Tidewater Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Q3 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Session. I would now like to turn the call over to Wes Goetjer, Senior Vice President of Strategy, Corporate Development and Investor Relations.

Speaker 1

Thank you, Novi. Good morning, everyone, and welcome to Tidewater's Q3 2024 Earnings Conference Call. I'm joined on the call this morning by our President and CEO, Quintin Neem 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 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're making during today's conference call.

Speaker 1

Please refer to our most recent Form 10 ks and Form 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, November 8, 2024. 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 in our earnings release located on our website at tdw.com. And now with that, I'll turn the call over to Clinton.

Speaker 2

Thank you, Wes. Good morning, everyone, and welcome to the Q3 2024 Tidewater earnings conference call. 3rd quarter revenue came in as expected as day rates continue to improve nicely, exceeding our expectations by over $600 per day. Gross margin came in at 47.2% and we generated free cash flow of $67,000,000 Year to date, we have generated nearly $224,000,000 of free cash flow, dollars 174,000,000 more than the same period last year. The substantial improvement in free cash flow generation is the result of high grading our fleet through focusing on newer higher specification vessels and our contracting strategy to relentlessly drive global day rates higher.

Speaker 2

We believe that long term fundamentals support continued free cash flow progression and we expect our free cash flow generation to improve over the coming quarters. The 3rd quarter is typically characterized as the most active quarter of the year as customers take advantage of favorable weather conditions to execute their plans ahead of the seasonally less favorable 4th and 1st quarters. We saw this dynamic play out this year with average day rates improving over 5% and leading edge day rates moving up nicely, particularly in our high specification PSVs and smaller anchor handlers. Utilization came down slightly as additional time between jobs principally in our West Africa and Europe and Mediterranean segments along with higher than anticipated dry dock days globally both increased from the 2nd quarter. On last quarter's call, we discussed our weekly reforecasting process in the context of the rapid pace at which the industry outlook can change and the need to frequently evaluate our outlook as the factors driving our business evolve.

Speaker 2

We've seen that play out in the past 3 months as activity in certain of our regions softened unexpectedly due to a lack of incremental projects, projects ending early and regulatory delays causing more idle time for some of our vessels, principally in the Americas and Asia Pacific. The North Sea, particularly in the UK sector, is anticipated to be weaker due to a combination of typical winter seasonality and adjustments to their regulatory and tax programs, both of which are putting pressure on day rates and utilization. We are also planning on making more investments during the Q4 in our fleet than we had originally planned to prepare for what is expected to be a better market as we progress into the second half of twenty twenty five. And these incremental investments will result in incremental dry dock days as compared to our previous expectation. More broadly, as we evaluate the landscape for 2025, the outlook on the timing and pace of growth in offshore vessel activity is less clear than it's been in a few years.

Speaker 2

We continue to see conviction in long cycle projects by our customers. However, continued near term activity growth appears to be somewhat subdued. We've seen our customers take a measured approach to executing incremental growth projects. Importantly, projects aren't being canceled, but the decision to procure vessels and other assets has been stalled as operators evaluate the outcome of recent successes and contend with lead time issues for critical offshore infrastructure and equipment. We've not seen a pullback in day rates as evidenced by both the increase in average day rates for the quarter along with the increase in the quarter's leading edge day rates.

Speaker 2

However, lower activity levels adversely impact our ability to continue to push day rates as aggressively as we have over the past 2 years. Over the last 2 years, we've been able to push day rates up over $4,000 per day each year, which incidentally is fantastic. And those increases have had a big impact on earnings. I'm confident we can still push day rates up, but whether it's $1500 per day, which historically has been the benchmark during industry upturns or the $4,000 a day we've seen recently is what we are grappling with. So we're holding off on guidance for 2025 until we get some better visibility, which we anticipate we will have for you on next quarter's call.

Speaker 2

We've talked at length about our contracting strategy over the past few years. The merits of taking a short approach to contract duration in order to push dayrates in contractual terms. We've seen the benefit of this strategy with realized average day rates now almost double what they were at the beginning of 2022, which has had a substantial impact on the earnings of cash flow of the business. This strategy trades contract coverage and higher utilization for the opportunity to push rates. Although the near term expectation in the growth of offshore activity is less certain, we still believe that going short is the right strategy, though it may cause some lower utilization in the near term.

Speaker 2

In our view, market day rates still do not justify the economics required for new build vessels and that the day rates will ultimately need to move to a point where new build vessels are economically viable. We see vessel attrition continuing to further constrain vessel supply over the coming years. And given the very low number of new vessels on order, we expect that the balance of supply and demand will remain firmly in our favor for at least the next 3 years. As such, we anticipate that as we move through 2025 and into 2026, leading edge day rates will continue to increase from where we are today and we will be well positioned to take advantage of the imbalance of that imbalance as the growth and activity level accelerates. Subsequent to last quarter's earnings release, we repurchased about $15,000,000 of shares in the open market.

Speaker 2

That brings our year to date share repurchases to about $48,000,000 And since the inception of the buyback program in the Q4 of 2023, we have repurchased nearly $83,000,000 of shares in the open market. In addition to the open market repurchases, we used $28,500,000 of cash in the Q1 to buy shares from employees so that they can pay their tax obligation on the equity compensation. In lieu of those employees issuing shares into the open market, which incidentally we will do again in the Q1 of 2025. So over the past 4 quarters, we've used $111,000,000 of cash to reduce the share count by over 1,400,000 shares. We still believe that acquisitions done at a price that reflects a sharing of the cyclical and market risk is a solid way to make significant investments to the long term value of the shares and we're still generally focused on acquisition opportunities in North and South America.

Speaker 2

The aforementioned lack of near term visibility has increased the bid ask spread at least for now. So for now, we'll remain focused on repurchasing our own shares because our confidence in cash flows over the next two quarters remain strong, we are inclined to increase the rate of share repurchases. In summary, we are confident that the long term fundamentals for this business remain favorable and that our ability to capture the benefits of the imbalance of vessel supply and demand is intact. We are confident that the business will continue to generate substantial free cash flow that will allow us to take advantage of these near term uncertainties and provide opportunities to continue our past successes in enhancing shareholder value. And with that, let me turn the call back over to Wes for additional commentary and our financial outlook.

Speaker 1

Thank you, Quintin. Over the past 4 quarters Tidewater has generated $285,000,000 of free cash flow. Over the same timeframe, we've used $111,000,000 of cash to reduce the outstanding share count and used $103,000,000 of cash on the required amortization of our outstanding debt for a total of $214,000,000 of free cash flow allocated directly to equity enhancing uses. We are pleased to announce that our Board of Directors has authorized an additional $10,100,000 of share repurchase capacity. The new authorization brings our total unused share repurchase capacity to $42,800,000 The authorized share repurchase program and remaining unused capacity represents the maximum amount of permissible debt under our existing debt agreements.

Speaker 1

We anticipate our share repurchase capacity to increase by close to $100,000,000 in in the Q1 of 2025 under our existing debt agreements. We expect that free cash flow will increase over the next few quarters and we remain committed to allocating our free cash flow to enhance shareholder value. We continue to evaluate the best path to achieve our goal of establishing a long term unsecured debt capital structure along with a sizable revolving credit facility. We remain opportunistic on pursuing a potential refinancing as we have no near term maturities and no immediate need to access the debt capital markets. During the Q3, we initiated consent solicitation process to amend certain terms of our unsecured bond issued in the Nordic bond market as the debt capital markets appeared favorable to new issuance.

Speaker 1

The amendments proposed were in our view credit enhancing to existing bondholders. We subsequently canceled the consent process as the cost to achieve the amendments was unattractive. Given our free cash flow outlook and debt maturity profile, we are comfortable to continue to evaluate the most economically viable path to establish a long term debt capital structure. Over the past few years, we have provided quarterly composite leading edge day rates along with the average duration of new contracts. We believe that it is now more instructive to provide quarterly leading edge day rate information by vessel class to provide a subset of data that presents a more representative view of how day rates progressed across each of our vessel classes within the fleet during the quarter.

Speaker 1

Leading edge day rates by vessel class can be found in our investor presentation on our website that was posted yesterday alongside our earnings press release. A few worthwhile data points to note. Day rates in our 2 largest classes of PSVs moved up nicely during the quarter with a greater than 900 square meter class of PSVs up 6% sequentially to over $37,000 per day and our medium class of PSV saw strong momentum sequentially with rates up 26% to over $35,000 per day. In our smaller classes of anchor handlers, we saw double digit increases sequentially with our 8000 to 12000 BHP anchor handlers up 16% and our 4 to 8000 BHP anchor handlers up 37%. Looking to the remainder of 2024, we are updating our full year revenue guidance to $1,330,000,000 to $1,350,000,000 and a 48% gross margin.

Speaker 1

We now anticipate 4th quarter revenue to be essentially flat with the 3rd quarter and gross margins to improve 1 percentage point sequentially. The decline in Q4 margin expectations from the prior quarter is principally related to the decrease in revenue associated with lower utilization, increased idle time and higher than anticipated dry dock days and to a lesser extent an increase in repair and maintenance expenses and an increase in fuels expense associated with additional idle days. Drydock days are expected to decline by about half in the Q4 versus the Q3. We look forward to providing our updated thoughts on 2025 guidance next quarter as visibility improves for the pace and timing of growth of offshore activity. Our contracted backlog currently sits at about $332,000,000 of revenue for the 4th quarter with 79% of available days contracted.

Speaker 1

The risk to our backlog revenue is unanticipated downtime due to unplanned maintenance and for drydock days. With that, I'll turn the call over to Piers for an overview of the commercial landscape.

Speaker 3

Thank you, Wes, and good morning, everyone. This quarter, I will try and put some context around where 2024 sits in the pantheon of previous up cycles and then also frame out a little of what we are seeing in each of our regions as we go into 20252026. First off, our overall long term outlook for the offshore space remains strong. And for 2024, the OSV market has managed to achieve record breaking day rates in most of the basins and vessel classes in which Tidewater is active. The fundamentals for the OSV market remain strong.

Speaker 3

The sector remains supply side constrained with little prospect of capacity expansion from the stacked fleet or from the negligible order book. Despite a small number of newbuild orders over the summer, the majority of which aren't expected to start delivering until 2027, the PSV and AHS order book is still under 3% of the OSV fleet. And while we have seen some demand ease back recently in some of our regional markets with the constrained supply story, we are still very well placed to weather any short term headwinds and make further progress through 2025 and into 2026 as expected demand growth picks up again both in exploration and subsea construction projects. Turning to our regions and starting with Europe. Uncertainty over the U.

Speaker 3

K. Tax regime and the government's decision to increase and extend the energy profits levy is creating some uncertainty over future drilling programs and is expected to weigh on demand in 2025, although we are expecting an uptick in decommissioning and wind farm support projects, which will help offset some of this uncertainty in the U. K. In 2025 and 2026. In Norway, we see stronger drilling demand kicking off in 2025 through to 2027, driven primarily by the Norwegian government tax incentive scheme that was introduced in 2020.

Speaker 3

And in the Mediterranean, projects that were delayed from Q3 have now stopped in Q4 and should carry through into the second half of twenty twenty five. And in addition, there are a number of construction projects in the region that are expected to suck up PSVs out of the U. K. In the first half of twenty twenty five. In Africa, we're expecting a strong 4th quarter helped by a number of exploration projects that were pushed from Q3, which have now started in and around the Orange Basin in Q4, with some of that drilling work expected to continue through into the first half of twenty twenty five.

Speaker 3

Visibility in the region in the second half of the year is more opaque as many of our customers plan to pause drilling campaigns as they assess next steps before starting field development of these projects, which are expected to kick off in 2026 and 2027. However, offsetting some of that pause in drilling in the second half of twenty twenty five, we are seeing pressure from the Angolan government on the IOCs to increase production in country, which if it plays out as the government wishes, would see an uptick in vessel demand from both the IOCs and EPC contractors in the second half of twenty twenty five and through to 2026. In the Middle East, vessel demand and day rates continue to strengthen in twenty twenty four, driven mainly by the EPC contractors operating in the kingdom as well as additional incremental demand in Qatar and Abu Dhabi. While this is a very fragmented market, which makes it much harder to drive rates aggressively, we are starting to see supply constraints in certain vessel classes. And if demand continues at its current pace, we could see some very positive momentum in day rates as we get into the latter part of 'twenty five and through to 2027.

Speaker 3

In the Americas, Brazil and Mexico demand appears set to remain positive for 2025. However, there is still some uncertainty in Mexico visavis what the new government's long term intentions are with Pemex and how to increase production in the long term. And as such, we probably won't have much visibility around actual long term plans for Mexico until after Q1 next year. But both Brazil and Mexico are expected to increase in country investment in oil and gas in the longer term out beyond 2,030. As mentioned on many previous calls, Brazil's long term demand horizon remains very robust with no signs of any slowdown from either Petrobras or the IOCs currently working in country.

Speaker 3

The U. S. GOM and Caribbean had a softer than expected 2024 and we expect that many that may continue into the first half of twenty twenty five. But we are seeing some indications of demand for additional drilling in the second half of twenty twenty five and into 2026 as well as an uptick in the renewables market on the East Coast during the same period. Lastly, in Asia Pacific, Q3 and Q4 have been affected by the ongoing discussions in Malaysia between Petronas and the local governments of East Malaysia regarding the respective sovereign rights over the natural resources of Sabra and Sarawak.

Speaker 3

We are now hearing that both sides are hoping to resolve these issues in early 2025, which would mean that we can expect exploration and production, some of which has been paused to start back up again during Q1 of 2025, which in turn would then have a significant impact on the supply demand balance in the region for both AHTSs and PSCs and mean that we should see this region retighten as we move through to the latter half of twenty twenty five. We also see several large EPCI and wind projects starting in the year in both Australia and Taiwan respectively, which will be supportive for our large ATSs and large PSCs in the region for the second half of twenty twenty five. Overall, we're very pleased with how the market has continued to move in the right direction during 2024 and we remain very optimistic on the long term fundamentals for our business, still being very much in the shipowners paper for some time to come. Thank you.

Speaker 4

Thank you, Pierce, and good morning, everyone. At this time, I would like to take you through our financial results. And as in previous calls, my discussion will focus primarily on the quarter to quarter results of the Q3 of 2024 compared to the Q2 of 2024. I will also discuss some of the operational aspects that affected the Q3 and how we see the rest of the year playing out. As noted in our press release filed yesterday, we reported net income in the Q3 of 2024 of 46,400,000 or $0.87 per share.

Speaker 4

In Q3, we generated revenue of $340,400,000 compared to $339,200,000 in the Q2 of 2024, an increase of $1,200,000 Average day rates increased by 5.4 percent from $21,130 per day in the 2nd quarter to $22,275 per day in the 3rd quarter, which was the main driver for the increase in revenue. Offsetting the increase in day rates was a decline in active utilization from 80.7% in the 2nd quarter to 76.2% in Q3. The utilization decrease was a result of an increase principally in idle days and a slight increase in dry dock and repair days. Gross margin in Q3 was $160,800,000 compared to $161,900,000 in Q2. Adjusted EBITDA was $142,600,000 in Q3 compared to $139,700,000 in Q2.

Speaker 4

Vessel operating costs for the quarter were $178,700,000 dollars On our call last quarter, we expected our operating costs to decrease by $2,800,000 from Q3. However, our costs went up by $2,200,000 The main drivers included higher than anticipated repair costs on several vessels totaling $2,600,000 We also had higher fuel costs related to the 4.48 additional idle days as well as from mobilizing a vessel from Southeast Asia to Africa. In addition, we had approximately 200 higher drydock days, 150 of which were related to longer durations and 50 of which were related to timing differences between quarters. The total fuel cost for both idle and drydock days was about 1,000,000 dollars Also in the quarter, we incurred penalties due to delays in returning to work on vessels that incurred higher drydock days and we also increased our accrual related to labor claims in Brazil, which combined totaled 1,400,000 dollars In comparison to our Q2 actual results, as mentioned previously, our operating costs increased by $2,200,000 The main drivers included slightly higher R and M costs of $800,000 and higher crew costs of $1,500,000 due primarily to 1 vessel working in Australia where operating costs are higher. Supplies and consumables were higher by $1,700,000 due mainly to higher fuel costs related to the 7 0 4 more idle days and 83 more dry dock days.

Speaker 4

The increases were offset by lower other vessel expenses of $2,000,000 The largest components were a mobilization expense write off and a customs assessment that did not occur in Q3. In Q4, we are not anticipating the high levels of repair costs that we saw in Q3 and we see utilization increasing slightly as vessels return to work after the busy drydock schedule. In turn, we expect a significant decrease in fuel costs and penalties. As a result, we expect Q4 revenue to remain flat and operating costs to be lower by about 4,000,000 dollars Operating cost reductions will include $1,000,000 in R and M costs, dollars 1,800,000 in fuel and other vessel supply costs and about $1,200,000 in other costs such as crew costs, penalties and other miscellaneous costs. G and A cost for the Q3 was $28,500,000 $2,100,000 higher than Q2, primarily due to an increase in professional fees and personnel costs.

Speaker 4

For the year, we expect our G and A cost to be $109,000,000 which includes approximately $13,000,000 of non cash stock compensation. In the Q3, we incurred $35,500,000 in deferred dry dock costs compared to $40,100,000 in Q2. We anticipate $18,000,000 of drydock cost in the 4th quarter. Drydock cost for the full year of 2024 is expected to be 134,000,000 dollars Drydock days affected utilization by nearly 7 percentage points during the quarter. Year to date, drydock days have affected utilization by about 6 percentage points.

Speaker 4

In Q3, we incurred $5,700,000 in capital expenditures related to vessel modifications, ballast water treatment installations and IT and DP system upgrades. For the full year 2024, we expect to incur approximately $27,000,000 in capital expenditures. We generated $67,000,000 of free cash flow this quarter compared to $87,600,000 in Q2. Year to date, we have generated $223,900,000 of free cash flow. The free cash flow decrease quarter over quarter was primarily attributable to a significant increase in working capital due mainly to the investment in accounts receivable.

Speaker 4

Through September 30, we have made $87,500,000 in principal payments on our senior secured term loan and $1,500,000 on supplier facility agreement. We are comfortable with our current debt maturity profile. We have no immediate need to refinance our debt, but remain opportunistic in pursuing a potential refinance that would improve our overall debt capital structure. Year to date through September 30, we have used about $46,600,000 in cash to reduce the number of our shares in the market by approximately 520,000. As mentioned on our first call Q1 call, we also spent $28,500,000 in cash to pay taxes on behalf of employees and move employees selling approximately 321,000 shares of stock in the open market to pay those taxes.

Speaker 4

We conduct our business through 5 segments. I refer to the tables in the press release and the segment footnote and results of operation discussions in the 10 Q for details of our regional results. To summarize the sequential results of our regions, day rates improved by 5.4% during the quarter led by the Asia Pacific region, which improved by 23% and our West Africa region, which improved by 10%. Revenues were higher in all regions except Americas, which declined by 12%, primarily due to lower utilization. Gross margins decreased slightly from 47.7% in Q2 to 47.2% in Q3.

Speaker 4

The Americas regions experienced a decline of about 5 gross margin percentage points due primarily to more idle and repair days. In our APAC region, despite the increase in average day rates, we had a gross margin decline of about 3 percentage points due to higher idle and drydock days. Similarly, our Europe and Mediterranean regions saw a gross margin decline of 2 percentage points due to higher idle days and drydock days. However, with the increase in day rates, we saw improvements in gross margin in our West Africa and Middle East regions of 4 3 percentage points, respectfully. We expect consolidated gross margin increase slightly in Q4 as an increase in utilization combined with a decrease in operating costs should improve our overall results.

Speaker 4

In summary, despite a Q4 decline compared to our previous expectation, 2024 execution has been strong. Although visibility into 2025 may not be as clear as we would like it to be, generating strong free cash flows and profitability will continue to be a priority as we move into 2025 and beyond. In the near term, we continue to invest and improve our existing fleet and look to capitalize on future M and A opportunities as they present themselves. Absent accretive M and A options, we continue to view REIT share repurchases as an attractive investment and return of our capital option for our shareholders. We remain optimistic in the long term fundamentals of the industry and opportunities this will provide Tidewater.

Speaker 4

With that, I will turn it back over to Quentin.

Speaker 2

All right. Thank you, Sam. Novi, why don't we go ahead and open it up for questions?

Operator

Your first question comes from the line of Jim Rollison with Raymond James.

Speaker 4

Good morning, Jim.

Operator

Jim, your line might be on mute.

Speaker 5

Good morning, Quentin. Sorry about that. Good

Speaker 1

morning, Jim.

Speaker 5

I know you're not prepared to do guidance yet, but maybe from a high level, if we kind of talk about the puts and takes, right? You've got it sounds to me like rates will should still migrate higher next year, uncertain of magnitude at this point. We'll probably get more clarity next quarter. The utilization benefits from dry docking reduction next year relative to this year, which you, I think, said 6% year to date was the impact. And then offsetting that, you'll probably have some of this choppiness that you and peers went through.

Speaker 5

I'm just maybe just a little kind of color high level how you're thinking about the puts and takes. Like I would think your costs should generally come down with the lack of dry docking. Just kind of trying to get to the different pieces and how you're thinking about them as we go into guidance in a

Speaker 2

quarter? Thank you. Obviously, there's less clarity than we appreciate having at this point as we look into 2025. I'm going to give it over to Wes and Pierce who have been studying this really hard as we've gone through the last couple of months. But in general, I think that you're right.

Speaker 2

The only thing that I would highlight to you is that I do expect it to be a lower dry dock year next year than this year. That won't show up in op cost, but it will certainly show up in improved cash flow. Jim, hey, good morning. It's West.

Speaker 1

You characterized it probably there's some puts and takes and so forth. And obviously, as we discussed, the visibility is lower. But as we pointed out in the prepared remarks we do anticipate that day rates should increase next year. The order of magnitude of which is uncertain. However, we do expect that to push forward.

Speaker 1

So we're not in a position to directly quantify as we discuss what the outlook is, but I think it would be fair to say that given the increase in day rate and a year in which dry docks are down that we would anticipate 2025 to look better than 2024 on an all in basis.

Speaker 5

Got it. And then just as a follow-up and then I can get back in the queue. I'm curious, Quintin, with this kind of pause in activity that we're seeing and obviously the rig guys have been talking about this through earnings season as well. Does it set up the potential opportunity on the M and A front where maybe guys had it just purely up into the right expectations and that was reflected in their asking price? And now with this bit of consolidation going on in activity, actually more willing to be reasonable on asking price and you can actually get some potential M and A done.

Speaker 5

Are you seeing that? Or is it still too early for that?

Speaker 1

Too early for that.

Speaker 2

I mean, I am with you that of the uncertainty that gets highlighted when times like this occur in our industry should reinforce in the minds of potential sellers. Hey, this is a volatile industry and you need to get out when you can and think about that as a risk factor for continuing to invest in the business. It's certainly a risk that we feel very comfortable managing. However, people are never as reasonable as you and I are having the discussion now would indicate. And so I think it takes a little bit more time for them to come down.

Speaker 2

And so we're just going to be patient. I feel very confident in repurchasing our shares at these levels. And so you'll probably see us do more of that than the M and A side, but I'm still actively engaged in M and A discussions around the world.

Speaker 5

Got it. Thank you. Appreciate the help.

Operator

Your next question comes from the line of David Smith with Pickering Energy Partners.

Speaker 6

Hey, good morning and thank you for taking my questions.

Speaker 1

Good morning, Mark.

Speaker 2

Good morning.

Speaker 6

For the Q4 guidance, I just want to make sure I understood. Did you say utilization is expected to be up, but revenue is expected flat? If so, implication is average day rate would be down. So, I just wanted to ask if you could provide some color on that. I'm guessing that's mix.

Speaker 1

That's correct, Dave. It's West. That is the correct inference from the guidance language we provided on Q4. As we discussed in the prepared remarks, I think a combination of some of the pressures that we're seeing in the U. K.

Speaker 1

Specter of the North Sea specifically as well as the regional highlights that we had in Americas and Asia Pacific and then some of the project delays in idle time and so forth with vessels in that region are contributing to those moving pieces within the Q4 guidance components.

Speaker 6

I appreciate it. And the follow-up question if I may, seeing some sloppy rates for the large CSPs in the North Sea, Can you talk about the factors that might act as friction against exporting those rates to the Mediterranean, West Africa or beyond, recognizing there might be other that there are other vessel contractors in the North Sea with operations in other countries?

Speaker 3

Yes. Hi, David. It's Piers here. Yes, so sloppy

Speaker 5

rates in

Speaker 3

the North Sea. It's obviously, it's a very spot market business. I mean I think what's important to remember about the North Sea is all the vessels whilst we talk about our 900 square meter vessels, there's also certain specifications on those vessels. So having firefighting and

Speaker 4

mud capacity and things like that, which are

Speaker 3

quite specific to certain and mud capacity and things like that, which are quite specific to certain regions. So, you can export some vessels, but actually, when you're doing a drilling program, for instance, down in the Mediterranean, where we've got some of our vessels, we've taken as we talked about previously, taken some vessels from the North Sea down to work in the Orange Basin this quarter, you need to have vessels with big mud capacity. And a lot of the vessels in the North Sea are limited. They're just big deck space vessels and they tend to do quite North Sea specific. So that is one of the sort of factors that you need to think about.

Speaker 3

We've got some, as I sort of mentioned, some vessels going down to the Med. And I think it's depending on the vessels, you can be slightly specific around where those vessels can end up. I'm sure there'll be some movement around the regions, but there is a limiting factor on some of the vessels in terms of the actual specifications once you get into the details of it.

Speaker 6

Great. I appreciate that color. I'll circle back. Thank you.

Speaker 2

Thanks, Dave.

Speaker 7

Thanks, Dave.

Operator

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

Speaker 4

Yes. Hi, thank you and thanks for taking my questions.

Speaker 3

I was hoping to get

Speaker 8

a little color on some of the dry dockings that we saw in the Q4. Kind of if you could kind of bucket them, I guess, how much of that do we think roughly was planned? How much of it was kind of pulled forward because vessels were going off hire and we just figured we would do it? And how much of it was, I want to say, a year ago, we had that kind of a bunch of that unplanned dry docking. I believe it was in West Africa.

Speaker 8

If you could kind of walk through some of that just so we understand what gets maybe give us let us think through how we want to think about dry docking in 2025?

Speaker 4

Yes. Greg, this is Sam. The drydocking that occurred in Q3, obviously, there was like 200 excess dates, 150 of that was just longer duration related and then 50 of it was timing. So you might have had I think we had like 1 or 2 boats pulled into Q3 that should happen in Q4. And then we had some just started a little later in Q2 that actually came into Q3.

Speaker 4

So that extra 50 days is a combination of that.

Speaker 8

Okay. So kind of what we dealt with a year ago when vessels were running hard and there was like unplanned issues with the boats that seems like that's kind of resolved?

Speaker 4

Yes, to some degree, right. I mean there is still some damper repair days that we have to deal with. We did see some of that in Q3. But once they go into the dry docks, hopefully that kind of smooths the repair costs going forward.

Speaker 8

Yes. One thing I

Speaker 2

was just going to allocate add to that rather was that we were running at about 4% DFR down for repair last year and we want to get it down to about 2%. We're probably right now at about 3%. So I think there's still room to improve there, but it's not getting worse.

Speaker 8

Okay, great. And then we don't need to go through all the basins and I think you kind of alluded to some of the pricing issues in some of the pricing headwinds we're seeing in some of the markets. I guess, everyone looks at the North Sea data where we have issues getting more data, which are bigger mark which are equally important. I remarked important, but I guess could you talk a little bit about the large and then I guess we classify them as large and small PSVs in West Africa as well as in Southeast Asia and really what we're seeing around the pricing environment and then really just as we kind of look at those are largely term markets. What does the outlook look like for price for contract resets in maybe those 2 markets?

Speaker 8

I guess maybe in Q4 and Q1 or whatever you have kind of in front of you, you can kind of talk to just so we can kind of gauge what type of pricing resets that we can kind of or pricing renewals we can kind of think about?

Speaker 3

Yes. Hi, Greg. It's Piers. There's something Q3, trying not to go around all the bases, as you said, but I think in general held up very well on the rates for the vessels as West alluded to on his remarks as well. And going forward actually into Q4 as well, we saw as I think we've spoken about in the past how some contracts push from Q3 into Q4 in places like the MES and African places like that.

Speaker 3

So Q4 is also holding up pretty well on those larger class vessels. I think as you look out to 25 and we sort of again talked a little bit about this in our remarks, but there is a little bit of some lack of visibility on some of the decisions being made. I think obviously there's the drilling piece which has been very public and people have talked about. When we look at projects going forward, we tend to know about those much earlier. So there's normally a 6 to 12 month lead time on some of that.

Speaker 3

What we're seeing is obviously these construction projects, which tend to come to market a little bit later. And they tend to require they don't tend to, they require large deck PSCs as well. So we're seeing more and more of those requirements coming out in places like Australia, Asia Pac more broadly, in Africa a little bit as well and then also in the Caribbean as well and the Med. So we're optimistic we're able to sort of hold rates on the larger vessels as we sort of see the year progress. But we haven't had we don't have all those tenders coming through yet at the moment in terms of the visibility that we'd normally have at this point in the year.

Speaker 3

So we're as we said, I think in our comments, we're very optimistic. Long term, we just don't have the clear line of sight on some of it.

Speaker 8

Yes. And so really when we kind of took guidance down, you clear called out drilling, but it almost maybe sounds like the delays maybe on the construction side were maybe more of a bigger issue around some of the weakness or some of the guide down for the year than maybe the drilling? Is that kind of what you're trying to communicate?

Speaker 3

I think we don't really see that on the construction side. I mean, it's still there, but they just come to the market much later. That's the concern. So we're waiting to see that.

Speaker 8

Super helpful. Thank you. Have a good weekend.

Speaker 2

You too, Greg.

Operator

Your next question comes from the line of John Crist with Johnson Rice.

Speaker 9

Good morning, guys. Can you remind us your percentage of work coming from FPSOs and more sticky work from that side versus drilling? And I think you touched on it on your last answer, but it sounds like the project delays were much more focused around the delivery schedule of FPSOs versus the start up of new drilling campaigns. Can you just is that the correct way of thinking?

Speaker 3

Hi, Don, it's Pierce again. So I think on the drilling side, we normally exploration is sort of 30% of the book, which maybe next year is going to be a little bit smaller than that. On the subsea construction side, it's not just on FPSOs, it's obviously on pipe. We support pipelines, things like that. So some of our contracts as well.

Speaker 3

So it's a combination of those projects. In Australia, we're supporting projects doing pipeline installation as well. But it's not so much necessarily the delay on some of the FPSOs. It's just there's just the tenders come out much later and sort of from our subsea construction guys, from the subsea sands and the sidebands and the all these all those guys come to market much later in terms of how they come out. But I think drilling is and exploration is going to be, as we said, a little bit white small white space than perhaps we've seen in the past, but the subsea construction stuff should pick up on that as we go forward into 2025.

Speaker 9

Okay. Thanks for that clarification. And

Speaker 3

on utilization,

Speaker 9

can we really use the 3rd quarter as kind of a bottom in utilization? And I'm thinking about it more from the aspect of maybe this weakness pulls forward some of the retirements that are happening in the industry and maybe that with the lack of new construction out there and your comment in the press release around no new construction going forward, are those discussions have gone away that maybe the Q3 utilization might be a bottom and we should see that tick up just from vessel retirements not necessarily with you all but from the industry?

Speaker 1

Hey, Don. It's Wes. I think that's a reasonable approach. We talked about utilization picking up a little bit in Q4 and thinking about that as a baseline moving into 2025 drydocks will come down. And so when you think about 2025 in its totality, I think as the market our expectation is the market continues to improve and recover to some degree in the back half with a lower dry dock year that utilization should be improved relative to the Q3 levels.

Speaker 9

Okay. And just to clarify, you're not seeing anybody out there other than that tender that was put out in by Petrobras for new vessels, you don't see anybody out there proposing to build new rigs or new vessels today?

Speaker 3

No, not at the moment. Just as you said that the Petrobras tenders, we haven't seen anything asking to build UPSDs like handlers.

Speaker 9

I appreciate all the color. I'll turn

Speaker 7

it back. Thanks.

Speaker 1

Thanks, Don.

Operator

Your next question comes from the line of James West with Evercore ISI.

Speaker 5

Hey, good morning, guys.

Speaker 2

Hey, good morning, James.

Speaker 7

So I wanted to just clear up 2 things on the 3rd quarter. 1, on the utilization that was a bit below what we were expecting. How much of that do you believe was kind of unplanned in your mind versus kind of planned that we just missed? And then secondarily, with the day rate increases that we've seen in the last few quarters, which have been very impressive, is that pure day rate increase? Or are we seeing the impact of perhaps dry docks or downtimes from higher day rate vessels?

Speaker 7

So just kind of thinking through kind of how we should think about average day rates moving forward. Hopefully, it's the latter that the actual day rate increase and not utilization driven.

Speaker 2

Yes. You know what, I'm going to get this over to Sam. Sam has been studying this real hard in the last Yes.

Speaker 4

Hey, James, on the utilization, the drop that we had from Q2 to Q3, there was several factors. Obviously, idle time had something to play with that. But we had dry dock days that were like 85 days higher than Q2. And then we also had, as I mentioned, DFR days. We had some engine problems in some of our boats, etcetera, that added like another 80, 81 days.

Speaker 4

In the quarter, we also moved one of our boats from Southeast Asia to Africa, which added like another 70 days of idle time. So when you add all that up, that affected utilization by a couple of percentage points from actually went down like almost 4 percentage points from Q2 to Q3.

Speaker 7

And

Speaker 2

Jason, let me add one more thing. I think part of your question related to the product mix and whether or not the product mix, the downtime had an impact on day rates. I think that there is it's not a significant impact, but the UK sector is typically and the North Sea sector broadly is a high day rate region. When that region goes through a bit of a pullback, those high day rate boats go they hit the spot market as Pierce was indicating and that spot market tends to come down pretty quickly. As a result that has an impact on day rates.

Speaker 2

And I think Pierce and his global team are working to reallocate those vessels into other large boat regions that have not been impacted like the UK sector. So I think that product mix and where they're at geographically has an impact when things like what we're talking about in Q3 occur.

Speaker 7

Okay. Okay. That's helpful. Matt, I think you guys should leave the U. K.

Speaker 7

Sector just in general for now given the profit taxes and everybody else is fleeing the region. So there's no reason to be there. But maybe a longer term question as we go into 2025. I recognize that the customer base is hesitant to make decisions just right now on their plans or maybe their shorter term plans. But a lot of the plans are also long term deepwater projects too, which I would assume you have much better visibility on that versus short term, maybe construction or even wind farm or shallow water plans, what are they telling you about when those decisions will be made?

Speaker 7

I mean, is this a, hey, we're going through a budget process right now, we'll let you know in a month or so? Or is it we're going to let you know as we start the next year? What's the timing impact on when you'll have when that visibility starts to clear out?

Speaker 3

Yes. James, it's Piers. Good question. I think by the end of this year, we'll start seeing a little bit more visibility on some of those longer term plans. I mean, we haven't seen as we've mentioned, we've not seen any indications around really suggesting canceling anything.

Speaker 3

I think the noise around election cycles and things like that obviously has maybe delayed some of the decision making processes from the higher ups in our customer base. But there's been no pullback in terms of for instance, if you look at the Orange Basin, obviously, a lot of noise and successes down in Namibia, but we're supporting a number of drilling campaigns down there at the moment. And all of the people we're supporting are saying, look, we'd like to get development first oil in there 26, 27, which is a pretty that's pretty aggressive move from those companies. So still very positive sort of indicators saying in the Caribbean as well. There's a slight we've spoken about some pauses in drilling in this year on some projects.

Speaker 3

Again, we're expecting people come back, maybe a few exploration wells next year in that region and then starting to install more FPSOs into that region sort of 2026 and 2027. So we're not seeing any real indicators of anybody sort of pulling back or canceling anything. So we're very positive that those projects will continue. And obviously Brazil, it's better to ask moves at its own pace, but they're certainly not slowing down on their side. So yes, I think by the end of this year, we'll start to hear more publicly from the higher ups and the IOCs certainly as to their sort of longer term plans and from that side.

Speaker 7

Got it. Okay. Thanks, Peter. Thanks, guys. Thank

Speaker 4

you.

Operator

Your next question comes from the line of Frederic Steyn with Clarksons Securities.

Speaker 10

Quentin and team. Hope you are all well and thanks for all the color that has been given on 2025 so far, even if it's difficult to guide in detail at this moment. My question actually relates to capital allocation and even more so on the M and A side. You guys have talked about that you're willing to do accretive M and A transactions if the right transaction presents itself and you obviously have a great track record of doing so in almost any type of market. But you're also one of the fewer listed players.

Speaker 10

So your equity price or stock price will track sentiment at any given time. So I was wondering if has that enabled or disabled any type of M and A transactions? Or if you were to have discussions with players that are not listed, are they also do they also understand that in a way private prices or price of private companies also fluctuate with sentiment? Interested to hear anything you have to say on the matter. Thanks.

Speaker 2

Hey, Frederic. Thanks for your question. We've been most of these M and A transactions that we have done and this is probably not a surprise to anyone, they take more than a year to get done. I mean, a lot of these transactions germinate and on and off again and take a while to get done. And during that process, the price has been as high as 110, it's been as low as 55.

Speaker 2

And so it's been really volatile time. And they know that because most of who we're speaking with are sophisticated, some of them private equity, a lot of them because we're the one of the only listed companies out there, they're marking to us. So they're feeling the pain as well. So I think it should work its way through, but it doesn't work its way through as quickly as you might think and into people's thinking and so forth. And of course, sometimes people feel like the market gets dislocated and therefore maybe exaggerates the downside.

Speaker 2

And so they don't want to price at that particular point. So you have to find a price in between the prices and it still has to make sense for Tidewater longer term from a long term value perspective. So I would tell you that it complicates the deal process. A stable price helps the deal process, a volatile price doesn't, But most of the people we're dealing with are very sophisticated and they need time to adjust to it, but they will.

Speaker 10

That's very helpful. Just one quick, not really a follow-up, but a different question. Are you able to, at this point, say something about the amount of contracted backlog and contracted days that you have so far for 2025, kind of similar to what you did for the Q4 in the prepared remarks?

Speaker 1

Hey, Frederic, it's West. We're prepared to give a 2025 backlog. Right now, our backlog for 2025 is about $855,000,000 but providing incremental detail around that I'm not sure we're prepared to put out there at this point, but that is our 2025 backlog as we sit here today.

Speaker 10

That's super. Thank you for good answers. And have a good day.

Operator

Your next question comes from the line of Don Crist with Johnson Rice.

Speaker 9

Thanks for letting me back in guys. I just wanted to ask one question on the debt covenant that you tried to get changed. Is the new plan going forward just to hold cash on the balance sheet and take those out at first call January 2026? Or any thoughts around using cash that you can't find an M and A used for today to pay off the term loans or anything else that you could kind of extinguish that kind of 10% debt?

Speaker 2

I'd much rather just repurchase shares honestly. So if I could get a deal done, I would do that. Similar to the answers to some earlier questions, there's process that anyone would prefer. But absent that, I don't feel the need to delever at all. So I would return that to shareholders in the most constructive way and of course, the path that we found over the last year is repurchasing shares.

Operator

I will now turn the call back over to Quintin Meen for closing remarks.

Speaker 2

Okay. Well, listen, no closing remarks from me. Thank you, Novi. We look forward to updating everybody again in February.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Tidewater Q3 2024
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