Tidewater Inc Q2 FY2022 Earnings Call

Good morning. My name is Chantel, and I'll be your conference operator today. I would like to welcome everyone to the Tidewater Q2 2022 Earnings Conference Call. Please note that this call is being recorded.

Thank you, Chantel. Good morning, everyone, and welcome to Tidewater's earnings conference call for the three and six months ended June 30, 2022. I'm joined on the call this morning by our President and CEO, Quintin Kneen; our Chief Financial Officer, Sam Rubio; our General Counsel and Corporate Secretary, Daniel Hudson; and our Vice President of Sales and Marketing, Piers Middleton. During today's call, we'll make certain statements that are forward-looking and refer 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 comments that we make during today's conference call. Please refer to our most recent Form 10-K and 10-Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, August 5, 2022. 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. A reconciliation of GAAP to non-GAAP financial measures can be found on our website at tdw.com and is included in yesterday's press release. And now with that, I'll turn the call over to Quintin.

Thank you, West. Good morning, everyone, and welcome to the Second Quarter 2022 Tidewater Earnings Conference Call. I'm pleased to say that the second quarter continued a pace of rapid improvement in the offshore vessel market and marked an inflection point in the market that we have been anticipating for some time now. We've talked about momentum building in the business. The second quarter marked the tipping point in vessel supply and demand dynamics and a significant step-up in our operational and financial results. I'll provide more details on some of our regions and vessel classes. In short, the most important indicator of our business strength, day rate, increased by nearly $1,900 per day sequentially. With 172 working vessels, that's a big move for one quarter. You may recall that we've previously discussed an increase of about $1,500 per day over an entire year during a typical upcycle. This sequential quarterly uptick is the most telling signal of the step change we're experiencing in the market today. During the second quarter, we closed on the acquisition of Swire Pacific Offshore. I'm pleased to report that the integration is progressing well with some early successes, and that the SPO fleet contributed $43.2 million of revenue during the second quarter post-closing, generating vessel-level cash margins in line with our consolidated vessel-level cash margin of 38%. For the quarter, the legacy SPO general and administrative costs totaled approximately $3.9 million, which translates to $5.2 million on a full-quarter run rate. Total G&A burden for legacy SPO in 2021 was about $35 million. We are confident we will achieve our targeted goal of $20 million in G&A synergies over the next nine months and more broadly will achieve total target synergies, including both G&A and operational expense synergies of approximately $45 million over the next 12 months. I want to thank both the legacy SPO employees and our legacy Tidewater employees for their efforts in ensuring the success of this acquisition and integration. Looking back at the second quarter, revenue increased significantly, up 55% compared to the first quarter. Total revenue rose to $163.4 million in the second quarter from $105.7 million in the first quarter, which included the contribution from the recently acquired SPO vessels starting in late April. On a normalized basis, revenue per active vessel was up approximately 18% sequentially, while average day rate was up about 17%, with the increase in revenue almost fully attributed to the rise in day rates. Vessel-level cash margin expanded over 4 percentage points to 38.2%, well above our 30% target discussed in recent quarters and nearly 11 percentage points higher than the second quarter of last year. Across our various regions, we experienced broad-based momentum. My focus is on a per-vessel perspective to avoid distortions from the absolute impact of the SPO acquisition, but Sam will provide more details on the absolute changes later. Our fleet in Europe and the Mediterranean led the way with a 30% sequential improvement in day rates, seeing significant gains in the U.K., Norway, and Egypt. The second quarter is typically strong seasonally in this segment, particularly in the North Sea, due to favorable spring and early summer weather. Vessel-level cash margin improved considerably during the quarter, rising 14 percentage points to nearly 41% and up nearly 20 percentage points from recent lows at the end of 2021. Utilization dipped slightly, more as a reflection of our choice to engage in the spot market rather than any weakness in the overall market. The spot market has more frictional unemployment, and we aim to offset that with quicker day rate increases. We've chosen to be more aggressive in the spot market than in previous periods given the current market strength, as reflected in the day rates achieved and the corresponding margin expansion. Additionally, we had one more vessel on average working during the quarter. West Africa showed strong momentum as well. As you might recall, we essentially doubled the size of our OSV fleet in Africa through the SPO acquisition. Day rates improved 21% sequentially to about $10,700 per day, a significant increase compared to what we have seen in recent memory. Vessel-level operating margin slightly improved to 42% sequentially since this region was the largest beneficiary of the new SPO vessels and their existing cost structure. Given the scale of operations from the legacy SPO fleet in West Africa, much of the operational expense synergy we targeted will ultimately benefit this region, aiding continued margin expansion. Average active utilization increased nearly 4 percentage points to 83% in the second quarter. The legacy SPO fleet consistently exhibited high utilization, testament to the quality of the vessels, and we expect to drive utilization and margin expansion further with the anticipated operational expense synergies in the region. Moving to our Middle East region, I want to point out that this segment was previously titled Middle East and Asia Pacific and included a limited number of vessels we had operated in Asia Pacific before acquiring SPO. Due to the significant presence created in Asia Pacific through the acquisition, we decided to separate the Middle East into its own segment and establish Asia Pacific as a new distinct segment to provide clearer disclosure about these sizable markets. In terms of the quarter, one intriguing signal concerning the global supply vessel market's tightness is the price improvements noted in the Middle East this quarter. Historically, the Middle East market has consistently accommodated a large number of low to medium specification vessels, yet it has been challenging to achieve day rate increases due to relative oversupply. However, in the second quarter, the average day rate rose by 16% to about $9,500 per day, representing a significant increase compared to averages over the past several years. Vessel cash margin approached 30%, rising almost 4% and exceeding historical averages. As for the Americas segment, average day rate improved about 7% sequentially, although regional mix obscured the improvements within the quarter and other interesting markets in that segment. The Caribbean portion of the Americas continued to show strong momentum, with average day rates up about 25% sequentially. In Mexico, which at times mirrors the Middle East market with a relatively small vessel market dominated by a single, day-owned customer, we saw nearly double-digit percentage increases. The U.S. Gulf of Mexico remained roughly flat due to the limited number of vessels in the area, while the overall day rate improvement for the Americas segment, though somewhat modest comparatively, began to demonstrate inherent operating leverage during the second quarter. Utilization improved by nearly 11 percentage points. Alongside the day rate increase, we boosted revenue by about $9 million sequentially, with $6.5 million contributing to vessel cash margin, which increased by 9 percentage points sequentially to 43%, nearly double that from a year ago. Lastly, I’ll highlight our new Asia Pacific segment. Approximately 30% of the legacy SPO fleet comprised vessels in this geography, primarily operating in Southeast Asia and Australia. At the end of the quarter, 17 vessels were active in the Asia Pacific region. Financial comparisons are somewhat challenging this quarter due to the sizable increase in vessels and the diversity of the mix in this broad region. However, we are pleased to strengthen our presence there and are optimistic that the momentum seen in our other regions is similarly building in this area, which also offers long-term opportunities beyond traditional hydrocarbon activities, particularly in the advancing offshore wind market. Our general and administrative costs for the quarter totaled $27.8 million, which includes $7.3 million in professional fees and transaction-related expenses related to the SPO acquisition, in addition to the previously mentioned SPO-related G&A expense of $3.9 million. Excluding transaction-related fees, G&A was approximately $20.5 million for the quarter, compared to a pre-acquisition normalized G&A of $17 million in the first quarter. We expect the G&A burden associated with the added vessels and the new regional office in Singapore from the SPO acquisition to stabilize next year at around $2.5 million per quarter. Our free cash flow for the quarter was a negative $14.9 million. As previously noted, we expected free cash flow in the first half of 2022 to be impacted by significant dry dock expenses and vessel reactivations, for which we allocated approximately $33 million in the first half, including on the newly acquired vessels. We anticipate spending about $21 million on dry dock expenses in the second half of 2022. We continued to experience working capital build during the second quarter, partly due to natural working capital growth expected in a quarter with substantial revenue advancement and a significant acquisition. However, we also faced delays in customer payments, contributing about $15 million to the working capital build. We anticipate collections will improve in the third quarter and aim for our days sales outstanding to normalize by year-end. We are confident that market conditions will allow our entire fleet to be active by the end of 2022, through a mix of reactivations and the disposal of non-core vessels. During the second quarter, we made progress in disposing of vessels available for sale, selling four for total proceeds of $3.5 million. We wrapped up the quarter with nine vessels still classified as held-for-sale, including one SPO vessel from the acquisition. Vessel lay-off costs were $700,000 in the second quarter, reduced by about half quarter-over-quarter, while COVID-19-related costs fell to $800,000 in the second quarter. In summary, we are very pleased with the second quarter results. We believe the remainder of 2022 will show continued strength, with another upturn in demand anticipated moving into 2023, in what has become an increasingly constrained supply vessel market.

Thank you, Quintin, and good morning, everyone. Last quarter, we talked about some of the supply issues we are seeing that are affecting the global OSV market today and why, with our modern larger fleet of PSVs and AHTSs, we are well placed to take advantage of this continuing upturn in the market. These larger vessel classes are where we believe the supply-demand balance is almost in parity. And of those vessels that are still stacked, they have been for over five years and/or over 20 years old, and in our view, we'll find it difficult, if not impossible, to come back into the market, especially as we're still seeing limited dry docking space globally and significant long lead times for major equipment items, which we believe will further exacerbate the already tight supply-demand balance in these larger vessel classes. This quarter, I would like to focus more on the demand side globally and how that is affecting, obviously, day rates for the first half of 2022. Overall, the market remains very positive. In total, we see full year projected CapEx commitments for 2022 of $86 billion, which is up around 20% on the full year average, which bodes well for future years. Rig demand continues to improve with utilization levels across the floaters and jack-ups, almost touching 85% levels and term day rates for ultra-deepwater units almost at $450,000 per day, all of which drive the basic fundamentals of the OSV space and parlays nicely into our own fleet. Specifically on the OSV side, we've started to see the increase in demand and shortness and supply impact rates positively on the upside, with Clarksons Research reporting global one-year time charter rates for the largest PSVs at $22,000 per day levels compared to $15,000 per day levels in 2021 and one-year time charter rates for large AHTSs averaging circa $31,000 per day compared to $23,000 per day in 2021, all very positive indicators that the market is pushing rates in the right direction. Working through our various regions and starting with Europe, we've seen a very strong rebound in the North Sea and Mediterranean markets with a significant uptick in demand. Even previously mothballed projects like Jack door and the North Sea being greenlit by Shell in the U.K. government, which again bodes well for the future of the region. The large AHTS market in the North Sea hit record high spot rates of GBP 173,750 per day during June as supply for larger AHTSs remains tight. Our own recently reactivated large AHTS was able to also take advantage of this tightness in the North Sea market. In the European market, which includes the Med, where the majority of the fleet of PSVs, we were able to push rates for new contracts awarded in Q2 2022 across all sizes of assets in the region by nearly 40% compared to Q1 2022 to an average new leading day rate in excess of $17,000 per day across all vessel classes, which compares favorably to the Clarksons global OSV rate index, which saw only an 18% rise in the first half of 2022. Moving to Africa, which is now our biggest region with the acquisition of Swire, we again are seeing rising demand across the whole continent, but with particular focus in Angola, Congo, and Senegal, and with the added expectation of a significant increase in the floating rig count in the region by the end of 2023. Across the whole continent, we have a good cross-section of vessel classes from our largest 16,000 BHP plus anchor handlers to our smallest crew boats. So the region is a good indicator of where we see rates going globally for all of our vessel classes. The good news is that for new contracts awarded in Q2 across the whole fleet, we were able to again push rates by circa 84% compared to Q1, with average new leading day rates in excess of $21,000 per day. In the Middle East, Aramco remains the dominant player in the region as well as one of our key customers, but we're also seeing an uptick in tendering activity in Qatar as the region races to bring more production on stream. Aramco has been very public about bringing significantly more jack-ups into the Kingdom and in turn, came out for a large 20-plus OSV tender in Q2 to support this uptick in activity, all of which will not only tighten supply on the smaller vessel classes but will create an opportunity to continue to push rates and margin in the area. Most of our fleet in the region are on the smaller AHTS and PSV classes, but we were still able to push rates to new contracts across the fleet nearly 60% compared to last quarter. In the Americas, we saw continued high demand in Brazil in Q2, driven by Petrobras and expect this to continue throughout the year. And whilst we currently have a small footprint in the country, their requirement for larger volatile AHTSs and larger 900 square meter deck space PSVs sucks up supply elsewhere in the globe, helping to tighten the larger vessel class market globally. In Mexico, we're starting to see Pemex starting to ramp up and expect them to be a few quarters away from really getting going. In the U.S., Guyana, and Suriname, we continue to see very strong demand for rigs and vessels both in the first half of the year and going forward. Most of our Americas fleet is PSVs, and we were able to push rates in Q2 for new contracts across the whole fleet by almost 50% compared to Q1 2022 to a blended average new leading day rate of nearly USD 18,000 per day. Please bear in mind that as we mentioned in our last quarterly call that we have seen and continue to see charter rates for our large class of vessels in this region in the mid-30s to mid-40s range. Lastly, in Asia Pacific, Malaysia is one of the key drivers of demand in the region. However, we have started to see the whole region starting to play catch-up in the latter half of Q2 with gas projects being sanctioned in Australia, new licensing rounds in Indonesia, and an uptick in new wind farm projects expected to come online in Taiwan, where we have a significant presence off the Swire acquisition. Similar to Africa, we have a good cross-section of the fleet operating in the region from a large 16,000 BHP class of AHTSs and 900 square meter deck space PSVs all the way down to the smaller 4,000 to 8,000 BHP class of AHTSs. The market is probably a quarter or two behind other areas, but we are starting to see rate increases coming through on the larger vessel classes close to other regions. We expect Asia Pacific to be in line rate-wise with the rest of the world by end 2022. Overall, as mentioned by Quintin, we are very pleased with how the market has continued to move in the right direction in Q2, and we expect that positive momentum to continue into subsequent quarters. Lastly, we are really starting to see solid rate improvements across the whole fleet with new contracts in Q2 averaging nearly 50% more than in Q1 2022 or equivalent to a blended average rate of about $17,000 per day across the whole fleet.

Thank you, Piers, and good morning, everyone. I would like to discuss our financial results and highlight some key points from these results. My analysis will concentrate on comparing the second quarter of 2022 to the first quarter of 2022. As indicated in our press release issued yesterday, we reported a net loss of $25.6 million or $0.61 per share. From an operational standpoint, we observed significant revenue growth quarter-over-quarter. Our revenue for the second quarter of 2022 reached $163.4 million, which is an increase of $58 million or approximately 55% compared to the first quarter of 2022. This revenue growth was supported by the addition of the SPO vessels starting April 22 of this year, contributing $43.2 million to the revenue in this quarter. Utilization remained stable, with active utilization at 82.5%. Day rates increased by 17%, reaching $12,544 per day in the second quarter compared to $10,687 per day in the first quarter. Overall, our gross margin for Q2 improved to 38%, up from 35% in Q1. The vessel operating cost for the quarter was $100.3 million, an increase of $31.7 million from Q1, mainly due to the inclusion of the SPO vessels. The operating costs for the SPO vessels totaled $26.7 million for the remainder of the quarter after closing the transaction. The vessel operating cost per market day in Q2 averaged around $6,300 per day. This may rise slightly in Q3 until we start realizing our synergies in the second half of the year, which we expect to accelerate into the first half of next year, at which point we anticipate our operating cost per market day to decrease to nearly $6,000 per day. During the second quarter, we sold four vessels for net proceeds of $3.5 million and recorded a combined net loss of $1.3 million from these sales. We generated operating income of $1.8 million for the quarter, an improvement of $9.2 million, attributed to higher revenue and improved margin performance, largely due to the increase in day rates. Within the operating income, there is a $1.3 million loss related to asset sales. General and administrative costs for the quarter were $27.8 million, up about $9.6 million from Q1, including $7.3 million in transaction expenses associated with the SPO acquisition. Additionally, Q2 G&A costs included about $3.9 million tied to the legacy SPO costs, resulting in a full quarter run rate of $5.2 million, which is significantly below our expectation of around $2.8 million per month. We have begun to see some early success in achieving synergies and anticipate realizing the remaining G&A synergies over the next nine months. We expect our overall G&A run rate on a marketed day basis to stabilize at approximately $1,300 per day once all transaction costs are settled and synergies are fully realized. In Q2, we incurred $18.5 million in deferred drydock costs compared to $12.6 million in Q1, as expected for a heavy drydock quarter due to scheduled dry docks and vessel reactivations, which also involved some vessels from the SPO fleet. We had 20 dry docks underway during the quarter, incurring 733 drydock days compared to 547 in the first quarter, which adversely affected our overall utilization by about 5 percentage points. We expect to incur around $23 million for the remainder of the year, bringing the total to approximately $54 million for the full year 2022. We also incurred about $4.2 million in capital expenditures during the quarter, with expected CapEx for 2022 at about $13 million, including $2 million on SPO vessels as we perform modifications related to new contract demands and technology initiatives. Free cash flow for this quarter was negative $14.9 million, primarily due to significant drydock expenditures and working capital buildup. In terms of working capital, there was an increase in accounts receivable driven by the rise in revenue, despite some customers delaying payments contributing to approximately $15 million in the accounts receivable increase, which pushed our days sales outstanding beyond our typical target. We anticipate that days sales outstanding will normalize by year-end, which, along with reduced drydock spending and ongoing financial improvement, should lead to significant improvements in free cash flow in Q3 and Q4. Included in the negative $14.9 million are $4.2 million of legacy SPO tax payments. As previously mentioned, we are in ongoing discussions with Pemex regarding our outstanding accounts receivable. At the start of the quarter, we had around $13 million in accounts receivable with Pemex. During the quarter, Pemex initiated a unique bond offering aimed at reducing trade accounts payable to its vendors. We exchanged $8.6 million of past due accounts receivable for a June 2029 bond with an 8.75% interest rate priced at par. We aim to monetize this bond in the second half of 2022, at which point we will recognize the associated accounts receivable exchange. In Q4 2019, we began reclassifying vessels on our balance sheet from property and equipment to assets held for sale. To date, we have passed 86 vessels through this program. By the end of Q1 '22, there were 12 vessels held for sale valued at $8.6 million. In the second quarter, we sold 4 vessels for $3.5 million and added one SPO vessel to the assets held for sale list, which leaves us with nine vessels valued at $6.9 million. In June, we amended the share purchase agreement with Swire to correct a provision that inadvertently created a derivative from the Jones Act warrants, incurring a one-time non-cash charge of $14.2 million related to a mark-to-market adjustment concerning the warrants. I would like to turn to our regional performance. Our Americas region reported an operating income of $5.9 million for the quarter, compared to an operating loss of $82,000 in Q1. The region generated revenue of $37.5 million in Q2, up from $28.4 million in Q1. It operated 29 vessels during the quarter, an increase of 2 from Q1, including one from the SPO acquisition. Active utilization was 87%, up from 76% in the previous quarter. Day rates rose to $16,569 from $15,501 per day in Q1. The increase in operating income was driven by the rise in revenue, day rates, utilization, and the number of operational vessels in the region. Regarding our new segment, Asia Pacific, we've separated it from the Middle East region into its own segment. In the second quarter, Asia Pacific reported an operating loss of $899,000, down from an operating income of $2.2 million in Q1. Revenue for the region was $16.4 million, up from $4.9 million in the previous quarter due to the addition of the SPO vessels in April. The region averaged 18 vessels, an increase of 13 from Q1. Revenue and average vessel numbers rose mainly because of the 16 SPO vessels added. Active utilization fell by approximately 29 percentage points to 70% compared to 99% in Q1 as some vessels were taken off hire upon contract expiration. The previous utilization rate was exceptionally high, primarily because these vessels were all on term contracts. However, day rates improved to $13,748 per day in Q2 compared to $10,975 per day in Q1. The operating income was affected by the addition of the SPO vessels, which came with a legacy cost structure, compounded by the expiration of the contracts. We foresee the Asia Pacific region benefiting from targeted synergies going forward. Now, let's discuss the Middle East region. Similar to Asia Pacific, it now stands as its own segment. For the second quarter, the Middle East region reported an operating loss of $307,000, compared to an operating loss of $1.9 million in Q1. The region reported $28.4 million in revenue for Q2 compared to $20.2 million in the previous quarter. It operated at 41 vessels, an increase of eight vessels compared to Q1, with some vessels relocated from West Africa and Europe, coupled with the addition of seven vessels from the SPO acquisition. Active utilization dropped by about three percentage points to 81% in the quarter from 84% in Q1, primarily due to it being a heavy dry dock area. Nevertheless, day rates increased significantly to $9,490 per day in Q2 from $8,160 per day in Q1. The improvement in operating income was mainly due to rising day rates and the added SPO vessels, although partly offset by lower utilization. Our Europe and Mediterranean region reported an operating income of $4.3 million in Q2 compared to an operating loss of $2.4 million in Q1. Revenue increased to $32.5 million from $23.9 million in Q1. The region operated at 25 vessels during the quarter, an increase of one from Q1 as we incorporated one SPO vessel. Active utilization dipped slightly to 88.1% from 91.3% in Q1, while day rates saw a rise to $15,776 per day from $12,124 per day in Q1. The improvement in operating income for the quarter was primarily driven by increased revenue resulting from the rise in day rates. In the West Africa region, operating income was $9.3 million in Q2, compared to $3.2 million in Q1. The market in this area has steadily improved, showing six consecutive quarters of revenue growth. Revenue for Q2 totaled $47.4 million compared to $26.4 million in Q1. The region operated with 17 more vessels on average in Q2, and active utilization rose to 82.9% from 79.1% in Q1. Day rates climbed to $10,721 per day in Q2 from $8,834 per day in Q1. The increase in operating income from Q1 can be attributed to higher revenue from increased day rates and higher utilization, alongside the addition of 25 vessels from the acquired SPO fleet. In summary, we are pleased to see revenue growth bolstered by the newly acquired SPO vessels and rising day rates, as well as positive indicators in market activity. We expect both layup costs and COVID-related expenses to continue to decrease throughout 2022. We anticipate layup costs will cease by year-end and expect only modest costs going forward related to COVID issues. We are satisfied with our Q2 results and optimistic about the indicators we see for the rest of 2022 and into 2023.

Thank you, Sam. In closing, I would like to remark on what we see for the remainder of 2022 and into 2023. On last quarter's call, I expressed our confidence that the back half of 2022 would bring a meaningful uplift compared to the first half of the year. On the heels of a strong second quarter, our confidence in the second half of 2022 has not changed. We remain confident in the continued progression of day rates and utilization improvements throughout the remainder of the year. For the remainder of 2022, our revenue backlog stands at $327 million, representing fleet contracted coverage of approximately 77%. Contract coverage is fairly evenly led across all of our vessel classes with our largest class of PSVs having the most exposure to the spot market opportunities. As we move into 2023, revenue backlog stands right at $400 million, representing fleet contracted coverage of approximately 52%. Our largest class of PSVs has current contract coverage in 2023 of about 50%, representing a considerable opportunity to continue to deliver our largest class of vessels in a market environment currently experiencing substantial rate improvements. To put the strength of our day rate increase in perspective, during the second quarter, 24 of our vessels entered new contracts of various durations that will ultimately provide a nearly 50% aggregate uplift in day rates as compared to the previous aggregate contracted day rates. This compares to the 16 vessels that entered into new contracts during the first quarter that realized just over 20% pricing improvement. While there are some mix issues, it's worth noting that for our largest class of PSVs, pricing on new contracts entered into during the second quarter was in excess of 80% uplift as compared to their prior contracts. Candidly, the market is moving faster than we anticipated. And with that, Chantel, we will open it up for questions.

Just first question from my side, just to clarify, you said that the average day rate for the entire fleet was around $17,000 per day, while it says around $12,500 in the report. Can you just clarify those numbers?

Yes. I think they are rollover contracts. So, the contracts had rolled over during the quarter. We're just over $17,000, but they're all-in rate for all...

Okay. Perfect. Speaking of day rates, we've discussed this before. Even with this strong quarter, where do you expect the average day rates to be by the end of 2022?

Well, we don't have a public view that we're going to express on that at this point. But clearly, we're excited about the ramp-up that we're seeing. And we definitely have exposure to turn over our large class of our vessels, especially the larger vessels as we move into end of '22 and into '23.

Okay. Regarding your balance sheet, which I think has good leverage and a strong cash position, has your perspective changed on possibly increasing the leverage on your balance sheet? How do you plan to enhance your cash position moving forward? Is paying out dividends now more relevant than it was before? Are you exploring any investment opportunities? Could you provide some comments on this?

Certainly. I've expressed that I believe businesses should generate cash and return it to shareholders. I acknowledge that we are underleveraged for a capital-intensive company. However, we are navigating a transition after a significant contraction in our industry, and we are focused on maintaining liquidity for potential beneficial acquisitions, while ensuring we have the necessary resources until the industry stabilizes in a more positive cycle. While I recognize that we have room to leverage, we are looking for strategic opportunities to invest that capital in productive acquisitions when it aligns with our goals. I am eager to return funds to shareholders when the timing is appropriate.

I wanted to ask about how much will reactivations from competitors impact the kind of supply side for OSVs in going forward. I get that the spot market is tight right now, it sounds like, but is there a lot of spare capacity that can be reactivated relatively cheap that's going to put a hindrance on how much day rates can go up in the future?

Well, I'll give a start to answering the question, then I'm going to hand over to Piers to see if he's got any on-the-ground tactical perspective. But the economics are such that a vessel that's been laid up. As long as the vessels that remain in layup today have been laid up, it means that I think that this is very unlikely that any high-end vessel gets reactivated. We're definitely seeing reactivations on the low end, and that market was generally more oversupplied than the high-end boats when Piers was referencing a lot of tenders in the Middle East front. And those are generally low to medium stacked vessels. And so we're starting to see those large tenders from Saudi Aramco and others absorbing vessels out of Asia, which have been in layup since they delivered. And so that certainly will impact the market on those low-end vessels. But even though it will impact the market, we're still seeing some reasonable day rate increases even on those low-end boats. But let me get it over to Piers and see if he wants to add anything.

Yes, thank you, Quintin Kneen. To emphasize the larger sizes of our PSVs, we are seeing very few vessels, those around 700 square meters or more, that could potentially return to the market. The same goes for the larger 16,000 BHP class. Regarding Quintin's point, there is a chance that some smaller classes might come back, but many of those vessels have been out of service for five years. There are significant lead times for obtaining parts and performing maintenance, so while some might return, it will take time due to the supply challenges we’re facing in getting spare parts and reactivating them. Therefore, I am not overly concerned about the smaller vessels, nor do I have significant worries about the larger classes.

Okay. So following the offshore rig industry, I see a lot of contracts that have been signed recently, but these are rigs that are not actually working yet. So I would expect the demand side to continue to improve. So I mean, is that your expectation as well? Yes. And then I guess, just kind of your thoughts on, I mean if that's kind of the backdrop, where could we see day rates in '23?

I agree with you regarding demand. Over the past few years, I've observed that in 2019, there was a rise in oil prices, which led companies to focus on maintenance. As oil prices increased, the first response was to repair existing production facilities and enhance output. This trend started at the end of 2019, saw a decline during the pandemic, but reemerged towards the end of 2021 and the beginning of 2022. We've mainly seen demand for vessels driven by catching up on maintenance and seeking production enhancements. Additionally, the reactivation of rigs and the construction of offshore wind farms are contributing to demand, which we expect to see in 2023. While I won’t speculate on rate trends for 2023, I can mention that in previous peak cycles, average day rates for our fleet were around $20,000. The current fleet, however, is much higher quality due to acquisitions and improvements. Therefore, I expect day rates to exceed those peak levels in the upcoming cycle. I don't foresee any significant increase in market supply over the next three years due to the limited availability of vessels, crew, and parts. Moreover, new build economics aren’t favorable at this time. Consequently, I anticipate a vessel-constrained market, which will likely drive day rates up. Additionally, inflation will affect both costs and revenues, necessitating adjustments in pricing. We will continue monitoring the market closely and will keep you updated in the coming quarters.

Great. And then you provided a lot of numbers, but just kind of just for clarification, what's like a good run rate G&A per quarter once synergies are realized?

Yes. Probably, Patrick, I would see about $20 million per quarter once synergies are realized.

Thank you, Chantel, and we look forward to updating everybody again in November. Goodbye.

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