Tidewater Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Inc. Q2 2023 Earnings Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Followed by the number 1 on your telephone keypad to enter the question Thank you. I would like to hand the call over to Wes Gautier, Vice President of Finance and Investor Relations. You may begin your conference.

Speaker 1

Thank you, Ian. Good morning, everyone, and welcome to Tidewater's Q2 2023 earnings conference call. I'm joined on the call this morning by our President and CEO, Quintin Neen our Chief Financial Officer, Sam Rubio and our Chief Commercial Officer, Piers Middleton. During today's call, we'll make certain statements that are forward looking and referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we are making during today's conference call.

Speaker 1

Please refer to our most recent Form 10 ks and 10 Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC@sec.gov. Information presented on this call speaks only as of today, August 8, 2023. Therefore, you're advised that any time sensitive information may no longer be accurate at the time of any replay. Also during the call, we'll present both GAAP and non GAAP financial measures.

Speaker 1

A reconciliation of GAAP to non GAAP financial measures can be found on our website at tdw.com is included in yesterday's press release. And now with that, I'll turn the call over to Quintin.

Speaker 2

Thank you, Wes. Good morning, everyone, and welcome to the Q2 2023 Tidewater Earnings Conference Call. Before I turn the call over to Pearson Sams to discuss quarterly results. I wanted to briefly review our integration of the 37 high specification PSVs from Solostat Offshore, discuss the results of our recent warrant exploration and related to that reiterate our philosophy on capital allocation. We announced the completion of the Solstad vessel acquisition on July 5, shortly after the end of the second quarter.

Speaker 2

We believe this fleet will proved to be an accretive addition to the Tidewater fleet and will generate meaningful value for our shareholders over the coming years as the offshore upcycle continues. This acquisition is different from the last two in that it is largely an asset acquisition. So we have had to prepare the Shore Bay staff and staff up ahead of To ensure the vessel operations, we're poised to accept the transfer of the vessels into the existing Tidewater Operational and Administrative Infrastructure. The positive aspect of this type of acquisition is that we get to Have full control over the amount of incremental store based resources we assume, and we get to avoid the layoffs, downsizing and redundancies. But the negative aspect is that we have to start preparing much earlier to assume the assets and the margin of error is much lower as you are moving assets from an existing operational framework and over a few day period convert and importing the systems to the Tidewater infrastructure.

Speaker 2

I'm pleased to report that we have already transitioned 5 vessels in the 1st 35 days. We feel our transition processes are And our plan is to have the remaining vessels transferred over by the Q4. Integrations are critical to maintaining our scalable global infrastructure and our low per vessel overhead expense and accordingly we take all of our integrations very seriously. The last two acquisitions saw our G and A expense spike in the 1st full quarter of the acquisition and then worked down as we integrated the business. This one you see a ramp up beginning ahead of the closing and then working up to a new steady state over about 6 months.

Speaker 2

We became what might be termed an inadvertent equity issuer about a week ago as warrants from the 2017 restructuring expired in the money. We received proceeds of $111,000,000 and issued 1,900,000 new shares. All of the shares issued were actual common shares, no Jones Act warrants. We have ample U. S.

Speaker 2

Ownership now, so we no longer have any need to maintain Jones Act warrants. Incidentally, there is a remnant of Jones Act warrants Sandy, and we're glad to convert them into actual common shares for anyone listening who still holds Jones Act warrants. On a philosophical basis, I'm pleased that the pre restructuring Tidewater equity holders were able to obtain incremental value from these warrants, But we would not otherwise willingly be issuing shares. So as a result, we now have an additional $111,000,000 to allocate in the best interest of our shareholders. As it relates to capital allocation, our first allocation would be to accretive value acquisitions similar to the last 3 that we've done that support our existing global position in large tech PSVs and other OSVs that are somewhat less commoditized like the large anchor handlers.

Speaker 2

Other offshore energy related assets are always being considered as well, but they would need to fit That really makes sense from the perspective of fit price diversification, etcetera. Strategically, we are underrepresented in the Far West which is essentially the U. S. And Brazil. So candidates in these geographies are probably slightly favored.

Speaker 2

But with all that said, we We can make a tremendous amount of money with the 2 23 vessels we now have. We absolutely don't need to do any more acquisitions, But with the right vessels at the right price, we can certainly create more value. Absent value accretive M and A, we would seek the best to return money to shareholders. Frankly, we're making more money on our cash than we have in recent memory, but I'm still not looking to hold on to the cash and the associated negative carrier. Our current secured bond precludes any returns of capital until November 17 this year, about 3 months from now.

Speaker 2

Also, any returns of capital would need to be measured until we have a debt capital structure that is appropriate for a cyclical business. To me, that is a combination of long dated staggered maturity unsecured bond debt and an ample revolver. Our recent unsecured financing is a step in that direction. My belief is that we can make further strides in that direction over the next few quarters and quite frankly another appropriate acquisition to give us the scale to reset the debt Capital structure accordingly. Lastly, on capital matters, we will be filing an updated Form S-three this week.

Speaker 2

Our previous universal shell and issuer like Tidewater and prepares us for any of the potential acquisition opportunities we alluded to a moment ago. The Q2 was another positive period in the offshore vessel market. Most important indicator of strength in our business, Average day rate continued its upward momentum during the Q2 with the average day rate up $1400 per day sequentially, nearly a 10% movement. The average day rate is now up approximately $5,500 per day since the recovery began around the end of 2021. Every region and every vessel class, with the exception of our 8,000 to 16,000 BHP class anchor handlers, which were essentially flat sequentially.

Speaker 2

For the Q2, revenue increased about 11% to $215,000,000 compared to $193,000,000 in the Q1. Average day rate was up about 10% sequentially. Vessel level cash margin expanded 4 full percentage points to right at 44%. Leading edge day rates continued to improve during the Q2, up 11% over the Q1. During the Q2, we entered into term contracts on 26 vessels.

Speaker 2

The average day rate for contracts associated with the subset of vessels was right at dollars 23,500 per day with an average duration of about 6.5 months. This compares to leading edge day rate of approximately 20 dollars 1,000 per day with an average duration of 7.5 months in the Q1. And 11% increase in leading edge day rates is meaningful. Further, the leading edge composite average day rate of 23,500 is 46% above the average day rate for the 2nd quarter. And this growth potential continues to be a driving factor for our confidence in the revenue and gross margin guidance for the year and our optimistic outlook for 2024.

Speaker 2

As we've discussed frequently, day rate improvement is the primary driver of increasing profitability of our business, particularly as we look The intermediate to long term offshore cycle unfolding. As such, we remain focused on a variety of tactics to continue to drive global average day rates. We were successful in our tactics to continue to push dayrates globally. The strategy did have a short term utilization impact. We consciously chose to forego certain immediate contracts to pursue higher day rate opportunities.

Speaker 2

And in some cases, we incurred related to relocating vessels and waiting on customers for projects to commence. The combined opportunity cost to revenue for this strategy was approximately $8,000,000 from loss utilization during the Q2. We are confident that this chartering strategy is Right for the intermediate and long term profitability of the business as we not only achieved higher day rates in the short term, but continued to push baseline day rates for certain vessels that will prove beneficial as we progress through the remainder of 2023 and into 2024 and beyond. The improvement in day rates we realized from this strategy gives us the confidence to reiterate our 2023 annual guidance of $1,000,000,000 of revenue and $500,000,000 of operating margin, even with the impact to utilization in the second quarter. We anticipate Q3 revenue to increased by approximately $80,000,000 compared to the 2nd quarter and for revenue to increase an additional $30,000,000 in the 4th quarter.

Speaker 2

Both figures are inclusive of the newly acquired Solstad PSVs. To provide some additional context to our guidance, for the Q3, We currently have 87% of the fleet capacity contracted. And with that, we have 100% backlog coverage relative to our revenue guidance. Embedded in that backlog coverage, we are assuming 84% utilization. That's a nice step up in utilization.

Speaker 2

The downside risk is where we lose revenue from a vessel That is contracted and expected to work at 84% utilization. But for unanticipated reasons, usually being off hire for repair, the utilization is less than 84%. In summary, we are very pleased with the continued momentum across our regions and vessel classes during the Q2, and we remain highly constructive on the outlook for 2024 and beyond. And with that, let me turn the call over to Piers for an overview of the global markets and the company's performance within.

Speaker 3

Thank you, Quintin, and good morning, everyone. Before I focus on our area's performance, I want to talk a little about what we at Tidewater is seeing happening in the industry that gives us the necessary confidence in the long term outlook for our industry. Our teams regionally all continue to see positive investment momentum in their respective offshore markets, driven by resilient long cycle offshore developments, production capacity expansions, the return of global exploration and appraisal and the recognition of GAAP as a critical fuel source for energy security and as a part of the energy transition. Offshore markets remain strong and the supply demand outlook is very positive. Offshore vessel and rig demand is being bolstered by supportive energy prices with operators seeking to reinvest profits into increasing oil and gas output.

Speaker 3

Overall, $68,000,000,000 of offshore oil and gas project CapEx has been sanctioned in 2023 year to date with outside research projecting $119,000,000,000 for the full year, the highest level since 2013. And furthermore, other research resources forecast that E and P vessel spending is expected to increase by 32% this year, with spending estimated to increase the compound annual growth rate of 10% out to 2027. As evidence of some of this new found long term confidence in the market, BP has announced the revival of the huge offshore project, Kuskida in the U. S. Gulf, which they abandoned in 2014.

Speaker 3

And they are now planning to revise the project targeting FID in 2025 and first oil in 2028. Reservoir is estimated to hold more than 4,000,000,000 barrels of oil. Rig rates continue to firm with Clarksons Research reporting that their rig rate index is now up by 74% compared to the beginning of 2021, driven primarily by the floater sector with one recent fixture agreed at $484,000 per day in June for Harsh Environment Semi heading for Australia, a further sign of tightness in the harsh floater sector amidst reduced supply and strong competition for harsh units globally. Additionally, various multiple industry outlets forecast that the floater market will hit 100% utilization next year and into 2025 and that the jackup market will be at 98% utilization by 2025, all very positive indicators for the long term health of the OSV space. To back up various recent outside research reports, a leading global offshore rig provider recently disclosed that they now intend to exercise the purchase options for their 2 floaters currently sitting at a yard in South Korea.

Speaker 3

As the company said, it sees enough strong customer interest in their rigs based on their current market outlook and that the expectation is that most, if not all of the supply of stacked and newbuild drillships in the global fleet will be needed to meet growing growth future demand. Lastly, on the demand side, Q2 reports from 3 leading EPC contractors reveal a significant milestone Their combined backlog now surpasses the 2013 year end record reported backlog, which also bodes well for the long term demand of the industry, and many of these projects generally have a 3 to 5 year timeframe before completion. In addition, as we have said many times on these calls, vessel supply is set to remain constrained for some time. According to leading industry research, 43% of the remaining laid up OSCs have been in layout for more than 5 years, with reactivation becoming increasingly time and cost intensive and there is very little sign of any kind of newbuilding activity on the horizon due to the challenges securing finance, high newbuild pricing and uncertainty surrounding design and technology and day rates still not returning to a level to support long term newbuild economics.

Speaker 3

So overall, we remain very positive for the long term health of the market and have started to see some significant movement from our customers when it comes to discussing contract terms and in particular termination clauses with some customers now willing to accept no cancellation for convenience clauses in return for longer term contracts. Again, very positive momentum we believe for the industry. Moving on to our own fleet and as mentioned by Quintin, we continue to see the increase in demand and shortness in supply impact rates positively on the upside. And even though in Q2, we saw a slight tick down in neutralization compared to Q1, the team still managed to push our fleet composite day rate up by over $1400 per day compared to the prior quarter. Working through our various regions and starting with Europe, Coming out of Q1, whilst the UK market was slightly sluggish in Q2, we continue to see strong demand in both Norway and the Med PSCs, which offset any sluggishness in the UK.

Speaker 3

The team improved our composite fleet rates compared to Q1 2023 from $15,669 per day to $18,999 per day, a jump of $3,321 per day across the whole region. Whilst the UK PSV market was a little slow, We did have some of our medium sized PSCs roll off older contracts into newer contracts. We saw a significant uptick in rates in Q2 of $5,532 per day compared to Q1 in this class of vessel. In the Med, We also saw leading edge day rates for our larger class of vessels reach in excess of $32,000 per day. On the AHTS side, we mobilized back into the region one of our larger AHTSs after she had finished project work in Africa with the intention to have 2 large ATS in the region to take advantage of the traditionally strong summer season in the North Sea.

Speaker 3

Rates have remained robust in the U. S. Dollars $30,000 to $40,000 per day range and the expectation still remains that demand will pick up in Q3. Moving to Africa. We again continue to see rising demand across the whole continent with particular focus in Angola, Namibia, Congo and Senegal and have recently seen Total come out to tender for 2 10 year floating rig requirements to support their ongoing plans in the region.

Speaker 3

In Q2 2023, the composite fleet rate improved by $14.22 per day from $13,047 per day in Q1 2023 up to $14,469 per day with most of the day rates improvements in the quarter, again coming from our larger 16,000 BHP class anchor handlers and Plus 900 Square Meter Class of PSV. We also had a number of large and medium PSVs rolling off legacy below market contracts and into new contracts with leading edge day rates in excess of $34,000 per day levels. In the first half of the year, We also made the decision to mobilize several of our smaller 4000 to 8000 BHP class of AHTSs out of the region to the Middle East to support our operations in Saudi Arabia, where we'll be able to achieve much better utilization and margin for this class of vessels going forward. During the quarter, this relocation of vessels had a negative impact to our overall utilization numbers, but we believe it is the right time to take some short term pain for long term gain. To be clear, we still remain very positive for the Africa region going forward.

Speaker 3

And whilst our main focus will primarily be in growing our large PSV and HCS fleet in the region to continue to be the big boat supplier of first choice on the continent, We did also commit to building 4 new alacats to provide crew transfer services to one of our customers in the region against non cancel for convenience contracts. In the Middle East, Saudi Arabia remains the dominant country in the region as well as one of our key areas of focus for the fleet. And as I just mentioned, we made the decision in Q2 to mobilize a number of our smaller HTSs and smaller PSVs from other areas to take advantage of not just the improving day rates in the country for these class of vessels, but as importantly, the consistent utilization you are able to achieve in the kingdom compared to other regions. Checkup rig demand in the Middle East remains robust and currently stands at a record 148 units with demand in the Middle East projected to grow by an additional 8% for the rest of 2023. In what is our most challenging region competition wise, The team did a fantastic job pushing rates and increased our total composite fleet rate by $7.70 per day, dollars 9,679 per day in Q1 2023 to $10,449 per day in Q2 2023.

Speaker 3

In the Americas, as mentioned last quarter, we saw a lot of demand in Brazil in Q1 from Petrobras. The NOC reported to have awarded up to 20 new PSV contracts. And in Q2 market sources reported The rates being offered for this tender were all in excess of $40,000 per day levels for larger PSVs. In addition, Petrobras is expected to come out with a long term tender for large ATS shortly, which is expected to suck up additional supply from outside of the country when the contract starts in Q1 and Q2 2024. Elsewhere in the region, Guyana and Suriname continue to see a strong first half of the year and we also start to see the big boat market pick up steam in the U.

Speaker 3

S. Gulf of Mexico during the quarter. In Q2 2023, Para America's fleet continued to perform strongly, but we didn't have a huge uptick in rates as we saw in some other areas as we didn't have a large rollover of new contracts in the quarter as we continued working on contracts in the previous quarter. However, the team was still able to push the composite fleet rates by $4.75 per day from $19,794 per day in Q1 2023 up to $20,269 per day in Q2 2023. The majority of the uptake coming in the large PSV class, but we also managed to achieve leading edge day rates in of $40,000 per day.

Speaker 3

Lastly, in Asia Pacific, Malaysia, Taiwan and Australia continue to be the key drivers of demand in the region in Q2 2023, and we expect those countries to drive demand through the rest of the year and into 2024. We did move one of our smaller ATS in the Middle East for the same reasons as previously mentioned, with a focus for the region going forward being on the bigger boat market where we are best able to support our customers by being the supplier of choice for large ATSs and large PSVs. In Q2 2023, the Asia Pacific team continued to sustain impressive rates across the region and even managed to increase the composite rates in the region by $6.68 per day from 23,580 dollars 2 per day in Q1 2023 up to $24,250 per day in Q2 2023. All in all, a very impressive performance for the quarter and the first half of the year. Overall, as mentioned by Quintin, we are very pleased with how the market has continued to move in the right direction throughout the year and that we expect that positive momentum to continue into subsequent quarters and beyond with all signs being that we do not see any significant slowdown in demand in any of the regions in which we operate.

Speaker 3

And with that, I'll hand over to Sam. Thank you.

Speaker 4

Thank you, Pierce, and good morning, everyone. At this time, as in prior quarters, I would like to take you through our financial results and I will focus primarily on the quarter to quarter results of the Q2 of 2023 compared to the Q1 of 2023. As noted in our press release filed yesterday, we reported net income of $22,600,000 for the Q2 or $0.43 per share on revenue of $250,000,000 compared to $10,700,000 of net income or $0.21 per share in the Q1 on $193,100,000 in revenue. Active utilization decreased slightly from 80.6% in Q1 to 79.4% in the current quarter. The decrease is due primarily to higher drydock days and higher mobilization days as we mobilized 9 vessels to different regions in the quarter.

Speaker 4

Average day rates increased by 9.7% from $14,624 per day in the Q1 to $16,042 per day in the 2nd quarter, which was the main driver for the increase in revenue. Vessel margin in Q2 was $92,100,000 compared to $75,700,000 in Q1 and vessel margin percentage increased to 43.8 percent from 39.6% in Q1. Adjusted EBITDA was $72,000,000 in Q2 compared to $59,100,000 in Q1. Vessel operating costs for the quarter were $118,300,000 compared to $115,500,000 in Q1. In the quarter, we saw an increase in crew salaries and travel expenses and vessel supply expenses related to reactivation of a couple of vessels.

Speaker 4

In addition, as mentioned previously, we mobilized 9 vessels into different regions and incurred additional drydock days in the quarter that added to the increase in operating cost, mainly due to the fuel consumed. Our vessel operating cost per day was relatively flat quarter over quarter at about $71.50 per day. We estimate that fuel costs related to mobilizations and a couple of one time charges in the quarter affected our operating costs by about $2.50 As we look to the remainder of the year based on our most recent forecast and with the addition of the newly acquired 37 Solstat vessels, We estimate total 2023 revenues to be approximately $1,030,000,000 and vessel operating margin to dollars In the quarter, we sold 3 older non core vessels, 1 from our assets held for sale and 2 from the active fleet for net proceeds of $2,900,000 and reported a net gain of $1,400,000 on the sale of these vessels. We generated operating income of $38,900,000 for the Q2 of 2023 compared to $24,500,000 in Q1. The increase is due primarily to the higher revenue.

Speaker 4

G and A cost for the quarter was $26,000,000 $2,500,000 higher than Q1. G and A for the Q2 included $2,400,000 in bad debt expense related to a customer's receivable balance that was determined to be uncollectible. In addition, we also incurred $1,200,000 in transaction expenses related to the Solstad vessel acquisition. We expect our total G and A costs for 2023 to be approximately $97,000,000 which includes $6,200,000 transaction costs related to the Silvestet vessel acquisition and the $2,400,000 bad debt expense mentioned previously. Excluding these items, we anticipate our annual normal G and A run rate to be about $89,000,000 which includes additional costs added as part of the Solstad transaction.

Speaker 4

In the quarter, we incurred $21,400,000 in deferred drydock costs compared to $31,100,000 in Q1. In the quarter, we incurred 823 drydock days, which affected utilization by 5%. With the addition of the Solstad vessels, we now estimate our dry dock costs for the full year 2023 to be about 87,000,000 which includes $8,000,000 related to the Solstad vessels. In Q2, we also incurred $6,400,000 in capital expenditures related to IT upgrades and vessel modifications. In addition, we incurred $2,500,000 related to down payments on 4 new alley caps.

Speaker 4

For the full year 2023, we expect to incur approximately $28,000,000 in capital expenditures, dollars 5,000,000 of which has been reimbursed by our customers.

Speaker 2

We generated

Speaker 4

$11,300,000 of free cash flow this quarter. As cash flow in Q2 was affected primarily by higher drydock and CapEx expenditures. We also paid approximately $10,000,000 in taxes. Working capital increased by almost $23,000,000 for the quarter. And even though we do expect our investment in working capital to grow with the addition of Solstad vessels and as revenue increases, we will continue to manage this investment as tightly as possible.

Speaker 4

As anticipated, we did see a significant spend in CapEx and dry docks this quarter. However, we expect the cash flow performance to significantly improve in Q3, with additional improvements in Q4 as the business continues to accelerate. In Q4 of 2019, we began reclassifying vessels on our balance sheet from property equipment to assets held for sale. We have since run 88 vessels through this program. At the end of Q2 2023, we had 2 vessels remaining and assets held for sale at a value of about $600,000 During the Q2, as mentioned previously, We sold 1 vessel from NASS that's held for sale for proceeds of $500,000 On July 5, we completed the acquisition of the 37 platform supply vessels from Philistat for $580,000,000 We financed the acquisition through a combination of net proceeds From a $250,000,000 5 year 10.3 8ths fixed rate unsecured Nordic bond, a new $325,000,000 3 year so far linked floating rate amortizing secured senior bank term together with $18,500,000 of cash.

Speaker 4

More details of the financing are available in our recently filed Form 10Q. We're very pleased with the acquisition and we appreciate the support we received from the credit markets. We look forward to integrating the 37 vessels into our operational management and anticipate the completion by the Q4. I would now like to focus on the performance of the regions. Our Americas region reported operating profit of $6,200,000 for the quarter compared to operating profit of $8,000,000 in Q1 2023.

Speaker 4

Vessel operating margin increased from 40.7% in Q1 to 41.2 The region reported revenue of $50,400,000 in Q2 compared to $47,700,000 in Q1. The region operated 32 active vessels in the quarter, an increase of 1 vessel from Q1. Active utilization for the quarter was 85.4%, slightly higher than 85.2% in Q1. Day rates increased 2.4% to $200,269 from $19,794 per day in Q1. The decline in operating income was due primarily to increased reactivation expenses and the $2,400,000 bad debt charge taken in the quarter.

Speaker 4

For the Q2, the Asia Pacific region reported an operating profit of $7,000,000 compared to an operating profit of $5,600,000 in Q1. Vessel operating margin increased from 43.3% in Q1 to 47%. The region reported revenue of $22,600,000 in the 2nd quarter compared to $22,000,000 in the prior quarter. The region operated 14 active vessels, which was up 1 vessel on average compared to Q1. Active utilization decreased to 72.4 in the quarter compared to 77.8 percent in Q1.

Speaker 4

High average day rates increased by 2.8% from $23,582 per day in Q1 compared to $24,250 per day in Q2. The higher operating income is due to the increase in revenue, coupled with decreases in operating and G and A expenses. For the Q2, the Middle East region reported an operating loss of $1,700,000 compared to an operating loss of $344,000 in Q1. Vessel operating margin decreased from 25 percent to 22.7 percent. The region reported revenue of 31 $9,000,000 in the 2nd quarter compared to $30,800,000 in the prior quarter.

Speaker 4

The region operated 44 vessels, an increase of 1 vessel from Q1. Active utilization decreased from 82.5% in the Q1 to 76% in Q2 due mainly to higher mobilization days. Day rates increased from $9,679 per day in Q1 to $10,449 per day in Q2. The region incurred over 500 mobilization days in the quarter, which impacted utilization substantially as 4 vessels were transferred into the region. The decrease in operating income was due primarily to the increase in operating expenses, In particular, higher fuel expense resulting from the mobilizations into the area.

Speaker 4

Our Europe and Mediterranean region reported operating profit of $8,300,000 in Q2, a nice increase from Q1, where the region reported operating profit of 2,000,000 Vessel operating margin increased from 36.7 percent to 45.8%. Revenue increased 26% to $39,300,000 in Q2 compared to $31,300,000 in Q1. The region operated 26 vessels in the quarter, 1 less than Q1. Active utilization increased to 85.7% compared to 83.4% in Q1. The increase in utilization was primarily due to lower dry dock days in Q1 and the increase in activity as the seasonality impact is reduced.

Speaker 4

In addition, day rates jumped 21.2 percent to $18,990 per day compared to $15,669 per day in Q1. The increase in operating income for the quarter was mainly driven by the increase in revenue, offset by higher operating costs due to higher R and M and higher supplies and consumable expenses. Our West African region reported operating profit of 25 $500,000 in Q2 compared to operating profit of $17,200,000 in Q1. Vessel operating margin increased from 46 0.4% to 53.6%. The market in this area remains strong.

Speaker 4

Revenue for Q1 was $66,200,000 compared $59,500,000 in Q1. The region operated 65 vessels on average in Q2, one less than in Q1. Active utilization increased to 77.8% in Q2 from 76.6% in Q1 And day rates continue to increase as we saw a 10.9% increase to $14,469 per day in Q2. The increase in operating income from Q1 resulted mainly from the higher revenue, coupled with a decrease in vessel operating expenses. In summary, we are pleased with our Q2 results.

Speaker 4

In the quarter, we repositioned 9 vessels to different regions and had a high number of anticipated drydock phase that affected our overall results. However, this will have a positive impact on our results in the future. We are encouraged to see continued increases in revenue throughout the year driven by higher day rates. During 2022, we reactivated many of our previously stacked Legacy Tidewater vessels acquired 49 vessels with the Swire transaction. And in July 2023, we completed the purchase of 37 Solstad vessels, all of which will now put us in a stronger position to take advantage of the continued upturn in the industry.

Speaker 4

We remain encouraged by the leading indicators we see for the remainder of 2023 beyond. With that, I'll turn that over back over to Quintin.

Speaker 2

Well, thank you, Sam. Ian, why don't we open it up for questions?

Speaker 3

Thank you.

Operator

Our first question is from the line of Jim Rallison with Raymond James. Your line is open.

Speaker 5

Good morning, gentlemen.

Speaker 3

Good morning.

Speaker 5

Quentin, clearly a nice sequential move in terms of fleet average day rates and obviously the incremental contract average leading edge rates. On the duration front, you mentioned, I think, 6.5 months was the average duration of the incremental vessel signed in the quarter. Can you remind us what the kind of fleet average is today in terms of duration inclusive of Solstad?

Speaker 2

It's about 1 year for the legacy Tidewater fleet, yes.

Speaker 5

And when you are obviously, you guys have talked about incremental tightening in the market based on activity and spend. Are you getting from your customers, are they starting to get concerned about that trend? And I mean, obviously, As their spending plans change for the better, I have to imagine they look at all the same trends that we look at and start to get concerned about vessel availability. So just Kind of curious how those conversations go and are they trying to your actual duration went down by a month this quarter versus what you booked last quarter. So Curious if they're trying to book up longer duration contracts and just kind of how that conversation is going?

Speaker 2

Yes. In fact, Pierce is in Brazil. I'm going to hand it over to him in a second. But I would say that that period of Sticker shocks that we went through in 2022 is behind us. And now everyone realizes that rates are moving up and they're worried about It's scarcity.

Speaker 2

It's a scarcity issue for them. And so those that are more active in drilling campaigns are more concerned about scarcity. So we're starting to see them trying to book longer periods of time. We're still going short, But the person in our organization closest to it is Pierre. So let me ask him the comment.

Speaker 3

Yes. Thanks, Quintin. Hi, Jim. Yes. No, we I mean, I think strategically we sort of had a plan to sort of go short to allow us to roll a number of The poor legacy contracts we had.

Speaker 3

And part of that is also, I think I just mentioned, a lot of the contract term that Was in place in terms of these cancellation clauses for convenience that oil companies were able To push on us during the downturn. We're spending a lot of time pushing back on those and Getting people to commit if they're going to commit to a 1 year or a 2 year or 3 year contract, then they commit to the full term. So That process, we've had some positive momentum during the course of this year that people are starting to accept those types of terms of contracts again. It doesn't happen overnight, but that's certainly starting to happen and we're starting to have some successes with a number of our customers who are recognizing that if they want a 3 year contract, then they need to support that with an actual contract that commits to that, which they were starting to start to see because they need to have they are worried about the scarcity of vessels. So Yes, it takes time, but we're definitely seeing movement in that direction from our customer base.

Speaker 5

Yes, that makes sense and sounds good from your end. And Quentin on the relocation of vessels out of certain markets into the Middle East, obviously there's some near term kind of cost impacts and utilization impacts. Just maybe a little color on how much further does that still drag some in 3Q? And then How long before you think that starts to benefit you from the steady utilization and hopefully better rates kind of perspective?

Speaker 2

Yes. So an underlying theme in that situation in the quarter and really the 1st 6 months is the fact that The last boats to go to work are usually your lowest, least capable boats, so like small size and lowest specification boats. And those boats are great for the Middle East. But when you move them into the Middle East, you got to go through a whole solidization process,

Speaker 3

right?

Speaker 2

So you got a bunch of costs that go upfront. So it's good to put those boats back to work and we did that in the first half of the year, most of that hitting in Q2. But I think we have a small remainder in Q3, But not a well, nothing significant. Certainly all contemplated in the guidance that we laid out. But no, I think that reactivation surge and that resetting of the chess table globally is largely behind us

Operator

Your next question comes from the line of Greg Lewis with BTIG. Your line is open. Yes.

Speaker 6

Hi. Thank you and good morning, everybody. Thanks for taking my questions.

Speaker 2

Absolutely.

Speaker 6

I was hoping to get a little bit more color around the comment around the contracted fleet. You mentioned roughly 87% of the fleet is contracted. I guess the questions around that are, Is this a function of vessels rolling off contracts and then going back on longer contracts? Or is it, Hey, there's going to be this natural piece of our fleet that's going to just simply be paid trading in spot. And if you could, could you provide us a little color around where those spot vessels are and how those markets are doing?

Speaker 2

Yes. No, I think you've got it laid out right in the sense that most of those are going to be rolling through the spot market as we go through the next several quarters. Let me give it over to Pierce to give you an idea of where the spot market is most active around the world.

Speaker 3

Yes. Thank you, Quentin. Hi, Craig, yes, so we have I mean, yes, you sort of as Quentin said, you guessed it right. There's an element of spot in that availability. I mean, obviously, the North Sea, we always have a certain level of spot exposure the way that's set up, particularly on the larger anchor handlers as we go into the second half of the year.

Speaker 3

So there's some there. We're also seeing that market is holding up very well. It's still very positive. The good news, I think, with the Solstad transaction is we have a largest share on the PSV side in that market, but actually our competitors seem to be holding rates as well. So that's Turning over to a certain level in the North Sea, which is sparse.

Speaker 3

And then we're seeing a number of contracts Rolling off in Q3 and Q4 in Africa. But again, very positive momentum in that piece as well. So there's a few contracts down there. And then otherwise, we're pretty busy everywhere else in the world. So not a huge amount of a spot a little bit of spot exposure in Asia as well, but otherwise Everything else is working.

Speaker 3

So mainly out of the North Sea is where we see most of that exposure on the spot side.

Speaker 6

Okay, great. And then just I did want to talk a little bit about the Solstad fleet. You mentioned the 5 vessels that were integrated in. I guess, as we think about the remainder of that fleet being integrated in, Is there any way to kind of think about it on a vessel basis? What does that cost, right?

Speaker 6

I mean, you kind of touched on it. Is it basically to integrate each vessel into the fleet as a couple $100 And then as we think about those vessels that are still going to be Put in the fleet, realizing there's a heavy concentration in the North Sea, but there are some vessels from the Solstad fleet that are in Brazil, in West Africa. Is it kind of we expect these vessels to stay put or you mentioned during Brazil, are you already down there trying to figure out if we can boost our position down there? Just kind of curious as we think about that, just given the ebbs and flows and the recent the decision last quarter to reposition vessels to the Middle East.

Speaker 4

Hi, Greg. This is Sam. I'll kick it off and then maybe Quentin can Comment on this. But as far as it relates to the cost of integrating these boats, I would say that it's going to add maybe $25,000 to $35,000 of both just because of all the documents change and everything that we got to do. But it's really more Of a timing and anything else, it will take us a day, day and a half to switch over systems and stuff like that.

Speaker 4

So the impact is minimal As far as the timing and the cost.

Speaker 2

Now I'd layer on top Sam, as a result, you've increased your G and A guidance for the year from the standalone Tidewater fleet about

Speaker 4

That's correct. We're anticipating G and A to go up about $5,000 for a full year. So I mean, I'm sorry, dollars 5,000,000 for the full year, which should be about $2,500,000 for the second half of

Speaker 2

And that's the incremental to shore based facilities. But the actual movement of the vessels over is really just a plan it's an intensive planning exercise, but it's not an It's intense cost. Not an intense cost. That's correct.

Speaker 6

And then just what's the outlook To those vessels, just given when we acquired them, where they were located, I mean, is it too early to tell or should we be thinking about

Speaker 2

So right now, most of them are under contract, which is kind of good news, bad news on that fleet because I would really like to roll them over a little bit faster than I can. But the so I think over the next year, you're going to see them working in the areas where they're currently at. So the biggest slug is in the North Sea, but we've got a handful in Brazil, handful in Australia and just 1 or 2 in West Africa. And certainly, the thing that I'm optimistic about with that fleet is where they're at today, they're rolling on to new Contracts that are better than we actually anticipated. So from a merger analysis standpoint, I'm really pleased with that.

Speaker 2

Now, where I'm working so I'm more concerned that it lightens up more in the U. K. Sector over the next couple of years. And if it does that, then rolling them down into the Mediterranean, which has been recently very strong as well as West Africa is where I anticipate them to go. I don't expect point out of Brazil at this point, although Brazil is always a troubling area for an international operator.

Speaker 2

And I think there's real opportunity in Brazil for Brazilian owned tonnage. This is not Brazilian flag tonnage. This is foreign tonnage.

Speaker 3

Okay, great. Thank you. Thank you.

Operator

Your next question comes from the line of Frederic Steen with Marksons Securities. Your line is open.

Speaker 7

Hey, Quentin and team. Hopefully, you guys can hear me. Okay. And thanks for taking my question. I actually wanted to revert a bit to some of the themes that Greg touched upon in relation to contracted capacity.

Speaker 7

You've given us the numbers for the Q3. Are you able to give us some color on what's happening in the Q4 and also in 2024? And I'd be interested in both what you've booked of revenue going forward, but also what's left in terms of free capacity to play the market.

Speaker 2

Thanks. Sure. So Naturally, what happens as you look at each quarter is we have a little bit more room, a little bit more white space as it's commonly been called To fill. And so we're about 85% filled for the Q4. And so we will work over this quarter To fill in that white space to get it up to the same level that we're talking about in Q3, which is 100%.

Speaker 2

And then as you go out into I'll reserve on 24 until we do the 24 overview. But it's a similar step down as you go through the quarters.

Speaker 7

Okay. Thanks. And

Speaker 4

In terms of just

Speaker 7

how you commented on your earlier your strategy now in 2Q that you're holding on EBITDA on capacity to secure kind of longer term work with longer rates. Are you feeling on a general basis that you've come to a point where it's the right time to start to go from that short strategy as you've talked about to a long strategy to a large degree or is it The correct timing for some of the sub segments of your assets. Anything that kind of can help us get For cash flow visibility or comps. I truly believe in those fees, I don't misunderstand me, but If your attitude towards that has changed would be helpful. Thanks.

Speaker 2

No, my attitude really hasn't changed. I'm still very optimistic in the acceleration of day rates globally. And I really see nothing holding it back. There's no incremental supply of any magnitude coming in from anywhere and activity levels are continuing to increase. So generally, I'm still going short.

Speaker 2

Now we've been going short for so long that we're actually depleting a lot of our coverage. We may add some longer term contracts just to balance out the book, if you will. So, because there's always a meaningful piece of long term contracts, if you can get the right terms, if you can get the right price escalations and so forth. If I had my druthers, I'd just jam it on the spot market. But let me hand it over to Piers, and He's got to live with this.

Speaker 2

I'll ask him to comment as well.

Speaker 3

I mean, I think I sort of mentioned earlier, we are still focused on a relatively short term strategy. But I think as Quentin just said, if we We're spending a little bit of time getting the customers to actually commit to the term of contract. And if they're there to commit To a proper what I consider a proper non cancelable 3 year contract or 5 year contract on the right sort of terms, as Kunzin said, and that's certainly something we'd look to put into the fleet. But I don't see us in the short- to medium term Planning to change our strategy. I think we're very positive for the long term future of this market.

Speaker 3

So, that there's more upside opportunity as we go forward From our side. Yes.

Speaker 2

And I follow-up with one more item. A follow-up with just one more item on that, which is, obviously, we're playing the spot market and nothing's really changed. To the extent that we layer on additional contract cover like Pierce was indicating, it's because we're getting contract terms that we feel are sustainable over a 3 or 4 or 5 year period.

Speaker 7

Perfect. And just as a follow-up on that. I think in some of the other All sorts of sub segments like the rig space. What we see now over the last few months is that the lead time to contracts start has expanded for these long term contracts. And of course, there are different dynamics in these two markets.

Speaker 7

But in terms of your discussions With your clients, are they not only willing to give term or offer term contract, but how has the How far out in time are they trying to plan for their OSV needs? And how has that changed maybe Over the last 12 months.

Speaker 2

Hey, Pierce, you want to take that one?

Speaker 3

Yes. Yes, yes. Of course. And it always amazes me that you think customers will be slightly better organized and When it comes to looking to book their PSCs and anchor handlers. But I would still say the majority of the customers are leaving it Quite late still.

Speaker 3

They're still they may have a long lead time on a rig, but we're not still seeing 10 years sort of 3 months out, with the exception of perhaps of someone like a Petro. Some of the NOCs have a longer Lead times, but on the IOCs, their lead times tend to be 3 months 3 to 6 months before they Come out and in some cases, we have some of them who even come out expecting assets to be available in a month's time and we have So more often than not disappointment. So we're not really they haven't really tied it into the rigs yet, I would say, Frederic. But maybe that will change over the Few months, but they're definitely looking to commit to longer term and better contract terms when they do come out. So that bit is changing.

Speaker 7

All right. Thank you all for the color. Super helpful. That's all for me. And I wish you a good day.

Speaker 7

Thanks.

Operator

Thank you, Fred. There are no further questions at this time. I'd like to hand the call back over to Quentin Meen for closing remarks.

Speaker 2

Thank you, Ian. Thank you, everyone, and we will update you again in November. Goodbye.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Tidewater Q2 2023
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