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EX-10.39 - EXHIBIT 10.39 - GULFMARK OFFSHORE INCex10-39.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, 2016

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:

 

Class A Common Stock, $0.01 par value New York Stock Exchange

 

(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, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting 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

 

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, 2016, the last business day of the registrant’s most recently completed second fiscal quarter was $61,768,744 calculated by reference to the closing price of $3.13 for the registrant’s common stock on the New York Stock Exchange on that date.

 

Number of shares of Class A common stock outstanding as of March 15, 2017: 27,147,009

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information called for by Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K, will be included in a

definitive proxy statement or an amendment to this Form 10-K to be filed within 120 days after the end of

the fiscal year covered by this Form 10-K, and is incorporated herein by reference.

 

 
 

 

 

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

18

Item 1B.

Unresolved Staff Comments

34

Item 2.

Properties

34

Item 3.

Legal Proceedings

34

Item 4.

Mine Safety Disclosures

35

     

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

38

Item 7.

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

40

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

59

Item 8.

Financial Statements and Supplementary Data

61

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

90

Item 9A.

Controls and Procedures

90

Item 9B.

Other Information

90

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance

91

Item 11.

Executive Compensation

91

Item 12.

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

91

Item 13.

Certain Relationships and Related Transactions, and Director Independence

91

Item 14.

Principal Accountant Fees and Services

91

     

PART IV

   

Item 15.

Exhibits and Financial Statement Schedules

91

Item 16.

Form 10-K Summary

91

  

 
2

 

 

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,” “should,” “could,” “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:

 

 

our ability to continue as a going concern;

 

the potential need to seek bankruptcy protection;

 

covenant compliance and availability of borrowings under our revolving credit facilities;

 

financing plans, any potential debt restructuring or refinancing and access to sources of liquidity;

 

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 certain risks, uncertainties and assumptions, many of which are beyond our control, which 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. These risks, uncertainties and assumptions include, among others, the following:

 

 

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

 

operational risk;

 

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

 

sustained weakening of demand for our services;

 

general economic and business conditions;

 

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;

 

 
3

 

 

 

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 compliance with the Jones Act, including the repeal or administrative weakening of the Jones Act or changes in the interpretation of the Jones Act related to the U.S. citizenship qualification;

 

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 or in obtaining covenant relief from lenders or other contract parties;

 

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. We do so for the convenience of our investors and potential investors and in an effort to provide information available in the market intended to lead to a better understanding of the market environment in which we operate. 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. 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. We currently operate a fleet of 69 owned or managed offshore supply vessels, or OSVs, in the following regions: 28 vessels in the North Sea, 10 vessels offshore Southeast Asia, and 31 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 ten 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.

 

Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer to GulfMark Offshore, Inc., its subsidiaries and its predecessors.

 

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 Securities and Exchange Commission, or 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. The information provided on our website is not part of this report and is not incorporated by reference in this report. Filings are available on our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. 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.

 

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 continued into 2017. The decline was in part a result of an OPEC decision to increase production. The price of oil declined significantly from over $100 per barrel in July 2014 to below $30 per barrel in February 2016. 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. These changes in industry dynamics decreased demand for OSV services and led to an excess number of vessels in all of our operating regions. Although OPEC met in November 2016 and agreed to limit production going forward, day rates have not recovered. In many regions, day rates for OSV services have fallen below the levels needed to sustain our business. Assuming the industry cost structure remains at current levels, many industry observers believe that sustained oil price levels in excess of $60 per barrel are required to return the OSV business to profitability.

 

 
5

 

  

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 the 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, 2015 and our stacked vessels as of March 16, 2017: 

   

   

Owned

Vessels

   

Managed

Vessels

   

Total

Fleet

 

December 31, 2015

    70       3       73  

New-Build Program

    1       -       1  

Vessel Additions

    -       -       -  

Vessel Dispositions

    (4 )     -       (4 )

December 31, 2016

    67       3       70  

New-Build Program

    1       -       1  

Vessel Additions

    -       -       -  

Vessel Dispositions

    (2 )     -       (2 )

March 16, 2017

    66       3       69  
                         

Stacked vessels

    28       2       30  

 

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.

 

 
6

 

  

 

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 16, 2017:

 

Owned Vessels by Classification

 
   

AHTS

   

PSV

                         

Region

 

LgAHTS

   

SmAHTS

   

LgPSV

   

PSV

   

FSV

   

SpV

   

Total

 
                                                         

North Sea

    1       -       24       -       -       -       25  

Southeast Asia

    8       2       -       -       -       -       10  

Americas

    2       2       21       4       1       1       31  
      11       4       45       4       1       1       66  

 

Vessel Construction, Acquisitions and Divestitures

 

During 2016, we sold one older vessel from our North Sea 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, we sold two of our fast supply vessels and will record a first quarter 2017 combined loss 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 can elect not to take delivery of the second vessel and forego the final payment, in which case the shipbuilder will retain the vessel.

 

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, 2015

     

Year

Length

   

Month

Vessel Region Type(1)

Built

(feet)

BHP(2) DWT(3)

Delivered

             

 

Hercules

Americas

LgPSV

2016

286

10,960

5,300

Jun-16

North Barents

N. Sea

LgPSV

2017

304

11,935

4,700

Jan-17

  

 
7

 

 

Vessels Disposed of Since December 31, 2015

     

Year

Length

   

Month

Vessel  Region Type(1)

Built

(feet)

BHP(2) DWT(3)

Disposed

               

Highland Spirit

N. Sea

SpV

1998

202

6,000

1,620

May-16

Sea Intrepid

SEA

SmAHTS

2005

193

5,150

1,500

Jul-16

Sea Guardian

SEA

SmAHTS

2006

193

5,150

1,500

Jul-16

Highland Drummer

SEA

LgPSV

1997

220

5,450

3,122

Nov-16

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, SpV - Special Purpose Vessel, SmAHTS - Small Anchor Handling Vessel, FSV - Fast Supply Vessel

(2)BHP - Brake Horsepower

(3)DWT - Deadweight Tons

 

 

Maintenance of Our Vessels and Drydocking Obligations

 

In addition to repairs, 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. 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. Our drydocking expenditures for 11 drydocks in 2016 totaled $4.7 million. Future drydock costs will depend on vessel activity and vessel class requirements.

 

 
8

 

 

Vessel Listing

 

Currently, 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 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

Highland Valour

Americas

LgAHTS

2003

262

16,320

2,750

Malta

Highland Endurance

Americas

LgAHTS

2003

262

16,320

2,750

UK

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, 2015

    27       3       30  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Transfers

    (2 )     -       (2 )

Vessel Dispositions

    (1 )     -       (1 )

December 31, 2016

    24       3       27  

New-Build Program

    1       -       1  

Vessel Additions

    -       -       -  

Vessel Dispositions

    -       -       -  

March 16, 2017

    25       3       28  
                         

Stacked Vessels

    8       2       10  

 

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 December 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 continued to decrease in 2016, as operators reacted to the decline in commodity prices. Continued depressed commodity pricing through 2016 and future commodity price uncertainty have 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, 2015

    13       -       13  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Dispositions

    (3 )     -       (3 )

December 31, 2016

    10       -       10  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Dispositions

    -       -       -  

March 16, 2017

    10       -       10  
                         

Stacked Vessels

    3       -       3  

  

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 currently 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 are continuing 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, 2015

    30       -       30  

New-Build Program

    1       -       1  

Vessel Additions

    -       -       -  

Vessel Transfers

    2       -       2  

Vessel Dispositions

    -       -       -  

December 31, 2016

    33       -       33  

New-Build Program

    -       -       -  

Vessel Additions

    -       -       -  

Vessel Dispositions

    (2 )     -       (2 )

March 16, 2017

    31       -       31  
                         

Stacked Vessels

    17       -       17  

 

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 2016, due to the continued decline in the commodities market 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 taken a number of our vessels out of active service (and stacked them) to reduce operating expenses, preserve cash through deferred drydockings and improve the supply/demand balance in the market. We had 22 vessels stacked in the Americas at the end of 2016. 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 2016, industry reports indicate that there were 32 “floater” rigs (semi-submersibles and drillships) supporting deepwater drilling in the U.S. Gulf of Mexico with 24 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.

 

In general, the U.S. Gulf of Mexico remains a protected market. United States law requires that all vessels engaged in Coastwise Trade in the U.S. (which includes vessels servicing rigs and platforms in U.S. waters within the Exclusive Economic Zone), must be owned and managed by U.S. citizens, and be built in and registered under the laws of the United States. “Coastwise Trade”, as defined under the U.S. maritime and vessel documentation laws commonly referred to as the Jones Act, allows only those vessels that are owned and managed by U.S. citizens (as determined by those laws) and built in and registered under the laws of the United States to transport merchandise and passengers for hire between points in U.S. territorial waters.

 

We are currently 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 23 of our U.S. flagged OSVs that are operating in the U.S. Gulf of Mexico are DP-2 class vessels.

 

 
13

 

 

Mexico 

 

Since 2005, we have operated Small AHTSs and other OSVs in 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 (Petroleos Mexicanos) 75-year monopoly on oil and natural gas extraction and production. Mexico’s recent deepwater oil auction was reported to have surpassed expectations with 8 of 10 blocks awarded by the National Hydrocarbons Commission in the Perdido and Salina Basins to some of the world’s top oil and gas companies. We currently 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 OSVs operating in Trinidad for the foreseeable future. We currently operate two vessels offshore Trinidad.

 

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. (Petrobras) defers capital expenditures.  Also, many Brazilian PSV owners have asserted their rights to challenge foreign flagged vessels on their charters. In 2016, we began to wind down our operations in Brazil, and mobilized all but one vessel out of the region. This Brazilian flagged vessel is currently on bareboat charter in Brazil.

 

Refer to Note 12 to our Consolidated Financial Statements in Part II, Item 8 for segment and geographical revenue 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 is generally about two months. Activity in the U.S. Gulf of Mexico is often lower during the North Atlantic hurricane season of June through November. 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.

 

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 ten 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 including, without limitation, convenience) and others containing non-cancellable provisions except in the case of unsatisfactory performance by the vessel. For the year ended December 31, 2016, no customer accounted for 10% or more of our total consolidated revenue. For the year ended December 31, 2015, we 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. For the year ended December 31, 2014, we had revenue from Anadarko Petroleum Corporation and British Petroleum, or BP, in our Americas and North Sea regions totaling $88.7 million and $50.8 million, respectively, each accounting for 10% or more of our total consolidated revenue.    

 

 
14

 

 

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. Term charters in the Southeast Asia region have historically been less common than in the North Sea and generally have terms of less than two years. In addition, charters for vessels in support of floating production are typically life of field or “full production horizon” charters. In the Americas, particularly in the U.S. Gulf of Mexico, charters vary in length from short-term to multi-year periods, many with thirty day cancellation clauses. In Brazil, Mexico and Trinidad contracts are generally multi-year term contracts. As a result of options and frequent renewals, the stated duration of charters may have little correlation with the length of time the vessel is actually contracted to provide services to a particular customer. 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 management fee plus a monthly percentage of the charterhire day rate. 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, all of which are stacked.

 

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. Our operations are subject to extensive governmental regulation by the United States Coast Guard, the National Transportation Safety Board and the United States Custom and Border Protection, or CBP, and their foreign equivalents, and to regulation by private industry organizations such as the American Bureau of Shipping and Det Norske Veritas. The Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards, while the CBP is authorized to inspect vessels at will. 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 laws and regulations.

 

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 United States corporations), including vessels under construction in the United States. If one of the vessels in our fleet were purchased or requisitioned by the federal government under this law, we would be entitled to be paid 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 privilege of transporting merchandise or passengers for hire in Coastwise Trade in U.S. territorial waters is restricted to only those Jones Act qualified vessels that are owned and managed by U.S. citizens and are built in and registered under the laws of the United States. A corporation is not considered a U.S. citizen unless:

 

 

the corporation is organized under the laws of the U.S. 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;

 

directors representing not 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 a majority, or in the case of an endorsement for operating in Coastwise Trade, 75 percent of the ownership and voting power 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.

  

 
15

 

 

We are currently a U.S. citizen under these requirements, eligible to engage in Coastwise Trade. If we fail to comply with these U.S. citizen requirements, however, we would likely no longer be considered a U.S. citizen under the applicable laws. Such an event could result in our ineligibility to engage in Coastwise Trade, the imposition of substantial penalties against us, including 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.

 

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 U.S. Environmental Protection Agency, or the 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 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.

 

International Safety Management Code

 

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 non-compliance are inherent in offshore marine operations.

 

International Labour Organization’s Maritime Labour Convention

 

The International Labour Organization’s Maritime Labour Convention, 2006, or the Convention, mandates globally, among other things, seafarer living and working conditions (accommodations, wages, conditions of employment, health and other benefits) aboard ships that are engaged in commercial activities. Since its initial entry into force on August 20, 2013, 79 countries have now ratified the Convention, making for a diverse geographic footprint of enforcement.

 

Accordingly, we continue prioritizing certification of our vessels to Convention requirements based on the dates of enforcement by countries in which we have operations, 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 operationally identified flag states to seek substantial equivalencies to comparable national and industry laws that meet the intent of the Convention, but allow us to maintain our long-standing operational protocols and mitigate changes to our business processes. As ratifications continue, we continue to assess our global seafarer labor relationships and fleet operational practices not only to undertake compliance with the Convention but also to gauge the impact of effective 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 international convention covering prevention of pollution of the marine environment by vessels from operational or accidental causes. It 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; Annex I governs oil pollution, Annex V governs garbage pollution, and Annex VI governs air pollution.

 

 
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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% on and after 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 Federal Water Pollution Control Act, or 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 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 Clean Water Act to address potential oil and fuel spills from either our vessels or our shore-based facilities.

 

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. Beginning in December 2013, the EPA implemented the Phase II VGP Regime, or 2013 VGP, which covers 27 types of discharges. The 2013 VGP applies to U.S. and foreign-flag 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 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 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 whose vessels trade with the United States or its territories or possessions, or whose vessels operate in 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, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless it is subsequently determined by the Coast Guard or a court of competent jurisdiction that the spill results solely from the act or omission of a third party, an act of God or an act of war) for removal costs and damages arising from discharges or threatened discharges of oil from their vessels up to their limits of liability, unless the limits are broken as described below. “Damages” are defined broadly under OPA to include:

 

 

natural resources damages and the costs of assessment 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, safety or other hazards; and

 

the loss of subsistence use of 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 requested 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 substantial threat of discharge were to occur, we may be liable for costs and damages, which costs and liabilities could be material to our results of operations and financial position.

 

 
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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 the 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.  Our most recent review did not result in any substantial adjustments to our coverages or limits.

 

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 900 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 450 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.  

 

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.

 

 
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As a result of operating losses and negative cash flows from operations and our entry into a 30-day grace period with respect to certain interest payments, together with other factors, including covenant defaults under our revolving credit facilities and the possibility that a covenant default or other event of default could cause certain of our indebtedness to become immediately due and payable, subject to any available cure period, we may not have sufficient liquidity to sustain operations and to continue as a going concern.

 

We continued to incur significant losses from operations and had negative cash flows from operating activities for the year ended December 31, 2016. We expect to continue to incur losses from operations and generate negative cash flows from our operating activities which could also cause our vendors to require cash prepayment before goods are delivered and services are performed. These expectations and other liquidity risks described in this report raise substantial doubt about whether we will be able to meet our obligations as they become due within one year after the date of this report.

 

We are highly leveraged and had approximately $483.3 million of debt as of December 31, 2016, including $429.6 million outstanding under our unsecured 6.375% senior notes due 2022, or Senior Notes, $49.0 million outstanding under our secured Multicurrency Facility Agreement described below and $11.2 million outstanding under our secured Norwegian Facility Agreement described below. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt.” Our revolving credit facilities and the indenture governing our Senior Notes contain certain financial and other covenants that are more fully described below under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt” and in Note 6 to our Consolidated Financial Statements included in Part II, Item 8. At December 31, 2016, we had an aggregate of approximately $94.0 million of borrowing capacity, net of standby letters of credit, under our Multicurrency Facility Agreement and Norwegian Facility Agreement and we had approximately $8.8 million of cash on hand.

 

At December 31, 2016, we were in compliance with all financial covenants set forth in our revolving credit facilities and the indenture governing our Senior Notes; however, we are forecasting that for the quarter ending March 31, 2017, we will no longer be in compliance with the minimum consolidated adjusted EBITDA requirement contained in the Multicurrency Facility Agreement and the Norwegian Facility Agreement. Absent waivers or cures, non-compliance with such covenants would constitute an event of default under the Multicurrency Facility Agreement and the Norwegian Facility Agreement. As a result, all indebtedness under the Multicurrency Facility Agreement and the Norwegian Facility Agreement could be declared immediately due and payable upon the occurrence of such event of default, subject to any available cure periods. It is possible that we could obtain waivers from our lenders; however, our expectations concerning future losses from operations and cash flows and other liquidity risks raise substantial doubt about whether we will be able to meet our obligations as they become due within one year after the date of this report.

 

We also have not paid the $13.7 million interest payment due March 15, 2017 on our Senior Notes and, as provided for in the indenture governing the Senior Notes, have entered into the 30-day grace period to make such payment. Failure to pay this amount on March 15, 2017 would constitute an event of default under the indenture governing the Senior Notes if the payment is not made within 30 days of such date and would result in a cross-default under the Multicurrency Facility Agreement and the Norwegian Facility Agreement. As a result of these factors and the additional matters discussed below, as well as the continued downturn in the oil and gas industry and the decrease in offshore oil and natural gas exploration activities, among others, there exists substantial doubt whether we will be able to continue as a going concern.

 

Since December 31, 2016, we have made additional borrowings under our revolving credit facilities and as of March 15, 2017, the amount outstanding under our Multicurrency Facility Agreement had increased to approximately $72.0 million and the amount outstanding under our Norwegian Facility Agreement had increased to approximately $35.0 million. On March 8, 2017, we entered into an agreement with the agent under our Multicurrency Facility Agreement that prohibits us from requesting any additional loans under the Multicurrency Facility Agreement without the prior written consent of the agent (acting upon the instruction of all the lenders following unanimous consent). In this agreement, the lenders agreed to extend additional revolving loans in the aggregate principal amount of $10.0 million, subject to certain conditions precedent, including payment by us of certain fees and retainers of a financial advisor and counsel for the agent, and the lenders agreed to waive any default or event of default (no such default or event of default having been admitted by us) arising by virtue of a borrowing request submitted previously by us, which request was deemed to be withdrawn pursuant to the agreement. The lenders funded loans in such amount on March 8, 2017.

 

Our consolidated financial statements as of and for the year ended December 31, 2016 have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of the consolidated financial statements. However, for the reasons described herein, indebtedness with the stated maturities as summarized in Note 6 to our Consolidated Financial Statements included in Part II, Item 8 is classified as a current liability at December 31, 2016. The report from our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2016 includes an uncertainty paragraph that arises from the substantial doubt about our ability to continue as a going concern.

 

 
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Our Multicurrency Facility Agreement contains requirements that, among other things, require that we deliver an unqualified audit opinion from our auditors that is not subject to a going concern or like qualification or exception. The failure to deliver such an unqualified opinion constitutes an event of default under the Multicurrency Facility Agreement, which allows the lenders thereunder to cancel their commitments, accelerate the indebtedness thereunder and exercise remedies with respect to the collateral securing the Multicurrency Facility Agreement, the effect of which likewise is to cause a cross-default under our Norwegian Facility Agreement permitting the lenders thereunder to cancel their commitments, accelerate the indebtedness thereunder and exercise remedies with respect to the collateral securing the Norwegian Facility Agreement unless a waiver or forbearance is received from the lenders under the Multicurrency Facility Agreement. If the indebtedness under either the Multicurrency Facility Agreement or the Norwegian Facility Agreement is accelerated, it would, subject to a 15-business day cure period, constitute an event of default under the indenture governing our Senior Notes.

 

On March 14, 2017, we entered into a support agreement, or Support Agreement, with the agent under the Multicurrency Facility Agreement in which the lenders agreed to waive the existing or anticipated defaults or events of default under the Multicurrency Facility Agreement listed in the Support Agreement and forbear from exercising rights or remedies under the related finance documents as a result therefrom, for a limited support period. The Support Agreement, and the waiver and forbearance provided for therein, terminates upon the earliest to occur of certain termination events described therein or April 14, 2017. See Part II, Item 9B “Other Information” for a more detailed description of the Support Agreement.

 

If lenders or noteholders accelerate our outstanding indebtedness, our borrowings will become immediately payable and we will not have sufficient liquidity to repay those accelerated amounts. If we are unable to reach an agreement with lenders and noteholders to address any such defaults, we would likely pursue a variety of solutions that may include strategic and refinancing alternatives through a private restructuring of our indebtedness, seeking additional debt or equity financing, assets sales or a filing under Chapter 11 of the U.S. Bankruptcy Code, which could include a restructuring of our various debt obligations.

 

We are engaged in discussions with our principal lenders and noteholders to waive covenant breaches, including financial covenants and the inclusion of a going concern qualification in the audit opinion from our auditors, and/or to amend the underlying agreements. Any such amendments and/or waivers would require successful negotiations with our bank group and noteholders, and may require us to make certain concessions under the existing agreements, such as providing additional collateral, paying a higher rate of interest or some combination of these or others. Obtaining covenant relief will require us to reach an agreement that satisfies potentially divergent interests of our lenders and noteholders.

 

The current 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 has resulted in a decrease in the energy industry’s level of capital spending. Although crude oil prices have improved somewhat 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 2016 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.

 

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;

 

 
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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;

 

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

 

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 various 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.

 

As previously reported, in November 2016 we launched a proposed recapitalization including, among other things, a tender offer for a minimum of $250 million in aggregate principal amount of our Senior Notes. In connection with the tender offer, we entered into an agreement with two investors to sell such investors 50,000 shares of our Series A convertible preferred stock, par value $0.01 per share, for an aggregate cash purchase price of $50 million in a private placement. The closing of such private placement was conditioned upon a minimum of $250 million in aggregate principal amount of our Senior Notes being tendered by December 31, 2016. This minimum tender condition was not satisfied, and on December 30, 2016, we announced the termination of the tender offer. In January 2017, the investors terminated the proposed private placement. As a result, we were unable to complete the proposed recapitalization. We incurred approximately $11.3 million of expenses in connection with these transactions, including a termination fee which was comprised of $3.0 million in cash and $1.0 million in shares of our Class A common stock, represented by 555,586 shares of Class A common stock.

 

 
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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 (which could in turn trigger cross-acceleration or cross-default rights between the relevant agreements). The lenders under our Multicurrency Facility Agreement and Norwegian Facility Agreement, as applicable, 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, and we could be forced to seek bankruptcy protection to restructure our business and capital structure and may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements. If the amounts outstanding under our Multicurrency Facility Agreement or Norwegian Facility Agreement or any of our other indebtedness were to be accelerated, we cannot assure you that our assets would be sufficient at that time to repay in full the money owed to the lenders or to our other debt holders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt” and “– Resources and Liquidity” and Note 2 to our Consolidated Financial Statements in Part II, Item 8. We are in the process of analyzing various strategic alternatives to address our sources of liquidity and capital structure. See “– Our failure to deliver an audit opinion without a going concern qualification results in an event of default under our revolving credit facilities. If we are unable to comply with the covenants in our revolving credit facilities, a default could result in an acceleration of our obligation to repay the funds that we have borrowed at that time which would materially adversely impact our liquidity and would limit our ability to continue as a going concern.”

 

On March 14, 2017, we entered into the Support Agreement with the agent under the Multicurrency Facility Agreement in which the lenders agreed to waive the existing or anticipated defaults or events of default under the Multicurrency Facility Agreement listed in the Support Agreement and forbear from exercising rights or remedies under the related finance documents as a result therefrom, for a limited support period. The Support Agreement, and the waiver and forbearance provided for therein, terminates upon the earliest to occur of certain termination events described therein or April 14, 2017. See Part II, Item 9B “Other Information” for a more detailed description of the Support Agreement.

 

We expect to be dependent on our revolving credit facilities for liquidity in 2017; however, our ability to access these facilities is constrained by our failure to comply with the terms thereof. Our ability to borrow under the Multicurrency Facility Agreement requires the consent of the lenders, and any further reduction of the commitments under or the value of the collateral securing our Multicurrency Facility Agreement or Norwegian Facility Agreement could further reduce or eliminate our ability to borrow under the facility and may require us to repay indebtedness under the facility earlier than anticipated, which would materially adversely impact our liquidity and would limit our ability to continue as a going concern.

 

As a result of our decline in operating revenues and market outlook, we expect to continue to be dependent on our Multicurrency Facility Agreement and Norwegian Facility Agreement for liquidity. Due to low commodity prices and other factors, our ability to access the capital markets has been constrained and if market conditions do not improve and these constraints continue, we will continue to be primarily reliant on our Multicurrency Facility Agreement and Norwegian Facility Agreement, if they are available to us and, to the extent available, the cash provided by operating activities, for liquidity.

 

At December 31, 2016, there was approximately $35.8 million of available borrowing capacity under the Multicurrency Facility Agreement and approximately $58.2 million of available borrowing capacity under the Norwegian Facility Agreement, in each case subject to the terms and conditions of the applicable facility. Since December 31, 2016, we have made additional borrowings under our revolving credit facilities and as of March 15, 2017, the amount outstanding under our Multicurrency Facility Agreement had increased to approximately $72.0 million and the amount outstanding under our Norwegian Facility Agreement had increased to approximately $35.0 million. In addition, on March 8, 2017, we entered into an agreement with the agent under our Multicurrency Facility Agreement that prohibits us from requesting any additional loans under the Multicurrency Facility Agreement without the prior written consent of the agent (acting upon the instruction of all the lenders following unanimous consent). If we are unable to implement amendments to our existing debt arrangements, a debt restructuring or strategic transaction, our creditors could potentially force us into bankruptcy or we could be forced to seek bankruptcy protection to restructure our business and capital structure, in which case we could be forced to liquidate our assets at potentially depressed valuations and may receive less than the value at which those assets are carried on our financial statements. Even if we are able to implement amendments to existing debt arrangements, a debt restructuring or strategic transaction, such amendments, debt restructuring or strategic transaction may impose onerous terms on us. As a result, any amendments to existing debt arrangements, debt restructuring, strategic transaction or bankruptcy proceeding could place equity holders at significant risk of losing some or all of their interests in our company. See “– Our failure to deliver an audit opinion without a going concern qualification results in an event of default under our revolving credit facilities. If we are unable to comply with the covenants in our revolving credit facilities, a default could result in an acceleration of our obligation to repay the funds that we have borrowed at that time which would materially adversely impact our liquidity and would limit our ability to continue as a going concern” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt.”

 

 
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On March 14, 2017, we entered into the Support Agreement with the agent under the Multicurrency Facility Agreement in which the lenders agreed to waive the existing or anticipated defaults or events of default under the Multicurrency Facility Agreement listed in the Support Agreement and forbear from exercising rights or remedies under the related finance documents as a result therefrom, for a limited support period. The Support Agreement, and the waiver and forbearance provided for therein, terminates upon the earliest to occur of certain termination events described therein or April 14, 2017. See Part II, Item 9B “Other Information” for a more detailed description of the Support Agreement.

 

Our failure to deliver an audit opinion without a going concern qualification results in an event of default under our revolving credit facilities. If we are unable to comply with the covenants in our revolving credit facilities, a default could result in an acceleration of our obligation to repay the funds that we have borrowed at that time which would materially adversely impact our liquidity and would limit our ability to continue as a going concern.

 

Our Multicurrency Facility Agreement and Norwegian Facility Agreement include numerous affirmative and negative covenants, including financial covenants that are tested quarterly. Our ability to comply with these covenants can be affected by events beyond our control. Reduced activity levels in the oil and natural gas industry, such as we are currently experiencing, or the absence of substantial improvements in such activity levels could adversely impact our ability to comply with such covenants. Our failure to comply with any such covenant would result in an event of default under the applicable facility, and may result in a cross-default to other indebtedness. On March 8, 2017, we entered into an agreement with the agent under our Multicurrency Facility Agreement in which the lenders agreed to waive any default or event of default (no such default or event of default having been admitted by us) arising by virtue of a borrowing request submitted previously by us, which request was deemed to be withdrawn pursuant to the agreement. The agreement also imposes additional covenants and limitations on us, including prohibiting us from requesting any additional loans under the Multicurrency Facility Agreement without the prior written consent of the agent (acting upon the instruction of all the lenders following unanimous consent). In addition, the report from our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2016 includes an uncertainty paragraph that arises from the substantial doubt about our ability to continue as a going concern. Our Multicurrency Facility Agreement contains requirements that, among other things, require that we deliver an unqualified audit opinion from our auditors that is not subject to a going concern or like qualification or exception. The failure to deliver such an unqualified opinion constitutes an event of default under the Multicurrency Facility Agreement, the effect of which likewise is to cause a cross-default under our Norwegian Facility Agreement unless a waiver or forbearance is received from the lenders under the Multicurrency Facility Agreement. If the indebtedness under either the Multicurrency Facility Agreement or the Norwegian Facility Agreement is accelerated, it would, subject to a 15-business day cure period, constitute an event of default under the indenture governing our Senior Notes.

 

On March 14, 2017, we entered into the Support Agreement with the agent under the Multicurrency Facility Agreement in which the lenders agreed to waive the existing or anticipated defaults or events of default under the Multicurrency Facility Agreement listed in the Support Agreement and forbear from exercising rights or remedies under the related finance documents as a result therefrom, for a limited support period. The Support Agreement, and the waiver and forbearance provided for therein, terminates upon the earliest to occur of certain termination events described therein or April 14, 2017. See Part II, Item 9B “Other Information” for a more detailed description of the Support Agreement.

 

An event of default further prevents us from borrowing under our revolving credit facilities, which could have a material adverse effect on our available liquidity and would limit our ability to continue as a going concern. In addition, an event of default could result in our having to immediately repay all amounts outstanding under the Multicurrency Facility Agreement, Norwegian Facility Agreement and our Senior Notes and in foreclosure of liens on our assets. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt” and “– Resources and Liquidity” and Notes 2 and 6 to our Consolidated Financial Statements in Part II, Item 8.

 

In addition, the continued downturn in the OSV industry has made it more difficult to meet our financial covenants. If the OSV industry conditions do not improve, we may not be able to be in compliance with the covenants in our Multicurrency Facility Agreement and our Norwegian Facility Agreement that require us to maintain minimum consolidated adjusted EBITDA, and we are forecasting that for the quarter ending March 31, 2017, we will not be in compliance with the minimum consolidated adjusted EBITDA requirement contained in the Multicurrency Facility Agreement and the Norwegian Facility Agreement. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt” and “– Resources and Liquidity.” We plan to continue to work with the respective lenders to attempt to negotiate any amendments, waivers or forbearance agreements that may be required for any such non-compliance. There can be no assurance, however, that we would be able to negotiate acceptable terms with the lenders in these circumstances.

 

In light of the recent and forecasted defaults under our debt instruments, we are in the process of analyzing various strategic alternatives to address our sources of liquidity and capital structure, including strategic and refinancing alternatives through a private restructuring of our indebtedness, seeking additional debt or equity financing, assets sales and a filing under Chapter 11 of the U.S. Bankruptcy Code. Seeking bankruptcy court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as a proceeding related to a Chapter 11 proceeding continues, our senior management would be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing on our business operations. Bankruptcy court protection also might make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer a proceeding related to a Chapter 11 proceeding continues, the more likely it is that our customers and suppliers could lose confidence in our ability to reorganize our businesses successfully and would seek to establish alternative commercial relationships. There is no certainty that we will be able to implement any such options, and we can provide no assurance that any refinancing or changes in our debt or equity capital structure would be possible or that additional equity or debt financing could be obtained on acceptable terms, if at all.

  

 
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We have a substantial amount of indebtedness. We may not be able to generate sufficient cash to service all of our indebtedness, including our Senior Notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

At December 31, 2016, we had approximately $483.3 million of long-term debt and approximately $23.3 million due on a vessel under construction which was delivered in January upon payment of such amount. Our substantial amount of indebtedness could:

 

 

increase our vulnerability to general adverse economic and industry conditions;

 

limit our ability to fund future working capital, capital expenditures and other general corporate financing needs;

 

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

place us at a competitive disadvantage compared to our competitors that have less debt; and

 

limit or inhibit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds, obtain future financing for debt service or other purposes, or dispose of assets.

 

We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.  If our capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on our ability to access the capital markets and our financial position at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. Moreover, our facilities agreements and the indenture governing our Senior Notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

 

As described above, we were unable to complete the proposed recapitalization that we launched in November 2016. An unsuccessful debt restructuring could result in negative publicity or a negative impression of us in the investment community, and could adversely affect our relationships with employees, vendors, creditors and other business partners, could adversely affect the trading price of our Class A common stock and could result in less favorable terms for any alternative means of reducing our debt or improving our liquidity. This could enhance the risk that we may violate financial covenants in our debt instruments. See “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.” In addition, as discussed above, we are in the process of analyzing various strategic alternatives to address our sources of liquidity and capital structure, including strategic and refinancing alternatives through a private restructuring of our indebtedness, seeking additional debt or equity financing, assets sales and a filing under Chapter 11 of the U.S. Bankruptcy Code. See “Our failure to deliver an audit opinion without a going concern qualification results in an event of default under our revolving credit facilities. If we are unable to comply with the covenants in our revolving credit facilities, a default could result in an acceleration of our obligation to repay the funds that we have borrowed at that time which would materially adversely impact our liquidity and would limit our ability to continue as a going concern.

 

We have high levels of fixed costs that will be incurred regardless of our level of business activity.

 

Our business has high fixed costs. Downtime or low productivity due to reduced demand, weather interruptions or other causes can have a significant negative effect on our operating results and financial condition. Some of our fixed costs will not decline during periods of reduced revenue or activity, and we may incur additional operating costs for which we are generally reimbursed by the customer when a vessel is under contract. During times of reduced utilization, reductions in costs may not be immediate as we may incur additional costs associated with the stacking of a vessel, or we may not be able to fully reduce the cost of our support operations in a particular geographic region due to the need to support the remaining vessels in that region. A decline in revenue due to lower day rates and/or utilization may not be offset by a corresponding decrease in our fixed costs and could have a material adverse effect on our financial condition, results of operations and cash flows.

 

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

 

We have a number of charters that will expire in 2017 and 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;

 

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 has intensified price competition. The resulting increases 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.

 

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 2 to our Consolidated Financial Statements included in Part II, Item 8.

  

 
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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, including vessels designated as held for sale, will ultimately be realized.

 

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. As a result, and 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.

 

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

 

We and our customers 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, liabilities and penalties for noncompliance are inherent in offshore marine services 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 change frequently. 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.

 

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.

 

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. corporation, 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.

 

 
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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 2016-2017. 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.

 

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.

 

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.

  

 
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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.

 

Some 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. 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.

 

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 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;

 

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.

 

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 that 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 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 requirements or restrictions could adversely affect our financial condition, results of operations or cash flows.

 

 
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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 2017, with extensions available in certain circumstances beyond 2017, 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.

 

Our reported tax expense reflects our intention to permanently reinvest earnings from certain of our foreign operations and therefore those earnings are not subject to U.S. taxation. In the future, we may elect to decrease the portion of annual foreign earnings we intend to permanently reinvest, and, if so, this would increase our overall effective tax rate upward toward the U.S. federal statutory rate, which is currently 35%. If we should change our intention with regard to our prior years’ accumulated unremitted foreign earnings, we would recognize a charge to current earnings to reflect the effect of U.S. taxation on those prior years’ unremitted foreign earnings and that charge could be significant and material.

 

Our income tax expense, or benefit, and effective tax rate are impacted by inclusion of related U.S. earnings, or losses, taxed at the combined U.S. federal and state tax rates, which are subject to tax law changes. In addition, our tax returns are subject to examination and review by the tax authorities in the jurisdictions in which we operate.

 

Our international operations and new vessel construction programs 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 and when we construct vessels abroad. To minimize 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. We occasionally enter into forward foreign exchange contracts to hedge specific exposures, which include exposures related to firm contractual commitments in the form of future vessel payments, but we do not speculate in foreign currencies. 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.

 

Our stock price has been volatile and has declined significantly during the period from the fourth quarter of 2014 through the present, and it could decline further.

 

The securities markets in general and our Class A common stock in particular have experienced significant price and volume volatility in recent years. The market price and trading volume of our Class A common stock may continue to experience significant fluctuations due not only to general stock market conditions but also to a change in our industry conditions and in the price of crude oil.

 

 
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If the average closing price of our Class A common stock declines to less than $1.00 over 30 consecutive trading days or we fail to satisfy the minimum market capitalization requirements or other continued listing criteria, our Class A common stock could be delisted from the New York Stock Exchange or trading could be suspended.

 

Our Class A common stock is listed for trading on the New York Stock Exchange, or NYSE. The listing of our Class A common stock on the NYSE could be suspended or terminated if we fail to attain the NYSE’s quantitative and qualitative continued listing criteria, including if the minimum average closing price of our Class A common stock is less than $1.00 per share for 30 consecutive trading days. Our market capitalization decreased substantially in 2016, and since September 12, 2016, our Class A common stock has generally traded below $2.00 per share. In addition, the NYSE’s continued listing standards provide that a listed company will be considered to be below compliance if its average global market capitalization over a consecutive 30 trading-day period is less than $50 million and, at the same time, stockholders’ equity is less than $50 million. If our average global market capitalization over a consecutive 30 trading-day period were less than $15 million or there were “abnormally low” trading prices or trading volume for shares of our Class A Common Stock, the NYSE would initiate suspension and delisting procedures. Further declines in the trading price of our Class A common stock could cause us to fail to satisfy one or more of the NYSE’s continued listing criteria. As such, we cannot assure you that our Class A common stock will continue to be listed on the NYSE. The delisting of our Class A common stock from the NYSE could result in several adverse consequences, including reduced trading liquidity of our Class A common stock, lower demand for those shares, adverse publicity and a reduced interest in our company from investors, analysts and other market participants. In addition, a suspension or delisting could impair our ability to raise additional capital through equity or debt financing and our ability to attract and retain employees by means of equity compensation.

 

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 as a result 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 construction, 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 construction, 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.

 

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.

 

 
30

 

 

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.

 

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.

 

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.

 

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.

 

Our U.S. flagged vessels may be requisitioned or purchased by the United States in case of 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 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.

  

 
31

 

 

The Maritime Restrictions established to comply with the Jones Act may have an adverse effect on us and our stockholders.

 

Under our certificate of incorporation, our Class A common stock is subject to certain transfer and ownership restrictions designed to protect our eligibility to engage in Coastwise Trade, including restrictions that limit the maximum permitted percentage of outstanding shares of Class A common stock that may be owned or controlled in the aggregate by non-U.S. citizens to a maximum of 22 percent, which we refer to collectively as the Maritime Restrictions. These Maritime Restrictions:

 

 

may cause the market price of our Class A common stock to be lower than the market price of our competitors who may not impose similar restrictions;

 

may result in transfers to non-U.S. citizens being void and ineffective and, thus, may impede or limit the ability of our stockholders to transfer or purchase shares of our Class A common stock;

 

provide for the automatic transfer of shares in excess of the maximum permitted percentage, which we refer to as Excess Shares, to a trust for sale and may result in non-U.S. citizens suffering losses from the sale of Excess Shares;

 

permit us to redeem Excess Shares, which may result in stockholders who are non-U.S. citizens being required to sell their Excess Shares of Class A common stock at an undesirable time or price or on unfavorable terms;

 

may adversely affect our financial condition if we must redeem Excess Shares or if we do not have the funds or ability to redeem the Excess Shares; and

 

may impede or discourage efforts by a third party to acquire us, even if doing so would benefit our stockholders.

 

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 passengers or cargo between U.S. ports in Coastwise Trade be owned and managed by U.S. citizens, and be built in and registered under the laws of the United States. Violations of the Jones Act would result in our losing eligibility to engage in Coastwise Trade, the imposition of substantial penalties against us, including seizure or forfeiture of our vessels, and/or the inability to register our vessels in the United States, each 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 the Maritime Restrictions 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 controlled by U.S. citizens may from time to time be circumvented by foreign interests that seek to engage in trade reserved for vessels controlled 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 Homeland Security may suspend the citizenship requirements of the Jones Act in the interest of national defense. 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 in the offshore service vessel industry subject to the Jones Act such as us.

 

We depend on key personnel, and our U.S. citizen requirements may limit our ability to recruit and retain qualified directors and executive officers.

 

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.

 

As long as shares of our Class A common stock remain outstanding, our chairman of the board and chief executive officer, by whatever title, must be U.S. citizens. In addition, our certificate of incorporation and 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 applicable law) may be non-U.S. citizens so long as shares of our Class A common stock remain outstanding. Our bylaws provide for similar citizenship 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.

 

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 range from under $10 million to $100 million and potentially higher.

 

 
32

 

 

While we expect our cash on hand, cash flow from operations and available borrowings under our credit facilities to be adequate to fund our existing commitments, including our new-build vessel construction program, our ability to pay these amounts is dependent upon the success of our operations. To date, we have been able to obtain adequate financing to fund all of our commitments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt” and “– Resources and Liquidity” 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.

 

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;

 

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. As vessels under our new vessel construction program are placed in service, we may not be able to hire a sufficient number of employees. 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.

 

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.

 

 
33

 

 

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.

 

Prior events in the U.S. Gulf of Mexico have adversely impacted and are likely to continue to adversely impact our operations and financial condition.

 

In the aftermath of the Macondo Incident, the rig explosion and fire and subsequent oil spill in the Gulf of Mexico in April 2010, regulatory agencies with jurisdiction over oil and gas exploration adopted numerous new regulations and operating procedures.  If these regulations, operating procedures and possibility of increased legal liability are viewed by our current or future customers as a significant increased financial burden on the drilling projects in the U.S. Gulf of Mexico, drillships and other floating rigs could depart the U.S. Gulf of Mexico for other potentially more profitable regions, which would likely adversely affect the demand for our equipment and services.  In addition, government agencies could issue new safety and environmental guidelines or regulations for drilling in the U.S. Gulf of Mexico that could disrupt or delay drilling operations, increase the cost of drilling operations or reduce the area of operations available for drilling.  All of these uncertainties, including such announced and potential changes in laws and regulations, the cost or availability of insurance and the decisions by customers, governmental agencies or other industry participants could result in a reduced demand for our equipment and services or increase our cost of operations, which could have an adverse effect on our business.  We cannot reasonably or reliably estimate to what extent any of the foregoing changes may occur, when they may occur, or how severely they may impact us.

 

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.

 

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 and Youngsville, 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

 

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.

 

 
34

 

 

ITEM 4. Mine Safety Disclosures

 

NOT APPLICABLE

 

PART II

 

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

  

Our Class A common stock is traded on the New York Stock Exchange (NYSE) under the symbol “GLF”. The following table sets forth the range of high and low sales prices per share for our common stock and the amount of cash dividends per share declared for the periods indicated:

 

   

2016

   

2015

 
   

High

   

Low

   

Dividend

   

High

   

Low

   

Dividend

 

Quarter ended March 31,

  $ 7.38     $ 2.60     $ 0.00     $ 24.80     $ 13.04     $ 0.00  

Quarter ended June 30,

  $ 6.94     $ 3.06     $ 0.00     $ 17.38     $ 11.31     $ 0.00  

Quarter ended September 30,

  $ 3.76     $ 1.52     $ 0.00     $ 10.90     $ 6.09     $ 0.00  

Quarter ended December 31,

  $ 2.30     $ 1.10     $ 0.00     $ 8.79     $ 4.65     $ 0.00  

 

As of March 15, 2017, there were approximately 447 holders of record of our Class A common stock.

 

 
35

 

 

Issuer Repurchases of Equity Securities

 

In December 2012, our Board approved a stock repurchase program for up to a total of $100.0 million of our issued and outstanding Class A common stock. Under the program, repurchases can be made from time to time using a variety of methods, which may include open market purchases or purchases through a Rule 10b5-1 trading plan, or in privately negotiated transactions, all in accordance with SEC and other applicable legal requirements. In late 2012 and early 2013, we repurchased 373,619 shares of our Class A common stock for $13.3 million. In 2014, we repurchased 1,883,648 shares of our Class A common stock for $57.7 million.

 

We did not repurchase any of our Class A common stock in 2015 or, except as discussed below, 2016. We are limited under the terms of our Multicurrency Facility Agreement and our Norwegian Facility Agreement described below in our ability to make certain payments beyond permitted amounts for share repurchases. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt” included in Part II, Item 7.

 

Although we did not purchase any of our Class A common stock pursuant to the stock repurchase program in 2016, we acquired some shares of our Class A common stock in satisfaction of tax withholding obligations in connection with certain payouts under our Deferred Compensation Plan. The following table sets forth the number of such shares and the average effective acquisition price per share on a monthly basis during 2016:

 

Repurchase of Equity Securities  

Period

 

Total Number of

Shares Repurchased

   

Average Price Paid

Per Share

   

Total Number of Shares

Purchased as Part of

Publicly Announced

Plans or Programs

   

 

Maximum Number of

Shares that May Yet

Be Purchased Under

the Plans or Programs

(a)

 
                                     
January 1 -

31

    -     $ -       -       -  
February 1 -

29

    -       -       -       -  
March 1 -

31

    69,339       5.95       -       -  
April 1 -

30

    7,080       6.69       -       -  
May 1 -

31

    20,238       5.21       -       -  
June 1 -

30

    4,763       3.21       -       -  
July 1 -

31

    164       3.22       -       -  
August 1 -

31

    -       -       -       -  
September 1 -

30

    -       -       -       -  
October 1 -

31

    -       -       -       -  
November 1 -

30

    -       -       -       -  
December 1 -

31

    -       -       -       -  

Total

    101,584  (b)   $ 4.86       -       -  

  

 

(a)

We are limited under the terms of our Multicurrency Facility Agreement and our Norwegian Facility Agreement in our ability to make certain payments beyond permitted amounts for share purchases. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt” included in Part II, Item 7.

 

(b)

None of these shares were purchased pursuant to a publicly announced share repurchase program.

 

Dividend Program 

 

Our dividend policy is reviewed by the Board at such times as it deems appropriate in light of operating conditions, dividend restrictions of subsidiaries and investors or lenders, financial requirements, general business conditions and other factors it considers relevant. Beginning in December 2012 and for each quarter of 2013 and 2014, we paid a dividend of $0.25 per share ($1.00 per share in December 2012) of our Class A common stock. In February 2015, the Board suspended dividend payments indefinitely. The Board declared no dividends for the years ended December 31, 2015 and 2016.

 

Pursuant to the terms of the indenture governing our Senior Notes, as further described in Note 6 to our Consolidated Financial Statements in Part II, Item 8, we may be restricted from declaring or paying any future dividends. In addition, we were limited under the terms of our Multicurrency Facility Agreement and are limited under our Norwegian Facility Agreement in our ability to make certain payments beyond permitted amounts for dividends, acquisitions or share repurchases. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity, Capital Resources and Financial Condition – Long-Term Debt.”

 

 
36

 

 

Performance Graph

 

The following performance graph and table compare the cumulative return on our Class A common stock to the Dow Jones Total Market Index and the Dow Jones Oilfield Equipment and Services Index for the periods indicated. The graph assumes (i) the reinvestment of dividends, if any, and (ii) that the value of the investment in our Class A common stock and each index was $100 at December 31, 2010.

 

Comparison of Cumulative Total Return 

 

   

December 31,

 
   

2011

   

2012

   

2013

   

2014

   

2015

   

2016

 

GulfMark Offshore, Inc.

    100       78       111       58       13       4  

Dow Jones Total Market Index

    100       116       155       175       176       197  

Dow Jones Oilfield Equipment and Services Index

    100       100       129       107       83       106  

 

 
37

 

 

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.

 

   

Year Ended December 31,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 
   

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

 

Operating Data:

                                       

Revenue

  $ 123,719     $ 274,806     $ 495,769     $ 454,604     $ 389,205  

Direct operating expenses

    83,165       169,837       236,244       217,422       198,187  

Drydock expense

    4,662       15,387       24,840       24,094       33,280  

General and administrative expenses

    37,663       47,280       62,728       54,527       54,600  

Depreciation and amortization

    58,182       72,591       75,336       63,955       59,722  

Impairment charges

    162,808       152,103       8,995       -       1,152  

(Gain) loss on sale of assets and other

    8,564       1,160       (14,039 )     (5,870 )     (8,741 )

Operating income (loss)

    (231,325 )     (183,552 )     101,665       100,476       51,005  

Interest expense

    (33,486 )     (36,946 )     (29,332 )     (23,821 )     (23,244 )

Interest income

    133       260       307       202       338  

Gain (loss) on extinguishment of debt

    35,912       458       -       -       (4,378 )

Other financing costs

    (11,287 )     -       -       -       0  

Foreign currency gain (loss) and other

    (2,384 )     (1,088 )     (995 )     (1,289 )     (1,779 )

Income tax (provision) benefit (a)

    39,458       5,633       (9,270 )     (4,962 )     (2,669 )
                                         

Net income (loss)

  $ (202,979 )   $ (215,235 )   $ 62,375     $ 70,606     $ 19,273  

Amounts per common share (basic) (b):

                                       

Net income (loss)

  $ (8.09 )   $ (8.70 )   $ 2.39     $ 2.70     $ 0.73  

Weighted average common shares (basic)

    25,094       24,729       26,097       26,175       26,208  

Amounts per common share (diluted) (b):

                                       

Net income (loss)

  $ (8.09 )   $ (8.70 )   $ 2.39     $ 2.70     $ 0.73  

Weighted average common shares (diluted)

    25,094       24,729       26,097       26,185       26,228