Board of Directors changed significantly upon our emergence from bankruptcy. Our Board is now made up of seven directors, with a new non-executive Chairman of the Board, and six of whom did not previously serve on our Board. The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on our Board and, thus, may have different views on the issues that will determine the future of our company. There is no guarantee that the new Board will pursue, or will pursue in the same manner, our strategic plans in the same manner as our prior Board. As a result, our future strategy and plans may differ materially from those of the past.

 

Government regulation and environmental risks can reduce our business opportunities, increase our costs, and adversely affect the manner or feasibility of doing business.

 

We believe that we are in compliance in all material respects with the applicable environmental laws and regulations to which we are subject. We maintain a robust compliance program to ensure that we maintain and update our programs to meet or exceed regulatory requirements in the areas which we operate. However, we are subject to extensive governmental regulation in the form of international conventions, federal, state and local laws and laws and regulations in jurisdictions where our vessels operate and are registered. The risks of incurring substantial compliance costs and liabilities and penalties for noncompliance are inherent in offshore marine service operations. Compliance with the Jones Act, as well as with environmental, occupational, health and safety, and vessel and port security laws, can reduce our business opportunities and increase our costs of doing business. Additionally, these laws and regulations are subject to frequent changes. Therefore, we are unable to predict with certainty the future costs or other future impact of these laws on our operations and our customers. We could also incur substantial costs, including cleanup costs, fines, civil or criminal sanctions and third party claims for property damage or personal injury as a result of violations of, or liabilities under, environmental laws and regulations. In addition, there can be no assurance that we can avoid significant costs, liabilities and penalties imposed on us as a result of government regulation in the future.

 

Growth through acquisitions and investment could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations.

 

We routinely evaluate potential acquisitions of single vessels, vessel fleets and businesses, and we expect to continue to enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquisition could create unforeseen operating difficulties and expenditures. The areas where we face risks include:

 

 

diversion of management time and focus away from operating our business to integrating the business;

 

integration of the acquired company’s accounting, human resources and other administrative systems and the coordination of various business functions;

 

implementation of, and changes to, controls, procedures and policies at the acquired company;

 

transition of customers into our operations;

 

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries or regions;

 

32

 

 

 

cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;

 

liability for activities of the acquired company before the acquisition, including violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and

 

litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.

 

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions or investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business in general.

 

Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt or contingent liabilities, an increase in amortization expenses or write-offs of goodwill, any of which could harm our financial condition.

 

We can give no assurance that we will be able to identify desirable acquisition candidates or that we will have the financial resources necessary to pursue desirable acquisition candidates or be successful in entering into definitive agreements or closing any such acquisition on satisfactory terms. An inability to acquire additional vessels or businesses may limit our growth potential.

 

We may be unable to attract and retain qualified, skilled employees necessary to operate our business.

 

Our success depends in large part on our ability to attract and retain highly skilled and qualified personnel. Our inability to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business. In crewing our vessels, we require skilled employees who can perform physically demanding work, often in harsh or challenging environments for extended periods of time. As a result of the volatility of the oil and gas industry and the demanding nature of the work, potential vessel employees may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. Further, we face strong competition within the broader oilfield industry for potential employees, including competition from drilling rig operators, for our fleet personnel. It is possible that we will have to raise wage rates to attract workers and to retain our current employees. If we are not able to increase our charges to our customers to compensate for wage increases, our financial condition and results of operations may be adversely affected. If we are unable to recruit qualified personnel we may not be able to operate our vessels at full utilization, which would adversely affect our results of operations.

 

We may incur additional asset impairments as a result of reduced demand for certain vessels.

 

The current oversupply of vessels in offshore oil and gas exploration and production markets has resulted in numerous vessels being idled or stacked and, in some cases, retired or scrapped. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment write-offs could result if, for example, any of our vessels become obsolete or commercially less desirable or their carrying values become excessive due to the condition of the vessel, stacking the vessel, the expectation of stacking the vessel in the near future, a decision to retire or scrap the vessel, changes in technology, market demand or market expectations, or excess spending over budget on a new-build vessel. Asset impairment evaluations are, by their nature, highly subjective. The use of different estimates and assumptions could result in materially different carrying values of our assets, which could impact the need to record an impairment charge and the amount of any charge taken. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates Long-Lived Assets, Goodwill and Intangibles” in Part II, Item 7 and Note 3 to our Consolidated Financial Statements included in Part II, Item 8.

 

We can provide no assurance that our assumptions and estimates used in our asset impairment evaluations will ultimately be realized or that the current carrying value of our property and equipment will ultimately be realized.

 

Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result of the implementation of the Plan and the transactions contemplated thereby and our adoption of Fresh Start Accounting.

 

We emerged from bankruptcy under Chapter 11 of the Bankruptcy Code on November 14, 2017. Upon our emergence from bankruptcy, we adopted Fresh Start Accounting, as a consequence of which our assets and liabilities were adjusted to fair values and our accumulated deficit was restated to zero. Accordingly, our future financial condition and results of operations may not be comparable to the financial condition or results of operations reflected in our historical financial statements. The lack of comparable historical financial information may discourage investors from purchasing our securities. In addition, in conjunction with our emergence from bankruptcy and our adoption of Fresh Start Accounting, we adopted new accounting policies relating to drydocks and useful lives and estimated salvage values of our vessels. Prior to emergence, we expensed regulatory drydocks as they were incurred. With Fresh Start Accounting, we will capitalize the cost of regulatory drydocks and amortize such cost over 30 months, the regulatory interval between required drydocks. Prior to emergence, we depreciated the cost of each vessel over a useful life of 25 years to an estimated salvage value of 15% of original cost. Under Fresh Start Accounting, we reduced our useful life estimate of each vessel to 20 years and our salvage value estimate to 5%.

 

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We currently have no plans to pay cash dividends or other distributions on our Common Stock.

 

We currently do not expect to pay any cash dividends or other distributions on our Common Stock in the foreseeable future. Any future determination to pay cash dividends or other distributions on our Common Stock will be at the sole discretion of our Board of Directors and, if we elect to pay such dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time. The Board of Directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, agreements governing any existing and future indebtedness we or our subsidiaries may incur and other contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders, and such other factors as the Board of Directors may deem relevant.

 

Climate change, climate change regulations and greenhouse gas effects may adversely impact our operations and markets.

 

There is a concern that emissions of greenhouse gases, or GHGs, such as carbon dioxide and methane, alter the composition of the global atmosphere in ways that affect the global climate. Climate change, including the impact of global warming, may create physical and financial risk for organizations whose operations are affected by the climate. Some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our business, financial condition and results of operations.

 

Financial risks relating to climate change are likely to arise from increasing regulation of GHG emissions, as compliance with any new rules could be difficult and costly. For example, from time to time legislation has been proposed in the U.S. Congress to reduce GHG emissions. In addition, in the absence of federal GHG legislation, the EPA has taken steps to regulate GHG emissions. Depending on the outcome of these or other regulatory initiatives, increased energy, environmental and other costs and capital expenditures could be necessary to comply with the relevant limitations. Our vessels also operate in foreign jurisdictions that are addressing climate changes by legislation or regulation. Unless and until legislation or regulations are enacted and their terms are finalized, we cannot reasonably or reliably estimate its impact on our financial condition, operating performance or ability to compete. In addition, any GHG related legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and gas produced by our customers. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have an adverse effect on our business, financial condition and results of operations.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties

 

Our principal executive offices are leased and located in Houston, Texas. We lease offices and, in most cases, warehouse facilities for our local operations. Offices for our Southeast Asia operating segment are located in Singapore. Offices for our North Sea operating segment are located in Aberdeen, Scotland and Sandnes, Norway. Offices for our Americas operating segment are located in Macae, Brazil; Ciudad del Carmen, Mexico; Chaguaramus, Trinidad; and St. Rose, Louisiana. Our operations generally do not require highly specialized facilities, and suitable facilities are generally available on a lease basis as required.

 

ITEM 3. Legal Proceedings

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition, or the Chapter 11 Case, under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court. On October 4, 2017, the Bankruptcy Court entered an order approving our Amended Chapter 11 Plan of Reorganization, as confirmed, or the Plan. On November 14, 2017, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case.

 

Various legal proceedings and claims that arise in the ordinary course of business may be instituted or asserted against us. Although the outcome of litigation cannot be predicted with certainty, we believe, based on discussions with legal counsel and in consideration of reserves recorded, that an unfavorable outcome of these legal actions would not have a material adverse effect on our consolidated financial position and results of operations. We cannot predict whether any such claims may be made in the future.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

34

 

 

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

From January 1, 2016 through April 10, 2017, the Predecessor’s Class A common stock was listed on the New York Stock Exchange, or NYSE, under the symbol “GLF.” During the period from April 11, 2017 until the Effective Date, the Predecessor’s Class A common stock was quoted in the “Pink Sheets” of OTC Pink, an over-the-counter market, under the symbol “GLFM.” On the Effective Date, by operation of the Plan, all agreements, instruments and other documents evidencing, relating to or connected with any equity interests of the Predecessor, including the outstanding shares of the Predecessor’s Class A common stock, issued and outstanding immediately prior to the Effective Date, and any rights of any holder in respect thereof, were deemed cancelled, discharged and of no force or effect.

 

The Successor’s Common Stock and warrants exercisable for shares of Common Stock for cash at an initial exercise price of $100.00 per share, or in certain circumstances, in accordance with a cashless exercise, or Equity Warrants, are listed on the NYSE American under the symbols “GLF” and “GLF.WS”, respectively, and have been trading since November 16, 2017. On March 5, 2018, the Successor’s warrants exercisable for shares of Common Stock at an initial exercise price of $0.01 per share, or Noteholder Warrants, began being quoted and traded on the OTCQX market (which is operated by OTC Markets Group, Inc.) under the symbol “GLFMW.” There can be no assurance that an active trading market for the Noteholder Warrants will develop. As of March 30, 2018, there were approximately 2 holders of record of our Noteholder Warrants.

 

The following table sets forth the range of high and low sales prices per share for the Predecessor’s Class A common stock and the Successor’s Common Stock for the periods indicated, as reported by the NYSE, OTC Pink and NYSE American, as applicable.

 

Predecessor Class A Common Stock

 

   

2016

 
   

High

   

Low

 

First Quarter

  $ 7.38     $ 2.60  

Second Quarter

  $ 6.94     $ 3.06  

Third Quarter

  $ 3.76     $ 1.52  

Fourth Quarter

  $ 2.30     $ 1.10  

 

   

2017

 
   

High

   

Low

 

First Quarter

  $ 1.750     $ 0.350  

Second Quarter

  $ 0.336     $ 0.140  

Third Quarter

  $ 0.210     $ 0.133  

Fourth Quarter October 1 - November 14

  $ 0.185     $ 0.130  

 

 

Successor Common Stock

 

   

2017

 
   

High

   

Low

 

Fourth Quarter November 16 - December 31

  $ 34.96     $ 6.05  

 

As of March 30, 2018, there were approximately 286 holders of record of our Common Stock.

 

The following table sets forth, for the periods indicated, the high and low sales prices of our Equity Warrants as reported by the NYSE American.

 

 

Successor Equity Warrants

 

   

2017

 
   

High

   

Low

 

Fourth Quarter November 16 - December 31

  $ 4.00     $ 0.03  

 

As of March 30, 2018, there were approximately 414 holders of record of our Equity Warrants.

 

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Dividend Policy

 

The Board of Directors did not declare any dividends for the years ended December 31, 2017 and 2016.

 

We do not anticipate that cash dividends or other distributions will be paid with respect to our Common Stock in the foreseeable future. In addition, restrictive covenants in certain debt instruments to which we are, or may be, a party, limit our ability to pay dividends or our ability to receive dividends from our operating companies, and may negatively impact the trading price of our Common Stock.

 

While we have no current plans to pay dividends on our Common Stock, we will continue to evaluate the cash generated by our business and may decide to pay a dividend in the future. Any future determinations relating to our dividend policies and the declaration, amount and payment of any future dividends on our Common Stock will be at the sole discretion of our Board of Directors and, if we elect to pay such dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time. The Board of Directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, agreements governing any existing and future indebtedness we or our subsidiaries may incur and other contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders, and such other factors as the Board of Directors may deem relevant.

 

36

 

 

ITEM 6. Selected Financial Data

 

The data that follows should be read in conjunction with our Consolidated Financial Statements and the notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Part II, Item 7.

 

   

Successor

   

Predecessor

 
   

Period from

November 15

Through

December 31,

   

Period from

January 1

Through

November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

   

2014

   

2013

 
           

(Amounts in thousands, except per share amounts and vessels)

 

Operating Data:

                                               

Revenue

  $ 13,593     $ 88,229     $ 123,719     $ 274,806     $ 495,769     $ 454,604  

Direct operating expenses

    9,859       69,821       83,165       169,837       236,244       217,422  

Drydock expense

    -       5,432       4,662       15,387       24,840       24,094  

General and administrative expenses

    3,408       32,369       37,663       47,280       62,728       54,527  

Pre-petition restructuring charges

    -       17,861       -       -       -       -  

Depreciation and amortization

    4,425       47,721       58,182       72,591       75,336       63,955  

Impairment charges

    -       -       162,808       152,103       8,995       -  

(Gain) loss on sale of assets and other

    -       5,207       8,564       1,160       (14,039 )     (5,870 )

Operating income (loss)

    (4,099 )     (90,182 )     (231,325 )     (183,552 )     101,665       100,476  

Interest expense

    (1,343 )     (28,815 )     (33,486 )     (36,946 )     (29,332 )     (23,821 )

Interest income

    57       26       133       260       307       202  

Gain on extinguishment of debt

    -       -       35,912       458       -       -  

Reorganization items

    (969 )     (319,922 )     -       -       -       -  

Other financing costs

    -       -       (11,287 )     -       -       -  

Foreign currency loss and other

    (439 )     (270 )     (2,384 )     (1,088 )     (995 )     (1,289 )

Income tax (provision) benefit (a)

    10,304       38,244       39,458       5,633       (9,270 )     (4,962 )
                                                 

Net income (loss)

  $ 3,511     $ (400,919 )   $ (202,979 )   $ (215,235 )   $ 62,375     $ 70,606  

Amounts per common share (basic) (b):

                                               

Net income (loss)

  $ 0.35     $ (15.47 )   $ (8.09 )   $ (8.70 )   $ 2.39     $ 2.70  

Weighted average common shares outstanding (basic)

    9,998       25,917       25,094       24,729       26,097       26,175  

Amounts per common share (diluted) (b):

                                               

Net income (loss)

  $ 0.35     $ (15.47 )   $ (8.09 )   $ (8.70 )   $ 2.39     $ 2.70  

Weighted average common shares outstanding (diluted)

    9,998       25,917       25,094       24,729       26,097       26,185  

Statement of Cash Flows Data:

                                               

Cash provided by (used in) operating activities

  $ (9,256 )   $ (63,818 )   $ (23,339 )   $ 43,357     $ 153,848     $ 126,702  

Cash used in investing activities

    (141 )     (21,918 )     (9,659 )     (22,835 )     (121,104 )     (210,069 )

Cash provided by (used in) financing activities

    (862 )     151,088       20,167       (47,281 )     (40,024 )     (39,598 )

Effect of exchange rate changes on cash

    (67 )     765       (286 )     (2,087 )     (2,501 )     (1,644 )

Other Data:

                                               

Adjusted EBITDA (c)

  $ 326     $ (42,461 )   $ (10,335 )   $ 41,142     $ 185,996     $ 164,431  

Cash dividends per share (d)

  $ -     $ -     $ -     $ -     $ 1.00     $ 1.00  

Total vessels in fleet as of year end (e)

    69       69       71       73       76       79  

Average number of owned or chartered vessels (f)

    66.0       66.4       68.9       71.4       74.3       70.5  

 

   

Successor

   

Predecessor

 
   

As of

December 31,

   

As of December 31,

 
   

2017

   

2016

   

2015

   

2014

   

2013

 
           

(In thousands)

 

Balance Sheet Data:

                                       

Cash and cash equivalents

  $ 64,613     $ 8,822     $ 21,939     $ 50,785     $ 60,566  

Vessels, equipment and other fixed assets, including construction in progress, net

    364,128       995,220       1,266,487       1,484,561       1,494,611  

Total assets

    471,955       1,052,525       1,361,252       1,716,355       1,773,292  

Current portion of long-term debt (g)

    -       483,326       -       -       -  

Long-term debt (h)

    92,365       -       490,589       544,732       500,864  

Total stockholders’ equity

    324,490       449,621       698,308       968,753       1,063,341  

 

(a)

See Note 7 “Income Taxes” to our Consolidated Financial Statements included in Part II, Item 8.

 

(b)

Earnings per share is based on the weighted-average number of shares of common stock and common stock equivalents outstanding.

 

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(c)

EBITDA is defined as net income (loss) before interest expense, interest income, income tax (benefit) provision, and depreciation, amortization and impairment. Adjusted EBITDA is calculated by adjusting EBITDA for certain items that we believe are non-cash or non-operational, consisting of: (i) the cumulative effect of change in accounting principle, (ii) debt refinancing costs, (iii) loss from unconsolidated ventures, (iv) minority interests, (v) gain on extinguishment of debt, and (vi) other (income) expense, net. EBITDA and Adjusted EBITDA are not measurements of financial performance under generally accepted accounting principles, or GAAP, and should not be considered as an alternative to cash flow data, a measure of liquidity or an alternative to operating income or net income as indicators of our operating performance or any other measures of performance derived in accordance with GAAP.

 

EBITDA and Adjusted EBITDA are presented because they are widely used by securities analysts, creditors, investors and other interested parties in the evaluation of companies in our industry. This information is a material component of certain financial covenants in our debt obligations. Failure to comply with the financial covenants could result in an inability to borrow under our revolving credit facility and the imposition of restrictions on our financial flexibility. When viewed with GAAP results and the accompanying reconciliation, we believe the EBITDA and Adjusted EBITDA calculations provide additional information that is useful to gain an understanding of the factors and trends affecting our ability to service debt and meet our ongoing liquidity requirements. EBITDA is also a financial metric used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. However, because EBITDA and Adjusted EBITDA are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures used by other companies or comparable for other purposes. Also, EBITDA and Adjusted EBITDA, as non-GAAP financial measures, have material limitations as compared to cash flow provided by operating activities. EBITDA does not reflect the future payments for capital expenditures, financing–related charges and deferred income taxes that may be required as part of normal business operations. The following table summarizes the calculation of EBITDA and Adjusted EBITDA for the periods indicated.

 

   

Successor

   

Predecessor

 
   

November 15 Through December 31,

   

January 1, Through November 14,

   

Year Ended December 31,

 
   

2017

   

2017

   

2016

   

2015

   

2014

   

2013

 
           

(In thousands)

         

Net income (loss)

  $ 3,511     $ (400,919 )   $ (202,979 )   $ (215,235 )   $ 62,375     $ 70,606  

Interest expense

    1,343       28,815       33,486       36,946       29,332       23,821  

Interest income

    (57 )     (26 )     (133 )     (260 )     (307 )     (202 )

Income tax provision (benefit)

    (10,304 )     (38,244 )     (39,458 )     (5,633 )     9,270       4,962  
                                                 

Depreciation, amortization and impairment

    4,425       47,721       220,990       224,694       84,331       63,955  

EBITDA

    (1,082 )     (362,653 )     11,906       40,512       185,001       163,142  

Adjustments:

                                               

Other, net *

    1,408       320,192       (22,241 )     630       995       1,289  

Adjusted EBITDA

  $ 326     $ (42,461 )   $ (10,335 )   $ 41,142     $ 185,996     $ 164,431  

 

*   Net amount includes foreign currency transaction adjustments, other financing costs and gain/loss on extinguishment of debt.

 

(d)

In each quarter of 2013 and 2014, the Predecessor’s Board of Directors declared a quarterly cash dividend of $0.25 per share for a total dividend of $1.00 per share in each of the years 2013 and 2014. In February 2015, the Predecessor’s dividend was suspended and no dividends were declared in 2015, 2016 or 2017.

 

(e)

Includes managed vessels in addition to those that are owned at the end of the applicable period (excludes vessels held for sale). See “Worldwide Fleet” in Part I, Item 1 “Business” for further information concerning our fleet.

 

(f)

Average number of vessels is calculated based on the aggregate number of vessel days available during each period divided by the number of calendar days in such period and is adjusted for additions and dispositions occurring during each period.

 

(g)

Amounts at December 31, 2016 reflect the reclassification of the $483.3 million of long-term debt to current as a result of an event of default under the Predecessor’s Multicurrency Facility Agreement. On May 17, 2017, we filed a voluntary petition under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. On November 14, 2017, we emerged from the Chapter 11 Case. For a more detailed discussion of our bankruptcy proceedings and our emergence from bankruptcy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Bankruptcy Filing and Emergence” included in Part II, Item 7, and Note 2 to our Consolidated Financial Statements included in Part II, Item 8.

 

(h)

Excludes current portion of long-term debt.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This information should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, contained in Part II, Item 8 “Financial Statements and Supplementary Data.” See also Part II, Item 6 “Selected Financial Data” and “Cautionary Note Regarding Forward-Looking Statements.”

 

On May 17, 2017, GulfMark Offshore, Inc. filed a voluntary petition, or the Chapter 11 Case, under chapter 11 of title 11 of the United States Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court. On October 4, 2017, the Bankruptcy Court entered an order, or the Confirmation Order, approving our Amended Chapter 11 Plan of Reorganization, as confirmed, or the Plan. On November 14, 2017, or the Effective Date, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case. For a more detailed discussion of our bankruptcy proceedings and our emergence from bankruptcy, see “- General - Bankruptcy Filing and Emergence below and Note 2 to our Consolidated Financial Statements included in Part II, Item 8.

 

General

 

We provide marine support and transportation services to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport drilling materials, supplies and personnel to offshore facilities, and also move and position drilling structures. A substantial portion of our operations is international. Our fleet has grown in both size and capability, from 11 vessels in 1990 to our present number of 69 vessels, through strategic acquisitions and the new construction of technologically advanced vessels, partially offset by dispositions of certain older, less profitable vessels. As of March 30, 2018, our fleet includes 66 owned vessels, 29 of which are stacked, and three managed vessels, one of which is stacked.

 

Our results of operations are affected primarily by day rates, fleet utilization and the number and type of vessels in our fleet. Utilization and day rates, in turn, are influenced principally by the demand for vessel services from the offshore exploration and production sectors of the oil and natural gas industry. The supply of vessels to meet this fluctuating demand is related directly to the perception of future activity in both the drilling and production phases of the oil and natural gas industry as well as the availability of capital to build new vessels to meet the changing market requirements. As discussed below, the decline in the price of oil since 2014 has materially and negatively impacted our results of operations.

 

We also provide management services to other vessel owners for a fee. Management fees are included in revenue. These vessels are excluded for purposes of calculating fleet rates per day worked and utilization in the applicable periods. As of the date of this report, one of our managed vessels is stacked.

 

The operations of our fleet may be subject to seasonal factors. Operations in the North Sea are often at their highest levels from April to August and at their lowest levels from October through February. Operations in our other areas, although involving some seasonal factors, tend to remain more consistent throughout the year. Activity in the U.S. Gulf of Mexico may be slower during the hurricane season from June through November, although following a hurricane, activity may increase as there may be a greater demand for vessel services as repair and remediation activities take place.

 

Our operating costs are primarily a function of fleet configuration. The most significant direct operating cost is wages paid to vessel crews, followed by repairs and maintenance. Generally, fluctuations in vessel utilization have little effect on direct operating costs in the short term and, as a result, direct operating costs as a percentage of revenue may vary substantially due to changes in day rates and utilization.

 

In addition to direct operating costs, we incur fixed charges related to the depreciation of our fleet, modifications designed to ensure compliance with applicable regulations and maintaining certifications for our vessels with various international classification societies. The demands of the market, the expiration of existing contracts, the commencement of new contracts, seasonal factors and customer preferences can influence the timing of drydocks to some extent. As a result of the current market downturn, we have taken some vessels out of service (also referred to as stacking) and deferred a number of drydocks as part of our cost cutting initiatives. The deferred drydocks will eventually be required to be performed prior to returning the vessels to active service.

 

0il Price Impact

 

Our business is directly impacted by the level of activity in worldwide offshore oil and natural gas exploration, development and production, which in turn is influenced by trends in oil and natural gas prices. In addition, oil and natural gas prices are affected by a host of geopolitical and economic forces, including the fundamental principles of supply and demand. In particular, the oil price is significantly influenced by actions of the Organization of Petroleum Exporting Countries, or OPEC. Beginning in late 2014, the oil and gas industry experienced a significant decline in the price of oil causing an industry-wide downturn that continues into 2018. Beginning in late 2014, oil prices declined significantly from early year levels of over $100 per barrel. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in the first quarter of 2016. Prices began to recover over the remainder of 2016, stabilizing at over $40 per barrel for much of the second and third quarters of 2016 and further increasing to over $50 per barrel by year end. Prices are subject to significant uncertainty and continue to be volatile, declining again in early 2017 before recovering to over $60 per barrel in January 2018. The downturn of the last few years has significantly impacted the operational plans for oil companies, resulting in reduced expenditures for exploration and production activities, and consequently has adversely affected the drilling and support service sector.

 

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Bankruptcy Filing and Emergence

 

On May 17, 2017, GulfMark Offshore, Inc. filed the Chapter 11 Case under the Bankruptcy Code in the Bankruptcy Court, and on October 4, 2017, the Bankruptcy Court entered the Confirmation Order approving the Plan. On the Effective Date, November 14, 2017, the Plan became effective pursuant to its terms and we emerged from the Chapter 11 Case.

 

On May 15, 2017, the Predecessor entered into a restructuring support agreement, or the RSA, with holders, or the Noteholders, of approximately 50% of the aggregate outstanding principal amount of the Predecessor’s senior notes, to support a restructuring on the terms of the Plan.  The RSA provided for, among other things, the Predecessor’s $125.0 million cash rights offering, or the Rights Offering.  Upon emergence from bankruptcy, we implemented the provisions of the RSA in accordance with the Plan on the Effective Date as follows:

 

  Pursuant to the Rights Offering (subject to Jones Act limitations described below), eligible Noteholders purchased their pro rata share of 60% of the Common Stock of the Successor, or as applicable, Noteholder Warrants (as defined below), or the Successor Equity. The Rights Offering was backstopped by certain Noteholders for a 6.0% commitment premium that was paid with an additional 3.6% of the Successor Equity.
     
  Each holder of the Predecessor’s senior notes received (subject to Jones Act limitations described below) its pro rata share of 35.65% of the Successor Equity.
     
  The Jones Act, which applies to companies that engage in coastwise trade, requires that, among other things, with respect to a publicly traded company, the aggregate ownership of common stock by non-U.S. citizens be not more than 25% of its outstanding common stock. On the Effective Date, certain Noteholders who were eligible to receive Common Stock of the Successor pursuant to the Plan or the Rights Offering but who were non-U.S. holders received warrants to acquire Common Stock of the Successor at an exercise price of $.01 per share, or the Noteholder Warrants.
     
  Outstanding Class A common stock of the Predecessor was cancelled and each holder of such Class A common stock received its pro rata share of (a) Common Stock representing in the aggregate 0.75% of the Successor Equity and (b) Equity Warrants with an exercise price of $100 per share for 7.5% of the equity of the Successor.
     
  The Successor Equity purchased in the Rights Offering, issued to pay the backstop premium, issued in exchange for the Predecessor’s senior notes or in exchange for the Predecessor’s Class A common stock is subject to dilution by the Successor Equity issued or issuable under the proposed management incentive plan and upon exercise of the Equity Warrants.
     
  The Predecessor repaid in full its debtor-in-possession financing.     Holders of allowed claims arising under administrative expense claims, priority tax claims, other priority claims, and other secured claims of the Predecessor have received or will receive payment in full in cash. The Successor will continue to pay any general unsecured claims in the ordinary course of business.

 

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Markets

 

North Sea. We continue to expect significant activity in the North Sea region during 2018. We also expect the continued focus on operator savings and oversupply of OSVs to adversely impact vessel day rates. Although cost efficiencies are currently a priority of operators, we believe the North Sea region remains viable long-term with several large field developments in the United Kingdom, or U.K., and Norwegian sectors forecasted by industry analysts, along with decommissioning work and projects in the renewables sector. We expect these factors, combined with an upturn in drilling in remote northerly areas such as the Barents Sea, Kara Sea and offshore Greenland, to drive demand in the North Sea region in the coming years, although we can provide no assurance as to when these developments may occur.

 

Southeast