Tidewater Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 1, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by, and welcome to the Tidewater Inc. Q4 and Full Year 2023 Earnings Conference Call. I would now like to welcome Wes Goetjer, Vice President of Finance and Investor Relations to begin the call. Wes, over to you.

Speaker 1

Thank you, Mandeep. Good morning, everyone, and welcome to Tidewater's Q4 and full year 2023 earnings conference call. I'm joined on the call this morning by our President and CEO, Quentin Nien 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 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, March 1, 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 press release is located on our website at tdw.com. And now with that, I'll turn the call over to Quintin.

Speaker 2

Thank you, Wes. Good morning, everyone, and welcome to the Q4 2023 Tidewater earnings conference call. Before I start with my prepared remarks on the business, I'd like to mention that we've reorganized the call a bit. I'll begin today's call, but before turning the call over to Pierce and Sam for their prepared remarks, I'll hand the call back to Wes for some perspective on vessel supply and our forward looking guidance. I'd like to start the call today by highlighting some of the achievements Titan Water realized during 2023 and how that drives our outlook for 2024.

Speaker 2

The past year was by all measures a successful year marked by consistent growth and robust financial results. We generated over $1,000,000,000 in revenue for the year. Revenue and gross margin improved each quarter throughout the year. We acquired 37 PSVs solidifying Tidewater as the clear global OSV leader and the leading provider of hybrid OSVs. Printed and leading edge day rates increased each quarter of the year.

Speaker 2

We generated $111,000,000 of free cash flow during the year, over 80% of which was generated in the second half of the year. And we initiated a share repurchase program during the Q4, repurchasing $35,000,000 worth of shares. We are pleased with the many successes we realized during 2023 and we believe we will have even greater success in 2024. As strong as 2023 was from a financial and operational perspective, we are still not back to a place where the underlying economics on vessels justify new buildings. As a result, given the continued lack of new building orders on a global basis, we believe continued tightness in the global OSV supply will allow for continued day rate increases throughout 2024 and into 2025.

Speaker 2

Leading edge day rates improved nearly 40% during 2023, ending the year at 29,511. We anticipate that we will continue to see day rate momentum in all of our vessel classes driven by healthy demand across a variety of end markets and persistent tightness in vessel supply. With realized day rates improving each quarter of the year and for the average day rate to improve by approximately $4,000 per day on a year over year basis. As the financial performance of the business continues to improve, we expect to continue to generate substantial free cash flow throughout the year. We've repurchased $35,000,000 worth of shares during the Q4 of 2023, representing the maximum amount of repurchases permissible under our existing debt agreements and about 60% of our free cash flow generated during the Q4.

Speaker 2

Given the constructive outlook for the year and our view on the intrinsic value of the business, the Board of Directors has authorized the company to repurchase up to an additional $48,600,000 of the company's common stock. The new authorization represents the maximum permissible amount of share repurchase under our existing debt agreements. As previously communicated, we will update the repurchase program quarterly based on the utilization of the program and the amount permitted. More broadly, as we think about capital allocation throughout 2024, the share repurchase program will be an important feature of how we allocate our capital. Acquisitions remain a capital allocation priority as we do believe there are viable candidates that can be acquired on an accretive basis that will allow us to leverage our shore based infrastructure and to take advantage of the economies of scale that the Tidewater platform provides.

Speaker 2

We will continue to weigh the relative merits of given any given acquisition against the value of the share repurchases and pursue the most accretive alternative. We remain mindful of our balance sheet and we want to maintain a clear line of sight to a net cash position within the 6 quarters. Ultimately, our goal is to establish a long term debt capital structure more appropriate for a cyclical business and we will act opportunistically to do so as we progress through the year. In summary, we are very pleased with the performance of the business and with our achievements throughout 2023, And we are excited for the opportunities that lie ahead for us in 2024. Our primary objectives for the coming year are geared towards increasing cash flow generation through day rate and utilization expansion and to opportunistically deploy this cash into the highest value alternatives to drive even higher shareholder returns.

Speaker 2

We remain highly confident that the global shortage of vessels combined with increasing demand from drilling, subsea construction, floating infrastructure, existing production and offshore wind activities, all combined provide a compelling backdrop to accomplish our financial and operational objectives for 2024. And with that, let me give the call back over to Wes for more color on our view of future vessel supply and more commentary on our financial outlook for 2024.

Speaker 1

Thank you, Quintin. As we've observed over the past few years, the recovery in our industry and our business has been largely driven by the limitations of vessel supply. Demand is certainly more constructive than it was during the depths of the pandemic. The vessel supply has historically been the primary driver of the financial health of our business. As we survey the landscape of future vessel additions, there are multiple factors that provide us confidence in our outlook, not only for 2024, but for the intermediate to long term.

Speaker 1

1st, the current order book remains at an all time low with a minor number of vessels added during 2023. This is clearly a supportive indicator of limited near term supply additions. 2nd, shipyard capacity remains a fraction of what it once was during the recent peak of shipbuilding capacity in the mid-2000s, with many remaining shipyards out of capacity until at least 2026. This is a particularly relevant data point as the build time to complete an OSV is estimated to be between 2 3 years. The combination of limited shipyard capacity and the lead time to construct a new vessel provides for a significant runway of time before a material number of newbuild vessels could deliver and hit the water to alter the supply picture.

Speaker 1

Additionally, as we look out over the longer term, the aging of the existing fleet of vessels and associated attrition will begin to become a real factor impacting global vessel supply. We anticipate that between now and 2,035, nearly 1300 active OSVs or about 40% of OSVs currently on the water will age beyond 25 years, an age of which many vessels have historically reached the end of their economic lives. It is quite possible that some of these vessels will work beyond 25 years, but vessels ultimately do have a finite life. Vessel build quality and maintenance programs over the course of a vessel's life are the primary factors of the ability to extend the useful life of a vessel beyond 25 years. Given some of the headwinds related to new builds, we're confident in the intermediate to long term supply outlook providing a tailwind for vessel owners.

Speaker 1

Looking forward in 2024, we reiterate our full year guidance of $1,400,000,000 to $1,450,000,000 of revenue and a 52% gross margin. Our backlog currently sits at about $1,100,000,000 with 75% available vessel days contracted for the year, with our largest classes of PSVs and anchor handlers having most exposure to contract repricing opportunities throughout the year. We anticipate revenue to increase modestly in the Q1 and decrease each quarter throughout the year with a meaningful move up in both the second and third quarter similar to what we saw in 2023. Gross margin is likewise expected to improve every quarter of the year starting at 45% in Q1 and finishing at 56% in Q4 for an annual average gross margin of 52%. With that, I'll turn the call over to Piers for an overview of the commercial landscape.

Speaker 3

Thank you, West, and good morning, everyone. Before I talk about the market and put some of Quentin and West's comments into a wider global context, I wanted to mention that we'll be releasing our 4th sustainability report next week. This report is a global team effort, and I would like to take this opportunity to thank everyone within the Tidewater team for their hard work and commitment helping to put this report together as we continue to showcase to all our stakeholders our historical as well as our future commitment to sustainability. Please look out for the report. As Wes has just illustrated, limitation on vessel supply has been one of the key determinants allowing us to drive rates so dramatically upwards compared to previous industry up cycles over the past few years, culminating in our composite Q4 2023 leading edge day rates, new term contracts, ending the year at a very healthy $29,511 per day.

Speaker 3

But hand in hand with limited supply, we also saw increased demand across all regions and all industry sectors in which we operate. And with no sign of any abatement in demand expected through 2024, the future looks very bright. In the rig market alone, utilization is expected to hit 96% globally during 2024 and the active rig count is predicted to increase by a further 6% during the year. Over the last few months, we've already seen some clear signs that we can expect 2024 to continue to be a strong market for the OSCE space. On the rig side, we saw continued upward momentum on dayrates, with notably the 1st drillship dayrate over $500,000 per day being secured in West Africa for a short term commitment, but still a good indicator of where the rig market is expected to go over the next few years.

Speaker 3

In addition, Petrobras opened their last public PSV tender in January and for the foreign flag 4,500 deadweight class of vessels, which are similar to our 900 Square Meter Class of vessels. Offer levels went from $41,222 per day up to $64,982 per day with the majority of the boats offered starting with a 5. Again, a very solid early indicator on where the market is expecting day rates for OSVs to move during the year. Rather than go through specific regions, which Sam will cover in greater detail, I wanted to focus on how surplus of vessels really helped to deliver the $4,500 per day improvement that we managed to achieve between Q4 2022 and Q4 2023. During 2023, we stuck to our short term chartering strategy allowing us to push day rates and to keep rolling our vessels as quickly as possible onto new contracts and onto higher day rates, as well as staying focused on improving contract terms on our new contracts.

Speaker 3

While all vessel classes contributed towards the increases, our 2 largest classes of boats saw the highest rate increases as the year progressed. Our plus 900 square meter class of PSV jumped from $18,500 per day in Q4 2022 to $23,000 per day in Q4 2023. And our largest 16,000 BHP ATS class jumped $6,480 per day during the same time frame, with both classes in high demand to support the surge in both the drilling and subsea construction markets. Whilst our 2 largest vessel classes saw the biggest increases in rates during 2023, we have really started to see some positive impact on day rates on the rest of our fleet, particularly on the slightly smaller 800 square meter class of vessels where we saw leading edge dayrates in Q4 getting above $40,000 per day levels in certain regions, which is almost in line with leading edge day rates we've achieved for the biggest sister vessels. For 2024 and beyond, we will of course remain focused and disciplined on continuing to push rates and improving the contract terms that we enter into with our customers to make them more equitable for both parties and more in line with the realities of the marketplace we are in today.

Speaker 3

Overall, as mentioned by Quintin, we're very pleased with how the market continued to move in the right 2024 and into a sustained period of growth for the OSV space into the foreseeable future. And with that, I'll hand over to Sam. 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 discuss some key points that make up these results. I will begin by highlighting the full year activity and then turn to the quarterly consolidated and segment results. For the year, we generated revenue of $1,000,000,000 compared to $648,000,000 in 2022, an increase of 56%. The increase in day rates, the addition of the Solesat vessels in July and a full year effect of the Swire fleet were the main drivers to the revenue increase.

Speaker 4

Gross margin for the year was $449,100,000 compared to $248,300,000 in 2022. In 2023, our net income was $97,200,000 compared to a net loss of $21,700,000 in 2022. Operationally, average day rates improved more than $4,000 per day for the full year and gross margin increased by 6 percentage points year over year. Adjusted EBITDA was $386,700,000 for 2023 compared to 166 $700,000 in 2022, an increase of approximately 132%. We also generated 111 $300,000 of free cash flow, an increase of $60,800,000 or 120 percent from 2022.

Speaker 4

We ended the year with a $35,000,000 buyback of 590,499 shares of our common stock at an average price of $59.29 2023 was a breakout year and we are pleased to report the success we achieved. I would now like to turn our attention to the quarter. As in the past, my discussion will focus on the sequential quarterly results. For the Q4, we reported net income of $37,700,000 or $0.70 per diluted share compared to net income or 26 net income of $26,200,000 or $0.49 per diluted share for the 3rd quarter. Our revenue for the 4th quarter was $302,700,000 up $3,400,000 from the 3rd quarter revenue of $299,300,000 The increase resulted primarily from an increase in average day rates.

Speaker 4

In addition, we also had the full quarter effect of the Solstad acquisition that contributed 5 additional days of revenue. Average day rates increased 1% from $17,865 per day in the 3rd quarter to $18,066 per day in the 4th quarter. Active utilization increased marginally to 82.4% compared to 82.1% in Q3. Gross margin percentage for Q4 increased to 47.2%, up from 44.7% in Q3, due in part by the increase in revenue, coupled with a decrease in operating costs. Of note, Q4 2023 gross margin was nearly 10 percentage points higher than Q4 2022.

Speaker 4

Operating costs for the quarter were $159,900,000 a decrease of $5,800,000 from Q3, principally driven by lower repair costs and lower fuel costs as we mobilized fewer vessels in the quarter. In addition, the costs associated with the Solstad acquisition integration decreased as we quickly transitioned the vessels into Tidewater Management. As a result, our vessel operating cost per day declined 3.1 percent to $7,894 per day in Q4 compared to $8,148 per day in Q3. We sold 4 vessels during the 4th quarter for net proceeds of $5,900,000 and recorded a net gain of $4,200,000 on the sale of these vessels. We generated operating income of $63,100,000 for the quarter compared to $55,700,000 in Q3.

Speaker 4

The increase is due to several positive factors, including higher revenue, the decline in operating costs and an increase in gain and sale of assets, offset slightly by higher G and A expense. G and A expense for the quarter was $24,700,000 $3,700,000 higher than Q3 resulting mainly from personnel cost adjustments. For the year, our total G and A cost was $95,300,000 which is $6,600,000 less than 2022, primarily due to higher transaction costs incurred related to the Swire acquisition. For 2024, we are projecting our G and A cost to be $104,000,000 of which $13,600,000 is related to non cash stock compensation. In the quarter, we incurred $24,100,000 of deferred drydock costs, slightly higher than our projected amount due in part to delayed drydocks and timing of projects.

Speaker 4

In the quarter, we incurred 10.56 dry dock days, which affected utilization by 5%. For the full year, we incurred 3,386 dry dock days affected utilization by 4.6% and incurred a cost of 97,400,000 dollars Writeout cost for 2024 is expected to be approximately 127,000,000 In Q4, we also incurred about $8,400,000 in capital expenditures related to new build vessels, vessel modification and IT upgrades. For the full year, we incurred $31,600,000 in capital expenditures and we expect to incur approximately $21,000,000 in 2024. We generated $61,000,000 of free cash flow this quarter, which more than doubled the Q3 amount, driven by strong cash flow from operating activities. In 2024, we do expect to continue to invest in working capital as revenue continues to grow.

Speaker 4

However, we will continue to manage this as tightly as possible. During the Q4, we sold the last remaining vessel from assets held for sale, effectively ending the program. I would now like to focus on the performance of the regions. Our Americas region reported operating profit of $16,200,000 for the quarter compared to $12,600,000 in Q3. The region reported revenue of $68,400,000 in Q4 compared to 70,700,000 dollars in Q3.

Speaker 4

The region operated 37 average vessels in both quarters. Day rates increased 4.4% to $24,524 per day in Q4 from $23,495 per day in Q3. However, active utilization for the quarter was down to 81% from 86.3% in prior quarter. The improvement in operating profit was due primarily to a decrease in operating costs resulting from reduced crew costs, lower repair and maintenance costs and lower Solstad integration costs. For the 4th quarter, the Asia Pacific region reported an operating profit of 11 $3,000,000 compared to $14,600,000 in Q3.

Speaker 4

The region reported revenue of $38,600,000 in the 4th quarter compared to $39,000,000 in the prior quarter. The region operated 19 average vessels, which was up 1 vessel compared to Q3. Day rates declined slightly to $25,378 per day in Q4 compared to 25,860 dollars per day in Q3 and active utilization decreased to 86.6% in the quarter compared to 91.3% in Q3. The decrease in operating profit was due in part to a softer spot market, which decreased revenue slightly and higher operating costs due to the mix of vessels working in Australia, which has a higher cost structure. For the Q4, the Middle East reported an operating profit of $2,100,000 compared to an operating loss of $1,100,000 in Q3.

Speaker 4

Revenue increased almost 10% in the region to $38,100,000 in the 4th quarter compared to $34,100,000 in prior quarter. The region operated 45 vessels in both quarters. Day rates increased marginally to $10,855 per day in Q4 compared to $10,544 per day in Q3. Higher active utilization increased substantially to 85.6% in Q4 from 79.8% in Q3 as we had less vessels mobilizing in the quarter. The increase in operating income was due primarily to higher revenue, coupled with lower operating costs, mainly fuel expense associated with the lower mobilization days.

Speaker 4

Our Europe and Mediterranean region reported operating profit of $13,800,000 in Q4 compared to $9,600,000 in Q3. Revenue increased to $80,700,000 compared to $78,900,000 in Q3, driven mainly by the full quarter effect of the Solstad vessels. The region operated 51 vessels in the quarter, which was an increase of 1 vessel from Q3. We saw a small decline in day rates to $19,061 per day compared to $19,105 per day in Q3 and active utilization increased marginally to 89% compared to 88.8% in Q3. The increase in operating profit for the quarter was mainly driven by higher revenue coupled with lower operating costs as we saw integration costs decrease as we transition most of the Solstad vessels into our system by the end of November.

Speaker 4

Our West Africa region reported operating profit of $27,400,000 in Q4 compared to $28,400,000 in Q3. The market in this area continues to remain strong as revenue continues to maintain its upward trend. Revenue for Q4 was 74 $600,000 compared to $73,700,000 in Q3. The region operated 67 vessels, down 2 vessels from Q3. Day rates increased by 4% to $16,356 per day in Q4 from $15,772 per day in Q3 and active utilization also increased to 74.8% in Q4 from 73.9% in Q3.

Speaker 4

The decrease in operating profit from Q3 resulted mainly from higher dry dock amortization costs. In summary, we were pleased with our Q4 results. Q4 results have typically been below Q3, but this quarter growth outpaced seasonality. Finally, I do want to thank our teams for the successful integration of the Solstad vessels into our business and systems. This was a lot of hard work, but we have a talented and dedicated group of individuals.

Speaker 4

In the last 2 years, we have successfully integrated 2 significant acquisitions as we continue to grow our business. We are pleased to see continued increases in revenue driven by our acquisitions and the higher demand. Are excited about what we see developing for 2024 and beyond. With that, I'll turn it back over to Quinn.

Speaker 2

Thank you, Sam. 2024 will be a year dedicated to solid execution. We led the industry in reducing capacity during the downturn by disposing of more than 220 older vessels. We have led the industry by doing major acquisitions as the industry has begun to recover. And we will lead the industry in setting the standard for capital discipline.

Speaker 2

And with that, Monty, we will open it up for questions.

Operator

Our first question comes from the line of Frederic Steen with Clarksons Securities. Please go ahead.

Speaker 5

Hey, Quintin and team. Thank you. Hopeful as well and thank you for taking my question. Or two questions, actually. First, you are today reiterating guidance for the year.

Speaker 5

And I think that, at least in the written report, you say that the gross margin, first, it was the highest in 15 years now this Q4. But I do expect it to be around 56% in a year's time or the Q4 ending the year around that number. So I was thinking, are you able to give some more color on how you see that developing through the year? Should we think about it linearly so that you end up with 52% for the year as a whole? Or will there be some seasonality or other factors that would come into play to kind of skew it towards some period more than others?

Speaker 5

Thanks.

Speaker 3

That's the

Speaker 5

first one.

Speaker 2

Okay. Well, thank you for your question. Good to have you on the call today. I'll take the first stab, but Wes has done a lot of work on the forecasting. So I'll turn it over to him for additional color.

Speaker 2

But there will be the typical growth through the year. What we've seen in the last couple of years, and in fact, I think we saw it in Q4 as well, is that the growth in the business is outstripping the typical seasonality. Q4 is usually light, Q1 is usually a little bit lighter and then you get a stronger Q2 and a really strong Q3. That's generally the seasonality that we've experienced throughout the cycles. As the industry has reemerged from the downturn, the growth in day rates has been outstripping that seasonality.

Speaker 2

And I think we'll see some of that. So I do expect that we're going to see Q1 above Q4. And I do expect that we're going to see significant step ups in Q2 and Q3. And then I think Q4 will be similar to what we saw this year, which is up, but maybe just a slide over as opposed to a significant movement up. So growth throughout the year.

Speaker 2

Obviously, margins will be improving throughout the year as those day rates improve. So the day rate improvements that we're going to see that's driving those revenue increases and especially in Q2 and Q3 are going to drive the margin improvement for the year. But yes, certainly averaging 52% for the year.

Speaker 5

Yes. Thank you very much. 2nd, you have been, as you say, leading the way in terms of M and A to major transactions in the last couple of years. You say that you would weigh capital returns against potential acquisitions also in the future. Are there any sizes or minimum sizes for transactions or specific regions that you would like to target if you were to do more M and A anywhere particularly you would like to grow?

Speaker 5

Thanks.

Speaker 2

Well, we certainly focused on we've set our probably more than 15 to 20 in our analysis just because that just helps move the needle with a fleet of 220 vessels. I'm not against doing 5 and 6 vessel acquisitions, but we just get more bang for our buck with the larger transactions. I've been focused recently in the U. S, Gulf of Mexico and in Brazil, but I'm not averse to picking up vessels anywhere around the world. But those are the two areas where I feel that we're a little light.

Speaker 2

And if I could find a good opportunity in those geographies, I would probably prioritize those.

Operator

Our next question comes from the line of Connor Jensen with Raymond James. Please go ahead.

Speaker 6

Hey guys, thanks for taking my call today.

Speaker 7

Certainly.

Speaker 6

So another solid quarter of growth in the leading edge day rates up another $900 Are there any particular classes of vessels or regions driving the leading edge growth or something you expect to be particularly strong in 2024?

Speaker 3

Hi. Connor, it's Piers here. I mean, I think as we sort of said, we're very positive for 2024. I think we'll still continue to see the bigger class of ships, the larger PSVs and hand cameras driving the growth. And in terms of areas and regions, everywhere looks pretty positive.

Speaker 3

I mean, obviously, where the vessels that those class of vessels tend to work is Africa and the Americas tend to be the sort of driving areas, but also down in Asia Pac as well looks very positive as well. So we don't see any slowdown anywhere, but we expect the larger class of vessels to really continue to drive the market with the other ships following behind.

Speaker 6

Got it. Great. And then just lastly, is there any update on the down for a period of time this quarter versus 3Q? Is that still elevated? Or is this kind of returning back to the historical levels?

Speaker 4

Hi, this is Sam. So the down for repair days in Q4 compared to Q3, they were still pretty much equal, maybe a little lower than Q3, but you didn't see the impact dollar wise. I mean, they were small repairs, but I mean, the days were still slightly elevated from the Q3 amount.

Speaker 5

Got it.

Speaker 6

Thanks guys. We'll turn it back.

Operator

Our next question comes from the line of David Smith with Pickering Energy Partners. Please go ahead.

Speaker 7

Hey, good morning. Congratulations on a phenomenal year. Thank you for taking my question.

Speaker 2

Certainly, Jason.

Speaker 7

So one of the things for the offshore rig market has been extending contract lead times. I'm curious what you're seeing on that front, right? So if an operator signs a drillship to start working in April 25, Are they looking to sign vessel support too or is that something they'll just worry about later?

Speaker 3

Yes. Hi, David. It's Piers again. So I mean, we're seeing obviously our operators or our customers looking to fix that for the rigs. I would say, I think I might have mentioned this on the last call.

Speaker 3

We tend to still see they leave a little bit late for us, which works to our advantage in many ways because it tightens up the market because we can go slightly shorter. But no, there's certainly a few of some of the more forward thinking customers who are starting to realize that there's a lack of supply on the larger platform supply vessels in particular. So they're coming to talk to us a little bit. But no, generally, they haven't the majority haven't really caught on still. So that works to our advantage.

Speaker 3

So we're able to come in and push the rates. But no, it's the focus tends to be on the rigs rather than on the boats still a little bit.

Speaker 7

Appreciate that. And sorry if I missed it, but regarding the leading edge rate, is that kind of the same framework given on prior quarters? Or that's the average rate of new contracts signed representative of the fleet mix? And any color on average duration?

Speaker 3

Yes, that's correct. And the average duration last quarter was 9 months on contracts on the new contract side.

Speaker 7

Perfect. I'll circle back in the queue. Thank you.

Operator

Our next question comes from the line of Frederick Steen with Clarksons Securities. Please go ahead.

Speaker 5

Hello again. One thing I wanted to circle back on. You mentioned in your prepared remarks about or I think

Speaker 4

it was

Speaker 5

you, battle fleets being older and older and fair amounts actually hitting that 25 year, call it, limit over the next 10 ish years. Are you currently in what I would consider a very strong market already seeing that operators are changing their requirement? Or are they having less stringent requirement today in terms of age, crews, flags, again, depending on region compared to what they have before just because they're in a situation where securing vessels is hard at least periodically? Or are they still following preferences that they might have had historically, strictly? Thanks.

Speaker 3

Hi, Frederic. It's Piers again. There's definitely some relaxation towards age. But with that comes the expectation of our customers as they want to work with a Tier 1 operator who can operate safely and has some control of its supply chain and maintenance and all that side. And there's not a huge amount of our competitors perhaps who have that sort of strength that we have.

Speaker 3

So it comes as a sort of twofold discussion that they have no choice but to relax a little bit on some of their age requirements. But with that comes a lot of other expectations from the customer base that they expect to be supported by a Tier 1 operator like Tidewater. So yes, there is some relaxation and but they don't really have much choice on that. And some customers have a more relaxed than others, but yes. Just a quick follow-up

Speaker 5

on that, and that's super helpful, Piotr. For let's say that you and some competitor have a rig sorry, not a rig, but a vessel that's a bit on the old side compared to what an operator would prefer. Are you as with the Tidewater system backing that bid, able to actually get the preference for the contract and also maybe a premium on that contract versus what less trustworthy, less loaner we would get on a similar vessel just because you are part of the system that you're part of?

Speaker 3

I sincerely hope so, yes. You pay for a quality operator like Tidewater, so we charge appropriately.

Speaker 5

Super. Thank you so much again for taking round 2 of the questions. I wish you all a good weekend when that time comes. Thanks.

Speaker 7

You too. Thanks.

Operator

Our next question comes from the line of David Smith with Pickering Energy Partners. Please go ahead.

Speaker 7

Hey, I had that same question, but I'll ask one more. Thanks for letting me back in. So I really appreciate the commentary about the constraints for new vessel supply. And just thinking about other angles to address growing demand, when we were looking through the list of laid up vessels across the industry, one thing that struck me was a large number of vessels that looked like they were owned by entities that we can't tell are active vessel managers. And maybe that data is wrong or I'm missing something, but I'm curious if you've seen anything notable on the vessel M and A front with laid up vessels being acquired by active managers looking to grow their fleets?

Speaker 7

Hi,

Speaker 3

it's Piz again. No, we haven't really. I mean, most of the viable acquisitions that and one ship type of deals were done probably in sort of 2022 by people picking up vessels. But our view is that what's stacked and laid up today has been there for 5 plus years and is basically obsolete and won't be coming back into the marketplace. 1 or 2, I'm sure will make their way back.

Speaker 3

But the majority of what you see stacked and laid up has been there for a long, long time and it's going to be very, very difficult to bring those ships back out into the marketplace.

Speaker 7

Perfect. That's all for me. Thank you.

Operator

Our next question comes from the line of Don Crist with Johnson Rice. Please go ahead.

Speaker 8

Good morning, gentlemen. Just one balance sheet question for me, a lot of other topics have been covered. But as we look at free cash flow allocation, should we think or model some debt repayment in that? Or would you rather just build cash and kind of leave that debt on the balance sheet as you search for M and A and other kind of uses for that free cash flow?

Speaker 4

Hi, Don. The debt is, I guess, amortized on the balance sheet. But as far as free cash flow, the free cash flow we report is unlevered. But yes, we do have some amortizations running through the debt for 2024.

Speaker 2

But in general, I don't see a need to delever. So it's certainly not a priority. As I think about the capital allocation waterfall, I certainly would like to find value accretive acquisitions and we'll continue to look for solid opportunities. But right now, I'm real comfortable with the leverage of the business, especially where we're at in the cycle. The only thing I would probably change on the debt capital side would be just firming out the debt a little bit longer.

Speaker 2

And my hope is that the capital markets in the U. S. Will be constructive during 2024 and we'll be able to do some of that. But we do have, as Sam stated, some principal amortization, but that's a requirement under the debt agreements and certainly not anything that we would elect to do.

Speaker 8

Okay. And as far as size of

Speaker 5

M and A, are you

Speaker 8

I guess you're not really limited as to a certain dollar amount, but is there a size that you would target? Would you target 5 boats in the Americas or something like that? Or would it be a much bigger deal than

Speaker 2

that? We generally prefer bigger deals. But if we can't find bigger deals, doing smaller deals is certainly acceptable. Very often, it's the same amount of work to do 10 boats as it is to do 40 boats. And if you can get a comparable quality of fleet, but a larger number of vessels, I would definitely take that.

Speaker 2

But if facts and circumstances will dictate it, I'm not against it, but I have been focused on larger fleets over the past few years.

Operator

There are no further questions at this time. This concludes today's call. You may now disconnect.

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Earnings Conference Call
Tidewater Q4 2023
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